LIFE STORAGE, INC.
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. We make
statements in this section that are forward-looking statements within the
meaning of the federal securities laws. For a complete discussion of
forward-looking statements, see the section in this Form 10-K entitled "Forward
Looking Statements." Certain risk factors may cause actual results, performance
or achievements to differ materially from those expressed or implied by the
following discussion. For a discussion of such risk factors, see the section in
this Form 10-K entitled "Risk Factors." Dollar amounts in thousands, except
share and per share data, unless otherwise stated.
Business and Overview
We believe we are the fourth largest operator of self-storage properties in the
United States based on square feet owned and managed. All of our stores conduct
business under the customer-friendly name Life Storage ®.
Operating Strategy
Our operating strategy is designed to generate growth and enhance value by:
a.
Increasing operating performance and cash flow through aggressive management of our stores:
•
We seek to differentiate our self-storage facilities from our competition through innovative marketing and value-added product offerings including:
o
Strategic and efficient Web and Mobile marketing that places
o
Regional marketing which creates effective brand awareness in the cities where we do business;
o OurCustomer Care Center answers sales inquiries and makes reservations for all of our Properties on a centralized basis. Further, our call center and customer contact software was developed in-house and is 100% supported by our in-house experts; o
Our "Rent Now" fully-digital rental platform allows customers to "skip the counter" by selecting a specific storage unit, completing the rental agreement and making their rental payment online;
o
Our dehumidification system provides our customers with a better environment to store their goods and improves yields on our Properties;
•
Our customized computer applications link each of our primary sales channels (customer care center, web, and store) allowing for real time access to space type and inventory, pricing, promotions, and other pertinent store information. This also provides us with raw data on historical and current pricing, move-in and move-out activity, specials and occupancies, etc. This data is then used within the advanced pricing analytics programs employed by our revenue management team;
•
All of our store employees receive a high level of training. New store associates are assigned a Certified Training Manager as a mentor during their initial training period. In addition, all employees have access to our online training and development portal for initial training as well as continuing education. Finally, we have a company intranet that acts as a communications portal for company policy and procedures, online ordering, incentive rankings, etc.
b.
Acquiring additional stores:
•
Our objective is to acquire new stores in markets in which we currently operate. This is a proven strategy we have employed over the years as it facilitates our branding efforts, grows market share, and allows us to achieve improved economies of scale through shared advertising, payroll, and other services.
•
We also look to enter new markets that are in the top 50 Metropolitan Statistical Areas (MSA) by acquiring established multi-property portfolios. With this strategy we are then able to seek out additional acquisition or third-party management opportunities to continue to grow market share and branding and enhance economies of scale.
•
We primarily target stores with higher average rental rates per square foot than our overall portfolio to help improve operating margin.
c.
Expanding our management business:
•
We see our management business as a source of future acquisitions. We hold a
noncontrolling interest in multiple joint ventures which hold a total of 141
properties that we manage. In addition, we manage 299 self-storage facilities
for which we have no ownership. We may enter into additional management
agreements and develop additional joint ventures in the future.
22--------------------------------------------------------------------------------
•
To broaden opportunities available, we have implemented a bridge lending program under which an unconsolidated joint venture of the Company provides financing to owners of operating properties that we manage. We anticipate that this program will help us increase our management business, create additional future acquisition opportunities, and strengthen our relationship with partners, all while providing interest and fee income.
d.
Expanding and enhancing our existing stores:
•
Over the past five years we have undertaken a program of expanding and enhancing our Properties. In 2018, we added or converted to premium storage 390,000 square feet to existing Properties for a total cost of approximately$27.8 million ; in 2019, we added or converted to premium storage 694,000 square feet to existing Properties for a total cost of approximately$58.1 million ; in 2020, we added or converted to premium storage 522,000 square feet to existing Properties for a total cost of approximately$41.4 million ; in 2021, we added or converted to premium storage 287,000 square feet to existing Properties for a total cost of approximately$23.5 million ; and in 2022, we added or converted to premium storage 661,000 square feet to existing Properties for a total cost of approximately$55.7 million .
Supply and Demand / Operating Trends
We believe the supply and demand model in the self-storage industry is
micro-market specific in that a majority of our business comes from within a
five-mile radius of our stores. The out-performance of the sector compared to
other real estate asset classes has drawn new capital to self-storage. The
self-storage industry experienced significant new competition in recent years
and the Company expects modest growth in new supply at least through 2023.
Despite the inflow of additional properties throughout the nation, we have seen
capitalization rates on quality stabilized acquisitions in the top 50 major
metropolitan markets (expected annual return on investment) range from
approximately 4.0% to 5.5%.
We have experienced annual same store sales increases each year for the past 13
years, subsequent to the economic recession of 2009. We feel our recent
performance further supports the notion that the self-storage industry holds up
well regardless of the prevailing economic landscape. Our performance in 2022,
2021, and 2020 despite the effects of the COVID-19 global health crisis further
supports this notion.
We believe the increase in same store move ins in 2022 when compared to 2021 was
due to incremental demand linked to elevated levels of mobility, decluttering,
and home buying. We believe the increase in same store move outs over the same
period was a result of a return to and normalization of typical seasonal
patterns.
2022 2021 Change
Same store move ins 220,036 213,018 7,018 Same store move outs 225,569 206,495 19,074 Difference
(5,533 ) 6,523 (12,056 )
Although property tax increases were kept at moderate levels through assessment
challenges in 2022, elevated property tax increases are expected in the coming
years. We expect same store expense growth resulting from increases in health
costs, property insurance, and property taxes in 2023 to be partially offset by
operating efficiencies gained from leveraging technology. We believe the same
store expense increases will be at manageable levels.
Subsequent Events
OnFebruary 5, 2023 , Public Storage made public an unsolicited proposal to acquire the Company. OnFebruary 16, 2023 , the Company issued a press release announcing that the Company's board of directors unanimously rejected the proposal. The Company has incurred legal and professional fees and other costs related to Public Storage's unsolicited proposal and expects to incur additional fees and other costs and charges in the future in connection with the proposal, which may be significant. 23 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, including those related to carrying values of storage facilities, bad debts, and contingencies and litigation. We base these estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following estimates are considered critical because they are particularly dependent on our judgment about matters that have a significant level of uncertainty at the time the accounting estimates are made, and changes to those estimates could have a material impact on our financial condition or operating results. Assigning purchase price to assets acquired: Upon adoption of Accounting Standards Update 2017-01, most of our self-storage facility acquisitions, including all self-storage facility acquisitions in 2022 and 2021, do not meet the definition of business combinations and are therefore treated as asset acquisitions. As a result, the cost of acquired storage facilities is assigned primarily to land, land improvements, building, equipment, and in-place customer leases based on the relative fair values of these assets as of the date of acquisition. We use significant unobservable inputs in our determination of the fair values of these assets. The determination of these inputs involves judgments and estimates that can vary for each individual facility based on various factors specific to the facilities and the functional, economic and other factors affecting each facility. The fair values of the acquired facilities are determined using financial projections and applicable capitalization rates. To determine the fair value of land, we use prices per acre derived from observed transactions involving comparable land in similar locations. To determine the fair value of buildings, equipment and improvements, we use current replacement cost estimates based on information derived from construction industry data by geographic region as adjusted for age, condition, and turnkey factor, economic profit and economic obsolescence considerations associated with these assets. The fair values of in-place customer leases are based on the rent that would be lost due to the amount of time required to replace existing customers which is based on our historical experience with market demand and turnover in our facilities. Qualification as a REIT: We operate, and intend to continue to operate, as a REIT under the Code, but no assurance can be given that we will at all times so qualify. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders. If we fail to qualify as a REIT, any requirement to pay federal income taxes could have a material adverse impact on our financial condition and results of operations. Recent Accounting Pronouncements
See Note 2 to the financial statements.
YEAR ENDED
We recorded rental revenues of$917.1 million for the year endedDecember 31, 2022 , an increase of$226.3 million or 32.8% when compared to 2021 rental revenues of$690.8 million . Of the change in rental revenue,$97.9 million of the increase resulted from a 15.5% increase in rental revenues at the 576 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore the 576 core properties considered in same store sales are those included in the consolidated results of operations sinceDecember 31, 2020 , excluding stores not yet stabilized, eight stores significantly impacted by natural disasters, and three stores that the Company began to fully replace between 2017 and 2020). The increase in same store rental revenues was a result of an 16.7% increase in rental income per square foot, partially offset by a 140 basis point decrease in average occupancy. Also contributing to the overall increase in rental revenues was an increase of$128.4 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2022 and 2021. We recorded tenant reinsurance revenues of$73.8 million for the year endedDecember 31, 2022 , an increase of$15.7 million or 27.0% when compared to 2021 tenant reinsurance revenues of$58.1 million . The increase in tenant reinsurance revenues is primarily due to the increase in stores owned or managed in 2022. Other operating income, which includes merchandise sales, truck rentals, management fees and acquisition fees, increased by$7.5 million for the year endedDecember 31, 2022 compared to 2021 primarily as the result of increased management fees earned as a result of an increase in managed properties and increased merchandise sales. Property operations and maintenance expenses increased$36.1 million or 25.1% in 2022 compared to 2021. The 576 core properties considered in the same store pool experienced a$6.5 million or 5.5% increase in such expenses primarily as the result of increased repairs and maintenance expenditures, payroll expenses, utilities, office related expenses, and internet marketing. The net activity of the stores not included in the same store pool also contributed$29.6 million to the overall increase in property operations and maintenance expenses. Tenant reinsurance expenses increased$6.4 million or 28.0% in 2022 compared to 2021 primarily as the result of the increase in stores owned or managed in 2022. Real estate tax expense increased$19.8 million or 24.9% in 2022 compared to 2021. The 576 core properties considered in the same store pool experienced a$3.8 million or 5.2% increase in real estate taxes which is reflective of a net increase in property tax levies on 24
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those properties. In addition to the same store real estate tax expense
increase, real estate taxes increased
Our 2022 same store results consist of only those Properties that have been owned by the Company and included in our consolidated results sinceDecember 31, 2020 , excluding stores not yet stabilized, eight stores significantly impacted by natural disasters, and three stores that the Company began to fully replace between 2017 and 2020. The impact of tenant reinsurance related items is excluded from same store results. We believe that same store results are meaningful measures to investors in evaluating our operating performance because, given the acquisitive nature of the industry, same store results provide information about the overall business after removing the results from those properties that were not consistent from year-to-year. Additionally, same store results are widely used in the real estate industry and the self-storage industry to measure performance. Same store results should be considered in addition to, but not as a substitute for, consolidated results in accordance with generally accepted accounting principles ("GAAP"). The following table sets forth operating data for our 576 same store properties. These results provide information relating to property operating changes without the effects of acquisitions. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2022 2021 Change Same store rental income$ 730,567 $ 632,664 15.5 % Same store other operating income 7,417 7,923 (6.4 )% Total same store operating income 737,984 640,587 15.2 % Payroll and benefits 41,981 42,638 (1.5 )% Real estate taxes 77,129 73,313 5.2 % Utilities 17,533 15,978 9.7 % Repairs and maintenance 22,615 19,910 13.6 % Office and other operating expenses 19,913 18,294 8.8 % Insurance 7,109 7,065 0.6 % Advertising 192 230 (16.5 )% Internet marketing 16,361 15,048 8.7 % Total same store operating expenses 202,833 192,476 5.4 % Same store net operating income$ 535,151 $ 448,111 19.4 % Net operating income increased$192.8 million or 35.6% as a result of a 19.4% increase in our same store net operating income along with an increase of$105.8 million primarily related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool. Net operating income or "NOI" is a non-GAAP financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, operating lease expense, depreciation and amortization expense, any losses on sale of real estate, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, any gains on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure to investors in evaluating our operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. Additionally, 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 not indicative of operating performance, such as depreciation and amortization, which can vary depending on accounting methods and the book value of assets. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income. There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income. 25
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The following table reconciles our net income presented in the 2022 and 2021 consolidated financial statements to NOI generated by our self-storage facilities during those years.
Year ended December 31,
(dollars in thousands) 2022 2021
Net income $ 366,462 $ 252,175
General and administrative 77,201 62,617
Depreciation and amortization 192,902 147,119
Interest expense 109,240
86,786
Interest and dividend income (32 ) (827 ) Gain on sale of investments in joint ventures (1,572 )
-
Equity in income of joint ventures (9,235 ) (5,696 ) Net operating income$ 734,966 $ 542,174 Net operating income: Same store 535,151 448,111
Other stores, tenant reinsurance related income,
management fee income, and gain on sale of
non-real estate assets 199,815 94,063 Total net operating income$ 734,966 $ 542,174 General and administrative expenses increased$14.6 million or 23.3% from 2021 to 2022. This increase was primarily driven by an increase in home office personnel related costs to support the growth in stores, write-offs of certain technology assets with no future use, and costs related to terminated acquisition activity. Depreciation and amortization expense increased to$192.9 million in 2022 from$147.1 million in 2021 as a result of depreciation and amortization related to self-storage facilities acquired in 2022 and 2021. Interest expense increased from$86.8 million in 2021 to$109.2 million in 2022 primarily as a result of increased outstanding debt balances in 2022 as compared to 2021 as well as rising interest rates on the Company's line of credit in 2022. Equity in income of joint ventures increased from$5.7 million in 2021 to$9.2 million in 2022 primarily as a result of increased profits in 2022 as compared to 2021 from existing joint ventures as stores leased up and the full-year impact of joint ventures entered into during 2021.
The Company did not sell any properties in 2022 or 2021.
YEAR ENDED
We recorded rental revenues of$690.8 million for the year endedDecember 31, 2021 , an increase of$151.2 million or 28.0% when compared to 2020 rental revenues of$539.6 million . Of the change in rental revenue,$72.2 million of the increase resulted from a 14.3% increase in rental revenues at the 531 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore the 531 core properties considered in same store sales are those included in the consolidated results of operations sinceDecember 31, 2019 , excluding stores not yet stabilized, four stores significantly impacted by natural disasters, and two stores that the Company began to fully replace in 2017). The increase in same store rental revenues was a result of a 290 basis point increase in average occupancy coupled with a 9.8% increase in rental income per square foot. Also contributing to the overall increase in rental revenues was an increase of$79.0 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2021 and 2020. We recorded tenant reinsurance revenues of$58.1 million for the year endedDecember 31, 2021 , an increase of$13.4 million or 29.9% when compared to 2020 tenant reinsurance revenues of$44.7 million . The increase in tenant reinsurance revenues is primarily due to the increase in stores owned or managed in 2021. Other operating income, which includes merchandise sales, truck rentals, management fees and acquisition fees, increased by$7.2 million for the year endedDecember 31, 2021 compared to 2020 primarily as the result of increased acquisition fees, increased management fees earned as a result of an increase in managed properties and increased revenues from the Company's Warehouse Anywhere third-party logistics and warehousing solution. Property operations and maintenance expenses increased$21.1 million or 17.2% in 2021 compared to 2020. The 531 core properties considered in the same store pool experienced a$3.7 million or 3.5% increase in such expenses primarily as the result of increased repairs and maintenance expenditures and office related expenses. The net activity of the stores not included in the same store pool also contributed$17.4 million to the overall increase in property operations and maintenance expenses. Tenant reinsurance expenses increased$7.2 million or 45.5% in 2021 compared to 2020 primarily as the result of the increase in stores owned or managed in 2021. Real estate tax expense increased$9.6 million or 13.6% in 2021 compared to 2020. The 531 core properties considered in the same store pool experienced a$2.2 million or 3.4% increase in real estate taxes which is reflective of a net increase in property tax levies on those properties. In addition to the same store real estate tax expense increase, real estate taxes increased$7.3 million from the stores not included in the same store pool. 26 -------------------------------------------------------------------------------- Our 2021 same store results consist of only those Properties that have been owned by the Company and included in our consolidated results sinceDecember 31, 2019 , excluding stores not yet stabilized, four stores significantly impacted by natural disasters, and two stores that the Company began to fully replace in 2017. The impact of tenant reinsurance related items is excluded from same store results. The following table sets forth operating data for our 531 same store properties. These results provide information relating to property operating changes without the effects of acquisitions. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2021 2020 Change Same store rental income$ 578,658 $ 506,469 14.3 % Same store other operating income 6,893 6,519 5.7 % Total same store operating income 585,551 512,988 14.1 % Payroll and benefits 38,900 38,995 (0.2 )% Real estate taxes 67,142 64,918 3.4 % Utilities 14,654 14,273 2.7 % Repairs and maintenance 18,259 16,098 13.4 % Office and other operating expenses 16,680 15,397 8.3 % Insurance 6,374 6,151 3.6 % Advertising 212 241 (12.0 )% Internet marketing 13,871 14,069 (1.4 )% Total same store operating expenses 176,092 170,142 3.5 % Same store net operating income$ 409,459 $ 342,846 19.4 % Net operating income increased$134.0 million or 32.8% as a result of a 19.4% increase in our same store net operating income along with an increase of$67.4 million primarily related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool.
The following table reconciles our net income presented in the 2021 and 2020 consolidated financial statements to NOI generated by our self-storage facilities during those years.
Year ended December 31,
(dollars in thousands) 2021 2020
Net income $ 252,175 $ 152,360
General and administrative 62,617 52,055
Depreciation and amortization 147,119 122,925
Gain on sale of real estate - (302 )
Interest expense 86,786 86,015
Interest income (827 ) (19 )
Equity in income of joint ventures (5,696 ) (4,838 )
Net operating income $ 542,174 $ 408,196
Net operating income:
Same store 409,459 342,846Other stores, tenant reinsurance related income,
management fee income, and gain on sale of
non-real estate assets 132,715 65,350 Total net operating income$ 542,174 $ 408,196
General and administrative expenses increased
Depreciation and amortization expense increased to$147.1 million in 2021 from$122.9 million in 2020 as a result of depreciation and amortization related to self-storage facilities acquired in 2021 and 2020. 27 -------------------------------------------------------------------------------- Interest expense increased from$86.0 million in 2020 to$86.8 million in 2021 primarily as a result of increased outstanding debt balances in 2021 as compared to 2020, partially offset by a make whole payment of$4.0 million made in 2020 as part of the early repayment of$100 million of term notes.
The Company did not sell any properties in 2021 or 2020.
FUNDS FROM OPERATIONS
We believe that Funds from Operations ("FFO") provides relevant and meaningful
information about our operating performance that is necessary, along with net
earnings and cash flows, for an understanding of our operating results. FFO adds
back historical cost depreciation, which assumes the value of real estate assets
diminishes predictably in the future. In fact, real estate asset values increase
or decrease with market conditions. Consequently, we believe FFO is a useful
supplemental measure in evaluating our operating performance by disregarding (or
adding back) historical cost depreciation.
FFO is defined by the National Association of Real Estate Investment Trusts,
Inc. ("NAREIT") as net income available to common shareholders computed in
accordance with GAAP, excluding gains or losses on sales of properties, plus
impairment of real estate assets, plus depreciation and amortization and after
adjustments to record unconsolidated partnerships and joint ventures on the same
basis. We believe that to further understand our performance FFO should be
compared with our reported net income and cash flows in accordance with GAAP, as
presented in our consolidated financial statements.
Our computation of FFO may not be comparable to FFO reported by other REITs or
real estate companies that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition differently.
FFO does not represent cash generated from operating activities determined in
accordance with GAAP, and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of our performance,
as an alternative to net cash flows from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, or as an indicator of our
ability to make cash distributions.
Reconciliation of Net Income to Funds From Operations
For Year Ended December 31,
(dollars in thousands) 2022 2021 2020 2019 2018
Net income attributable to common
shareholders $ 358,128 $ 249,317 $ 151,571 $ 258,699 $ 206,590
Net income attributable to
noncontrolling common interests in
the
Operating Partnership 4,331 1,364 789 1,378 968
Net income attributable to
noncontrolling preferred interests
in the
Operating Partnership during
conversion period 1,998 - - - -
Depreciation of real estate and
amortization of intangible assets
exclusive of debt issuance costs 190,962 144,978 120,512 105,107 100,528
Depreciation and amortization from
unconsolidated joint
ventures 8,956 6,227 5,814 6,195 5,107
Gain on sale of storage facilities - - - (104,353 ) (56,398 )
Gain on sale of investments in joint
ventures (1,572 ) - - - -
Funds from operations allocable to
noncontrolling interest in
the Operating Partnership (6,718 ) (2,177 ) (1,443 ) (1,417 ) (1,197 )
Funds from operations available to
common shareholders $ 556,085 $ 399,709 $ 277,243 $ 265,609 $ 255,598
28
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LIQUIDITY AND CAPITAL RESOURCES
Our line of credit and term notes require us to meet certain financial covenants
measured on a quarterly basis, including prescribed leverage, fixed charge
coverage, minimum net worth, limitations on additional indebtedness, and
limitations on dividend payouts. At December 31, 2022 , the Company was in
compliance with all debt covenants. In the event that the Company violates its
debt covenants in the future, the amounts due under the agreements could be
callable by the lenders and could adversely affect our credit rating requiring
us to pay higher interest and other debt-related costs. We believe that if
operating results remain consistent with historical levels and levels of other
debt and liabilities remain consistent with amounts outstanding at December 31,
2022 , the entire availability under our line of credit could be drawn without
violating our debt covenants.
Our ability to retain cash flow is limited because we operate as a REIT. To
maintain our REIT status, a substantial portion of our operating cash flow must
be used to pay dividends to our shareholders. We believe that our internally
generated net cash provided by operating activities and the availability on our
line of credit will be sufficient to fund ongoing operations, capital
improvements, dividends and debt service requirements.
Cash flows from operating activities were $586.9 million , $433.9 million , and
$299.0 million for the years ended December 31, 2022 , 2021, and 2020,
respectively. The increases in operating cash flows from 2021 to 2022 and from
2020 to 2021 were primarily due to an increase in net income as adjusted for
non-cash depreciation and amortization expenses and other non-cash items during
these periods.
Cash used in investing activities was $1,140.2 million , $1,680.7 million , and
$576.0 million for the years ended December 31, 2022 , 2021, and 2020,
respectively. The decrease in cash used in investing activities from 2021 to
2022 was primarily the result of a decrease in self-storage facility acquisition
activity, increased proceeds from the sale of non-real estate assets in 2022,
and a decrease in property deposits paid during the year, partially offset by an
increase in improvements, equipment additions, and construction in progress in
2022 and a decrease in return of investment in unconsolidated joint ventures.
The increase in cash used in investing activities from 2020 to 2021 was the
result of an increase in self-storage facility acquisition activity, increased
capital spending, and an increase in the Company's investment in unconsolidated
joint ventures, partially offset by an increase in return of investment in
unconsolidated joint ventures.
Cash provided by financing activities was $406.4 million , $1,364.5 million , and
$314.2 million during the years ended December 31, 2022 , 2021, and 2020,
respectively. The decrease in cash provided by financing activities from 2021 to
2022 was primarily the result of a decrease in sales of shares of common stock
under the Company's continuous equity offering programs during 2022, a decrease
in proceeds from term notes resulting from $600 million of senior notes issued
in 2021 as compared to no notes issued in 2022, and an increase in dividends
paid in 2022 as compared to 2021, partially offset by an increase in net
proceeds from the line of credit. The increase in cash provided by finance
activities from 2020 to 2021 was primarily the result of the Company's issuance
of 2,875,000 shares of common stock through a public equity offering in 2021
resulting in net proceeds of $348.8 million , an increase in sales of shares of
common stock under the Company's continuous equity offering programs during
2021, and an increase in proceeds from term notes resulting from $600 million of
senior notes issued in 2021 as compared to $400 million of senior notes issued
in 2020, partially offset by an increase in dividends paid. Also contributing to
this increase is a reduction in the net repayment of the Company's line of
credit in 2021 as compared to 2020.
For the years 2020, 2021 and 2022, see Note 5 to the consolidated financial
statements for details of the Company's unsecured line of credit and term note
activity, Note 6 to the consolidated financial statements for the Company's
mortgage activity and related details, and Note 12 to the consolidated financial
statements for the Company's equity activity. Also, see Note 11 to the
consolidated financial statements for details of the activity in debt held by
unconsolidated joint ventures of the Company. The debt held by these
unconsolidated joint ventures is secured by the real estate owned by these
entities and is nonrecourse to the Company.
Our line of credit facility and term notes have an investment grade rating from Standard and Poor's (BBB) and Moody's (Baa2).
We expect to fund operating expenses, future acquisitions, our expansion and
enhancement program, share repurchases, if any, and any other cash requirements
with future cash flows from operations, draws on our line of credit, issuance of
common and/or preferred stock, the issuance of unsecured term notes, sale of
properties, and private placement solicitation of joint venture equity. Should
the capital markets deteriorate, we may have to curtail acquisitions, our
expansion and enhancement program, and/or any share repurchases.
29
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PENDING OBLIGATIONSThe following table summarized our pending obligations:
Payments due by period (in thousands)
2028 and
Contractual obligations Total 2023 2024-2025 2026-2027 thereafter
Line of credit 595,000 - - 595,000 -
Term notes 2,775,000 - 175,000 1,050,000 1,550,000
Mortgages payable 36,258 7,528 28,623 107 -
Interest payments 633,089 125,219 234,919 169,269 103,682
Land leases 9,296 741 1,487 1,488 5,580
Expansion and enhancement contracts 33,435 33,435 - - -
Building leases 15,313 2,301 4,257 4,277 4,478
Retail space rent 6,666 6,666 - - -
Self-storage facility acquisitions 73,800 73,800 - - -
Contribution to joint venture for
acquisition under contract 4,500 4,500 - - -
Total $ 4,182,357 $ 254,190 $ 444,286 $ 1,820,141 $ 1,663,740 Interest payments include actual interest on fixed rate debt.
ACQUISITION OF PROPERTIES
In 2022, we acquired 49 self-storage facilities comprising 3.8 million square
feet in Arizona (7), California (8), Florida (7), Georgia (2), Illinois (1),
Maryland (1), Massachusetts (2), Minnesota (1), Missouri (5), Nevada (1), New
York (3), North Carolina (5), South Carolina (1), and Texas (5), for a total
purchase price of $974.0 million . As discussed further in Note 4, the Company
held an 85.8% ownership interest in one of the properties acquired prior to the
acquisition of the remaining 14.2% ownership interest in the second quarter of
2022. Additionally, as discussed further in Note 4, during the third quarter of
2022, the Company purchased an 83% ownership interest in a self-storage facility
in New York from an unrelated joint venture partner that has been consolidated
in the Company's financial statements. Additionally, nine of these facilities
were managed by the Company for a third-party prior to acquisition. Based on the
trailing financial information of the entities from which the properties were
acquired, the weighted average capitalization rate for these acquisitions was
3.2%.
In 2021, we acquired 112 self-storage facilities comprising 7.9 million square
feet in Alabama (7), Arizona (4), California (1), Colorado (3), Connecticut (6),
Florida (31), Georgia (16), Illinois (4), Kentucky (1), Maine (1), New Hampshire
(4), New Jersey (5), New York (1), North Carolina (6), Ohio (1), Oklahoma (2),
South Carolina (5), Tennessee (1), Texas (10), Virginia (1), and Washington (2)
for a total purchase price of $1,696.3 million , which is net of the Company's
equity in profit from the acquisitions of the New York store and three Georgia
facilities purchased from unconsolidated joint ventures. Additionally, 27 of
these facilities were managed by the Company for a third-party prior to
acquisition. Based on the trailing financial information of the entities from
which the properties were acquired, the weighted average capitalization rate for
these acquisitions was 3.6%.
In 2020 we acquired 40 self-storage facilities comprising 3.1 million square
feet in California (8), Florida (6), Georgia (1), Missouri (1), New Jersey (7),
New York (1), Ohio (6), Pennsylvania (4), South Carolina (1), and Texas (5) for
a total purchase price of $532.6 million . One of these acquired facilities
resulted from the Company acquiring the remaining 15% of a joint venture.
Additionally, two of these facilities were managed by the Company for a
third-party prior to acquisition. Based on the trailing financial information of
the entities from which the properties were acquired, the weighted average
capitalization rate for these acquisitions was 5.0%.
FUTURE ACQUISITION AND DEVELOPMENT PLANS
Our external growth strategy is to increase the number of facilities we own by
acquiring suitable facilities in markets in which we already have operations, or
to expand into new markets by acquiring several facilities at once in those new
markets. We are actively pursuing acquisitions in 2023 and at December 31, 2022
we were under contract to acquire four self-storage facilities for an aggregate
purchase price of $70.8 million . The purchases of these self-storage facilities
under contract are subject to customary conditions to closing, and there is no
assurance that these facilities will be acquired.
In 2022, we added or converted to premium storage 661,000 square feet to
existing Properties for a total cost of approximately $55.7 million . Although we
do not expect to construct any new facilities in 2023, we do plan to complete
$50 million to $65 million in expansions and enhancements to existing facilities
of which $33.9 million was paid as of December 31, 2022 .
In 2022, the Company spent approximately $45.9 million for recurring capitalized
expenditures including roofing, paving, and office renovations. We expect to
spend $30 million to $35 million in 2023 on similar capital expenditures.
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DISPOSITION OF PROPERTIESThe Company did not sell or otherwise dispose of any properties during 2022, 2021, or 2020.
As part of our ongoing strategy to improve overall operating efficiencies and
portfolio quality, we may seek to sell certain Properties to third-parties or
joint venture partners in 2023.
REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, we are not required to pay federal income tax on income that we
distribute to our shareholders, provided that we satisfy certain requirements,
including distributing at least 90% of our REIT taxable income for a taxable
year. These distributions must be made in the year to which they relate, or in
the following year if declared before we file our federal income tax return, and
if they are paid not later than the date of the first regular dividend of the
following year.
As a REIT, we must derive at least 95% of our total gross income from income
related to real property, interest and dividends. In 2022, our percentage of
revenue from such sources was approximately 97%, thereby passing the 95% test,
and no special measures are expected to be required to enable us to maintain our
REIT designation. Although we currently intend to operate in a manner designed
to qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause our Board of Directors to revoke our REIT
election.
INTEREST RATE RISK
The primary market risk to which we believe we are exposed is interest rate
risk, which may result from many factors, including government monetary and tax
policies, domestic and international economic and political considerations, and
other factors that are beyond our control.
Based on our outstanding unsecured floating rate debt of $595 million at
December 31, 2022 , a 100 basis point increase in interest rates would have a
$6.0 million effect on our annual interest expense. This amount was determined
by considering the impact of the hypothetical interest rates on our borrowing
cost on December 31, 2022 . This analysis does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment. Further, in the event of a change of such magnitude, we would
consider taking actions to further mitigate our exposure to the change. However,
due to the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no changes in our capital
structure.
INFLATION
We do not believe that inflation has had or will have a direct effect on our
operations. Substantially all of the leases at the facilities are on a
month-to-month basis which provides us with the opportunity to increase rental
rates in a timely manner in response to any potential future inflationary
pressures.
SEASONALITY
Our revenues typically have been higher in the third and fourth quarters,
primarily because self-storage facilities tend to experience greater occupancy
during the late spring, summer and early fall months due to the greater
incidence of residential moves and college student activity during these
periods. However, we believe that our customer mix, diverse geographic
locations, rental structure and expense structure provide adequate protection
against undue fluctuations in cash flows and net revenues during off-peak
seasons. Thus, we do not expect seasonality to materially affect distributions
to shareholders.
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