PUBLIC STORAGE Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects," "believes," "anticipates," "should," "estimates" and similar expressions.
These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1, Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities and Exchange Commission (the "SEC") onFebruary 25, 2020 and in our other filings with theSEC including: ?general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development, expansion, and acquisition of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;
?risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;
?risks associated with the COVID-19 Pandemic (the "COVID Pandemic") or similar events, including but not limited to illness or death of our employees or customers, negative impacts to the economic environment and to self-storage customers which could reduce the demand for self-storage or reduce our ability to collect rent, and/or potential regulatory actions to (i) close our facilities if we were determined not to be an "essential business" or for other reasons, (ii) limit our ability to increase rent or otherwise limit the rent we can charge or (iii) limit our ability to collect rent or evict delinquent tenants; ?risk that even after the initial restrictions due to the COVID Pandemic ease, they could be reinstituted in case of future waves of infection or if additional pandemics occur; ?risk that we could experience a change in the move-out patterns of our long-term customers due to economic uncertainty and the significant increase in unemployment in the last 30 days. This could lead to lower occupancies and rent "roll down" as long-term customers are replaced with new customers at lower rates. We observed such a trend during the recessionary circumstances of 2009; however, to date we have not seen any material change in the move-out patterns of long-term customers;
?risk of negative impacts on the cost and availability of debt and equity capital as a result of the COVID Pandemic, which could have a material impact upon our capital and growth plans;
?the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
?the risk that our existing self-storage facilities may be at a disadvantage in competing with newly developed facilities with more visual and customer appeal;
?risks related to increased reliance on
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?difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage properties that we acquire directly or through the acquisition of entities that own and operate self-storage facilities;
?risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, changes in tax laws, and local and global economic uncertainty that could adversely affect our earnings and cash flows;
?risks related to our participation in joint ventures;
?the impact of the legal and regulatory environment as well as national, state
and local laws and regulations including, without limitation, those governing
environmental issues, taxes, our tenant reinsurance business, and labor,
including risks related to the impact of new laws and regulations;
?risks of increased tax expense associated either with a possible failure by us
to qualify as a real estate investment trust ("REIT"), or with challenges to the
determination of taxable income for our taxable REIT subsidiaries;
?risks due to a November 2020 California ballot initiative (or other equivalent
actions) that could remove the protections of Proposition 13 with respect to our
real estate and result in substantial increases in our assessed values and
property tax bills in California ;
?changes in
?security breaches or a failure of our networks, systems or technology could adversely impact our operations or our business, customer and employee relationships or result in fraudulent payments;
?risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;
?difficulties in raising capital at a reasonable cost;
?delays and cost overruns on our projects to develop new facilities or expand our existing facilities;
?ongoing litigation and other legal and regulatory actions which may divert management's time and attention, require us to pay damages and expenses or restrict the operation of our business; and
?economic uncertainty due to the impact of war or terrorism.
These forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether because of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.
Critical Accounting Policies
Our MD&A discusses our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"), and are affected by our judgments, assumptions and estimates. The notes to ourMarch 31, 2020 financial statements, primarily Note 2, summarize our significant accounting policies. 27 -------------------------------------------------------------------------------- We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain. Income Tax Expense: We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income. Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements. In addition, certain of our consolidated corporate subsidiaries have elected to be treated as "taxable REIT subsidiaries" for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income. Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income. Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated. Allocating Purchase Price for Acquired Real Estate Facilities: We estimate the fair values of land and buildings for purposes of allocating the aggregate purchase price of acquired properties. The related estimation processes involve significant judgment. We estimate the fair value of acquired buildings by determining the current cost to build new purpose-built self-storage facilities in the same location, and adjusting those costs for the actual age, quality, condition, amenities, and configuration of the buildings acquired. We estimate the fair value of acquired land by considering the most directly comparable recently transacted land sales ("Land Comps") and adjusting the transacted values for differentials to the acquired land such as location quality, parcel size, and date of sale, in order to derive the estimated value of the underlying acquired land. These adjustments to the Land Comps require significant judgment, particularly when there is a low volume of Land Comps or the available Land Comps lack similarity to the acquired property in proximity, date of sale, or location quality. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, as well as the level of land and buildings on our balance sheet. ? 28
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Overview
Impact of COVID-19
The COVID-19 pandemic (the "COVID Pandemic") has resulted in cessation, severe curtailment, or impairment of business activities in most sectors of the economy in virtually all markets we operate in, due to governmental "stay at home" orders, risk mitigation procedures, closure of businesses not considered to be "essential," as well as other direct and indirect impacts, including those that may not yet be identified. This has already resulted in a rapid and dramatic increase in unemployment in theU.S. We cannot estimate the extent of the COVID Pandemic's future negative impacts or how long the negative impacts of the COVID Pandemic will persist. In addition, it is possible that, even after the initial restrictions due to the COVID Pandemic ease, they could be reinstituted in case of future waves of infection or if additional pandemics occur. Our self-storage facilities qualify as "essential" businesses under all applicable business closure orders, and thus remain open to allow customers to move-in, move-out, pay rent, and access their storage units as they would have before the COVID Pandemic. However, the COVID Pandemic has negatively impacted our operations due to (i) stay at home orders which have discouraged customer activity, in particular move-ins, (ii) increased absentee rates for on-site property managers as a result of childcare issues, illness, or other issues, resulting in properties not opening on time or at all on certain days, (iii) delays in the timing of our standard in person "auction" process under lien sale statutes for delinquent tenants due, among other factors, to logistical issues associated with social distancing and (iv) remote working at home by most corporate and call center employees in ourGlendale, California andGilbert, Arizona offices, potentially hampering efficiency and effectiveness, including negative effects to communications and coordination among and across teams. To mitigate these operational issues, effective fromApril 1, 2020 toJune 30, 2020 , we have instituted a temporary$3.00 hourly wage increase and enhancements of paid time off benefits to virtually all of our property managers, and will provide additional financial support to selected employees (principally, property managers) to enable them to continue working. We have also instituted the use of masks, gloves, and social distancing by property managers to ensure the safety of our personnel and customers. These measures will increase our operating expenses. Since lateMarch 2020 , we have seen significant reductions in demand for self-storage space, and as a result, our move-in volumes, despite lower move-in rental rates, have also declined significantly, offset partially by lower move-out volumes. The reduction in move-out volumes may be temporary or even reverse, to the extent they are driven by short-term factors such as stay at home orders and delays in our auction process. We have also temporarily curtailed our existing tenant rate increase program. Because existing tenant rate increases have contributed the majority of our increase in rental income in recent years, curtailment of these increases will have a material adverse impact on our revenue growth. These curtailments will impact our revenue subsequent toMarch 31, 2020 . It is possible that the COVID Pandemic could change consumer behavior, either due to economic recession, uncertainty, or dislocation, as well as other factors, which could increase customer sensitivity and propensity to move-out in response to rate increases, either in the short or longer term. To date, we have observed no material degradation in rent collections. However, we believe that our bad debt losses (which are reflected as a reduction in revenues) could increase from historical levels of approximately 2% of rent, due to (i) cumulative stress on our customers' financial capacity, (ii) reduced rent recoveries from auctioned units, due to the closure of venues that bidders typically use to resell the goods, and (iii) the continued delay of auctions, which began inMarch 2020 , as a result of logistical difficulties due to social distancing and other considerations in the current environment. We are taking certain steps in order to augment our collection efforts, in anticipation of potential challenges in the near term in collecting rent, though there can be no assurance that such efforts will be successful in mitigating collection losses. We may experience a change in the move-out patterns of our long-term customers due to economic uncertainty and the significant increase in unemployment in the last 30 days. This could lead to lower occupancies and rent "roll down" as long-term customers are replaced with new customers at lower rates. We observed such a trend during the recessionary circumstances of 2009; however, to date we have not seen any material change in the move-out patterns of long-term customers. 29 -------------------------------------------------------------------------------- As a result of these actual and anticipated impacts of the COVID Pandemic and our responses, we believe it is likely that we will experience reductions in year-over-year same-store rental income and net operating income in the remainder of 2020. The COVID Pandemic could delay the estimated timing of completion of our existing pipeline of development and expansion projects, because many jurisdictions have shut down or delayed entitlement activities, and "stay at home" orders could potentially delay construction activities. In addition, the COVID Pandemic could extend the timeframe for a newly developed facility to reach stabilized occupancies and cash flows. We continue to monitor our projects to ensure that they still meet our risk-adjusted yield expectations, and reduced project yield estimates due to the COVID Pandemic or other factors could result in the cancellation of existing projects in the future, or we may not pursue certain new projects that we would have otherwise sought. We continue to seek to acquire additional self-storage facilities from third parties. Our acquisition volume was robust in the early part of 2020, with$253.0 million in acquisitions during 2020 thus far including facilities currently under contract. However, we believe that in the short-term, acquisition volume may decline due to economic uncertainty resulting from the COVID Pandemic, resulting in some third party sellers delaying the sale of their properties. Volume in the latter part of 2020 could increase as the economy stabilizes and seller confidence returns, or leveraged owners of recently developed facilities are forced to sell. There can be no assurance as to the level of future acquisitions of facilities. The COVID Pandemic has had negative impacts on the cost of debt and equity capital, and may continue to do so or such negative impacts may intensify. Based upon our substantial current liquidity relative to our capital requirements noted below, and our strong financial profile and credit ratings, we do not expect such capital market dislocations to have a material impact upon our expected capital and growth plans over the next 12 months. However, there can be no assurance that they would not in the future, if they were to persist for a long period or intensify. In addition, there can be no assurance, if significant additional opportunities to acquire facilities were to arise as a result of the COVID Pandemic or for other reasons, whether we would be able to raise capital at a reasonable cost to allow us to be able to take advantage of such opportunities.
General Overview
Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management's time is devoted to maximizing cash flows from our existing self-storage facilities.
Most of our facilities compete with other well-managed and well-located competitors within the local trade area, which is generally a three to five mile radius. In addition to local competition, we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name "Public Storage ," and our economies of scale enable us to meet such challenges effectively. In the last three years, there has been a marked increase in development of new self-storage facilities in many of the markets where we operate, due to the favorable economics of developing new properties. These newly developed facilities compete with many of the facilities we own, negatively impacting our occupancies, rental rates, and rental growth. This increase in supply has been most notable inAtlanta ,Austin ,Charlotte ,Chicago ,Dallas ,Denver ,Houston ,Miami ,Minneapolis ,New York , andPortland . The quality of the new supply may also allow these new facilities to compete more effectively with existing self-storage assets. Much of this new supply, including our own, represents "fifth generation" facilities which often have a more fresh and vibrant appearance, more amenities such as climate control, more attractive office configurations, newer design elements, and a more imposing and attractive retail presence as compared to the existing stock of self-storage facilities which were built over the last 50 years.
In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed "fifth generation" facilities), we have commenced a comprehensive program to rebrand our
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properties, in order to develop more pronounced, attractive, and clearly
identifiable color schemes and signage, as well as to upgrade the configuration
and layout of the offices and other customer zones to improve the customer
experience. This program has initially been concentrated in properties located
in a limited number of markets. The extent to which we continue this program in
additional markets, and the relative scope of work, will depend in part upon the
results of the initial implementation of the program.
In addition to managing our existing facilities for organic growth, we plan on
growing through the acquisition and development of new facilities and expanding
our existing self-storage facilities. Since the beginning of 2013 through March
31, 2020 , we acquired a total of 349 facilities with 24.5 million net rentable
square feet from third parties for approximately $3.3 billion , and we opened
newly developed and expanded self-storage space for a total cost of
$1.6 billion , adding approximately 15.3 million net rentable square feet.
Subsequent to March 31, 2020 , we acquired or were under contract to acquire
(subject to customary closing conditions) six self-storage facilities, with
approximately 0.4 million net rentable square feet, for $66.8 million . We will
continue to seek to acquire properties; however, there is significant
competition to acquire existing facilities and there can be no assurance as to
the number of facilities we may acquire.
At March 31, 2020 , we had a development pipeline to develop twelve new
self-storage facilities and expand 36 existing self-storage facilities, which
will add approximately 4.3 million net rentable square feet at a cost of
$634.5 million . We expect to continue to seek additional development projects;
however, the level of such activity may be limited due to various constraints
such as difficulty in finding available sites that meet our risk-adjusted yield
expectations, as well as challenges in obtaining building permits for
self-storage activities in certain municipalities. In addition, as noted above,
the COVID Pandemic may cause the delay or cancellation of projects in our
pipeline, and could limit the level of additional development projects that we
may seek in the future.
We believe that our development and redevelopment activities generate favorable
risk-adjusted returns over the long run. However, in the short run, our
earnings are diluted during the construction and stabilization period due to the
cost of capital to fund the development cost, as well as the related
construction and development overhead expenses included in general and
administrative expense. We believe the level of dilution incurred in 2019 and
the first quarter of 2020 will continue at similar levels in the remainder of
2020.
As of March 31, 2020 , we expect capital resources over the next year of
approximately $1.4 billion , which exceeds our currently identified capital needs
of approximately $539.6 million . Our expected capital resources include: (i)
$718.4 million of cash as of March 31, 2020 , (ii) $484.1 million of available
borrowing capacity on our revolving line of credit and (iii) approximately $200
million of expected retained operating cash flow in the next year. Retained
operating cash flow represents our expected cash flow provided by operating
activities, less shareholder distributions and capital expenditures to maintain
our real estate facilities.
Our currently identified capital needs consist primarily of $66.8 million in
property acquisitions currently under contract and $472.8 million of remaining
spending on our current development pipeline, which will be incurred primarily
in the next 18 to 24 months. We have no substantial principal payments on debt
until 2022. We expect our capital needs to increase over the next year as we add
projects to our development pipeline and acquire additional properties.
Additional potential capital needs could result from various activities
including the redemption of outstanding preferred securities, repurchases of
common stock, or mergers and acquisition activities; however, there can be no
assurance of any such activities transpiring in the near or longer term. In
addition, the COVID Pandemic could result in increases or decreases to our
capital needs as we continue to adjust our acquisition and development of
self-storage facilities in light of potential returns, execution issues, cost
and availability of capital, and other factors.
See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.
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Results of Operations
Operating Results for the Three Months Ended
For the three months endedMarch 31, 2020 , net income allocable to our common shareholders was$313.1 million or$1.79 per diluted common share, compared to$301.7 million or$1.73 per diluted common share in 2019 representing an increase of$11.4 million or$0.06 per diluted common share. The increase is due primarily to (i) a$9.5 million increase in self-storage net operating income (described below), (ii) a$8.5 million allocation to our preferred shareholders associated with our preferred share redemption activities in the three months endedMarch 31, 2019 , and (iii) our$8.1 million equity share of a gain on sale of real estate recorded by PS Business Parks in the three months endedMarch 31, 2020 , offset partially by (iv) a$14.0 million increase in depreciation and amortization expense. The$9.5 million increase in self-storage net operating income is a result of a$0.3 million increase in our Same Store Facilities (as defined below) and a$9.2 million increase in our non-Same Store Facilities (as defined below). Revenues for the Same Store Facilities increased 1.2% or$7.2 million in the three months endedMarch 31, 2020 as compared to 2019, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 4.0% or$7.0 million in the three months endedMarch 31, 2020 as compared to 2019, due primarily to a 58.8% ($5.3 million ) increase in marketing expenses and increased property tax expense. The increase in net operating income of$9.2 million for the non-Same Store Facilities is due primarily to the impact of facilities acquired in 2019 and 2020 and the fill-up of recently developed and expanded facilities.
Funds from Operations and Core Funds from Operations
Funds from Operations ("FFO") and FFO per share are non-GAAP measures defined by
the National Association of Real Estate Investment Trusts and are considered
helpful measures of REIT performance by REITs and many REIT analysts. FFO
represents GAAP net income before depreciation and amortization, which is
excluded because it is based upon historical costs and assumes that building
values diminish ratably over time, while we believe that real estate values
fluctuate due to market conditions. FFO also excludes gains or losses on sale of
real estate assets and real estate impairment charges, which are also based upon
historical costs and are impacted by historical depreciation. FFO and FFO per
share are not a substitute for net income or earnings per share. FFO is not a
substitute for GAAP net cash flow in evaluating our liquidity or ability to pay
dividends, because it excludes investing and financing activities presented on
our statements of cash flows. In addition, other REITs may compute these
measures differently, so comparisons among REITs may not be helpful.
For the three months ended
The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:
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Three Months Ended
March 31,
2020 2019
(Amounts in thousands, except per
share data)
Reconciliation of Diluted Earnings per Share to
FFO per Share:
Diluted Earnings per Share $ 1.79 $ 1.73
Eliminate amounts per share excluded from FFO: Depreciation and amortization 0.87
0.79
Gains on sale of real estate investments, including our equity share from investments (0.05) - FFO per share $ 2.61$ 2.52
Computation of FFO per Share:
Net income allocable to common shareholders$ 313,134 $ 301,743 Eliminate items excluded from FFO: Depreciation and amortization 135,137
121,941
Depreciation from unconsolidated real estate investments 18,243
17,514
Depreciation allocated to noncontrolling interests and restricted share unitholders (961)
(1,198)
Gains on sale of real estate investments, including our equity share from investments and other (9,241)
-
FFO allocable to common shares$ 456,312 $
440,000
Diluted weighted average common shares 174,616 174,376 FFO per share $ 2.61$ 2.52 We also present "Core FFO per share," a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities, and (iii) certain other non-cash and/or nonrecurring income or expense items primarily representing, with respect to the periods presented below, casualty losses, due diligence costs incurred in strategic transactions, and contingency resolutions. We review Core FFO per share to evaluate our ongoing operating performance and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.
The following table reconciles FFO per share to Core FFO per share:
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Three Months Ended March 31,
Percentage
2020 2019 Change
FFO per share $ 2.61 $ 2.52 3.6%
Eliminate the per share impact of items
excluded from Core FFO, including
our equity share from investments:
Foreign currency exchange gain (0.05) (0.04)
Application of EITF D-42 - 0.05
Other items 0.02 -
Core FFO per share $ 2.58 $ 2.53 2.0%
Analysis of Net Income by Reportable Segment
The following discussion and analysis is presented and organized in accordance with Note 11 to ourMarch 31, 2020 financial statements, "Segment Information." Accordingly, refer to the table presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments. Self-Storage Operations Our self-storage operations are analyzed in four groups: (i) the 2,224 facilities that we have owned and operated on a stabilized basis sinceJanuary 1, 2018 (the "Same Store Facilities"), (ii) 78 facilities we acquired afterDecember 31, 2017 (the "Acquired facilities"), (iii) 145 facilities that have been newly developed or expanded, or that we expect to commence expansion byDecember 31, 2020 (the "Newly developed and expanded facilities") and (iv) 45 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates sinceJanuary 1, 2018 (the "Other non-same store facilities"). See Note 11 to ourMarch 31, 2020 financial statements "Segment Information," for a reconciliation of the amounts in the tables below to our total net income. 34
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Self-Storage Operations
Summary Three Months Ended March 31,
Percentage
2020 2019 Change
(Dollar amounts and square footage in thousands)
Revenues:
Same Store facilities $ 609,535 $ 602,297 1.2%
Acquired facilities 11,869 3,921 202.7%
Newly developed and expanded facilities 42,285 33,715 25.4%
Other non-same store facilities 10,512 10,475 0.4%
674,201 650,408 3.7%
Cost of operations:
Same Store facilities 180,281 173,324 4.0%
Acquired facilities 5,512 2,114 160.7%
Newly developed and expanded facilities 18,348 14,446 27.0%
Other non-same store facilities 3,784 3,772 0.3%
207,925 193,656 7.4%
Net operating income (a):
Same Store facilities 429,254 428,973 0.1%
Acquired facilities 6,357 1,807 251.8%
Newly developed and expanded facilities 23,937 19,269 24.2%
Other non-same store facilities 6,728 6,703
0.4%
Total net operating income 466,276 456,752
2.1%
Depreciation and amortization expense: Same Store facilities (104,369) (100,355) 4.0% Acquired facilities (9,522) (3,692) 157.9% Newly developed and expanded facilities (15,110) (11,955) 26.4% Other non-same store facilities (6,899) (5,939) 16.2% Total depreciation and amortization expense (135,900) (121,941) 11.4% Net income: Same Store facilities 324,885 328,618 (1.1)% Acquired facilities (3,165) (1,885) 67.9% Newly developed and expanded facilities 8,827 7,314
20.7%
Other non-same store facilities (171) 764
(122.4)%
Total net income $ 330,376$ 334,811
(1.3)%
Number of facilities at period end: Same Store facilities 2,224 2,224 - Acquired facilities 78 37
110.8%
Newly developed and expanded facilities 145 138
5.1%
Other non-same store facilities 45 45
0.0%
2,492 2,444 2.0%
Net rentable square footage at period end: Same Store facilities 143,890 143,890 - Acquired facilities 5,522 2,397
130.4%
Newly developed and expanded facilities 16,775 14,477
15.9%
Other non-same store facilities 3,586 3,593 (0.2)%
169,773 164,357 3.3%
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-------------------------------------------------------------------------------- (a)Net operating income or "NOI" is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to ourMarch 31, 2020 financial statements for a reconciliation of NOI to our total net income for all periods presented. Net operating income from our self-storage operations has increased 2.1% in the three months endedMarch 31, 2020 , respectively, as compared to the same period in 2019. The increase is due primarily to the acquisition and development of new facilities and the fill-up of unstabilized facilities.
Same Store Facilities
The Same Store Facilities consist of facilities that have been owned and operated on a stabilized level of occupancy, revenues and cost of operations sinceJanuary 1, 2018 . Our Same Store Facilities increased from 2,159 facilities atDecember 31, 2019 to 2,224 atMarch 31, 2020 . The composition of our Same Store Facilities allows us to more effectively evaluate the ongoing performance of our self-storage portfolio in 2018, 2019, and 2020 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. We believe the Same Store information is used by investors and REIT analysts in a similar manner. The following table summarizes the historical operating results of these 2,224 facilities (143.9 million net rentable square feet) that represent approximately 85% of the aggregate net rentable square feet of ourU.S. consolidated self-storage portfolio atMarch 31, 2020 . 36 -------------------------------------------------------------------------------- Selected Operating Data for the Same Store Facilities (2,224 facilities) Three Months Ended March 31, Percentage 2020 2019 Change (Dollar amounts in thousands, except weighted average amounts) Revenues: Rental income $ 583,732 $ 575,562 1.4% Late charges and administrative fees 25,803 26,735 (3.5)% Total revenues (a) 609,535 602,297 1.2% Cost of operations: Property taxes 70,187 66,827 5.0% On-site property manager payroll 32,054 31,035 3.3% Supervisory payroll 10,813 10,051 7.6% Repairs and maintenance 12,395 13,758 (9.9)% Utilities 10,430 11,296 (7.7)% Marketing 14,296 9,001 58.8% Other direct property costs 16,452 16,844 (2.3)% Allocated overhead 13,654 14,512 (5.9)% Total cost of operations (a) 180,281 173,324 4.0% Net operating income 429,254 428,973 0.1% Depreciation and amortization expense (104,369) (100,355) 4.0% Net income $ 324,885 $ 328,618 (1.1)% Gross margin (before depreciation and amortization expense) 70.4%
71.2% (1.1)%
Weighted average for the period: Square foot occupancy 93.1%
92.5% 0.6%
Realized annual rental income per (b):
Occupied square foot $ 17.43 $ 17.30 0.8%
Available square foot $ 16.23 $ 16.00 1.4%
At March 31:
Square foot occupancy (c) 92.7% 92.1% 0.7%
Annual contract rent per
occupied square foot (d) $ 17.99 $ 17.83 0.9%
37
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(a)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See "Ancillary Operations" below for more information.
(b)Realized annual rent per occupied square foot is computed by dividing rental
income, before late charges and administrative fees, by the weighted average
occupied square feet for the period. Realized annual rent per available square
foot ("REVPAF") is computed by dividing rental income, before late charges and
administrative fees, by the total available net rentable square feet for the
period. These measures exclude late charges and administrative fees in order to
provide a better measure of our ongoing level of revenue. Late charges are
dependent upon the level of delinquency and administrative fees are dependent
upon the level of move-ins. In addition, the rates charged for late charges and
administrative fees can vary independently from rental rates. These measures
take into consideration promotional discounts, which reduce rental income.
(c)Occupancy levels at March 31, 2020 include delinquent tenants for whom an
auction was delayed, as noted below under "Same Store Revenue." Had customary
auction timelines been followed, these tenants would have been evicted by March
31, 2020 , and our square foot occupancy at March 31, 2020 would have been 92.4%
rather than 92.7%.
(d)Annual contract rent represents the agreed upon monthly rate that is paid by
our tenants in place at the time of measurement. Contract rates are initially
set in the lease agreement upon move-in and we adjust them from time to time
with notice. Contract rent excludes other fees that are charged on a per-item
basis, such as late charges and administrative fees, does not reflect the impact
of promotional discounts, and does not reflect the impact of rents that are
written off as uncollectible.
Analysis of Same Store Revenue
Revenues generated by our Same Store Facilities increased by 1.2% in the three months endedMarch 31, 2020 as compared to the same period in 2019, due primarily to an increase of 0.8% realized annual rent per occupied square foot for the three months endedMarch 31, 2020 , as compared to the same period in 2019. Same Store revenue growth is lower than long-term historical averages due to softness in demand for our storage space, which has led to lower move-in rental rates for new tenants (see below). We attribute some of this softness to local economic conditions and, in some markets most notablyAtlanta ,Austin ,Charlotte ,Chicago ,Dallas ,Denver ,Houston ,Miami ,Minneapolis ,New York andPortland , increased supply of newly constructed self-storage facilities.
Same Store weighted average square foot occupancy remained strong at 93.1% and
92.5% in the three months ended
We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on the Internet and other channels in order to generate sufficient move-in volume to replace tenants that vacate. Average annual contract rent per foot for customers moving in was$12.98 and$13.55 in the three months endedMarch 31, 2020 and 2019, respectively, and the related square footage for the space they moved into was 25.3 million, and 24.9 million, respectively. Average annual contract rent per foot for customers moving out was$15.88 and$15.96 in the three months endedMarch 31, 2020 and 2019, respectively, and the related square footage for the space they moved out of was 23.9 million and 23.7 million, respectively. In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a "$1.00 rent for the first month" offer. Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled$20.1 million and$20.5 million for the three months endedMarch 31, 2020 and 2019, respectively. Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage. It is possible that the COVID Pandemic could impact current seasonal demand trends in the short or long term, due to changes in certain factors impacting moving trends, 38 -------------------------------------------------------------------------------- such as potentially fewer college students living on-campus in favor of online learning or an increase in working from home reducing the necessity of moving for employment reasons. We typically increase rental rates to our long-term tenants (generally, those that have been with us for at least a year) once per year. As a result, the number of long-term tenants we have in our facilities is an important factor in our revenue growth. The level of rate increases to long-term tenants is based upon balancing the additional revenue from the increase against the negative impact of incremental move-outs, by considering the customer's in-place rent and prevailing market rents, among other factors. It is possible that in the short-term or long-term, the COVID Pandemic could change customer sensitivity and propensity to move out in response to rate increases, either due to economic recession, uncertainty, or dislocation, as well as other factors. Throughout 2019 and the first three months of 2020, we have had an increased average length of stay. The increased average length of stay contributed to an increased beneficial effect of rent increases to existing tenants, due to more long-term customers that were eligible for rate increases. However, this was offset partially by the impact of lower move-in rates and resulting increased "rent roll down" for new tenants relative to existing tenants that moved out. We believe that the COVID Pandemic, and its impact upon the confidence and financial strength of the consumer, will have a negative impact upon our revenue trends in the remainder of 2020. Year over year demand and move-in volumes have declined materially fromApril 1, 2020 throughApril 30, 2020 , despite reductions in average move-in rates. While year over year move-outs also declined during this period, such decreases were lower than the move-in volume decline, and such reductions may not be sustainable or may even reverse to the extent they are driven by temporary factors such as stay-at-home orders or delays in our auction process. We may experience a change in the move-out patterns of our long-term customers due to economic uncertainty and the significant increase in unemployment in the last 30 days. This could lead to lower occupancies and rent "roll down" as long-term customers are replaced with new customers at lower rates. We observed such a trend during the recessionary circumstances of 2009; however, to date we have not seen any material change in the move-out patterns of long-term customers. To date, we have observed no material degradation in rent collections. However, we believe that our bad debt losses (which are reflected as a reduction in revenues) could increase from historical levels of approximately 2% of rent, due to (i) cumulative stress on our customers' financial capacity, (ii) reduced rent recoveries from auctioned units, due to the closure of venues that bidders typically use to resell the goods, and (iii) the continued delay of auctions, which began inMarch 2020 , as a result of logistical difficulties due to social distancing and other considerations in the current environment. We are taking certain steps in order to augment our collection efforts, in anticipation of potential challenges in the near term in collecting rent, though there can be no assurance that such efforts will be successful in mitigating collection losses. Our Same Store revenue growth in recent years has come primarily from increases in rates to existing tenants. In addition, we have delayed and reduced existing tenant rent increases previously scheduled to take effect onApril 1, 2020 andMay 1, 2020 . We have not determined when we resume our existing tenant rate increase program. In addition, it is not possible at this time to determine the impact that the COVID Pandemic may have on existing customer sensitivity to rate increases, as noted above. Based upon present trends and our current expectations with respect to tenant rate increases, move-ins, collections, and rates, we believe that it is likely that our revenue will decline on a year over year basis in the remainder of 2020. There can be no assurance when the direct impacts of the COVID Pandemic, such as stay at home orders and direct curtailment of business activity by governmental authorities, may abate, or whether following abatement there may be continued sustained indirect impacts such as recession, job loss, and changes to consumer behavior that may affect demand for self-storage space; accordingly, there can be no assurance how quickly we can return to revenue growth after 2020.
We are continuing to take a number of actions to improve demand into our system, including increasing marketing spend on the Internet, offering lower rental rates to new customers and increasing the level of move-in discounts.
39--------------------------------------------------------------------------------
Analysis of Same Store Cost of Operations
Cost of operations (excluding depreciation and amortization) increased 4.0% in the three months endedMarch 31, 2020 as compared to the same period in 2019, due primarily to increased property tax and marketing expense. Property tax expense increased 5.0% in the three months endedMarch 31, 2020 as compared to the same period in 2019. We expect property tax expense growth of approximately 5.0% in the remainder of 2020 due primarily to higher assessed values (excluding the potential impact of theCalifornia initiative noted below) and, to a lesser extent, increased tax rates. As a result of Proposition 13, which limits increases in assessed values to 2% per year, the assessed value and property taxes we pay inCalifornia is less than it would be if the properties were assessed at current values. An initiative onCalifornia's November 2020 statewide ballot, if approved by voters, could result in the reassessment of ourCalifornia properties and substantially increase our property tax expense. It is uncertain (i) whether an initiative will pass, and (ii) if it does pass, what the timing and level of the reassessment and related property tax increases would be. See "Risk Factors - We have exposure to increased property tax inCalifornia " in ourDecember 31, 2019 Form 10-K for further information such as our aggregate net operating income and property tax expense inCalifornia . On-site property manager payroll expense increased 3.3% in the three months endedMarch 31, 2020 as compared to the same period in 2019. This increase was due primarily to higher wage rates. We have been impacted by a tight labor market across the country, as well as increases in minimum wages in certain jurisdictions. In response to the COVID Pandemic, effective fromApril 1, 2020 toJune 30, 2020 , we have instituted a temporary$3.00 hourly wage increase and enhancements of paid time off benefits to virtually all of our property managers, and will provide additional financial support to selected employees (principally, property managers) to enable them to continue working. These measures will result in an approximately 30% increase in on-site property manager payroll for the three months endedJune 30, 2020 as compared to the same period in 2019. While these measures are currently scheduled to endJune 30, 2020 , they could be extended. Once these measures are suspended, we expect continued inflationary increases in on-site property manager payroll expense. Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, increased 7.6% in the three months endedMarch 31, 2020 as compared to the same period in 2019, due to increased headcount and higher wages. We expect similar increases in the remainder of 2020. Repairs and maintenance expense decreased 9.9% in the three months endedMarch 31, 2020 as compared to the same period in 2019. Repair and maintenance costs include snow removal expense totaling$1.9 million and$2.9 million in the three months endedMarch 31, 2020 and 2019, respectively. Excluding snow removal costs, repairs and maintenance decreased 3.8% in in the three months endedMarch 31, 2020 as compared to the same period in 2019. Repairs and maintenance expense levels are dependent upon many factors such as (i) sporadic occurrences such as accidents, damage, and equipment malfunctions, (ii) short-term local supply and demand factors for material and labor, and (iii) weather conditions, which can impact costs such as snow removal, roof repairs, and HVAC maintenance and repairs. Accordingly, it is difficult to estimate future repairs and maintenance expense. Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense decreased 7.7% in the three months endedMarch 31, 2020 as compared to the same period in 2019. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable. We are making investments in energy saving technology such as solar power and LED lights which should generate favorable returns on investment in the form of lower utility usage. However, the actual reduction expected to be experienced in the remainder of 2020 will be relatively modest, based upon the expected level of and timing of such investments. 40
-------------------------------------------------------------------------------- Marketing expense is comprised principally of Internet advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprised primarily of keyword search fees assessed on a "per click" basis, varies based upon demand for self-storage space, the quantity of people inquiring about self-storage through online search, occupancy levels, the number and aggressiveness of bidding competitors and other factors. These factors are volatile; accordingly, Internet advertising can increase or decrease significantly in the short-term. Marketing expense increased 58.8% in the three months endedMarch 31, 2020 as compared to the same period in 2019. The year over year increase is due primarily to higher traditional "per click" advertising on paid search platforms as we have sought to attract more customers for our space, and cost per click for keyword search terms increased due to more keyword bidding competition from existing self-storage owners and operators, including owners of newly developed facilities and nontraditional storage providers. To a lesser extent, the increase reflects additional spending on social media outlets as well as aggregator websites, as we believe these channels provide exposure to incremental customers at a favorable cost. We expect continued increases in marketing expense in the remainder of 2020, and may intensify our efforts in this area to mitigate the aforementioned impact of the COVID Pandemic on customer demand. Other direct property costs include administrative expenses specific to each self-storage facility, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities' cash receipts, tenant mailings, credit card fees, and the cost of operating each property's rental office. These costs decreased 2.3% in in the three months endedMarch 31, 2020 as compared to the same period in 2019. We continue to experience increased credit card fees due to a long-term trend of more customers paying with credit cards rather than cash, checks, or other methods of payment with lower transaction costs. We expect inflationary increases in other direct property costs in the remainder of 2020. Allocated overhead represents administrative expenses for shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions include information technology support, hardware, and software, as well as centralized administration of payroll, benefits, training, repairs and maintenance, customer service, pricing and marketing, operational accounting and finance, and legal costs. These amounts also include the costs of senior executives responsible for these processes (other than our Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead decreased 5.9% in in the three months endedMarch 31, 2020 as compared to the same period in 2019, due primarily to the impact of an annual national leadership and sales conference which occurred in the three months endedMarch 31, 2019 , and is not expected to occur in 2020. We expect minimal increases in allocated overhead in the remainder of 2020.
Analysis of Same Store Depreciation and Amortization
Depreciation and amortization for Same Store Facilities increased 4.0% in the three months endedMarch 31, 2020 as compared to the same period in 2019, due primarily to elevated capital expenditures. We expect modest increases in depreciation expense in the remainder of the remainder of 2020.
Quarterly Financial Data
The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
?
41
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For the Quarter Ended
March 31 June 30 September 30 December 31 Entire Year
(Amounts in thousands, except for per square foot amounts)
Total revenues:
2020 $ 609,535
2019 $ 602,297 $ 616,055 $ 628,573 $
615,268
Total cost of operations: 2020$ 180,281 2019$ 173,324 $ 171,881 $ 175,983 $
140,306
Property taxes: 2020$ 70,187 2019$ 66,827 $ 67,550 $ 67,353 $
38,904
Repairs and maintenance: 2020$ 12,395 2019$ 13,758 $ 12,068 $ 13,166 $ 12,572 $ 51,564 Marketing: 2020$ 14,296 2019 $ 9,001$ 12,426 $ 14,345 $ 13,230 $ 49,002 REVPAF: 2020 $ 16.23 2019 $ 16.00$ 16.40 $ 16.71 $ 16.37 $ 16.37
Weighted average realized annual rent per occupied square foot: 2020
$ 17.43
2019 $ 17.30 $ 17.45 $ 17.74 $
17.59
Weighted average occupancy levels for the period:
2020 93.1%
2019 92.5% 94.0% 94.2% 93.1% 93.4%
?
42
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Analysis of Market Trends
The following table sets forth selected market trends in our Same Store Facilities:
Same Store Facilities Operating Trends by
Market
Three Months Ended March 31,
2020 2019 Change
(Amounts in thousands, except for
Market (number of facilities, weighted average data)
square footage in millions)
Revenues:
Los Angeles (212, 14.9) $ 95,200 $ 92,758 2.6%
San Francisco (128, 7.9) 50,556 49,439 2.3%
New York (89, 6.2) 38,792 38,377 1.1%
Seattle-Tacoma (86, 5.8) 28,467 27,855 2.2%
Washington DC (89, 5.5) 28,148 27,727 1.5%
Miami (81, 5.7) 27,609 27,791 (0.7)%
Atlanta (99, 6.5) 21,187 21,564 (1.7)%
Chicago (129, 8.1) 29,584 28,987 2.1%
Dallas-Ft. Worth (102, 6.5) 21,200 21,162 0.2%
Houston (84, 5.8) 18,103 18,633 (2.8)%
Orlando-Daytona (72, 4.5) 15,412 15,397 0.1%
Philadelphia (56, 3.5) 14,730 14,304 3.0%
West Palm Beach (38, 2.5) 11,627 11,470 1.4%
Tampa (52, 3.5) 11,690 11,766 (0.6)%
Charlotte (50, 3.8) 10,285 10,297 (0.1)%
All other markets (857, 53.2) 186,945 184,770 1.2%
Total revenues $ 609,535 $ 602,297 1.2%
Net operating income:
Los Angeles $ 77,151 $ 75,578 2.1%
San Francisco 39,942 39,478 1.2%
New York 25,678 25,673 0.0%
Seattle-Tacoma 21,347 21,232 0.5%
Washington DC 20,003 19,937 0.3%
Miami 19,002 19,635 (3.2)%
Atlanta 15,202 15,774 (3.6)%
Chicago 13,995 13,265 5.5%
Dallas-Ft. Worth 13,623 13,853 (1.7)%
Houston 11,262 11,823 (4.7)%
Orlando-Daytona 10,668 10,875 (1.9)%
Philadelphia 10,075 9,999 0.8%
West Palm Beach 8,372 8,418 (0.5)%
Tampa 7,720 8,096 (4.6)%
Charlotte 7,463 7,517 (0.7)%
All other markets 127,751 127,820 (0.1)%
Total net operating income $ 429,254 $ 428,973 0.1%
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Same Store Facilities Operating Trends by
Market (Continued)
Three Months Ended March 31,
2020 2019 Change
Weighted average square foot
occupancy:
Los Angeles 95.3% 94.8% 0.5%
San Francisco 94.0% 93.7% 0.3%
New York 93.6% 93.3% 0.3%
Seattle-Tacoma 92.6% 91.8% 0.9%
Washington DC 92.7% 91.8% 1.0%
Miami 92.6% 92.1% 0.5%
Atlanta 91.9% 92.6% (0.8)%
Chicago 91.6% 89.5% 2.3%
Dallas-Ft. Worth 91.9% 91.0% 1.0%
Houston 91.5% 88.9% 2.9%
Orlando-Daytona 93.6% 93.8% (0.2)%
Philadelphia 94.9% 94.6% 0.3%
West Palm Beach 94.4% 93.2% 1.3%
Tampa 91.8% 91.9% (0.1)%
Charlotte 91.3% 91.1% 0.2%
All other markets 93.2% 92.6% 0.6%
Total weighted average
square foot occupancy 93.1% 92.5% 0.6%
Realized annual rent per
occupied square foot:
Los Angeles $ 26.00 $ 25.40 2.4%
San Francisco 26.66 26.10 2.1%
New York 25.92 25.65 1.1%
Seattle-Tacoma 20.38 20.08 1.5%
Washington DC 21.26 21.10 0.8%
Miami 20.09 20.30 (1.0)%
Atlanta 13.31 13.36 (0.4)%
Chicago 15.16 15.16 0.0%
Dallas-Ft. Worth 13.49 13.56 (0.5)%
Houston 12.99 13.72 (5.3)%
Orlando-Daytona 13.70 13.64 0.4%
Philadelphia 16.67 16.19 3.0%
West Palm Beach 18.69 18.52 0.9%
Tampa 13.95 14.00 (0.4)%
Charlotte 11.20 11.22 (0.2)%
All other markets 14.36 14.26 0.7%
Total realized rent per
occupied square foot $ 17.43 $ 17.30 0.8%
?
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Same Store Facilities Operating Trends by
Market (Continued)
Three Months Ended March 31,
2020 2019 Change
REVPAF:
Los Angeles $ 24.77 $ 24.08 2.9%
San Francisco 25.05 24.45 2.5%
New York 24.26 23.92 1.4%
Seattle-Tacoma 18.87 18.43 2.4%
Washington DC 19.70 19.37 1.7%
Miami 18.61 18.68 (0.4)%
Atlanta 12.23 12.38 (1.2)%
Chicago 13.88 13.57 2.3%
Dallas-Ft. Worth 12.40 12.34 0.5%
Houston 11.88 12.20 (2.6)%
Orlando-Daytona 12.83 12.80 0.2%
Philadelphia 15.82 15.32 3.3%
West Palm Beach 17.63 17.26 2.1%
Tampa 12.81 12.87 (0.5)%
Charlotte 10.23 10.22 0.1%
All other markets 13.39 13.20 1.4%
Total REVPAF $ 16.23 $ 16.00 1.4%
We believe that our geographic diversification and scale across substantially
all major metropolitan markets in the U.S. provides some insulation from
localized economic effects and enhances the stability of our cash flows. It is
difficult to predict localized trends in short-term self-storage demand and
operating results. Over the long run, we believe that markets that experience
population growth, high employment, and otherwise exhibit economic strength and
consistency will outperform markets that do not exhibit these characteristics.
Acquired Facilities
The Acquired Facilities represent 78 facilities that we acquired in 2018, 2019, and the first three months of 2020. As a result of the stabilization process and timing of when these facilities were acquired, year-over-year changes can be significant.
The following table summarizes operating data with respect to the Acquired Facilities:
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ACQUIRED FACILITIES
Three Months Ended March 31,
2020 2019 Change (a)
($ amounts in thousands, except for per square foot
amounts)
Revenues (b):
2018 Acquisitions $ 4,126 $ 3,724 $ 402
2019 Acquisitions 7,061 197 6,864
2020 Acquisitions 682 - 682
Total revenues 11,869 3,921 7,948
Cost of operations (b):
2018 Acquisitions 1,869 2,054 (185)
2019 Acquisitions 3,313 60 3,253
2020 Acquisitions 330 - 330
Total cost of operations 5,512 2,114 3,398
Net operating income:
2018 Acquisitions 2,257 1,670 587
2019 Acquisitions 3,748 137 3,611
2020 Acquisitions 352 - 352
Net operating income 6,357 1,807 4,550
Depreciation and
amortization expense (9,522) (3,692) (5,830)
Net income (loss) $ (3,165) $ (1,885) $ (1,280)
At March 31:
Square foot occupancy:
2018 Acquisitions 88.4% 82.3% 7.4%
2019 Acquisitions 81.1% 79.2% 2.4%
2020 Acquisitions 49.4% - -
78.9% 81.3% (3.0)%
Annual contract rent per
occupied square foot:
2018 Acquisitions $ 11.65 $ 11.33 2.8%
2019 Acquisitions 11.64 11.06 5.2%
2020 Acquisitions 15.09 - -
$ 11.94 $ 11.25 6.1%
Number of facilities:
2018 Acquisitions 25 25 -
2019 Acquisitions 44 12 32
2020 Acquisitions 9 - 9
78 37 41
Net rentable square feet (in thousands):
2018 Acquisitions 1,629 1,629 -
2019 Acquisitions 3,145 768 2,377
2020 Acquisitions 748 - 748
5,522 2,397 3,125
46
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ACQUIRED FACILITIES (Continued) As of
?March 31,
?2020
Costs to acquire (in thousands):
2018 Acquisitions $ 181,020
2019 Acquisitions 429,850
2020 Acquisitions 186,183
$ 797,053
(a)Represents the percentage change with respect to square foot occupancy and
annual contract rent per occupied square foot, and the absolute nominal change
with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See "Ancillary Operations" below for more information.
We believe that our economies of scale in marketing and operations allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities. The Acquired Facilities have an aggregate of approximately 5.5 million net rentable square feet, including 0.8 million inVirginia , 0.5 million inTexas , 0.4 million in each ofFlorida ,Georgia ,Indiana ,Minnesota andNebraska , 0.3 million in each ofMassachusetts ,South Carolina andTennessee and 1.3 million in other states. For the three months endedMarch 31, 2020 , the weighted average annualized yield on cost, based upon net operating income, for the 25 facilities acquired in 2018 was 5.0%. The yield for the facilities acquired in the three months endedMarch 31, 2020 is not meaningful due to our limited ownership period, and the yield for the facilities acquired in 2019 is not meaningful due to the presence of unstabilized facilities. Subsequent toMarch 31, 2020 we acquired or were under contract to acquire six self-storage facilities (four inOhio and one each inCalifornia andFlorida ) with 0.4 million net rentable square feet, for$66.8 million . We continue to seek to acquire additional self-storage facilities from third parties. Our acquisition volume was robust in the early part of 2020, with$253.0 million in acquisitions during 2020 thus far including facilities currently under contract. However, we believe that in the short-term, acquisition volume may decline due to economic uncertainty resulting from the COVID Pandemic, resulting in some third party sellers delaying the sale of their properties. Volume in the latter part of 2020 could increase as the economy stabilizes and seller confidence returns, or leveraged owners of recently developed facilities are forced to sell. There can be no assurance as to the level of future acquisitions of facilities.
Analysis of Depreciation and Amortization of Acquired Facilities
Depreciation and amortization with respect to the Acquired Facilities for the three months endedMarch 31, 2020 and 2019 totaled$9.5 million and$3.7 million , respectively. These amounts include (i) depreciation of the acquired buildings, which is recorded generally on a straight line basis over a 25 year period, and (ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to the Acquired Facilities owned atMarch 31, 2020 , depreciation of buildings and amortization of tenant intangibles is expected to aggregate approximately$36.4 million in the year endingDecember 31, 2020 . There will be additional depreciation and amortization of tenant intangibles with respect to new buildings that are acquired in the remainder of 2020. ? 47
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Developed and Expanded Facilities
The developed and expanded facilities include 74 facilities that were developed on new sites sinceJanuary 1, 2015 , and 71 facilities subject to expansion of their net rentable square footage. Of these expansions, 20 were completed atJanuary 1, 2019 , 31 were completed in the 15 months endedMarch 31, 2020 , and 20 are currently in process or are expected to commence renovation in 2020. The following table summarizes operating data with respect to the Developed and Expanded Facilities: DEVELOPED AND EXPANDED FACILITIES Three Months Ended March 31, 2020 2019 Change (a) ($ amounts in thousands, except for per square foot amounts) Revenues (b): Developed in 2015 $ 4,511$ 4,236 $ 275 Developed in 2016 - 2018 16,371 12,262 4,109 Developed in 2019 1,075 10 1,065 Expansions completed before 2019 8,062 6,617 1,445 Expansions completed in 2019 or 2020 6,717 4,701 2,016 Expansions in process 5,549 5,889 (340) Total revenues 42,285 33,715 8,570 Cost of operations (b): Developed in 2015 1,583 1,401 182 Developed in 2016 - 2018 7,530 6,891 639 Developed in 2019 1,071 85 986 Expansions completed before 2019 2,826 2,375 451 Expansions completed in 2019 or 2020 3,787 2,132 1,655 Expansions in process 1,551 1,562 (11) Total cost of operations 18,348 14,446 3,902 Net operating income: Developed in 2015 2,928 2,835 93 Developed in 2016 - 2018 8,841 5,371 3,470 Developed in 2019 4 (75) 79 Expansions completed before 2019 5,236 4,242 994 Expansions completed in 2019 or 2020 2,930 2,569 361 Expansions in process 3,998 4,327 (329) Net operating income 23,937 19,269 4,668 Depreciation and amortization expense (15,110) (11,955) (3,155) Net income $ 8,827$ 7,314 $ 1,513 At March 31: Square foot occupancy: Developed in 2015 91.6% 90.2% 1.6% Developed in 2016 - 2018 79.8% 67.6% 18.0% Developed in 2019 51.0% 8.1% 529.6% Expansions completed before 2019 79.8% 66.0% 20.9% Expansions completed in 2019 or 2020 62.7% 51.7% 21.3% Expansions in process 88.3% 89.3% (1.1)% 75.1% 66.4% 13.1% ? 48
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DEVELOPED AND EXPANDED
FACILITIES (Continued) Three Months Ended March 31,
2020 2019 Change (a)
(Amounts in thousands, except for number of facilities)
Annual contract rent per occupied
square foot:
Developed in 2015 $ 15.66 $ 14.74 6.2%
Developed in 2016 - 2018 13.15 11.88 10.7%
Developed in 2019 9.46 7.46 26.8%
Expansions completed before 2019 14.64 15.12 (3.2)%
Expansions completed in 2019 or 2020 10.21 13.94 (26.8)%
Expansions in process 20.27 20.16 0.5%
$ 13.46 $ 14.04 (4.1)%
Number of facilities:
Developed in 2015 13 13 -
Developed in 2016 - 2018 50 50 -
Developed in 2019 11 4 7
Expansions completed before 2019 20 20 -
Expansions completed in 2019 or 2020 31 31 -
Expansions in process 20 20 -
145 138 7
Net rentable square feet (c):
Developed in 2015 1,242 1,242 -
Developed in 2016 - 2018 6,250 6,250 -
Developed in 2019 1,057 444 613
Expansions completed before 2019 2,755 2,689 66
Expansions completed in 2019 or 2020 4,248 2,596 1,652
Expansions in process 1,223 1,256 (33)
16,775 14,477 2,298
As of
?March 31,
?2020
Costs to develop:
Developed in 2015 $ 119,258
Developed in 2016 - 2018 759,643
Developed in 2019 150,387
Expansions completed before 2019 (d) 159,217
Expansions completed in 2019 or 2020
(d) 248,047
$ 1,436,552
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-------------------------------------------------------------------------------- (a)Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See "Ancillary Operations" below for more information.
(c)The facilities included above have an aggregate of approximately 16.8 million net rentable square feet atMarch 31, 2020 , including 6.5 million inTexas , 2.3 million inCalifornia , 1.8 million inFlorida , 1.5 million inColorado , 1.0 million inMinnesota , 0.8 million inNorth Carolina , 0.7 million inWashington , 0.3 million in each ofArizona ,Georgia ,Michigan andSouth Carolina and 1.0 million in other states. (d)These amounts only include the direct cost incurred to expand and renovate these facilities, and do not include (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period. It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Physical occupancy can be achieved as early as two to three years following completion of the development or expansion, through offering lower rental rates during fill-up. As a result, even after achieving high occupancy, there can still be a period of elevated revenue growth as the tenant base matures and higher rental rates are achieved. Our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses in general and administrative expense. Despite this short-term dilution, we believe that our development and expansion activities generate favorable risk-adjusted returns over the long run. The COVID Pandemic could delay the estimated timing of completion of our existing pipeline of development and expansion projects, because many jurisdictions have shut down or delayed entitlement activities, and "stay at home" orders could potentially delay construction activities. In addition, the COVID Pandemic could extend the timeframe for a newly developed facility to reach stabilized occupancies and cash flows. We continue to monitor our projects to ensure that they still meet our risk-adjusted yield expectations, and reduced project yield estimates due to the COVID Pandemic or other factors could result in the cancellation of existing projects in the future, or we may not pursue certain new projects that we would have otherwise sought.
Newly Developed Facilities
The facilities included under "Developed in 2015" had high occupancies atDecember 31, 2018 . Nonetheless, they generated 6.5% year over year rent growth in the three months endedMarch 31, 2020 , representing maturity of the existing tenant base following attainment of high occupancy, illustrating the latter stage of the stabilization process noted above. The annualized yield on cost for these facilities, based upon the net operating income for the three months endedMarch 31, 2020 , was 9.8%. The facilities included under "Developed in 2016 - 2018" and "Developed in 2019" continue to be, on average, in the occupancy stabilization phase. We expect continued growth in these facilities throughout the remainder of 2020 and beyond as they continue to stabilize. The annualized yields that may be achieved on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property, the level of new and existing supply, as well as the impact of the COVID Pandemic. Accordingly, the 9.8% yield achieved on the facilities under "Developed in 2015" may not be indicative of the yield on cost to be achieved on these facilities. We have twelve additional newly developed facilities in process, which will have a total of 1.4 million net rentable square feet of storage space and have an aggregate development cost totaling approximately$228.8 million . We expect these facilities to open over the next 18 to 24 months. ? 50
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Expansions of Existing Facilities
The expansion of an existing facility involves the construction of new space on an existing facility, either on existing unused land or through the demolition of existing buildings in order to facilitate densification. The construction costs for an expanded facility may include, in addition to adding space, adding amenities such as climate control to existing space, improving the visual appeal of the facility, and to a much lesser extent, the replacement of existing doors, roofs, and HVAC. The return profile on the expansion of existing facilities differs from a new facility, due to a lack of land cost, and there can be less cash flow risk because we have more direct knowledge of the local demand for space on the site as compared to a new facility. However, many expansions involve the demolition of existing revenue-generating space with the loss of the related revenues during the construction and fill-up period. The facilities under "completed expansions" represent those facilities where the expansions have been completed atMarch 31, 2020 . We incurred a total of$407.3 million in direct cost to expand these facilities, demolished a total of 1.0 million net rentable square feet of storage space, and built a total of 4.5 million net rentable square feet of new storage space. The facilities under "expansions in process" represent those facilities where development is in process atMarch 31, 2020 or which will commence construction byDecember 31, 2020 . We have a pipeline to add a total of 2.9 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of$405.7 million . We have already demolished 0.1 million net rentable square feet of space in connection with our expansion projects, and expect to demolish an additional 0.3 million net rentable square feet.
Analysis of Depreciation and Amortization of Developed and Expanded Facilities
Depreciation and amortization with respect to the Developed and Expanded Facilities totaled$15.1 million and$12.0 million for the three months endedMarch 31, 2020 and 2019, respectively. These amounts represent depreciation of the developed buildings and, in the case of the expanded facilities, the legacy depreciation on the existing buildings. With respect to the Developed and Expanded Facilities completed atMarch 31, 2020 , depreciation of buildings is expected to aggregate approximately$61.5 million in the year endingDecember 31, 2020 . There will be additional depreciation of new buildings that are developed or expanded in the remainder of 2020.
Other non-same store facilities
The "other non-same store facilities" represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized sinceJanuary 1, 2018 , due primarily to casualty events such as hurricanes, floods, and fires, as well as facilities acquired from third parties prior toJanuary 1, 2018 that were recently developed or expanded by the previous owner. The other non-same store facilities have an aggregate of 3.6 million net rentable square feet, including 0.7 million inTexas , 0.5 million in each ofOhio andOklahoma , 0.4 million in each ofNew York andSouth Carolina and 1.1 million in other states. The net operating income for these facilities was$6.7 million in each of the three month periods endedMarch 31, 2020 and 2019. During the three months endedMarch 31, 2020 and 2019, the average occupancy for these facilities was 85.0%, and 85.4%, respectively. Over the longer term, we expect the growth in operations of these facilities to be similar to that of our Same Store facilities. However, in the short run, year over year comparisons will vary due to the impact of the underlying events which resulted in these facilities being classified as non-same store.
Depreciation and amortization with respect to the other non-same store
facilities totaled
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of the remaining three months periods in 2020 will approximate the level
experienced in the three months ended
Ancillary Operations
Ancillary revenues and expenses include amounts associated with the reinsurance
of policies against losses to goods stored by tenants in our self-storage
facilities in the
Three Months Ended March 31,
2020 2019 Change
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums$ 34,696 $ 31,593 $ 3,103 Merchandise 7,185 7,037 148 Total revenues 41,881 38,630 3,251 Cost of Operations: Tenant reinsurance 6,782 6,251 531 Merchandise 4,163 4,294 (131) Total cost of operations 10,945 10,545 400 Net operating income Tenant reinsurance 27,914 25,342 2,572 Merchandise 3,022 2,743 279
Total net operating income
Tenant reinsurance operations: Our customers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary ofPublic Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as "Tenant reinsurance premiums" in the above table. The subsidiary pays a fee toPublic Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in consolidation and is therefore not shown in the above table. Tenant reinsurance revenue increased$3.1 million or 9.8% from$31.6 million in the three months endedMarch 31, 2019 to$34.7 million in the three months endedMarch 31, 2020 . The increase is due to higher average premiums and an increase in our tenant base with respect to acquired, newly developed, and expanded facilities. Tenant reinsurance revenue with respect to the Same Store Facilities increased$1.5 million or 5.3% from$28.0 million in the three months endedMarch 31, 2019 to$29.5 million in the three months endedMarch 31, 2020 . We expect future growth will come primarily from customers of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities. However, tenant reinsurance revenues could be negatively impacted by lower occupancies and move-in volume resulting from the COVID Pandemic. Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the number of insured tenants and the volume of events which drive covered customer losses, such as burglary, as well as catastrophic weather events affecting 52
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multiple properties such as hurricanes and floods. Cost of operations were
Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in the remainder of 2020.
Equity in earnings of unconsolidated real estate entities
For all periods presented, we have equity investments in PSB and Shurgard, which
we account for on the equity method and record our pro-rata share of the net
income of these entities. The following table, and the discussion below, sets
forth our equity in earnings of unconsolidated real estate entities:
Three Months Ended March 31,
2020 2019 Change
(Amounts in thousands)
Equity in earnings:
PSB $ 21,737 $ 13,720 $ 8,017
Shurgard 2,231 3,952 (1,721)
Total equity in earnings $ 23,968 $ 17,672 $ 6,296
Investment in PSB: Throughout all periods presented, we owned 7,158,354 shares
of PS Business Parks, Inc. ("PSB") common stock and 7,305,355 limited
partnership units in an operating partnership controlled by PSB, representing an
aggregate approximately 42% common equity interest. The limited partnership
units are convertible at our option, subject to certain conditions, on a
one-for-one basis into PSB common stock.
At March 31, 2020 , PSB wholly-owned approximately 27.5 million rentable square
feet of commercial space and had a 95% interest in a 395-unit apartment complex.
PSB also manages commercial space that we own pursuant to property management
agreements.
Equity in earnings from PSB totaled $21.7 million and $13.7 million for the
three months ended March 31, 2020 and 2019, respectively. Included in the amount
for three months ended March 31, 2020 is our equity share of gains on sale of
real estate totaling $8.1 million .
Equity in earnings from PSB, excluding the aforementioned real estate gains,
decreased $0.1 million in the three months ended March 31, 2020 , as compared to
the same period in 2019 due primarily to increased depreciation. See Note 4 to
our March 31, 2020 financial statements for further discussion regarding PSB.
PSB's filings and selected financial information, including discussion of
impacts from the COVID Pandemic, can be accessed through the SEC , and on PSB's
website, www.psbusinessparks.com. Information on this website is not
incorporated by reference herein and is not a part of this Quarterly Report on
Form 10-Q.
Investment in Shurgard: Throughout all periods presented, we effectively owned,
directly and indirectly, 31,268,459 Shurgard common shares, representing an
approximate 35% equity interest in Shurgard. Shurgard's common shares trade on
Euronext Brussels under the "SHUR" symbol.
At March 31, 2020 , Shurgard owned 234 self-storage facilities with approximately
13 million net rentable square feet. Shurgard pays us license fees for use of
the "Shurgard" trademark, as described in more detail in Note 4 to our March 31,
2020 financial statements.
In the three months ended
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Our equity in earnings from Shurgard totaled $2.2 million and $4.0 million for
the three months ended March 31, 2020 and 2019, respectively. The decrease is
due primarily to our (i) $3.5 million equity share of a casualty loss incurred
by Shurgard with respect to a facility destroyed by fire in the three months
ended March 31, 2020 , offset partially by (ii) an increase as a result of our
$1.4 million equity share of Shurgard's resolution of a contingency in the three
months ended March 31, 2020 .
Our future earnings from Shurgard will also be affected by (i) the operating
results of its existing facilities, (ii) the level of development and
acquisition activities, (iii) the income tax rates applicable in the various
European jurisdictions in which Shurgard operates, and (iv) the exchange rate
between the U.S. Dollar and currencies in the countries in which Shurgard
conducts its business (principally the Euro).
Shurgard's public filings and publicly reported information, including
discussion of the impacts from the COVID Pandemic, can be obtained on its
website, https://corporate.shurgard.eu and on the website of the
For purposes of recording our equity in earnings from Shurgard, the Euro was translated at average exchange rates of 1.103 and 1.136 for the three months endedMarch 31, 2020 and 2019, respectively.
Analysis of items not allocated to segments
General and administrative expense: The following table sets forth our general
and administrative expense:
Three Months Ended March 31,
2020 2019 Change
(Amounts in thousands)
Share-based compensation expense
1,640 1,328 312
Development and acquisition costs 2,444 2,067 377
Tax compliance costs and taxes paid 1,713 1,433 280
Legal costs 2,432 3,704 (1,272)
Public company costs 1,386 1,512 (126)
Other costs 4,842 1,865 2,977
Total $ 21,064 $ 19,503 $ 1,561
Share-based compensation expense includes the amortization of restricted share
units and stock options granted to employees and trustees, as well as related
employer taxes. Share-based compensation expense varies based upon the level of
grants and their related vesting and amortization periods, forfeitures, as well
as the Company's common share price on the date of grant. See Note 10 to our
March 31, 2020 financial statements for further information on our share-based
compensation.
Our share-based compensation plans were revised after March 31, 2020 to allow
vesting ("Retirement Vesting"), rather than forfeiture, of all unvested
share-based grants upon termination of service, for employees that meet certain
requirements, such as minimum age, minimum years of service, notice, and who
cooperate as needed in a transition plan. This change is expected to increase
share-based compensation expense in the remainder of 2020, due primarily to
accelerated amortization of share-based grants that are expected to be eligible
for Retirement Vesting at an earlier date than the original vesting date. In
addition, 770,000 stock options were granted in the three months ended March 31,
2020 , which will also result in an increase in share-based compensation expense
during the remainder of 2020.
Costs of senior executives represent the cash compensation paid to our CEO and CFO.
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Development and acquisition costs primarily represent internal and external
expenses related to our development and acquisition of real estate facilities
and varies primarily based upon the level of activities. The amounts in the
above table are net of $3.1 million for each of the three month periods ended
March 31, 2020 and 2019, in development costs that were capitalized to newly
developed and redeveloped self-storage facilities. Development and acquisition
costs are expected to remain stable in the remainder of 2020. However, the COVID
Pandemic could decrease the proportion of overhead capitalized in the remainder
of 2020, due to delays in construction and entitlement activities.
Tax compliance costs and taxes paid include taxes paid to various state and
local authorities, the internal and external costs of filing tax returns, costs
associated with complying with federal and state tax laws, and maintaining our
compliance with Internal Revenue Service REIT rules. Such costs vary primarily
based upon the tax rates of the various states in which we do business.
Legal costs include internal personnel as well as fees paid to legal firms and
other third parties with respect to general corporate legal matters and risk
management, and varies based upon the level of legal activity. The future level
of legal costs is not determinable.
Public company costs represent the incremental costs of operating as a
publicly-traded company, such as internal and external investor relations
expenses, stock listing and transfer agent fees, board of trustees' (our
"Board") costs, and costs associated with maintaining compliance with applicable
laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act and Sarbanes-Oxley Act of 2002.
Other costs represent certain professional and consulting fees, payroll, and
overhead that are not attributable to our property operations. Such costs
include nonrecurring and variable items, including $1.6 million in due diligence
costs incurred in the three months ended March 31, 2020 in connection with our
non-binding proposal, which we did not proceed with, to acquire 100% of the
stapled securities of National Storage REIT. The level of these costs depend
upon corporate activities and initiatives and, as a result, such costs are not
predictable.
Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.
Interest and other income: Interest and other income is comprised primarily of the net income from our commercial operations, our property management operation, interest earned on cash balances, and trademark license fees received from Shurgard, as well as sundry other income items that are received from time to time in varying amounts. Excluding amounts attributable to the aggregate of our commercial operations and property management operations totaling$2.6 million , and$2.7 million in the three months endedMarch 31, 2020 and 2019, respectively, interest and other income decreased in the three months endedMarch 31, 2020 due primarily to a decline in average interest rates, offset partially by an increased level of uninvested cash balances. We do not expect any significant changes in income from commercial and property management operations in the remainder of 2020; however, the COVID Pandemic could result in difficulties in collecting commercial rent or leasing space. The level of other interest and income items in the remainder of 2020 will be dependent upon the level of cash balances we retain, interest rates, and the level of sundry other income items. Interest expense: For the three months endedMarch 31, 2020 and 2019, we incurred$14.6 million , and$9.3 million , respectively, of interest on our outstanding debt. In determining interest expense, these amounts were offset by capitalized interest of$0.9 million and$1.2 million during the three months endedMarch 31, 2020 and 2019, respectively, associated with our development activities. The increase in the three months endedMarch 31, 2020 , as compared to the same period in 2019, is due to our issuances on (i)April 12, 2019 of$500 million in senior notes bearing interest at an annual rate of 3.385% and on (ii)January 24, 2020 of €500 million ($551.6 million ) aggregate principal amount of senior notes bearing interest at an annual rate of 0.875%. AtMarch 31, 2020 , we had$2.5 billion of debt outstanding, with an average interest rate of 2.4%.
Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs.
55
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Foreign Exchange Gain: For the three months ended March 31, 2020 and 2019, we
recorded foreign currency translation gains of $8.9 million and $7.8 million ,
respectively, representing the changes in the U.S. Dollar equivalent of our
Euro-denominated unsecured notes due to fluctuations in exchange rates. The Euro
was translated at exchange rates of approximately 1.100 U.S. Dollars per Euro at
March 31, 2020 , 1.122 at December 31, 2019 , 1.122 at March 31, 2019 and 1.144 at
December 31, 2018 . Future gains and losses on foreign currency translation will
be dependent upon changes in the relative value of the Euro to the U.S. Dollar,
and the level of Euro-denominated debt outstanding.
Gain on Real Estate Investment Sales: In the three months ended March 31, 2020 ,
we recorded $1.1 million (none in the same period in 2019) in gains, primarily
in connection with the partial sale of real estate facilities pursuant to
eminent domain proceedings.
Net Income Allocable to Preferred Shareholders: Net income allocable to
preferred shareholders based upon distributions decreased from $55.0 million in
the three months ended March 31, 2019 to $52.0 million in the same period in
2020, due primarily to lower average coupon rates due to redemptions of
preferred shares with the proceeds from the issuance of new series with lower
market coupon rates. We also allocated $8.5 million of income from our common
shareholders to the holders of our preferred shares in the three months ended
March 31, 2019 in connection with the redemption of our Series Y Preferred
Shares. Based upon our preferred shares outstanding at March 31, 2020 , our
quarterly distribution to our preferred shareholders is expected to be
approximately $52.0 million .
Liquidity and Capital Resources
While being a REIT allows us to minimize the payment of federal income tax expense, we are required to distribute 100% of our taxable income to our shareholders. This requirement limits cash flow from operations that can be retained and reinvested in the business, increasing our reliance upon raising capital to fund growth.
Because raising capital is important to our growth, we endeavor to maintain a strong financial profile characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody's andStandard & Poor's . Our senior debt has an "A" credit rating byStandard & Poor's and "A2" by Moody's. Our credit ratings on each of our series of preferred shares are "A3" by Moody's and "BBB+" byStandard & Poor's . Our credit profile and ratings enable us to effectively access both the public and private capital markets to raise capital.
While we must distribute our taxable income, we are nonetheless able to retain
operating cash flow to the extent that our tax depreciation exceeds our
maintenance capital expenditures. In recent years, we have retained
approximately
Capital needs in excess of retained cash flow are met with: (i) preferred equity, (ii) medium and long-term debt, and (iii) common equity. We select among these sources of capital based upon relative cost, availability, the desire for leverage, and considering potential constraints caused by certain features of capital sources, such as debt covenants. We view our line of credit, as well as short-term bank loans, as bridge financing. We have a$500.0 million revolving line of credit which we occasionally use as temporary "bridge" financing until we are able to raise longer term capital. As ofMarch 31, 2020 andApril 30, 2020 , there were no borrowings outstanding on the revolving line of credit, however, we do have approximately$15.9 million of outstanding letters of credit which limits our borrowing capacity to$484.1 million . Our line of credit matures onApril 19, 2024 . The COVID Pandemic has had negative impacts on the cost of debt and equity capital, and may continue to do so or such negative impacts could intensify. Based upon our substantial current liquidity relative to our capital requirements noted below, and our strong financial profile and credit ratings, we do not expect such capital market dislocations to have a material impact upon our expected capital and growth plans over the next 12 months. However, there can be no assurance that they would not in the future, if they were to persist for a long period of time or intensify. 56 -------------------------------------------------------------------------------- Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures and distributions to our shareholders over the next 12 months. As ofMarch 31, 2020 , we expect capital resources over the next year of approximately$1.4 billion , which exceeds our currently identified capital needs of approximately$539.6 million . Our expected capital resources include: (i)$718.4 million of cash as ofMarch 31, 2020 , (ii)$484.1 million of available borrowing capacity on our revolving line of credit and (iii) approximately$200 million of expected retained operating cash flow in the next year. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities. Our currently identified capital needs consist primarily of$66.8 million in property acquisitions currently under contract and$472.8 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 to 24 months. We have no substantial principal payments on debt until 2022. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential capital needs could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or mergers and acquisition activities; however, there can be no assurance of any such activities transpiring in the near or longer term. In addition, the COVID Pandemic could result in increases or decreases to our capital needs as we continue to adjust our acquisition and development of self-storage facilities in light of potential returns, execution issues, the cost and availability of capital, and other factors. To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities. Required Debt Repayments: As ofMarch 31, 2020 , the principal outstanding on our debt totaled approximately$2.5 billion , consisting of$26.8 million of secured debt,$926.3 million of Euro-denominated unsecured debt and$1.5 billion ofU.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts in thousands): Remainder of 2020$ 1,519 2021 1,865 2022 502,584 2023 19,219 2024 110,129 Thereafter 1,817,714$ 2,453,030 The remaining maturities on our debt over at the next two years are nominal. Our debt is well-laddered, with material debt maturities at least 18 months apart, which moderates refinancing risk. Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage. Capital expenditures totaled$56.9 million in the first three months of 2020, and are expected to approximate$175 million in the year endingDecember 31, 2020 . Our capital expenditures for 2020 include certain projects that are upgrades and not traditional like-for-like replacements of existing components, and in certain circumstances replace existing components before the end of their functional lives. Such projects include installation of LED lighting, replacing existing planting configurations with more drought tolerant and low maintenance configurations, installation of solar panels, improvements to office and customer zone configurations to provide a more customer-friendly experience, and improvements to outdoor facades and color schemes. Such incremental investments improve customer satisfaction, the attractiveness and competitiveness of our facilities to new and existing customers, or reduce operating costs. The$175 million in capital expenditures expected for the year endingDecember 31, 2020 , as well as 57
-------------------------------------------------------------------------------- the$192.5 million incurred in 2019, represent a substantial increase from the amounts incurred of$139.4 million ,$124.8 million and$86.0 million in 2018, 2017, and 2016, respectively. We expect continued elevated capital expenditures beyond 2020; however, the level and persistence of this elevation is uncertain at this time. As noted above, the COVID Pandemic may impact our capital expenditures, due to "stay at home" orders and business shutdowns which in many jurisdictions has shut down or delayed certain capital expenditure projects. The estimate of$175 million noted above represents our best estimate at this time; however, there is no assurance our capital expenditure amounts will not change as we continue to monitor the impact of the COVID Pandemic on our ability to execute on capital expenditure work. Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. OnApril 21, 2020 , our Board declared a quarterly cash dividend of$2.00 per common share totaling approximately$350 million , which will be paid at the end ofJune 2020 . Our consistent, long-term dividend policy has been to distribute only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities. We estimate the annual distribution requirements with respect to our Preferred Shares outstanding atMarch 31, 2020 , to be approximately$208.0 million per year.
We estimate we will pay approximately
Real Estate Investment Activities: We continue to seek to acquire additional self-storage facilities from third parties. Our acquisition volume was robust in the early part of 2020, with$253.0 million in acquisitions during 2020 thus far including facilities currently under contract. However, we believe that in the short-term, acquisition volume may decline due to economic uncertainty resulting from the COVID Pandemic, resulting in some third party sellers delaying the sale of their properties. Volume in the latter part of 2020 could increase as the economy stabilizes and seller confidence returns, or leveraged owners of recently developed facilities are forced to sell. There can be no assurance as to the level of future acquisitions of facilities. In addition, there can be no assurance, if significant additional opportunities to acquire facilities were to arise as a result of the COVID Pandemic or for other reasons, whether we would be able to raise capital at a reasonable cost to allow us to be able to take advantage of such opportunities. As ofMarch 31, 2020 we had development and expansion projects at a total cost of approximately$634.5 million . Costs incurred throughMarch 31, 2020 were$161.7 million , with the remaining cost to complete of$472.8 million expected to be incurred primarily in the next 18 to 24 months. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. The COVID Pandemic could delay the estimated timing of completion of our existing pipeline of development and expansion projects, because many jurisdictions have shut down or delayed entitlement activities, and "stay at home" orders could potentially delay construction activities. In addition, the COVID Pandemic could extend the timeframe for a newly developed facility to reach stabilized occupancies and cash flows. We continue to monitor our projects to ensure that they still meet our risk-adjusted yield expectations, and reduced project yield 58
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estimates due to the COVID Pandemic or other factors could result in the cancellation of existing projects in the future, or we may not pursue certain new projects that we would have otherwise sought.
Redemption of Preferred Securities: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As ofApril 30, 2020 , we have the following series of preferred securities that are eligible for redemption, at our option and with 30 days' notice; our 5.375% Series V Preferred Shares ($495 million ), our 5.200% Series W Preferred Shares ($500 million ), and our 5.200% Series X Preferred Shares ($225 million ). See Note 8 to ourMarch 31, 2020 financial statements for the redemption dates of our other series of preferred shares. Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities. None of our preferred securities are redeemable at the option of the holders. Repurchases of Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three months endedMarch 31, 2020 , we did not repurchase any of our common shares. From the inception of the repurchase program throughApril 30, 2020 , we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately$679.1 million . Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.
Contractual Obligations
Our significant contractual obligations atMarch 31, 2020 and their impact on our cash flows and liquidity are summarized below for the years endingDecember 31 (amounts in thousands): Remainder of Total 2020 2021 2022 2023 2024 Thereafter Interest and principal payments on debt (1)$ 2,850,849 $ 44,814 $ 59,501 $ 556,670
Leases and other commitments (2) 76,010 3,328 4,395 3,745
3,522 3,541 57,479
Construction commitments (3) 103,001 75,013 23,037 4,951 - - - Total$ 3,029,860 $ 123,155 $ 86,933 $ 565,366
(1)Represents contractual principal and interest payments. Amounts with respect
to certain Euro-denominated debt are based upon exchange rates at
(2)Represents future contractual payments on land, equipment and office space under various leases and other commitments.
(3)Represents future expected payments for construction under contract at
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding atMarch 31, 2020 to be approximately$208.0 million per year. Dividends are paid when and if declared by our Board and accumulate if not paid.
Off-Balance Sheet Arrangements: At
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