ITEM
2
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects," "believes," "anticipates," "should," "estimates" and similar expressions.
These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements.
Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1,
Item 1A, "Risk Factors"
in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2018 and in our other filings with the SEC including:
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·
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general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;
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·
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risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;
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·
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the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
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·
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difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;
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·
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risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, changes in tax laws, and local and global economic uncertainty that could adversely affect our earnings and cash flows;
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·
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risks related to our participation in joint ventures;
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·
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the impact of the regulatory environment as well as national, state and local laws and regulations including, without limitation, those governing environmental, taxes, our tenant reinsurance business and labor, and risks related to the impact of new laws and regulations;
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·
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risks of increased tax expense associated either with a possible failure by us to qualify as a real estate investment trust (“REIT”), or with challenges to the determination of taxable income for our taxable REIT subsidiaries;
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·
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changes in United States (“U.S.”) federal or state tax laws related to the taxation of REITs and other corporations;
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·
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security breaches or a failure of our networks, systems or technology could adversely impact our
business
, customer and employee relationships;
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·
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risks
associated
with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;
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·
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difficulties in raising capital at a reasonable cost;
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·
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delays in the development process;
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·
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ongoing litigation and other legal and regulatory actions which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business; and
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·
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economic uncertainty due to the impact of war or terrorism.
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These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.
Critical Accounting Policies
Our MD&A discusses our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our March 31, 2018 financial statements, primarily Note 2, summarize our significant accounting policies.
We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.
Income Tax Expense:
We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements.
In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income.
Impairment of Long-Lived Assets:
The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accrual for Uncertain and Contingent Liabilities:
We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and
our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.
Accounting for Acquired Real Estate Facilities:
We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, and (iv) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.
Overview
Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities.
Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.
We plan on
growing organically as well as
through the
acquisition and development of new
facilities
and expanding our existing self-storage facilities
. Since the beginning of 2013 through March 31, 2018,
we acquired a total of 273 facilities with 19.2 million net rentable square feet from third parties for approximately $2.5 billion, and we opened newly developed and
expanded
self-storage space for a total cost of $947.4 million, adding approximately 8.5 million net rentable square feet.
Subsequent to March 31, 2018, we acquired or were under contract to acquire
(subject to customary closing conditions)
three s
elf-storage facilities for $22.5
million. We will continue to seek to acquire properties; however, there is significant competition
to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.
As of March 31, 2018, we had additional development and redevelopment projects in process which will add approximately
5.0
million net rentable square feet at a total cost of approximately $6
6
1.
9
million. We expect to continue to seek additional development projects; however, the level of such activity may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities
in certain municipalities.
We believe that our development and redevelopment activities are beneficial to our business over the long run. However, in the short run, such activities dilute our earnings due to the three to four year period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the cost, combined with related overhead expenses flowing through general and administrative expense. We believe this dilution will increase in the remainder of 2018 and beyond, because of an increased level of net rentable square feet being added to our portfolio due to continued development and redevelopment efforts.
On September 18, 2017, we completed a public offering of $1.0 billion in aggregate principal amount of unsecured notes in two equal tranches (collectively, the “U.S. Dollar Notes”), one maturing in September 2022 bearing interest at 2.370%, and another maturing in September 2027 bearing interest at 3.094%. This was our first public offering of debt, which should also serve to facilitate future offerings.
As of March 31, 2018, our capital resources over the next year are
expected to be approximately $1.1 billion which exceeds our current planned capital needs over the next year of approximately $4
16
.
0
million. Our capital resources include: (i) $
363.0
million of cash as of March 31, 2018, (ii) $483.9 million of available
borrowing capacity on our revolving line of credit, and (iii) approximately $200 million to $300 million
of expected retained operating
cash flow for the next twelve months. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.
Our planned capital needs o
ver the next year consist of (i) $
382.3
million of remaining spend on our current development pipeline, (ii) $
22
.
5
million
in property acqui
sitions currently under contract, and (iii) $11.2 million in principal repayments on existing debt. Our capital needs
may increase significantly over the next year as we expect to increase our development pipeline and acquire additional properties. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.
See
Liquidity and Capital Resources
for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.
Results of Operations
Operating results for the three months ended March 31, 2018 and 2017
For the three months ended March 31, 2018, net income allocable to our
common shareholders was $287.8
million or $1.65 per diluted common share, compared to $281.1 million or $1.62 per diluted common share in 2017 representing an increase of $6.7 million or
$0.03 per diluted common share
. The
increase is due primarily to i)
a $13.6 million increase in self-storage net operating income (described below), ii) our $10.9 million equity share of a gain recorded by PS Business Parks in the three m
onths ended March 31, 2018 and
iii) a $6.0 million reduction in income allocated to our preferred shareholders. These increases were offset partially by i) $
7.8 million in additional share-
based compensation included in general and administrative expense in the three months ended March 31, 2018 due to the upcoming retirement of our CEO and CFO, ii) a $7.1 million increase in interest expense due to higher debt balances and iii) a $6.3 million increase in foreign exchange losses associated with our euro denominated debt.
The $13.6 million increase in self-storage net operating income is a result of a $6.5 million increase in our Same Store Facilities (as defined below) and a $7.1 million increase in our Non Same Store Facilities (as defined below). Revenues for the Same Store Facilities increased 2.1% or $11.5 million in the three months ended March 31, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 3.3% or $5.0 million in the three months ended March 31, 2018 as compared to 2017, due primarily to increased property taxes and property manager payroll. The increase in net operating income for the Non Same Store Facilities is due primarily to the impact of 127 self-storage facilities acquired and developed since January 2016.
Funds from Operations and Core Funds from Operations
Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents net income before real estate depreciation, which is excluded because it is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical real estate costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among
REITs may not be helpful.
For
the three months ended March 31, 2018,
FFO was $2.37 per diluted common share, as compared to $2.34 for the same p
eriod in 2017, representing an in
crease of 1.3%, or $0.03 per
diluted common share.
The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:
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Three Months Ended March 31,
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2018
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2017
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(Amounts in thousands, except per share data)
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Reconciliation of Diluted Earnings per Share to
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FFO per Share:
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Diluted Earnings per Share
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$
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1.65
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$
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1.62
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Eliminate amounts per share excluded from FFO:
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Depreciation and amortization
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0.78
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0.73
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Gains on sale of real estate investments,
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including our equity share from
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investments and other
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(0.06)
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(0.01)
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FFO per share
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$
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2.37
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$
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2.34
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Computation of FFO per Share:
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Net income allocable to common shareholders
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$
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287,819
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$
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281,131
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Eliminate items excluded from FFO:
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Depreciation and amortization
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117,979
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110,929
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Depreciation from unconsolidated
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real estate investments
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19,315
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17,213
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Depreciation allocated to noncontrolling
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interests and restricted share unitholders
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(918)
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(962)
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Gains on sale of real estate investments,
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including our equity share from
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investments
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(11,891)
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(1,611)
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FFO allocable to common shares
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$
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412,304
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$
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406,700
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Diluted weighted average common shares
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174,148
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174,069
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FFO per share
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$
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2.37
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$
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2.34
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We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses
and (ii) $7.8 million in additional share-based compensation included in general and administrative expense in the three months ended March 31, 2018 due to the upcoming retirement of our CEO and CFO
. We review Core FFO per share to evaluate our ongoing operating performance, and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs
.
The following table reconciles FFO per share to Core FFO per share:
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Three Months Ended March 31,
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Percentage
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2018
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2017
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Change
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FFO per share
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$
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2.37
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$
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2.34
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1.3%
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Eliminate the per share impact of items
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excluded from Core FFO:
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Foreign currency exchange loss
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0.07
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0.03
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Accelerated expense on executive officer
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share-based awards due to upcoming retirement
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0.04
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-
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Core FFO per share
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$
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2.48
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$
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2.37
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4.6%
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Analysis of Net Income by Reportable Segment
The following discussion and analysis is presented and organized in accordance with Note 11 to our March 31, 2018 financial statements, “Segment Information.” Accordingly, refer to the tables presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments.
Self-Storage Operations
Our self-storage operations are analyzed in two groups: (
i) the 2,052 facilities
that we have owned and operated on a stabilized basis since January 1, 2016 (the “Same Store Facilities”), and (ii) all other facilities, which are newly acquired, newly developed, or recently redeveloped (the “Non Same Store Facilities”). See Note 11 to our March 31, 2018 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.
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Self-Storage Operations
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Summary
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Three Months Ended March 31,
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Percentage
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2018
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2017
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Change
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(Dollar amounts in thousands)
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Revenues:
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Same Store Facilities
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$
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549,903
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$
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538,436
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2.1%
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Non Same Store Facilities
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81,634
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69,342
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17.7%
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631,537
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607,778
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3.9%
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Cost of operations:
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Same Store Facilities
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154,051
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149,100
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3.3%
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Non Same Store Facilities
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28,136
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22,878
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23.0%
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182,187
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171,978
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5.9%
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Net operating income (a):
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Same Store Facilities
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395,852
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389,336
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1.7%
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Non Same Store Facilities
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53,498
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46,464
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15.1%
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Total net operating income
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449,350
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435,800
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3.1%
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Depreciation and amortization expense:
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Same Store Facilities
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(88,758)
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(88,159)
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0.7%
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Non Same Store Facilities
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(29,221)
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(22,770)
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28.3%
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Total depreciation and
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amortization expense
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(117,979)
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(110,929)
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6.4%
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Net income:
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Same Store Facilities
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307,094
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301,177
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2.0%
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Non Same Store Facilities
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24,277
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23,694
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2.5%
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Total net income
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$
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331,371
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$
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324,871
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2.0%
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Number of facilities at period end:
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Same Store Facilities
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2,052
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2,052
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-
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Non Same Store Facilities
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341
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291
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17.2%
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Net rentable square footage at period end (in thousands):
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Same Store Facilities
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131,643
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131,643
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-
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Non Same Store Facilities
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27,565
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22,804
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20.9%
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(a)
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Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our March 31, 2018 financial statements for a reconciliation of NOI to our total net income for all periods presented.
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Net operating income from our self-storage operations has increased 3.1% in the three months ended March 31, 2018 as compared to the same period in 2017. These increases are due to higher revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities.
Same Store Facilities
The Same Store
Facilities represent those facilities that have been owned and operated at a stabilized level of occupancy, revenues and cost of operations since January 1, 201
6
. We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 201
6
, 201
7
, and 201
8
.
We believe the Same Store information is used by investors and
REIT
analysts in a similar manner. The Same Store pool increased from 2,042 facilities at December 31, 2017 to 2,052 facilities at March 31, 2018. The following table summarizes the historical operating results of these 2,052 facilities (
131.6
million net rentable square feet) that represent approximately 83% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio
at
March 31, 2018
.
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Selected Operating Data for the Same Store Facilities (2,052 facilities)
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Three Months Ended March 31,
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Percentage
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2018
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2017
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Change
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(Dollar amounts in thousands, except weighted average amounts)
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Revenues:
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Rental income
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$
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525,184
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$
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514,263
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2.1%
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Late charges and
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administrative fees
|
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24,719
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|
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24,173
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2.3%
|
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Total revenues (a)
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549,903
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538,436
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2.1%
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Cost of operations:
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Property taxes
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58,582
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56,050
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4.5%
|
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On-site property manager payroll
|
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28,729
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|
27,577
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4.2%
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Supervisory payroll
|
|
9,617
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|
|
10,165
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(5.4)%
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Repairs and maintenance
|
|
11,564
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|
|
11,732
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(1.4)%
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Utilities
|
|
10,847
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|
|
10,235
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|
6.0%
|
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Advertising and selling
|
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6,538
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|
|
6,816
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(4.1)%
|
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Other direct property costs
|
|
15,066
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|
|
14,303
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5.3%
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Allocated overhead
|
|
13,108
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|
|
12,222
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|
7.2%
|
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Total cost of operations (a)
|
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154,051
|
|
|
149,100
|
|
3.3%
|
|
Net operating income
|
|
395,852
|
|
|
389,336
|
|
1.7%
|
|
Depreciation and amortization expense
|
|
(88,758)
|
|
|
(88,159)
|
|
0.7%
|
|
Net income
|
$
|
307,094
|
|
$
|
301,177
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
|
Gross margin (before depreciation
|
|
|
|
|
|
|
|
and amortization expense)
|
|
72.0%
|
|
|
72.3%
|
|
(0.4)%
|
|
|
|
|
|
|
|
|
|
|
Weighted average for the period:
|
|
|
|
|
|
|
Square foot occupancy
|
|
92.3%
|
|
|
93.1%
|
|
(0.9)%
|
|
|
|
|
|
|
|
|
|
|
Realized annual rental income per (b):
|
|
|
|
|
|
|
Occupied square foot
|
$
|
17.30
|
|
$
|
16.79
|
|
3.0%
|
|
Available square foot
|
$
|
15.96
|
|
$
|
15.63
|
|
2.1%
|
|
|
|
|
|
|
|
|
|
|
At March 31:
|
|
|
|
|
|
|
|
|
Square foot occupancy
|
|
92.1%
|
|
|
93.2%
|
|
(1.2)%
|
|
Annual contract rent per
|
|
|
|
|
|
|
occupied square foot (c)
|
$
|
17.81
|
|
$
|
17.35
|
|
2.7%
|
|
|
(a)
|
|
Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities.
|
|
(b)
|
|
Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependen
t upon the level of delinquency
and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.
|
|
(c)
|
|
Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in t
he lease agreement upon move-in
and we adjust them from time to time with notice. Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.
|
Analysis of Same Store Revenue
Revenues generated by our Same Store Facilities increased by 2.1% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to an increase of 3.0%
in the three months ended March
31, 2018 as compared to the same period in 2017 in realized annual rental income
per occupied square foot.
Year-over-year growth in our Same
Store revenues has declined from 4.1% for the three months ended March 31, 2017 as compared to the same period in 2016, to 2.1% for the three months ended March 31, 2018 as compared to the same
period in 2017. Growth trends decelerated throughout 2017, with year over year revenue growth at 3.4% for the three months ended June 30, 2017, 2.4% for the three months ended September 30, 2017, and 2.2% for the three months ended December 31, 2017. We are experiencing softness in demand in substantially all of our major markets, which has led to lower
move-in volumes combined with a lack of pricing power with respect to new tenants. We attribute some of this softness to local economic conditions a
nd, in some markets
,
most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, and New York, increased
supply of newly constructed self-storage facilities.
Same Store weighted average square foot occupancy declined 0.9% to 92.3% during the three months ended March 31, 2018 as compared to 93.1% for the same period in 2017
, as move-out volume
declined in the three months ended March 31, 2018 as compared to the same period in 2017, partially offsetting lower move-in volume.
We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts in order to generate sufficient move-in volume to replace tenants that vacate.
Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. Rental rate increases to existing tenants in the three months ended March 31, 2018 have been similar to the same period in 2017, and we expect rate increases to existing tenants in the remainder of 2018 to be similar to the same period in 2017.
Annual contract rent per occu
pied foot
increased 2.7% from March 31, 2017 to March 31, 2018, as compared to a 3.1% increase from December 31, 2016 to December 31, 2017. These year-over-year increases were primarily driven by annual rate increases given to existing tenants, partially offset by the net impact of replacing vacating tenants with new tenants with lower contract rates, or “rent roll down.” The reduction in the year over year growth in
annual
contract
rent per occupied foot
from 3.1%
at the beginning of the year to 2.7% at the end of the quarter
is due primarily to
continued
rent roll down.
During the three months ended March 31, 2018, the annual contract rent for tenants who moved in decreased 2.5% to $13.82 per foot as compared to $14.18 for the same period in 2017, and the annual contract rent for tenants who moved out increased 3.1% to $16.18 per foot as compared to $15.69 per foot
for the same period in 2017.
In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer. Promotional discounts, based upon the move-in contractual rates for the related
promotional period,
totaled $18.6 million and $20.2 million for the three months ended March 31, 2018 and 2017
, respectively
and are recorded as a reduction
to revenue.
Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage.
We believe rental growth in the remainder of 2018 will come primarily from continued annual rent increases to existing tenants. Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants.
We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in the remainder of 2018. However, there can be no assurance of continued revenue growth, because current trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors. Such factors include initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, the level of consumer demand, competition from newly developed facilities and the degree and timing of rate increases previously passed to existing tenants.
We are taking a number of actions to improve demand into our system, including (i) increasing marketing spend on the Internet, and (ii) reducing rental rates and continuing to offer promotional discounts to new tenants. Even if these actions are successful in improving demand into our system, in at least the near term, we believe these actions may have a negative impact on our revenue trends due to less growth in initial rental rates and increased promotional discounts.
Analysis of Same Store Cost of Operations
Cost of operations (
excluding depreciation and amortization) increased 3.3% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to
increased property tax expense and
on-site property manager payroll.
Property tax expense increased 4.5% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to higher assessed values. We expect property tax expense growth of approximately 4.5% in the remainder of 2018 due primarily to higher assessed
values.
On-site property manager
payroll expense increased 4.2% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to higher wage rates.
We expect on-site property manager payroll expense to increase on an inflationary basis in the remainder of 2018.
Supervisory
payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 5.4% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to
lower
headcount.
We expect inflationary increases in wage rates and stable headcount in the remainder of 2018.
Repairs and ma
intenance expense decreased 1.4% in the three months ended March 31, 2018 as compared to the same period in 2017. Repair and maintenance costs include snow removal expense totaling $2.1 million and $2.0 million in the three months ended March 31, 2018 and 2017, respectively. Excluding snow removal costs, repairs and maintenance decreased 2.9% in in the three months ended March 31, 2018 as compared to the same period in 2017.
Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random
events. We expect inflationary increases in repairs and maintenance expense in the remainder of 2018, excluding snow removal expense, which is primarily weather dependent and not predictable.
Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in
usage levels are driven primarily by weather and temperature. Utility expense increased 6.0% in the three months ended
March 31, 2018 as compared to the same period in 2017. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable.
Advertising and selling expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center. Advertising and selling expense varies based upon demand, occupancy levels, and other factors. Television and Internet advertising, in particular, can increase or decrease significantly in the short term. Advertising and selling
expenses decreased 4.1% in the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to
de
creased
television advertising spending
partially offset by increased
Internet
marketing expenditures. We expect moderate increases in advertising and selling expense in the remainder of 2018.
Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office. These
costs increased
5.3
% in the three months ended March 31, 2018 as compared to the same period in 2017. The increases were due primarily to higher credit card fees, due to a higher proportion of collections being received from credit cards and higher revenues.
We expect inflationary increases in other direct property costs in the remainder of 2018.
Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations. Such functions include information technology, human
resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer
(
“
CEO”)
and Chief Financial Officer
(
“
CFO”)
, which are included in general and administrative expense). Allocated overhead increased
7
.
2
% in the three months ended March 31, 2018 as compared to the same period in 2017, due to increased headcount and information technology expenses. We expect greater than inflationary increases in allocated overhead
in the remainder of 2018 due primarily to increased information technology expenses.
Analysis of Same Store Depreciation and Amortization
Depreciation and amortization for Same Store
Facilities in
creased
0.7
% in the
three months
ended
March 31, 2018
as compared to the same
period in 201
7
. We expect depreciation to be flat in the remainder of 201
8 as compared to the same period
in 201
7
.
The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Entire Year
|
|
(Amounts in thousands, except for per square foot amounts)
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
549,903
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
538,436
|
|
$
|
551,522
|
|
$
|
569,853
|
|
$
|
556,999
|
|
$
|
2,216,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
154,051
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
149,100
|
|
$
|
147,283
|
|
$
|
148,568
|
|
$
|
118,606
|
|
$
|
563,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
58,582
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
56,050
|
|
$
|
56,180
|
|
$
|
56,016
|
|
$
|
32,394
|
|
$
|
200,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repairs and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
11,564
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
11,732
|
|
$
|
11,422
|
|
$
|
11,450
|
|
$
|
12,007
|
|
$
|
46,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and selling expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
6,538
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
6,816
|
|
$
|
8,158
|
|
$
|
6,987
|
|
$
|
6,821
|
|
$
|
28,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVPAF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
15.96
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
15.63
|
|
$
|
16.03
|
|
$
|
16.54
|
|
$
|
16.17
|
|
$
|
16.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average realized annual rent per occupied square foot:
|
|
|
|
2018
|
$
|
17.30
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
16.79
|
|
$
|
16.95
|
|
$
|
17.49
|
|
$
|
17.37
|
|
$
|
17.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average occupancy levels for the period:
|
|
|
|
|
|
|
|
|
2018
|
|
92.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
93.1%
|
|
|
94.6%
|
|
|
94.6%
|
|
|
93.1%
|
|
|
93.8%
|
Analysis of
Market
Trends
The following table sets forth
selected market
trends in our Same Store Facilities:
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Change
|
|
|
(Amounts in thousands, except
|
|
|
for weighted average data)
|
Revenues:
|
|
|
|
|
|
|
|
|
Los Angeles (199 facilities)
|
$
|
83,644
|
|
$
|
80,046
|
|
4.5%
|
|
San Francisco (124 facilities)
|
|
47,059
|
|
|
45,509
|
|
3.4%
|
|
New York (83 facilities)
|
|
34,489
|
|
|
33,512
|
|
2.9%
|
|
Chicago (129 facilities)
|
|
28,990
|
|
|
29,663
|
|
(2.3)%
|
|
Washington DC (82 facilities)
|
|
25,564
|
|
|
25,582
|
|
(0.1)%
|
|
Seattle-Tacoma (81 facilities)
|
|
25,429
|
|
|
24,611
|
|
3.3%
|
|
Miami (73 facilities)
|
|
23,924
|
|
|
23,650
|
|
1.2%
|
|
Atlanta (98 facilities)
|
|
20,461
|
|
|
20,051
|
|
2.0%
|
|
Houston (71 facilities)
|
|
16,655
|
|
|
16,380
|
|
1.7%
|
|
Dallas-Ft. Worth (79 facilities)
|
|
16,103
|
|
|
16,299
|
|
(1.2)%
|
|
Philadelphia (57 facilities)
|
|
13,827
|
|
|
13,462
|
|
2.7%
|
|
Orlando-Daytona (64 facilities)
|
|
13,327
|
|
|
12,679
|
|
5.1%
|
|
West Palm Beach (38 facilities)
|
|
11,468
|
|
|
11,198
|
|
2.4%
|
|
Tampa (47 facilities)
|
|
10,851
|
|
|
10,594
|
|
2.4%
|
|
Charlotte (48 facilities)
|
|
9,965
|
|
|
9,943
|
|
0.2%
|
|
All other markets
|
|
|
|
|
|
|
|
|
(779 facilities)
|
|
168,147
|
|
|
165,257
|
|
1.7%
|
|
Total revenues
|
$
|
549,903
|
|
$
|
538,436
|
|
2.1%
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
68,577
|
|
$
|
65,616
|
|
4.5%
|
|
San Francisco
|
|
37,723
|
|
|
36,629
|
|
3.0%
|
|
New York
|
|
22,893
|
|
|
22,510
|
|
1.7%
|
|
Chicago
|
|
14,158
|
|
|
15,338
|
|
(7.7)%
|
|
Washington DC
|
|
18,480
|
|
|
18,769
|
|
(1.5)%
|
|
Seattle-Tacoma
|
|
19,484
|
|
|
19,031
|
|
2.4%
|
|
Miami
|
|
16,631
|
|
|
16,663
|
|
(0.2)%
|
|
Atlanta
|
|
14,993
|
|
|
14,505
|
|
3.4%
|
|
Houston
|
|
11,052
|
|
|
11,034
|
|
0.2%
|
|
Dallas-Ft. Worth
|
|
10,755
|
|
|
10,840
|
|
(0.8)%
|
|
Philadelphia
|
|
9,499
|
|
|
9,331
|
|
1.8%
|
|
Orlando-Daytona
|
|
9,496
|
|
|
9,108
|
|
4.3%
|
|
West Palm Beach
|
|
8,404
|
|
|
8,267
|
|
1.7%
|
|
Tampa
|
|
7,633
|
|
|
7,451
|
|
2.4%
|
|
Charlotte
|
|
7,459
|
|
|
7,451
|
|
0.1%
|
|
All other markets
|
|
118,615
|
|
|
116,793
|
|
1.6%
|
|
Total net operating income
|
$
|
395,852
|
|
$
|
389,336
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Weighted average square foot
|
|
|
|
|
|
|
|
|
occupancy:
|
|
Los Angeles
|
|
95.0%
|
|
|
95.5%
|
|
(0.5)%
|
|
San Francisco
|
|
94.2%
|
|
|
95.0%
|
|
(0.8)%
|
|
New York
|
|
93.5%
|
|
|
93.2%
|
|
0.3%
|
|
Chicago
|
|
88.1%
|
|
|
90.1%
|
|
(2.2)%
|
|
Washington DC
|
|
90.3%
|
|
|
91.6%
|
|
(1.4)%
|
|
Seattle-Tacoma
|
|
92.1%
|
|
|
93.4%
|
|
(1.4)%
|
|
Miami
|
|
92.3%
|
|
|
93.4%
|
|
(1.2)%
|
|
Atlanta
|
|
91.9%
|
|
|
92.6%
|
|
(0.8)%
|
|
Houston
|
|
91.5%
|
|
|
90.3%
|
|
1.3%
|
|
Dallas-Ft. Worth
|
|
90.9%
|
|
|
93.2%
|
|
(2.5)%
|
|
Philadelphia
|
|
93.4%
|
|
|
93.9%
|
|
(0.5)%
|
|
Orlando-Daytona
|
|
94.2%
|
|
|
94.5%
|
|
(0.3)%
|
|
West Palm Beach
|
|
93.9%
|
|
|
94.8%
|
|
(0.9)%
|
|
Tampa
|
|
92.7%
|
|
|
93.8%
|
|
(1.2)%
|
|
Charlotte
|
|
90.4%
|
|
|
91.8%
|
|
(1.5)%
|
|
All other markets
|
|
92.0%
|
|
|
92.8%
|
|
(0.9)%
|
|
Total weighted average
|
|
|
|
|
|
|
|
|
square foot occupancy
|
|
92.3%
|
|
|
93.1%
|
|
(0.9)%
|
|
|
|
|
|
|
|
|
|
|
Realized annual rent per
|
|
|
|
|
|
|
|
|
occupied square foot:
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
25.09
|
|
$
|
23.88
|
|
5.1%
|
|
San Francisco
|
|
25.60
|
|
|
24.55
|
|
4.3%
|
|
New York
|
|
24.68
|
|
|
24.05
|
|
2.6%
|
|
Chicago
|
|
15.48
|
|
|
15.52
|
|
(0.3)%
|
|
Washington DC
|
|
21.25
|
|
|
20.81
|
|
2.1%
|
|
Seattle-Tacoma
|
|
19.69
|
|
|
18.75
|
|
5.0%
|
|
Miami
|
|
19.57
|
|
|
19.12
|
|
2.4%
|
|
Atlanta
|
|
12.96
|
|
|
12.63
|
|
2.6%
|
|
Houston
|
|
14.18
|
|
|
14.09
|
|
0.6%
|
|
Dallas-Ft. Worth
|
|
13.34
|
|
|
13.18
|
|
1.2%
|
|
Philadelphia
|
|
15.68
|
|
|
15.23
|
|
3.0%
|
|
Orlando-Daytona
|
|
13.56
|
|
|
12.86
|
|
5.4%
|
|
West Palm Beach
|
|
18.32
|
|
|
17.76
|
|
3.2%
|
|
Tampa
|
|
14.09
|
|
|
13.58
|
|
3.8%
|
|
Charlotte
|
|
11.50
|
|
|
11.32
|
|
1.6%
|
|
All other markets
|
|
14.48
|
|
|
14.11
|
|
2.6%
|
|
Total realized rent per
|
|
|
|
|
|
|
|
|
occupied square foot
|
$
|
17.30
|
|
$
|
16.79
|
|
3.0%
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
REVPAF:
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
23.83
|
|
$
|
22.81
|
|
4.5%
|
|
San Francisco
|
|
24.12
|
|
|
23.33
|
|
3.4%
|
|
New York
|
|
23.07
|
|
|
22.42
|
|
2.9%
|
|
Chicago
|
|
13.65
|
|
|
13.99
|
|
(2.4)%
|
|
Washington DC
|
|
19.19
|
|
|
19.05
|
|
0.7%
|
|
Seattle-Tacoma
|
|
18.14
|
|
|
17.51
|
|
3.6%
|
|
Miami
|
|
18.07
|
|
|
17.85
|
|
1.2%
|
|
Atlanta
|
|
11.91
|
|
|
11.69
|
|
1.9%
|
|
Houston
|
|
12.97
|
|
|
12.72
|
|
2.0%
|
|
Dallas-Ft. Worth
|
|
12.13
|
|
|
12.29
|
|
(1.3)%
|
|
Philadelphia
|
|
14.65
|
|
|
14.30
|
|
2.4%
|
|
Orlando-Daytona
|
|
12.77
|
|
|
12.15
|
|
5.1%
|
|
West Palm Beach
|
|
17.20
|
|
|
16.83
|
|
2.2%
|
|
Tampa
|
|
13.06
|
|
|
12.74
|
|
2.5%
|
|
Charlotte
|
|
10.40
|
|
|
10.38
|
|
0.2%
|
|
All other markets
|
|
13.32
|
|
|
13.10
|
|
1.7%
|
|
Total REVPAF
|
$
|
15.96
|
|
$
|
15.63
|
|
2.1%
|
|
We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics.
Non Same Store Facilities
The Non Same Store Facilities at March 31, 2018
represent 341 facilities
that were not stabilized with respect to occupancies or rental rates since January 1, 2016, or that we did not own as of January 1, 2016. As a result of the stabilization process and timing of when facilities were newly acquired or development activities were completed, year-over-year changes can be significant.
The following table summarizes operating data with respect to the Non Same Store Facilities:
|
|
|
|
|
|
|
|
|
NON SAME STORE
|
Three Months Ended March 31,
|
FACILITIES
|
2018
|
|
2017
|
|
Change
|
|
(Dollar amounts in thousands, except square foot amounts)
|
Revenues:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
$
|
67
|
|
$
|
-
|
|
$
|
67
|
2017 acquisitions
|
|
6,860
|
|
|
339
|
|
|
6,521
|
2016 acquisitions
|
|
9,429
|
|
|
8,581
|
|
|
848
|
2016 - 2018 new developments
|
|
7,120
|
|
|
2,327
|
|
|
4,793
|
2013 - 2015 new developments
|
|
6,401
|
|
|
5,798
|
|
|
603
|
Other facilities
|
|
51,757
|
|
|
52,297
|
|
|
(540)
|
Total revenues
|
|
81,634
|
|
|
69,342
|
|
|
12,292
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
22
|
|
|
-
|
|
|
22
|
2017 acquisitions
|
|
2,507
|
|
|
151
|
|
|
2,356
|
2016 acquisitions
|
|
3,637
|
|
|
3,482
|
|
|
155
|
2016 - 2018 new developments
|
|
4,055
|
|
|
2,296
|
|
|
1,759
|
2013 - 2015 new developments
|
|
2,099
|
|
|
1,867
|
|
|
232
|
Other facilities
|
|
15,816
|
|
|
15,082
|
|
|
734
|
Total cost of operations
|
|
28,136
|
|
|
22,878
|
|
|
5,258
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
45
|
|
|
-
|
|
|
45
|
2017 acquisitions
|
|
4,353
|
|
|
188
|
|
|
4,165
|
2016 acquisitions
|
|
5,792
|
|
|
5,099
|
|
|
693
|
2016 - 2018 new developments
|
|
3,065
|
|
|
31
|
|
|
3,034
|
2013 - 2015 new developments
|
|
4,302
|
|
|
3,931
|
|
|
371
|
Other facilities
|
|
35,941
|
|
|
37,215
|
|
|
(1,274)
|
Net operating income
|
|
53,498
|
|
|
46,464
|
|
|
7,034
|
Depreciation and
|
|
|
|
|
|
|
|
amortization expense
|
|
(29,221)
|
|
|
(22,770)
|
|
|
(6,451)
|
Net income
|
$
|
24,277
|
|
$
|
23,694
|
|
$
|
583
|
|
|
|
|
|
|
|
|
|
At March 31:
|
|
|
|
|
|
|
|
|
Square foot occupancy:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
71.5%
|
|
|
-
|
|
|
-
|
2017 acquisitions
|
|
88.8%
|
|
|
89.7%
|
|
|
(1.0)%
|
2016 acquisitions
|
|
87.2%
|
|
|
85.9%
|
|
|
1.5%
|
2016 - 2018 new developments
|
|
56.5%
|
|
|
43.1%
|
|
|
31.1%
|
2013 - 2015 new developments
|
|
90.4%
|
|
|
89.8%
|
|
|
0.7%
|
Other facilities
|
|
87.2%
|
|
|
87.2%
|
|
|
0.0%
|
|
|
82.1%
|
|
|
82.4%
|
|
|
(0.4)%
|
Annual contract rent per
|
|
|
|
|
|
|
occupied square foot:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
$
|
10.88
|
|
$
|
-
|
|
|
-
|
2017 acquisitions
|
|
14.39
|
|
|
10.81
|
|
|
33.1%
|
2016 acquisitions
|
|
10.19
|
|
|
9.86
|
|
|
3.3%
|
2016 - 2018 new developments
|
|
11.83
|
|
|
12.69
|
|
|
(6.8)%
|
2013 - 2015 new developments
|
|
14.88
|
|
|
13.95
|
|
|
6.7%
|
Other facilities
|
|
16.97
|
|
|
16.80
|
|
|
1.0%
|
|
$
|
14.79
|
|
$
|
14.92
|
|
|
(0.9)%
|
NON SAME STORE
|
Three Months Ended March 31,
|
FACILITIES (Continued)
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
2
|
|
|
-
|
|
|
2
|
2017 acquisitions
|
|
34
|
|
|
4
|
|
|
30
|
2016 acquisitions
|
|
55
|
|
|
55
|
|
|
-
|
2016 - 2018 new developments
|
|
36
|
|
|
18
|
|
|
18
|
2013 - 2015 new developments
|
|
20
|
|
|
20
|
|
|
-
|
Other facilities
|
|
194
|
|
|
194
|
|
|
-
|
|
|
341
|
|
|
291
|
|
|
50
|
Net rentable square feet (in thousands):
|
|
|
|
|
|
|
2018 acquisitions
|
|
181
|
|
|
-
|
|
|
181
|
2017 acquisitions
|
|
2,114
|
|
|
214
|
|
|
1,900
|
2016 acquisitions
|
|
4,177
|
|
|
4,121
|
|
|
56
|
2016 - 2018 new developments
|
|
4,632
|
|
|
2,470
|
|
|
2,162
|
2013 - 2015 new developments
|
|
1,877
|
|
|
1,877
|
|
|
-
|
Other facilities
|
|
14,584
|
|
|
14,122
|
|
|
462
|
|
|
27,565
|
|
|
22,804
|
|
|
4,761
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2018
|
|
|
|
|
|
|
Costs to acquire or develop:
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
$
|
18,024
|
|
|
|
|
|
|
2017 acquisitions (a)
|
|
291,329
|
|
|
|
|
|
|
2016 acquisitions
|
|
429,123
|
|
|
|
|
|
|
2016 - 2018 new developments
|
|
549,967
|
|
|
|
|
|
|
2013 - 2015 new developments
|
|
188,049
|
|
|
|
|
|
|
Other facilities (b)
|
|
-
|
|
|
|
|
|
|
|
$
|
1,476,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Acquisition costs includes i) $149.8 million paid for 22 facilities acquired from third parties, ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and iii)
the $6.3
million historical book value of our existing investment in the legacy institutional partnership.
|
|
(b)
|
|
Other facilities
include
existing facilities for which we
recently
expanded their square footage
at
a
cost of $164.7
million. We have not included these costs
or the historical
costs incurred to initially acquire or develop these 194 facilities
in the table, as they would not be meaningful or consistent with the amounts for the acquired and newly developed
facilities.
|
The facilities included above under “2017 acquisitions” include 22 facilities acquired from third parties
and
12 stabilized facilities previously owned by a legacy institutional partnership that we began consolidating effective December 31, 2017
.
For the three months ended March 31, 2018, the weighted average annualized yield on cost, based upon net operating income, for i) the facilities acquired in 2016 was 5.4% and ii) the 22 facilities acquired in 2017 from third parties for $149.8 million was 4.7%. The yield for the other facilities acquired are not meaningful due to our limited ownership period in the case of facilities acquired in 2018 and our preexisting ownership interest in and management of the 12 stabilized facilities owned by a legacy institutional partnership.
We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities.
We believe that our real estate development activities are beneficial
to our business over the long run. However, in the short run, development activities dilute our earnings due to the three to four year period to reach a stabilized level of cash flows and the cost of capital to fund development, combined with general and administrative expenses associated with development. We believe this dilution will increase in the remainder of 2018 because of an increased level of net rentable square feet being added to our portfolio.
We expect the Non Same Store Facilities to continue to provide increased net operating income in the remainder of 2018 as these facilities approach stabilized occupancy levels and the earnings of the 2017 acquisitions are reflected in our operations for a longer period in 2018 as compared to 2017.
We also expect to increase the number and net rentable square feet of Non Same Store Facilities through development of new self-storage facilities, redevelopment of existing facilities and acquisitions of facilities.
As of March 31, 2018, we had development and
redevelopment projects which will add approximately
5.0
million net rentable square feet of storage space at a total cost of approximately $6
61
.
9
million. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be
limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.
Subsequent to March 31, 2018, we acquired or were under contract to acquire
(subject to customary closing
conditions)
t
hree
self-storage facilities for $22
.
5
million. We will
continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefore the dollar value of acquisitions is unpredictable.
Depreciation and
amortization with respect to the Non Same Store Facilities totaled $2
9
.
2
million and $22.8 million in the three months ended March 31, 2018 and 2017, respectively. These amounts include i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and ii) amortization of cost allocated to the tenants in place upon
acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to Non Same Store Facilities owned at March 31, 2018, depreciation of buildings and amortization of tenant intangibles is
expected to total $74.8 million and $7.8 million, respectively, in the remainder of 2018. The level of future depreciation and amortization will also depend upon
the level of acquisitions of facilities and the level o
f newly developed storage space.
Ancillary Operations
Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities. The following table sets forth our ancillary operations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
|
Change
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Tenant reinsurance premiums
|
$
|
30,837
|
|
$
|
29,940
|
|
$
|
897
|
Merchandise
|
|
7,550
|
|
|
7,829
|
|
|
(279)
|
Total revenues
|
|
38,387
|
|
|
37,769
|
|
|
618
|
|
|
|
|
|
|
|
|
|
Cost of Operations:
|
|
|
|
|
|
|
|
|
Tenant reinsurance
|
|
6,200
|
|
|
6,277
|
|
|
(77)
|
Merchandise
|
|
4,440
|
|
|
4,647
|
|
|
(207)
|
Total cost of operations
|
|
10,640
|
|
|
10,924
|
|
|
(284)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Tenant reinsurance
|
|
24,637
|
|
|
23,663
|
|
|
974
|
Merchandise
|
|
3,110
|
|
|
3,182
|
|
|
(72)
|
|
|
|
|
|
|
|
|
|
Total net income
|
$
|
27,747
|
|
$
|
26,845
|
|
$
|
902
|
Tenant reinsurance operations:
Our
cu
s
tomers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary of Public Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table.
The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in consolidation and is therefore not shown in the above table.
Tenant
reinsurance revenue increased from $29.9 million in the three months ended March 31, 2017 to $30.8 million during the same period in 2018, due primarily to an increase in our tenant base due to newly acquired and developed facilities.
We expect future growth will come primarily from c
u
stomers of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities.
Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the level of insured tenants, and the level of events affecting claims at particular prop
erties (such as burglary) as well as catastrophic weather events affecting multiple properties such as hurricanes and floods. Cost of operations decreased from $6.3 million in the three months ended March 31, 2017 to $6.2 million during
the same period in 2018.
Merchandise sales:
We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in 2018.
Equity in earnings of unconsolidated real estate entities
At March 31, 2018, we have equity investments in PSB and Shurgard Europe, which we account for on the equity method and record our pro-rata share of the net income of these entities for each period.
The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
Equity in earnings:
|
|
|
|
|
|
|
|
|
|
PSB
|
|
$
|
23,831
|
|
$
|
13,700
|
|
$
|
10,131
|
Shurgard Europe
|
|
|
6,964
|
|
|
5,591
|
|
|
1,373
|
Disposed Investment (a)
|
|
|
-
|
|
|
658
|
|
|
(658)
|
Total equity in earnings
|
|
$
|
30,795
|
|
$
|
19,949
|
|
$
|
10,846
|
|
(a)
|
|
This represents our equity earnings in a legacy institutional partnership. On December 31, 2017, we acquired the 74.25% interest that we did not own in this partnership for $135.5 million. As a result, no further equity earnings will be recorded.
|
Investment in PSB:
At March 31, 2018 and December 31, 2017, we had approximately a 42% common equity interest in PS Business Parks, Inc. (“PSB”), comprised of our ownership of 7,158,354 shares of PSB’s common stock
and 7,305,355 limited partnership units in an operating partnership controlled by PSB. The limited partnership units are convertible
at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.
At March 31, 2018, PSB wholly-owned approximately 28 million rentable square feet of commercial space
and had a 95%
interest in
a
395
-unit apartment complex
. PSB also manages commercial space that we own pursuant to property management agreements.
Equity in earnings from PSB increased $10.1 million in the three months ended March 31, 2018, as compared to the same period in 2017, due primarily to an increase of $9.3 million in our equity share of gains on sales of real estate in 2018 as compared to the same period in 2017 and from improved real estate facility operating results. See Note 4 to our March 31, 2018 financial statements for selected financial information on PSB, as well as
PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website,
www.psbusinessparks.com
.
Investment in Shurgard Europe:
We have a 49% equity share in Shurgard Europe’s net income. At March 31, 2018, Shurgard Europe’s operations are comprised
of 222 wholly
-owned facilities with 12 million net rentable square feet. See Note 4 to our March 31, 2018 financial statements for selected financial data on Shurgard Europe for the three months ended March 31, 2018 and 2017. As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe.
Our equity in
earnings from Shurgard Europe increased $1.4 million for the three months ended March 31, 2018 as compared to the same period in 2017, due primarily to improved same-store operating results
.
Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the countries in
which it does business and incurs tax expense. Our equity share of such income tax expense was approximately $2.8 million and $1.4 million
in the three months ended March 31, 2018 and 2017, respectively.
For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated at average exchange rates of 1.229 and 1.065 for the three months ended March 31, 2018 and 2017, respectively.
Our future earnings from Shurgard Europe will be affected primarily by the operating results of its existing facilities, the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro), the impact of income taxes, and the degree to which Shurgard Europe reinvests the cash it generates from operations into real estate investments or distributes the amounts to its shareholders.
Analysis of items not allocated to segments
General and administrative expense:
The following table sets forth our general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
16,910
|
|
$
|
8,897
|
|
$
|
8,013
|
Costs of senior executives
|
|
|
3,570
|
|
|
4,620
|
|
|
(1,050)
|
Development and acquisition costs
|
|
|
2,333
|
|
|
3,277
|
|
|
(944)
|
Tax compliance costs and taxes paid
|
|
|
1,348
|
|
|
1,349
|
|
|
(1)
|
Legal costs
|
|
|
1,744
|
|
|
1,946
|
|
|
(202)
|
Public company costs
|
|
|
1,219
|
|
|
1,125
|
|
|
94
|
Other costs
|
|
|
4,396
|
|
|
3,814
|
|
|
582
|
Total
|
|
$
|
31,520
|
|
$
|
25,028
|
|
$
|
6,492
|
Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes. Share-based compensation expense varies based upon the level of grants and their related vesting and amortization periods, forfeitures, as well as the Company’s common share price on the date of grant.
In February 2018, we announced that our
CEO
and
CFO
are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees. For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire. Accordingly, all remaining share-based compensation expense for these two executives will now be amortized by the end of 2018. Included in share-based compensation expense for the three months ended March 31, 2018 is approximately $7.8 million due to the accelerated amortization of grants to our CEO and CFO. Similar increases in share-based compensation expense are expected in the remainder of 2018.
See Note 10 to our March 31, 2018 financial statements for further information on our share-
based compensation.
Costs of senior executives represent the cash compensation paid to our chief executive officer and chief financial officer.
Development and acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities. The amounts in the above table are net of $3.1 million and $2.1 million for the three months ended March 31, 2018 and 2017, respectively, in development costs that were capitalized to newly developed and redeveloped self-storage facilities. Development and acquisition costs are expected to remain stable in the remainder of 2018.
Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules. Such costs vary primarily based upon the tax rates of the various states in which we do business.
Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of legal activity. The future level of legal costs is not determinable.
Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ (our “Board”)
costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Sarbanes-Oxley Act of 2002.
Other costs represent professional and consulting fees, payroll and overhead that are not directly attributable to our property operations. Such costs vary depending upon the level of corporate activities and initiatives and, as such, are not predictable.
Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.
Interest and other income:
Interest and other income is comprised primarily of the net income from our commercial operations and property management operations and to a lesser extent interest earned on cash balances, trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts. Amounts attributable to our commercial operations and property management operations
totaled $2.8 million
and $2.6 million in the three months ended March 31, 2018 and 2017, respectively. We do not expect any significant changes in interest and other income in the remainder of 2018.
Interest expense:
For the three
months ended March 31, 2018 and 2017, we incurred $9.5 million and $2.1 million, respectively, of interest on our outstanding debt. In determining interest expense, these amounts were offset by capitalized interest of $1.4 million and $1.1 million during the three months ended March 31, 2018 and 2017, respectively, associated with our development activities. On September 18, 2017, we completed a public offering of $1.0 billion notes (the “U.S. Dollar Notes
”) bearing an
average annual interest rate of 2.732%. For the three months ended March 31, 2018, we incurred interest expense totaling $7.1 million on the U.S. Dollar Notes. At March 31, 2018, we had $1.4 billion of debt outstanding, with an average interest rate of 2.6%. See Note 6 to our March 31, 2018 financial statements for further information on our debt balances. Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs.
Foreign Exchange Loss:
For the three months ended March 31, 2018 and 2017, we recorded foreign currency translation losses of $11.8 million and $5.6 million, respectively, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates. The Euro was translated at exchange rates of approximately 1.232 U.S. Dollars per Euro at March 31, 2018, 1.198 at December 31, 2017, 1.068 at March 31, 2017 and 1.052 at December 31, 2016. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding.
Gain on Real Estate Investment Sales:
In the three months ended March 31, 2018, we recorded gains
totaling $424,000
, primarily in connection with the partial sale of real estate facilities pursuan
t to eminent domain proceedings.
Net Income Allocable to Preferred Shareholders:
Net income allocable to preferred shareholders based upon distributions decreased in the three months ended March 31, 2018 as compared to the same period in 2017, due to lower average rates and lower weighted average preferred shares outstanding. Based upon our preferred shares outstanding at March 31, 2018, our quarterly distribution to our preferred shareholders is expected to be approximately $54.1 million.
Liquidity and Capital Resources
Financing Strategy:
As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important. Historically we have primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferred securities. Over the past two years, we have diversified our capital sources by issuing medium term debt.
Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s. Our unsecured debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.
We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital. As of March 31, 2018 and
May 2,
2018, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $16.1 million of outstanding letters of credit which limits our borrowing capacity to $483.9 million.
Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of additional medium or long term debt, and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the desire for leverage, refinancing risk, and considering potential constraints caused by certain features of capital sources, such as debt covenants.
Liquidity and Capital Resource Analysis:
We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures, and distributions to our shareholders for the foreseeable future.
As of March 31, 2018, our capital
resources over the next year are expected to be approximately $1.1 billion which exceeds our current planned capital needs over the next year of approximately $4
16
.
0
million. Our capital resources include: (i) $36
3
.
0
million of cash as of March 31, 2018, (ii) $483.9 million of available borrowing capacity on our revolving line of credit, and (iii) approximately $200 million to $300 million of expected retained operating cash flow for the next twelve months. Retained
operating cash flow represents our expected cash
flows from our
operating activities, less shareholder
distributions and capital expenditures to maintain our real estate facilities.
Our planned capital needs over the next year consist of (i) $
382
.
3
million of remaining spend on our current
development pipeline, (ii) $22.5
million in property acquisitions currently under contract, and (iii) $11.2 million in principal repayments on existing debt. Our capital needs may increase over the next year as we expect to increase our development pipeline and acquire additional properties
. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.
To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.
Required Debt Repayments:
As of March 31, 2018, our outstanding debt totaled approximately $1.4 billion, consisting of $28.8 million of secured debt, $421.5 million of Euro-denominated unsecured debt and $1.0 billion of U.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts in thousands):
|
|
|
|
|
|
Remainder of 2018
|
$
|
10,802
|
2019
|
|
1,505
|
2020
|
|
1,585
|
2021
|
|
1,503
|
2022
|
|
502,071
|
Thereafter
|
|
932,788
|
|
$
|
1,450,254
|
The remaining maturities on our debt over at least the next five years are nominal compared to our expected annual retained operating cash flow.
Capital Expenditure Requirements:
Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.
Capital expenditures totaled $24.3 million in the first three months of 2018, and are expected to be approximately $100 million in 2018. However, we are evaluating the potential upgrade of climate control, offices, lighting, and elevator units in certain facilities, which could result in additional capital expenditure amounts in the remainder of 2018. For the last four years, maintenance capital expenditures have ranged between approximately $0.45 and $0.75 per net rentable square foot per year.
Requirement to Pay Distributions:
For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.
On April 25, 2018, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of June 2018. Our consistent, long-term dividend policy has been to distribute only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash
flows from
operating activities.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at March 31, 2018, to be approximately $216.3 million per year.
We estimate we will pay approximate
ly $7.0 million
per year in distributions to noncontrolling interests outstanding at March 31, 2018.
Real Estate Investment Activities:
Subsequent to March 31, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) three
self-storage facilities for $22
.
5
million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.
As of
March 31, 2018 we had development and redevelopment projects at a total cost of approximately $6
6
1.
9
million. A total of $
279
.
6
million of these costs were incurred through March 31, 2018, with the remaining cost to complete of $
382
.
3
million expected to be incurred primarily in the next 18 months. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional projects; however, the level of future
development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.
Redemption of Preferred Securities
: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of
May 2,
2018, we have four series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.625% Series U Preferred Shares with $287.5 million outstanding, our 5.375% Series V Preferred Shares with $495.0 million outstanding, our 5.200% Series W Preferred Shares with $500.0 million outstanding and our 5.200% Series X Preferred Shares with $225.0 million outstanding. Redemption of such preferred shares will depend upon many factors. None of our preferred securities are redeemable at the option of the holders.
Repurchases of Common Shares
: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three months ended March 31, 2018, we did not repurchase any of our common shares. From the inception of the repurchase program
through
May 2,
2018, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.
Contractual Obligations
Our significant contractual obligations at March 31, 2018 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
of 2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
Interest and principal payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on debt (1)
|
$
|
1,720,852
|
|
$
|
47,367
|
|
$
|
38,024
|
|
$
|
38,024
|
|
$
|
37,849
|
|
$
|
534,896
|
|
$
|
1,024,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (2)
|
|
85,268
|
|
|
3,226
|
|
|
4,420
|
|
|
4,541
|
|
|
4,687
|
|
|
4,064
|
|
|
64,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction commitments (3)
|
|
162,079
|
|
|
129,663
|
|
|
32,416
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,968,199
|
|
$
|
180,256
|
|
$
|
74,860
|
|
$
|
42,565
|
|
$
|
42,536
|
|
$
|
538,960
|
|
$
|
1,089,022
|
|
(1)
|
|
Represents contractual principal and interest payments. Amounts with respect to certain Euro-denominated debt are based upon exchange rates at March 31, 2018. See Note 6 to our March 31, 2018 financial statements for further information.
|
(2)
Represents future contractual payments on land, equipment and office space under various operating leases.
(3)
Represents future expected development spending that was under contract at March 31, 2018.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at March 31, 2018 to be
approximately $216.3 million
per year. Dividends are paid when and if declared by our Board and accumulate if not paid.
Off-Balance Sheet Arrangements
: At March 31, 2018, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.