NATIONAL STORAGE AFFILIATES TRUST Forward-Looking Statements We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may," or similar expressions, we intend to identify forward-looking statements. The forward-looking statements contained in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. One of the most significant factors is the ongoing and potential impact of the current outbreak of COVID-19 on the economy, the self storage industry and the broader financial markets, which may have a significant negative impact on the Company's financial condition, results of operations and cash flows. The Company is unable to predict whether the continuing effects of the COVID-19 pandemic will trigger a further economic slowdown or a recession and to what extent the Company will experience disruptions related to the COVID-19 pandemic in the third quarter or thereafter. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below and the risks described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 26, 2020 (the "Annual Report"), the risk factor set forth in this quarterly report under Item 1A below, and the Company's subsequent filings under the Exchange Act. Statements regarding the following subjects, among others, may be forward-looking: •market trends in our industry, interest rates, the debt and lending markets or the general economy; •our business and investment strategy; •the acquisition of properties, including those under contract, and the ability of our acquisitions to achieve underwritten capitalization rates and our ability to execute on our acquisition pipeline; •the timing of acquisitions; •the internalization of retiring PROs into the Company; •our relationships with, and our ability and timing to attract additional, PROs; •our ability to effectively align the interests of our PROs with us and our shareholders; •the integration of our PROs and their managed portfolios into the Company, including into our financial and operational reporting infrastructure and internal control framework; •our operating performance and projected operating results, including our ability to achieve market rents and occupancy levels, reduce operating expenditures and increase the sale of ancillary products and services; •our ability to access additional off-market acquisitions; •actions and initiatives of theU.S. federal, state and local government and changes toU.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies; •the state of theU.S. economy generally or in specific geographic regions, states, territories or municipalities; •economic trends and economic recoveries; •our ability to obtain and maintain financing arrangements on favorable terms; •general volatility of the securities markets in which we participate; •the negative impacts from the continued spread of COVID-19 on the economy, the self storage industry, the broader financial markets, the Company's financial condition, results of operations and cash flows and the ability of the Company's tenants to pay rent; •changes in the value of our assets; •projected capital expenditures; 30 -------------------------------------------------------------------------------- •the impact of technology on our products, operations, and business; •the implementation of our technology and best practices programs (including our ability to effectively implement our integrated Internet marketing strategy); •changes in interest rates and the degree to which our hedging strategies may or may not protect us from interest rate volatility; •impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; •our ability to continue to qualify and maintain our qualification as a REIT forU.S. federal income tax purposes; •availability of qualified personnel; •the timing of conversions of subordinated performance units in our operating partnership and subsidiaries of our operating partnership into OP units in our operating partnership, the conversion ratio in effect at such time and the impact of such convertibility on our diluted earnings (loss) per share; •the risks of investing through joint ventures, including whether the anticipated benefits from a joint venture are realized or may take longer to realize than expected; •estimates relating to our ability to make distributions to our shareholders in the future; and •our understanding of our competition. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. Readers should carefully review our financial statements and the notes thereto, as well as the sections entitled "Business," "Risk Factors," "Properties," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," described in the Company's Annual Report , and the other documents we file from time to time with theSEC . If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OverviewNational Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment trust organized in the state ofMaryland onMay 16, 2013 . We have elected and we believe that we have qualified to be taxed as a REIT commencing with our taxable year endedDecember 31, 2015 . We serve as the sole general partner of our operating partnership, aDelaware limited partnership formed onFebruary 13, 2013 to conduct our business, which is focused on the ownership, operation, and acquisition of self storage properties located within the top 100 metropolitan statistical areas throughoutthe United States . Our executive chairman of the board of trustees and former chief executive officer,Arlen D. Nordhagen , co-foundedSecurCare Self Storage, Inc. in 1988 to invest in and manage self storage properties. While growing SecurCare to over 150 self storage properties,Mr. Nordhagen recognized a market opportunity for a differentiated public self storage REIT that would leverage the benefits of national scale by integrating multiple experienced regional self storage operators with local operational focus and expertise. We believe that his vision, which is the foundation of the Company, aligns the interests of our participating regional operators ("PROs"), with those of our public shareholders by allowing our PROs to participate alongside our shareholders in our financial performance and the performance of our PROs' managed portfolios. This structure offers our PROs a unique opportunity to serve as regional property managers for their managed portfolios and directly participate in the potential upside of those properties while simultaneously diversifying their investment to include a broader portfolio of self storage properties. 31 --------------------------------------------------------------------------------
COVID-19
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. The outbreak of COVID-19 in many countries, includingthe United States , has adversely impacted economic activity. The effect of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified, most states and municipalities have reacted by instituting quarantines, mandating business and school closures, requiring restrictions on travel, "shelter-in-place" and/or "stay-at-home" orders, and imposing restrictions on the types of businesses that may continue to operate. These containment measures generally do not apply to businesses, like ours, which are designated as "essential," but may apply to certain of our tenants, employees, vendors, lenders and joint venture partners. As of the date of this report, our stores continue to operate and we are in compliance with federal, state and local COVID-19 guidelines and mandates. In response to the pandemic, we have increased the level and frequency of cleaning and sanitation of our self storage facilities and enacted recommended social distancing guidelines. Many of our stores feature online rental capabilities whereby a customer can complete the entire rental process online and receive an access code to the storage facility. For the remainder of our stores that do not yet benefit from the online rental feature, the combination of call center and email communication eliminates the need for any physical contact between customers and employees. Due to the pandemic, we experienced a moderate slowdown in overall business activity during the three months endedJune 30, 2020 . Specifically, our same store portfolio (as defined below) operations were affected as follows: •Same store move-in volume decreased approximately 14% during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 ; •Same store move-out volume decreased approximately 18% during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . •Same store period-end occupancy was 89.8% as ofJune 30, 2020 , a decrease of approximately 100 basis points compared toJune 30, 2019 . •Same store average occupancy was 88.1% for the three months endedJune 30, 2020 , a decrease of approximately 140 basis points compared to the three months endedJune 30, 2019 . OurJuly 2020 same store portfolio (as defined below) operations were affected as follows: •Same store move-in volume increased approximately 8% inJuly 2020 , compared to the same period in 2019. •Same store move-out volume decreased approximately 20% inJuly 2020 , compared to the same period in 2019. •Same store period-end occupancy was 91.1% as ofJuly 31, 2020 , which was a 130 basis point increase compared toJune 30, 2020 and a increase of approximately 80 basis points compared toJuly 31, 2019 . We continue to take proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following: •We have resumed rental rate increases for in-place tenants at the vast majority of our stores during the third quarter of 2020; •We have closely monitored our liquidity position. As ofJuly 31, 2020 , we had the capacity to borrow remaining Revolver commitments of approximately$257 million with less than$5 million of debt maturing through 2022; •We have entered into an agreement to issue$150.0 million of 2.99% senior unsecured notes dueAugust 5, 2030 and$100.0 million of 3.09% senior unsecured notes dueAugust 5, 2032 in a private placement, as discussed further in Note 14 to Item 1; •We are continuing to diligently manage operating expenses, including store-level personnel costs, marketing and repairs and maintenance expenses. We have also continued to incur lower corporate travel costs compared to expectations at the beginning of the year. •We remain committed to acquiring properties at appropriate risk-adjusted returns. We expect in the near-term there may be a lower volume of acquisition transactions in the self storage sector generally due to uncertainty from the pandemic. We believe our acquisition opportunities through our captive pipeline and relationship- 32 -------------------------------------------------------------------------------- based third-party deals sourced by our PROs will continue to be a differentiating factor for us to prudently deploy capital, including through the issuance of OP equity. The above discussion is intended to provide shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management's efforts to respond to those impacts. We are unable to predict the impact of the COVID-19 pandemic on our business for the balance of the third quarter of 2020 and thereafter. We will continue to monitor its effects and will adjust our operations as necessary. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows for the third quarter of 2020 and future periods. See "Risk Factors" under Item 1A. Our Structure Our structure promotes operator accountability as subordinated performance units issued to our PROs in exchange for the contribution of their properties are entitled to distributions only after those properties satisfy minimum performance thresholds. In the event of a material reduction in operating cash flow, distributions on our subordinated performance units will be reduced before or disproportionately to distributions on our common shares held by our common shareholders. In addition, we expect our PROs will generally co-invest subordinated equity in the form of subordinated performance units in each acquisition that they source, and the value of these subordinated performance units will fluctuate with the performance of their managed portfolios. Therefore, our PROs are incentivized to select acquisitions that are expected to exceed minimum performance thresholds, thereby increasing the value of their subordinated equity stake. We expect that our shareholders will benefit from the higher levels of property performance that our PROs are incentivized to deliver. Our PROs The Company had nine PROs as ofJune 30, 2020 : Northwest, Optivest, Guardian, Move It, Storage Solutions, Hide Away, Personal Mini, Southern and Moove In. As discussed in Note 1 in Item 1, onMarch 31, 2020 , we closed on the merger and internalization of the management platform of SecurCare, which prior to the merger and internalization was our largest PRO. As part of the internalization, we offered and provided employment to most of SecurCare's employees, including its key persons, to continue managing SecurCare's managed portfolio under the brand SecurCare as members of our existing property management platform. As a result of the merger, we no longer pay any fees or reimbursements to SecurCare and distributions on the series of subordinated performance units related to SecurCare's managed portfolio were discontinued. We seek to further expand our platform by continuing to recruit additional established self storage operators, while integrating our operations through the implementation of centralized initiatives, including management information systems, revenue enhancement, and cost optimization programs. Our national platform allows us to capture cost savings by eliminating redundancies and utilizing economies of scale across the property management platforms of our PROs while also providing greater access to lower-cost capital. OurConsolidated Properties We seek to own properties that are well located in high quality sub-markets with highly accessible street access and attractive supply and demand characteristics, providing our properties with strong and stable cash flows that are less sensitive to the fluctuations of the general economy. Many of these markets have multiple barriers to entry against increased supply, including zoning restrictions against new construction and new construction costs that we believe are higher than our properties' fair market value. We have an attractive, high quality potential acquisition pipeline that we expect will continue to drive our future growth. As ofJune 30, 2020 , we owned a geographically diversified portfolio of 607 self storage properties, located in 29 states andPuerto Rico , comprising approximately 36.6 million rentable square feet, configured in approximately 291,000 storage units. Of these properties, 268 were acquired by us from our PROs, 338 were acquired from third-party sellers and one was acquired from the 2016 Joint Venture. During the six months endedJune 30, 2020 , we acquired 40 self storage properties for$259.0 million , comprising approximately 2.0 million rentable square feet, configured in approximately 16,000 storage units. Of these acquisitions, three were acquired from our PROs and 37 were acquired from third-party sellers. 33 -------------------------------------------------------------------------------- OurUnconsolidated Real Estate Ventures We seek to opportunistically partner with institutional funds and other institutional investors to acquire attractive portfolios utilizing a promoted return structure. We believe there is significant opportunity for continued external growth by partnering with institutional investors seeking to deploy capital in the self storage industry. In addition, we consider the 75% third-party interest in the Company's unconsolidated real estate ventures, which currently own 177 properties, to present a potential acquisition opportunity. Were we to pursue an acquisition of these interests, it could potentially drive our future growth. 2018 Joint Venture As ofJune 30, 2020 , our 2018 Joint Venture, in which we have a 25% interest, owned and operated a portfolio of 103 properties containing approximately 7.7 million rentable square feet, configured in approximately 64,000 storage units and located across 17 states. 2016 Joint Venture As ofJune 30, 2020 , our 2016 Joint Venture, in which we have a 25% ownership interest, owned and operated a portfolio of 74 properties containing approximately 4.9 million rentable square feet, configured in approximately 40,000 storage units and located across 13 states. During the six months endedJune 30, 2020 , our 2016 Joint Venture acquired two self storage properties containing less than 0.1 million rentable square feet, configured in approximately 500 storage units and located in one state. Our Property Management Platform Through our property management platform, we direct, manage and control the day-to-day operations and affairs of certain consolidated properties and our unconsolidated real estate ventures. As ofJune 30, 2020 , our property management platform managed and controlled 266 of our consolidated properties and 177 of our unconsolidated real estate venture properties. We earn certain customary fees for managing and operating the properties in the unconsolidated real estate ventures and we facilitate tenant insurance and/or tenant warranty protection programs for tenants at these properties in exchange for half of all proceeds from such programs. Results of Operations When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired 40 self storage properties during the six months endedJune 30, 2020 and 69 self storage properties during the year endedDecember 31, 2019 . As a result of these and other factors, we do not believe that our historical results of operations discussed and analyzed below are comparable or necessarily indicative of our future results of operations or cash flows. To help analyze the operating performance of our self storage properties, we also discuss and analyze operating results relating to our same store portfolio. Our same store portfolio is defined as those properties owned and operated since the first day of the earliest year presented, excluding any properties sold, expected to be sold or subject to significant changes such as expansions or casualty events which cause the portfolio's year-over-year operating results to no longer be comparable. As ofJune 30, 2020 , our same store portfolio consisted of 500 consolidated self storage properties. The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements in Item 1. Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding. 34 -------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 compared to the Three Months EndedJune 30, 2019 Net income was$17.8 million for the three months endedJune 30, 2020 , compared to$17.7 million for the three months endedJune 30, 2019 , an increase of$0.1 million . The increase was primarily due to an increase in net operating income ("NOI") resulting from an additional 53 self storage properties acquired betweenJuly 1, 2019 andJune 30, 2020 partially offset by increases in depreciation and amortization and a decrease in gains from the sale of self storage properties. For a description of NOI, see "Non-GAAP Financial Measures - NOI". The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 (dollars in thousands): Three Months Ended June 30, 2020 2019 Change Rental revenue Same store portfolio$ 80,141 $ 81,038 $ (897) Non-same store portfolio 15,161 6,137 9,024 Total rental revenue 95,302 87,175 8,127 Other property-related revenue Same store portfolio 2,860 2,921 (61) Non-same store portfolio 558 207 351 Total other property-related revenue 3,418 3,128 290 Property operating expenses Same store portfolio 24,780 25,052 (272) Non-same store portfolio 5,477 2,138 3,339 Total property operating expenses 30,257 27,190 3,067 Net operating income Same store portfolio 58,221 58,907 (686) Non-same store portfolio 10,242 4,206 6,036 Total net operating income 68,463 63,113 5,350 Management fees and other revenue 5,697 5,116 581 General and administrative expenses (10,329) (10,813) 484 Depreciation and amortization (29,309) (25,829) (3,480) Other (462) (357) (105) Other (expense) income Interest expense (15,513) (13,947) (1,566) Equity in earnings (losses) of unconsolidated real estate ventures 52 (1,646) 1,698 Acquisition costs (252) (305) 53 Non-operating expense (317) (169) (148) Gain on sale of self storage properties - 2,814 (2,814) Other expense (16,030) (13,253) (2,777) Income before income taxes 18,030 17,977 53 Income tax expense (243) (244) 1 Net income 17,787 17,733 54
Net income attributable to noncontrolling interests (7,365)
(25,389) 18,024
Net income (loss) attributable to
10,422 (7,656) 18,078
Distributions to preferred shareholders (3,274) (3,257) (17)
Net income (loss) attributable to common
shareholders $ 7,148 $ (10,913) $ 18,061
35-------------------------------------------------------------------------------- Total Revenue Our total revenue increased by$9.0 million , or 9.4%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase was primarily attributable to incremental revenue from 53 self storage properties acquired betweenJuly 1, 2019 andJune 30, 2020 , regular rental increases for in-place tenants, partially offset by a decrease in total portfolio average occupancy from 89.1% for the three months endedJune 30, 2019 to 87.5% for the three months endedJune 30, 2020 . Average occupancy is calculated based on the average of the month-end occupancy immediately preceding the period presented and the month-end occupancies included in the respective period presented. Rental Revenue Rental revenue increased by$8.1 million , or 9.3%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The increase in rental revenue was due to a$9.0 million increase in non-same store rental revenue which was primarily attributable to incremental rental revenue of$5.9 million from 49 self storage properties acquired betweenJuly 1, 2019 andMarch 31, 2020 , and$0.3 million from four self storage properties acquired during the three months endedJune 30, 2020 . Same store portfolio rental revenues decreased$0.9 million , or 1.1%, due to a decrease in average occupancy from 89.5% for the three months endedJune 30, 2019 to 88.1% for the three months endedJune 30, 2020 partially offset by a 0.4% increase, from$11.94 to$11.99 , in annualized same store rental revenue (including fees and net of any discounts and uncollectible customer amounts) divided by average occupied square feet ("average annualized rental revenue per occupied square foot"), driven primarily by increased contractual lease rates for in-place tenants. Other Property-Related Revenue Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and sales of storage supplies. Other property-related revenue increased by$0.3 million , or 9.3%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase primarily resulted from a$0.4 million increase in non-same store other property-related revenue which was primarily attributable to incremental other property-related revenue of$0.3 million from 49 self storage properties acquired betweenJuly 1, 2019 andMarch 31, 2020 . Management Fees and Other Revenue Management fees and other revenue, which are primarily related to managing and operating the unconsolidated real estate ventures, were$5.7 million for the three months endedJune 30, 2020 , compared to$5.1 million for the three months endedJune 30, 2019 , an increase of$0.6 million . This increase was primarily attributable to incremental tenant insurance fees and dividends from an investment in a tenant reinsurance company made during the three months endedJune 30, 2019 . Property Operating Expenses Property operating expenses were$30.3 million for the three months endedJune 30, 2020 compared to$27.2 million for the three months endedJune 30, 2019 , an increase of$3.1 million , or 11.3%. The increase in property operating expenses primarily resulted from a$3.3 million increase in non-same store property operating expenses that was primarily attributable to incremental property operating expenses of$2.5 million from 49 self storage properties acquired betweenJuly 1, 2019 andMarch 31, 2020 , and$0.1 million from four self storage properties acquired during the three months endedJune 30, 2020 . General and Administrative Expenses General and administrative expenses decreased$0.5 million , or 4.5%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . This decrease was attributable to decreases in supervisory and administrative fees charged by our PROs primarily as a result of the merger and internalization of the management platform of SecurCare onMarch 31, 2020 , as discussed in Note 1 in Item 1. 36 -------------------------------------------------------------------------------- Depreciation and Amortization Depreciation and amortization increased$3.5 million , or 13.5%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . This increase was primarily attributable to incremental depreciation expense related to the 53 self storage properties we acquired betweenJuly 1, 2019 andJune 30, 2020 and partially offset by a decrease in amortization of customer in-place leases from$2.8 million for the three months endedJune 30, 2019 to$2.4 million for the three months endedJune 30, 2020 . Interest Expense Interest expense increased$1.6 million , or 11.2%, for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . The increase in interest expense was primarily attributable to additional borrowings consisting of$155.0 million of additional term loan borrowings under the Company's credit facility inJuly 2019 ,$100.0 million of borrowings under the 2029 Term Loan Facility inApril 2019 and the issuance of the$150.0 million Senior Unsecured Notes in a private placement inAugust 2019 . The increase in interest expense from these additional borrowings was partially offset by lower outstanding borrowings under the Revolver.Equity In Earnings (Losses) Of Unconsolidated Real Estate Ventures Equity in earnings (losses) of unconsolidated real estate ventures represents our share of earnings and losses incurred through our 25% ownership interests in the 2018 Joint Venture and the 2016 Joint Venture. During the three months endedJune 30, 2020 , we recorded$0.1 million of equity in earnings from our unconsolidated real estate ventures compared to$1.6 million of losses for the three months endedJune 30, 2019 . This was primarily the result of incremental losses from our 2018 Joint Venture during the three months endedJune 30, 2019 driven by real estate depreciation and amortization of customer in-place leases following the acquisition of the Initial 2018 Joint Venture portfolio inSeptember 2018 . Gain On Sale ofSelf Storage Properties Gain on sale of self storage properties was$2.8 million for the three months endedJune 30, 2019 . During the three months endedJune 30, 2019 , we sold one self storage property to an unrelated third party for gross proceeds of$6.5 million . Net Income Attributable to Noncontrolling Interests As discussed in Note 2 in Item 1, we allocate GAAP income (loss) utilizing the HLBV method, in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating partnership at period end after adjusting for any distributions or contributions made during such period. Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests. Net income attributable to noncontrolling interests was$7.4 million for the three months endedJune 30, 2020 , compared to$25.4 million for the three months endedJune 30, 2019 . Six Months EndedJune 30, 2020 compared to the Six Months EndedJune 30, 2019 Net income was$33.6 million for the six months endedJune 30, 2020 , compared to$30.7 million for the six months endedJune 30, 2019 , an increase of$2.9 million . The increase was primarily due to an increase in NOI resulting from an additional 53 self storage properties acquired betweenJuly 1, 2019 andJune 30, 2020 and same store NOI growth partially offset by increases in depreciation and amortization and interest expense. The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 (dollars in thousands): Six Months Ended June 30, 2020 2019 Change
Rental revenue
Same store portfolio
9,654 19,300
Total rental revenue 190,704 170,030 20,674
37
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Six
Months Ended
2020 2019 Change
Other property-related revenue
Same store portfolio 5,767 5,601 166
Non-same store portfolio 1,022 351 671
Total other property-related revenue 6,789 5,952 837
Property operating expenses
Same store portfolio 50,518 50,271 247
Non-same store portfolio 10,331 3,376 6,955
Total property operating expenses 60,849 53,647 7,202
Net operating income
Same store portfolio 116,999 115,706 1,293
Non-same store portfolio 19,645 6,629 13,016
Total net operating income 136,644 122,335 14,309
Management fees and other revenue 11,146 10,009 1,137
General and administrative expenses (21,423) (21,193) (230)
Depreciation and amortization (58,414) (50,178) (8,236)
Other (851) (743) (108)
Other (expense) income
Interest expense (31,141) (27,158) (3,983)
Equity in losses of unconsolidated real estate
ventures (288) (3,748) 3,460
Acquisition costs (1,085) (462) (623)
Non-operating expense (509) (267) (242)
Gain (loss) on sale of self storage properties - 2,814 (2,814)
Other expense (33,023) (28,821) (4,202)
Income before income taxes 34,079 31,409 2,670
Income tax expense (529) (736) 207
Net income 33,550 30,673 2,877Net income attributable to noncontrolling interests (16,480)
(30,918) 14,438
Net income (loss) attributable to
17,070 (245) 17,315
Distributions to preferred shareholders (6,547) (5,845) (702)
Net income (loss) attributable to common
shareholders $ 10,523 $ (6,090) $ 16,613
Total Revenue
Our total revenue increased by $22.6 million , or 12.2%, for the six months ended
June 30, 2020 , as compared to the six months ended June 30, 2019 . This increase
was primarily attributable to incremental revenue from 53 self storage
properties acquired between July 1, 2019 and June 30, 2020 , regular rental
increases for in-place tenants, partially offset by a decrease in total
portfolio average occupancy from 88.2% for the six months ended June 30, 2019 to
87.2% for the six months ended June 30, 2020 .
38
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Rental Revenue
Rental revenue increased by $20.7 million , or 12.2%, for the six months ended
June 30, 2020 , as compared to the six months ended June 30, 2019 . The increase
in rental revenue was due to a $19.3 million increase in non-same store rental
revenue which was primarily attributable to incremental rental revenue of $3.2
million from 13 self storage properties acquired between July 1, 2019 and
December 31, 2019 , and $7.8 million from 40 self storage properties acquired
during the six months ended June 30, 2020 . Same store portfolio rental revenues
increased $1.4 million , or 0.9%, due to a 1.6% increase, from 11.96 to 12.15, in
average annualized rental revenue per occupied square foot, driven primarily by
increased contractual lease rates for in-place tenants partially offset by a
decrease in average occupancy from 88.5% for the six months ended June 30, 2019
to 87.7% for the six months ended June 30, 2020 .
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage
properties, such as tenant insurance-related access fees and sales of storage
supplies. Other property-related revenue increased by $0.8 million , or 14.1%,
for the six months ended June 30, 2020 , as compared to the six months ended June
30, 2019 . This increase primarily resulted from a $0.7 million increase in
non-same store other property-related revenue which was primarily attributable
to incremental other property-related revenue of $0.1 million from 13 self
storage properties acquired between July 1, 2019 and December 31, 2019 , and $0.3
million from 40 self storage properties acquired during the six months ended
June 30, 2020 .
Management Fees and Other Revenue
Management fees and other revenue, which are primarily related to managing and
operating the unconsolidated real estate ventures, were $11.1 million for the
six months ended June 30, 2020 , compared to $10.0 million for the six months
ended June 30, 2019 , an increase of $1.1 million . This increase was primarily
attributable to incremental tenant insurance fees and dividends from an
investment in a tenant reinsurance company made during the three months ended
June 30, 2019 .
Property Operating Expenses
Property operating expenses were $60.8 million for the six months ended June 30,
2020 compared to $53.6 million for the six months ended June 30, 2019 , an
increase of $7.2 million , or 13.4%. The increase in property operating expenses
primarily resulted from a $7.0 million increase in non-same store property
operating expenses that was primarily attributable to incremental property
operating expenses of $1.2 million from 13 self storage properties acquired
between July 1, 2019 and December 31, 2019 , and $3.2 million from 40 self
storage properties acquired during the six months ended June 30, 2020 .
General and Administrative Expenses
General and administrative expenses increased $0.2 million , or 1.1%, for the six
months ended June 30, 2020 , compared to the six months ended June 30, 2019 . This
increase was primarily attributable to increases in payroll and related costs
partially offset by decreases in supervisory and administrative fees charged by
our PROs primarily as a result of the merger and internalization of the
management platform of SecurCare on March 31, 2020 , as discussed in Note 1 in
Item 1.
Depreciation and Amortization
Depreciation and amortization increased $8.2 million , or 16.4%, for the six
months ended June 30, 2020 , compared to the six months ended June 30, 2019 . This
increase was primarily attributable to incremental depreciation expense related
to the 53 self storage properties we acquired between July 1, 2019 and June 30,
2020 .
Interest Expense
Interest expense increased $4.0 million , or 14.7%, for the six months ended June
30, 2020 , compared to the six months ended June 30, 2019 . The increase in
interest expense was primarily attributable to additional borrowings consisting
of $155.0 million of additional term loan borrowings under the Company's credit
facility in July 2019 , $100.0 million of borrowings under the 2029 Term Loan
Facility in April 2019 and the issuance of the $150.0 million Senior Unsecured
Notes in a private placement in August 2019 . The increase in interest expense
from these additional borrowings was partially offset by lower outstanding
borrowings under the Revolver.
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Equity In Earnings (Losses) Of Unconsolidated Real Estate Ventures
Equity in earnings (losses) of unconsolidated real estate ventures represents
our share of earnings and losses incurred through our 25% ownership interests in
the 2018 Joint Venture and the 2016 Joint Venture. During the six months ended
June 30, 2020 , we recorded $0.3 million of equity in losses from our
unconsolidated real estate ventures compared to $3.7 million of losses for the
six months ended June 30, 2019 . This was primarily the result of incremental
losses from our 2018 Joint Venture during the six months ended June 30, 2019
driven by real estate depreciation and amortization of customer in-place leases
following the acquisition of the Initial 2018 Joint Venture portfolio in
September 2018 .
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties was $2.8 million for the six months
ended June 30, 2019 . During the six months ended June 30, 2019 , we sold one self
storage property to an unrelated third party for gross proceeds of $6.5 million .
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 in Item 1, we allocate GAAP income (loss) utilizing the
HLBV method, in which we allocate income or loss based on the change in each
unitholders' claim on the net assets of our operating partnership at period end
after adjusting for any distributions or contributions made during such period.
Due to the stated liquidation priorities and because the HLBV method
incorporates non-cash items such as depreciation expense, in any given period,
income or loss may be allocated disproportionately to noncontrolling interests.
Net income attributable to noncontrolling interests was $16.5 million for the
six months ended June 30, 2020 , compared to $30.9 million for the six months
ended June 30, 2019 .
Non-GAAP Financial Measures
FFO and Core FFO
Funds from operations, or FFO, is a widely used performance measure for real
estate companies and is provided here as a supplemental measure of our operating
performance. The December 2018 Nareit Funds From Operations White Paper - 2018
Restatement, which we refer to as the White Paper, defines FFO as net income (as
determined under GAAP), excluding: real estate depreciation and amortization,
gains and losses from the sale of certain real estate assets, gains and losses
from change in control, mark-to-market changes in value recognized on equity
securities, impairment write-downs of certain real estate assets and impairment
of investments in entities when it is directly attributable to decreases in the
value of depreciable real estate held by the entity and after items to record
unconsolidated partnerships and joint ventures on the same basis. Distributions
declared on subordinated performance units and DownREIT subordinated performance
units represent our allocation of FFO to noncontrolling interests held by
subordinated performance unitholders and DownREIT subordinated performance
unitholders. For purposes of calculating FFO attributable to common
shareholders, OP unitholders, and LTIP unitholders, we exclude distributions
declared on subordinated performance units, DownREIT subordinated performance
units, preferred shares and preferred units. We define Core FFO as FFO, as
further adjusted to eliminate the impact of certain items that we do not
consider indicative of our core operating performance. These further adjustments
consist of acquisition costs, organizational and offering costs, gains on debt
forgiveness, gains (losses) on early extinguishment of debt, and after
adjustments for unconsolidated partnerships and joint ventures.
Management uses FFO and Core FFO as key performance indicators in evaluating the
operations of our properties. Given the nature of our business as a real estate
owner and operator, we consider FFO and Core FFO as key supplemental measures of
our operating performance that are not specifically defined by GAAP. We believe
that FFO and Core FFO are useful to management and investors as a starting point
in measuring our operational performance because FFO and Core FFO exclude
various items included in net income (loss) that do not relate to or are not
indicative of our operating performance such as gains (or losses) from sales of
self storage properties and depreciation, which can make periodic and peer
analyses of operating performance more difficult. Our computation of FFO and
Core FFO may not be comparable to FFO reported by other REITs or real estate
companies.
FFO and Core FFO should be considered in addition to, but not as a substitute
for, other measures of financial performance reported in accordance with GAAP,
such as total revenues, operating income and net income (loss). FFO and Core FFO
do not represent cash generated from operating activities determined in
accordance with GAAP and are not a measure of liquidity or an indicator of our
ability to make cash distributions. We believe that to further
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understand our performance, FFO and Core FFO should be compared with our
reported net income (loss) and considered in addition to cash flows computed in
accordance with GAAP, as presented in our consolidated financial statements.
The following table presents a reconciliation of net income (loss) to FFO and
Core FFO for the three and six months ended June 30, 2020 and 2019 (in
thousands, except per share and unit amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income $ 17,787 $ 17,733 $ 33,550 $ 30,673
Add (subtract):
Real estate depreciation and amortization 28,955 25,510 57,719 49,537
Company's share of unconsolidated real
estate venture real estate depreciation and
amortization 3,811 5,472 7,598 10,929
Gain on sale of self storage properties - (2,814) - (2,814)
Mark-to-market changes in value on equity
securities - - 142 -
Company's share of unconsolidated real
estate venture loss on sale of properties - - - 202
Distributions to preferred shareholders and
unitholders (3,514) (3,461) (7,028) (6,214)
FFO attributable to subordinated
performance unitholders(1) (6,030) (8,462) (14,694) (15,755)
FFO attributable to common shareholders, OP
unitholders, and LTIP unitholders 41,009 33,978 77,287 66,558
Add:
Acquisition costs 252 305 1,085 462
Core FFO attributable to common
shareholders, OP unitholders, and LTIP
unitholders $ 41,261 $ 34,283 Weighted average shares and units outstanding - FFO and Core FFO:(2) Weighted average shares outstanding - basic 68,210
57,543 64,004 57,101
Weighted average restricted common shares
outstanding 34 29 29 29
Weighted average OP units outstanding 29,720 30,213 30,215 30,081
Weighted average DownREIT OP unit
equivalents outstanding 1,925 1,848 1,887 1,848
Weighted average LTIP units outstanding 534 537 576 641
Total weighted average shares and units
outstanding - FFO and Core FFO 100,423 90,170 96,711 89,700
FFO per share and unit $ 0.41 $ 0.38 $ 0.80 $ 0.74
Core FFO per share and unit $ 0.41 $ 0.38 $ 0.81 $ 0.75
41-------------------------------------------------------------------------------- (1) Amounts represent distributions declared for subordinated performance unitholders and DownREIT subordinated performance unitholders for the periods presented. (2)NSA combines OP units and DownREIT OP units with common shares because, after the applicable lock-out periods, OP units in the Company's operating partnership are redeemable for cash or, atNSA's option, exchangeable for common shares on a one-for-one basis and DownREIT OP units are also redeemable for cash or, atNSA's option, exchangeable for OP units in our operating partnership on a one-for-one basis, subject to certain adjustments in each case. Subordinated performance units, DownREIT subordinated performance units, and LTIP units may also, under certain circumstances, be convertible into or exchangeable for common shares (or other units that are convertible into or exchangeable for common shares). See footnote(1) in the following table for additional discussion of subordinated performance units, DownREIT subordinated performance units, and LTIP units in the calculation of FFO and Core FFO per share and unit. The following table presents a reconciliation of earnings (loss) per share - diluted to FFO and Core FFO per share and unit for the three and six months endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Earnings (loss) per share - diluted$ 0.10 $ (0.19) $ 0.16 $ (0.11) Impact of the difference in weighted average number of shares(1) (0.03) 0.07 (0.06) 0.04 Impact of GAAP accounting for noncontrolling interests, two-class method and treasury stock method(2) 0.07 0.28 0.17 0.35 Add real estate depreciation and amortization 0.29 0.28 0.60 0.55Add Company's share of unconsolidated venture real estate depreciation and amortization 0.04 0.06 0.08 0.12 Subtract gain on sale of self storage properties - (0.03) - (0.03) FFO attributable to subordinated performance unitholders (0.06) (0.09) (0.15) (0.18) FFO per share and unit 0.41 0.38 0.80 0.74 Add acquisition costs - - 0.01 0.01 Core FFO per share and unit$ 0.41 $ 0.38 $ 0.81 $ 0.75 (1) Adjustment accounts for the difference between the weighted average number of shares used to calculate diluted earnings per share and the weighted average number of shares used to calculate FFO and Core FFO per share and unit. Diluted earnings per share is calculated using the two-class method for the company's restricted common shares and the treasury stock method for certain unvested LTIP units, and assumes the conversion of vested LTIP units into OP units on a one-for-one basis and the hypothetical conversion of subordinated performance units, and DownREIT subordinated performance units into OP units, even though such units may only be convertible into OP units (i) after a lock-out period and (ii) upon certain events or conditions. For additional information about the conversion of subordinated performance units, DownREIT subordinated performance units and LTIP units into OP units, see Note 9 in Item 1. The computation of weighted average shares and units for FFO and Core FFO per share and unit includes all restricted common shares and LTIP units that participate in distributions and excludes all subordinated performance units and DownREIT subordinated performance units because their effect has been accounted for through the allocation of FFO to the related unitholders based on distributions declared. (2) Represents the effect of adjusting the numerator to consolidated net income (loss) prior to GAAP allocations for noncontrolling interests, after deducting preferred share and unit distributions, and before the application of the two-class method and treasury stock method, as described in footnote(1).
NOI
Net operating income, or NOI, represents rental revenue plus other
property-related revenue less property operating expenses. NOI is not a measure
of performance calculated in accordance with GAAP.
We believe NOI is useful to investors in evaluating our operating performance
because:
•NOI is one of the primary measures used by our management and our PROs to
evaluate the economic productivity of our properties, including our ability to
lease our properties, increase pricing and occupancy and control our property
operating expenses;
•NOI is widely used in the real estate industry and the self storage industry to
measure the performance and value of real estate assets without regard to
various items included in net income that do not relate to or are
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not indicative of operating performance, such as depreciation and amortization,
which can vary depending upon accounting methods, the book value of assets, and
the impact of our capital structure; and
•We believe NOI helps our investors to meaningfully compare the results of our
operating performance from period to period by removing the impact of our
capital structure (primarily interest expense on our outstanding indebtedness)
and depreciation of the cost basis of our assets from our operating results.
There are material limitations to using a non-GAAP measure such as NOI,
including the difficulty associated with comparing results among more than one
company and the inability to analyze certain significant items, including
depreciation and interest expense, that directly affect our net income (loss).
We compensate for these limitations by considering the economic effect of the
excluded expense items independently as well as in connection with our analysis
of net income (loss). NOI should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in accordance
with GAAP, such as total revenues and net income (loss).
The following table presents a reconciliation of net income (loss) to NOI for
the three and six months ended June 30, 2020 and 2019 (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income $ 17,787 $ 17,733 $ 33,550 $ 30,673
(Subtract) Add:
Management fees and other revenue (5,697) (5,116) (11,146) (10,009)
General and administrative expenses 10,329 10,813 21,423 21,193
Other 462 357 851 743
Depreciation and amortization 29,309 25,829 58,414 50,178
Interest expense 15,513 13,947 31,141 27,158
Equity in (earnings) losses of
unconsolidated real estate ventures (52) 1,646 288 3,748
Acquisition costs 252 305 1,085 462
Income tax expense 243 244 529 736
Gain on sale of self storage properties - (2,814) - (2,814)
Non-operating expense 317 169 509 267
Net Operating Income $ 68,463 $ 63,113 $ 136,644 $ 122,335
Our consolidated NOI shown in the table above does not include our proportionate
share of NOI for our unconsolidated real estate ventures. For additional
information about our 2018 Joint Venture and 2016 Joint Venture see Note 5 to
the condensed consolidated financial statements in Item 1.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss), as determined under GAAP, plus interest
expense, loss on early extinguishment of debt, income taxes, depreciation and
amortization expense and the Company's share of unconsolidated real estate
venture depreciation and amortization. We define Adjusted EBITDA as EBITDA plus
acquisition costs, organizational and offering expenses, equity-based
compensation expense, losses on sale of properties and impairment of long-lived
assets, minus gains on sale of properties and debt forgiveness, and after
adjustments for unconsolidated partnerships and joint ventures. These further
adjustments eliminate the impact of items that we do not consider indicative of
our core operating performance. In evaluating EBITDA and Adjusted EBITDA, you
should be aware that in the future we may incur expenses that are the same as or
similar to some of the adjustments in this presentation. Our presentation of
EBITDA and Adjusted EBITDA should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items.
We present EBITDA and Adjusted EBITDA because we believe they assist investors
and analysts in comparing our performance across reporting periods on a
consistent basis by excluding items that we do not believe are indicative of our
core operating performance. EBITDA and Adjusted EBITDA have limitations as an
analytical tool. Some of these limitations are:
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•EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future
requirements, for capital expenditures, contractual commitments or working
capital needs;
•EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or
the cash requirements necessary to service interest or principal payments, on
our debts;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
EBITDA and Adjusted EBITDA do not reflect any cash requirements for such
replacements;
•Adjusted EBITDA excludes equity-based compensation expense, which is and will
remain a key element of our overall long-term incentive compensation package,
although we exclude it as an expense when evaluating our ongoing operating
performance for a particular period;
•EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of our ongoing
operations; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA
differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by considering the economic effect of the
excluded expense items independently as well as in connection with our analysis
of net income (loss). EBITDA and Adjusted EBITDA should be considered in
addition to, but not as a substitute for, other measures of financial
performance reported in accordance with GAAP, such as total revenues and net
income (loss).
The following table presents a reconciliation of net income (loss) to EBITDA and
Adjusted EBITDA for the three and six months ended June 30, 2020 and 2019
(dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income $ 17,787 $ 17,733 $ 33,550 $ 30,673
Add:
Depreciation and amortization 29,309 25,829 58,414 50,178
Company's share of unconsolidated real
estate venture depreciation and
amortization 3,811 5,472 7,598 10,929
Interest expense 15,513 13,947 31,141 27,158
Income tax expense 243 244 529 736
EBITDA 66,663 63,225 131,232 119,674
Add:
Acquisition costs 252 305 1,085 462
Gain on sale of self storage properties - (2,814) - (2,814)
Company's share of unconsolidated real
estate venture loss on sale of
properties - - - 202
Equity-based compensation expense 1,151 1,108 1,925 2,220
Adjusted EBITDA $ 68,066 $ 61,824 $ 134,242 $ 119,744
Liquidity and Capital Resources
Liquidity Overview
Liquidity is the ability to meet present and future financial obligations. Our
primary source of liquidity is cash flow from our operations. Additional sources
are proceeds from equity and debt offerings, and debt financings including
borrowings under the credit facility, 2023 Term Loan Facility, 2028 Term Loan
Facility and 2029 Term Loan Facility.
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Our short-term liquidity requirements consist primarily of property operating
expenses, property acquisitions, capital expenditures, general and
administrative expenses and principal and interest on our outstanding
indebtedness. A further short-term liquidity requirement relates to
distributions to our common and preferred shareholders and holders of preferred
units, OP units, LTIP units, subordinated performance units, DownREIT OP units
and DownREIT subordinated performance units. We expect to fund short-term
liquidity requirements from our operating cash flow, cash on hand and borrowings
under our credit facility.
Our long-term liquidity needs consist primarily of the repayment of debt,
property acquisitions, and capital expenditures. We acquire properties through
the use of cash, preferred units, OP units and subordinated performance units in
our operating partnership or DownREIT partnerships. We expect to meet our
long-term liquidity requirements with operating cash flow, cash on hand, secured
and unsecured indebtedness, and the issuance of equity and debt securities.
The availability of credit and its related effect on the overall economy may
affect our liquidity and future financing activities, both through changes in
interest rates and access to financing. Currently, interest rates are low
compared to historical levels. Our ability to access capital on favorable terms
as well as to use cash from operations to continue to meet our liquidity needs,
all of which are highly uncertain and cannot be predicted, could be affected by
various risks and uncertainties, including, but not limited to, the effects of
the COVID-19 pandemic. We believe that, as a publicly-traded REIT, we will have
access to multiple sources of capital to fund our long-term liquidity
requirements, including the incurrence of additional debt and the issuance of
debt and additional equity securities. However, we cannot assure you that this
will be the case.
Cash Flows
At June 30, 2020 , we had $17.3 million in cash and cash equivalents and $5.6
million of restricted cash, a decrease in cash and cash equivalents of $3.3
million and an increase in restricted cash of $1.9 million from December 31,
2019 . Restricted cash primarily consists of escrowed funds deposited with
financial institutions for real estate taxes, insurance, and other reserves for
capital improvements in accordance with our loan agreements. The following
discussion relates to changes in cash due to operating, investing, and financing
activities, which are presented in our condensed consolidated statements of cash
flows included in Item 1 of this report.
Operating Activities
Cash provided by our operating activities was $105.7 million for the six months
ended June 30, 2020 compared to $93.5 million for the six months ended June 30,
2019 , an increase of $12.2 million . Our operating cash flow increased primarily
due to the 13 self storage properties that were acquired between July 1, 2019
and December 31, 2019 that generated cash flow for the entire six months ended
June 30, 2020 , and an additional 40 self storage properties acquired during the
six months ended June 30, 2020 . Because these 53 self storage properties were
acquired after June 30, 2019 , our operating results for the six months ended
June 30, 2019 were not impacted by them. The increase in our operating cash
flows was partially offset by higher cash payments for interest expense.
Investing Activities
Cash used in investing activities was $243.9 million for the six months ended
June 30, 2020 compared to $318.1 million for the six months ended June 30, 2019 .
The primary uses of cash for the six months ended June 30, 2020 were for our
acquisition of 40 self storage properties for cash consideration of $239.1
million , capital expenditures of $8.6 million , investments in our 2016 Joint
Venture of $3.1 million , expenditures for corporate furniture, equipment and
other of $0.3 million and deposits for potential acquisitions of $0.3 million
partially offset by $7.6 million of proceeds from the sale of equity securities.
The primary uses of cash for the six months ended June 30, 2019 were for our
acquisition of 56 self storage properties for cash consideration of $307.8
million , capital expenditures of $10.4 million , acquisition of the interest in a
reinsurance company and related cash flows of $6.6 million , capital expenditures
of corporate furniture and equipment of $0.4 million and deposits for potential
acquisitions of $0.2 million , partially offset by $6.3 million of net proceeds
from the sale of a self storage property and distributions received from our
2016 Joint Venture of $1.0 million .
Capital expenditures totaled $8.6 million and $10.4 million during the six
months ended June 30, 2020 and 2019, respectively. We generally fund
post-acquisition capital additions from cash provided by operating activities.
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We categorize our capital expenditures broadly into three primary categories: •recurring capital expenditures, which represent the portion of capital expenditures that are deemed to replace the consumed portion of acquired capital assets and extend their useful life; •value enhancing capital expenditures, which represent the portion of capital expenditures that are made to enhance the revenue and value of an asset from its original purchase condition; and •acquisitions capital expenditures, which represent the portion of capital expenditures capitalized during the current period that were identified and underwritten prior to a property's acquisition. A summary of the capital expenditures for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows for the six months endedJune 30, 2020 and 2019, are presented below (dollars in thousands):
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