LIFE STORAGE, INC. The following discussion and analysis of the Company's consolidated financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this document, the words "intends," "believes," "expects," "anticipates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; risks associated with the COVID-19 global health crisis or similar events, including but not limited to (i) the impact to the health of our employees and/or customers, (ii) the negative impacts to the economy and to self-storage customers which could reduce the demand for self-storage or reduce our ability to collect rent, (iii) reducing or eliminating our ability to increase rents charged to our current or future customers, (iv) limiting our ability to collect rent from or evict past due customers, (v) we could see an increase in move-outs of longer-term customers due to the economic uncertainty and significant rise in unemployment resulting from the COVID-19 global health crisis which could lead to lower occupancies and reduced average rental rates as longer-term customers are replaced with new customers at lower rates, and (vi) potential negative impacts on the cost and availability of debt and equity which could have a negative impact on our capital and growth plans; the Company's ability to evaluate, finance and integrate acquired self-storage facilities into the Company's existing business and operations; the Company's ability to effectively compete in the industry in which it does business; the Company's existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company's outstanding floating rate debt; the Company's ability to comply with debt covenants; any future ratings on the Company's debt instruments; regional concentration of the Company's business may subject it to economic downturns in the states ofFlorida andTexas ; the Company's reliance on its call center; the Company's cash flow may be insufficient to meet required payments of operating expenses, principal, interest and dividends; and tax law changes that may change the taxability of future income.
RESULTS OF OPERATIONS
FOR THE PERIOD
We recorded rental revenues of$182.9 million for the three months endedSeptember 30, 2021 , an increase of$46.9 million or 34.5% when compared to rental revenues of$136.0 million for the same period in 2020. This increase in rental revenue was driven by a$22.8 million , or 17.7%, increase in rental revenues at the 531 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore the 531 core properties considered in same store sales are those included in the consolidated results of operations sinceJanuary 1, 2020 , excluding stores not yet stabilized, four stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017). The increase in same store rental revenues was a result of a 220 basis point increase in average occupancy along with an increase of 14.3% in rental income per square foot. Also affecting the overall increase in rental revenues was an increase of$24.1 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2020 and 2021. Other operating income, which includes merchandise sales, revenues related to tenant reinsurance, truck rentals, management fees and acquisition fees, increased by$5.0 million for the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily as a result of increased revenues related to the Company's tenant insurance program and increased management fees as a result of an increase in managed properties. Property operations and maintenance expenses increased$6.4 million or 17.8% in the three months endedSeptember 30, 2021 compared to the same period in 2020. Property operations and maintenance expenses related to the 531 core properties considered in the same store pool increased by$0.6 million or 2.1% primarily as the result of increased repairs and maintenance expenditures. The remainder of the increase in property operations and maintenance expenses is primarily the result of the net activity of the stores not included in the same store pool. Real estate tax expense increased$3.7 million during the three months endedSeptember 30, 2021 as compared to the same period in 2020. The 531 core properties considered in the same store pool experienced a 5.7% increase in real estate taxes which is reflective of a net increase in property tax levies on those properties. In addition to the same store real estate tax expense increase, real estate taxes increased$2.7 million from stores not included in the same store pool.
Net operating income increased
30
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Net operating income, or "NOI," is a non-GAAP (generally accepted accounting
principles) financial measure that we define as total continuing revenues less
continuing property operating expenses. NOI also can be calculated by adding
back to net income: interest expense, impairment and casualty losses, operating
lease expense, depreciation and amortization expense, any losses on sale of real
estate, acquisition related costs, general and administrative expense, and
deducting from net income: income from discontinued operations, interest income,
any gains on sale of real estate, and equity in income of joint ventures. We
believe that NOI is a meaningful measure to investors in evaluating our
operating performance because we utilize NOI in making decisions with respect to
capital allocations, in determining current property values, and in comparing
period-to-period and market-to-market property operating results. Additionally,
NOI is widely used in the real estate industry and the self-storage industry to
measure the performance and value of real estate assets without regard to
various items included in net income that do not relate to or are not indicative
of operating performance, such as depreciation and amortization, which can vary
depending on accounting methods and the book value of assets. NOI should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with GAAP, such as total revenues,
operating income and net income. There are material limitations to using a
measure such as NOI, including the difficulty associated with comparing results
among more than one company and the inability to analyze certain significant
items, including depreciation and interest expense, that directly affect our net
income. We compensate for these limitations by considering the economic effect
of the excluded expense items independently as well as in connection with our
analysis of net income.
The following table reconciles our net income presented in the consolidated
financial statements to NOI generated by our self-storage facilities for the
three months ended
Three Months ended September 30,
(dollars in thousands) 2021 2020
Net income $ 71,051 $ 37,288
General and administrative 16,141 13,369
Depreciation and amortization 37,158 33,018
Interest expense 21,350 20,544
Interest income (2 ) (8 )
Equity in income of joint ventures (1,477 ) (1,829 )
Net operating income $ 144,221 $ 102,382
Net operating income
Same store $ 108,436 $ 87,210Other stores, tenant reinsurance related income
and management fee income 35,785 15,172 Total net operating income$ 144,221 $ 102,382 Our 2021 same store results consist of only those properties that have been owned by the Company and included in our consolidated results sinceJanuary 1, 2020 , excluding stores not yet stabilized, four stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017. We believe that same store results are meaningful measures to investors in evaluating our operating performance because, given the acquisitive nature of the industry, same store results provide information about the overall business after removing the results from those properties that were not consistent from year-to-year. Additionally, same store results are widely used in the real estate industry and the self-storage industry to measure performance. Same store results should be considered in addition to, but not as a substitute for, consolidated results in accordance with GAAP. The following table sets forth operating data for our 531 same store properties. These results provide information relating to property operating changes without the effects of acquisitions. 31 --------------------------------------------------------------------------------
Same Store Summary
Three Months ended September 30, Percentage
(dollars in thousands) 2021 2020 Change
Same store rental income $ 151,459 $ 128,692 17.7 %
Same store other operating income 1,822 1,849 (1.5 )%
Total same store operating income 153,281 130,541 17.4 %
Payroll and benefits 9,456 9,514 (0.6 )%
Real estate taxes 17,639 16,688 5.7 %
Utilities 4,107 4,192 (2.0 )%
Repairs and maintenance 4,218 3,679 14.7 %
Office and other operating expenses 4,149 3,841 8.0 %
Insurance 1,566 1,500 4.4 %
Advertising 48 64 (25.0 )%
Internet marketing 3,662 3,853 (5.0 )%
Total same store operating expenses 44,845 43,331 3.5 %
Same store net operating income $ 108,436 $ 87,210 24.3 %
ChangeQuarterly same store move ins 49,439 57,114 (7,675 ) Quarterly same store move outs 53,151 52,483 668
We believe the decrease in same store move ins was due to lack of available space at many of our stores as a result of extremely high occupancy rates during the three months endedSeptember 30, 2021 . We believe the increase in same store move outs was a result of the impacts of the COVID-19 global health crisis during the three months endedSeptember 30, 2020 as many jurisdictions implemented stay-at-home orders for all or a portion of that period. General and administrative expenses for the three months endedSeptember 30, 2021 increased$2.8 million or 20.7% when compared with the three months endedSeptember 30, 2020 . This increase was primarily driven by an increase in home office personnel related costs to support the growth in stores. Depreciation and amortization expense increased to$37.2 million in the three months endedSeptember 30, 2021 from$33.0 million in the same period in 2020 as a result of depreciation and customer list amortization related to those properties acquired in 2021 and 2020.
Total interest expense increased by
FOR THE PERIOD
We recorded rental revenues of$496.3 million for the nine months endedSeptember 30, 2021 , an increase of$102.6 million or 26.1% when compared to rental revenues of$393.7 million for the same period in 2020. This increase in rental revenue was driven by a$49.7 million , or 13.2%, increase in rental revenues at the 531 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore the 531 core properties considered in same store sales are those included in the consolidated results of operations sinceJanuary 1, 2020 , excluding stores not yet stabilized, four stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017). The increase in same store rental revenues was a result of a 350 basis point increase in average occupancy along with an increase of 7.9% in rental income per square foot. Also affecting the overall increase in rental revenues was an increase of$52.9 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2020 and 2021. Other operating income, which includes merchandise sales, revenues related to tenant reinsurance, truck rentals, management fees and acquisition fees, increased by$14.5 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily as a result of increased acquisition fees, increased management fees as a result of an increase in managed properties, increased revenues related to the Company's tenant insurance program, and increased revenues from the Company's Warehouse Anywhere third party logistics and warehousing solution. Property operations and maintenance expenses increased$18.7 million or 18.4% in the nine months endedSeptember 30, 2021 compared to the same period in 2020. Property operations and maintenance expenses related to the 531 core properties considered in the same store pool increased by$2.4 million or 3.1% primarily as the result of increased repairs and maintenance expenditures and office related expenses. The remainder of the increase in property operations and maintenance expenses is primarily the result of the net activity of the stores not included in the same store pool. Real estate tax expense increased$9.0 million during the nine months 32
-------------------------------------------------------------------------------- endedSeptember 30, 2021 as compared to the same period in 2020. The 531 core properties considered in the same store pool experienced a 5.4% increase in real estate taxes which is reflective of a net increase in property tax levies on those properties. In addition to the same store real estate tax expense increase, real estate taxes increased$6.3 million from stores not included in the same store pool.
Net operating income increased
The following table reconciles our net income presented in the consolidated
financial statements to NOI generated by our self-storage facilities for the
nine months ended
Nine Months ended September 30,
(dollars in thousands) 2021 2020
Net income $ 176,408 $ 110,560
General and administrative 45,407 38,498
Depreciation and amortization 106,287 90,335
Gain on sale of real estate - (302 )
Interest expense 62,470 61,056
Interest income (787 ) (14 )
Equity in income of joint ventures (4,126 ) (3,915 )
Net operating income $ 385,659 $ 296,218
Net operating income
Same store $ 296,906 $ 251,968
Other stores, tenant reinsurance related income
and management fee income 88,753 44,250
Total net operating income $ 385,659 $ 296,218
Our 2021 same store results consist of only those properties that have been
owned by the Company and included in our consolidated results since January 1,
2020 , excluding stores not yet stabilized, four stores significantly impacted by
flooding, and two stores that the Company began to fully replace in 2017. We
believe that same store results are meaningful measures to investors in
evaluating our operating performance because, given the acquisitive nature of
the industry, same store results provide information about the overall business
after removing the results from those properties that were not consistent from
year-to-year. Additionally, same store results are widely used in the real
estate industry and the self-storage industry to measure performance. Same store
results should be considered in addition to, but not as a substitute for,
consolidated results in accordance with GAAP. The following table sets forth
operating data for our 531 same store properties. These results provide
information relating to property operating changes without the effects of
acquisitions.
Same Store Summary
Nine Months ended
September 30, Percentage
(dollars in thousands) 2021 2020 Change
Same store rental income $ 424,871 $ 375,186 13.2 %
Same store other operating income 5,193 4,806 8.1 %
Total same store operating income 430,064 379,992 13.2 %
Payroll and benefits 28,902 28,775 0.4 %
Real estate taxes 52,578 49,872 5.4 %
Utilities 11,201 11,024 1.6 %
Repairs and maintenance 13,066 11,173 16.9 %
Office and other operating expenses 11,976 11,123 7.7 %
Insurance 4,655 4,507 3.3 %
Advertising 143 191 (25.1 )%
Internet marketing 10,637 11,359 (6.4 )%
Total same store operating expenses 133,158 128,024 4.0 %
Same store net operating income $ 296,906 $ 251,968 17.8 %
ChangeYear-to-date same store move ins 147,337 156,874 (9,537 ) Year-to-date same store move outs 139,977 139,968
9
33
-------------------------------------------------------------------------------- We believe the decrease in same store move ins was due to lack of available space at many of our stores as a result of extremely high occupancy rates during the nine months endedSeptember 30, 2021 . Same store move outs remained relatively consistent period-over-period as we believe the impact of customers increasing their length of stay was offset by the impacts of the COVID-19 global health crisis during the three months endedSeptember 30, 2020 as many jurisdictions implemented stay-at-home orders for all or a portion of that period. General and administrative expenses for the nine months endedSeptember 30, 2021 increased$6.9 million or 17.9% when compared with the nine months endedSeptember 30, 2020 . This increase was primarily driven by an increase in home office personnel related costs to support the growth in stores and increased investments in technology. Depreciation and amortization expense increased to$106.3 million in the nine months endedSeptember 30, 2021 from$90.3 million in the same period in 2020 as a result of depreciation and customer list amortization related to those properties acquired in 2021 and 2020. Total interest expense increased by$1.4 million during the nine months endedSeptember 30, 2021 as compared to the same period in 2020 as a result of an increase in the Company's outstanding debt balances during the majority of the nine months endedSeptember 30, 2021 . Total interest and dividend income increased by$0.8 million during the nine months endedSeptember 30, 2021 as compared to the same period in 2020 as a result of a preferred dividend received from one of the Company's unconsolidated joint ventures during the nine months endedSeptember 30, 2021 .
FUNDS FROM OPERATIONS
We believe that Funds from Operations ("FFO") provides relevant and meaningful
information about our operating performance that is necessary, along with net
earnings and cash flows, for an understanding of our operating results. FFO adds
back historical cost depreciation, which assumes the value of real estate assets
diminishes predictably in the future. In fact, real estate asset values increase
or decrease with market conditions. Consequently, we believe FFO is a useful
supplemental measure in evaluating our operating performance by disregarding (or
adding back) historical cost depreciation.
FFO is defined by the National Association of Real Estate Investment Trusts,
Inc. ("NAREIT") as net income available to common shareholders computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains or losses on sales of properties, plus impairment of real estate assets,
plus depreciation and amortization and after adjustments to record
unconsolidated partnerships and joint ventures on the same basis. We believe
that to further understand our performance FFO should be compared with our
reported net income and cash flows in accordance with GAAP, as presented in our
consolidated financial statements.
Our computation of FFO may not be comparable to FFO reported by other REITs or
real estate companies that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition differently.
FFO does not represent cash generated from operating activities determined in
accordance with GAAP, and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of our performance,
as an alternative to net cash flows from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, or as an indicator of our
ability to make cash distributions.
34
--------------------------------------------------------------------------------Reconciliation of Net Income to Funds From Operations (unaudited)
Three Months ended September 30, Nine Months ended September 30,
(in thousands)
2021 2020 2021 2020
Net income attributable to common
shareholders $ 70,274 $ 37,095 $ 175,172 $ 109,984
Net income attributable to
noncontrolling interests
in the Operating Partnership 301 193 760 576
Depreciation of real estate and
amortization of
intangible assets exclusive of
debt issuance costs 36,615 32,417 104,691 88,557
Depreciation and amortization
from unconsolidated
joint ventures 1,796 1,024 4,239 4,502
Funds from operations allocable
to noncontrolling
interest in the Operating
Partnership (465 ) (367 ) (1,231 ) (1,060 )
Funds from operations available
to common
shareholders $ 108,521 $ 70,362 $ 283,631 $ 202,559 LIQUIDITY AND CAPITAL RESOURCES
The COVID-19 global health crisis impacted the cost of debt and equity for a time during 2020 and may disrupt markets in the future. We expect to be able to maintain adequate liquidity as we manage through the current environment. While uncertainty exists as to the full impact of the COVID-19 global health crisis on our liquidity and capital resources, as of the date of this report we believe that the combination of our cash on hand, the cash generated by our operations, and our line of credit will be adequate to fund our operations. We will continue to actively monitor the potential impact of the COVID-19 global health crisis on our liquidity and capital resources. Our line of credit and term notes require us to meet certain financial covenants measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness, and limitations on dividend payouts. AtSeptember 30, 2021 , the Company was in compliance with all debt covenants. In the event that the Company violates its debt covenants in the future, the amounts due under the agreements could be callable by the lenders and could adversely affect our credit rating requiring us to pay higher interest and other debt-related costs. We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain consistent with amounts outstanding atSeptember 30, 2021 , the entire availability under our line of credit could be drawn without violating our debt covenants.
Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally-generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements.
Cash flows from operating activities were$308.1 million and$211.7 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in operating cash flows in the 2021 period compared to the 2020 period was primarily due to the increase in net income after adjusting for non-cash items. Cash used in investing activities was$860.6 million and$449.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in cash used in investing activities in the 2021 period compared to the 2020 period was primarily due to the increased volume of acquisitions, along with an increase in investments in unconsolidated joint ventures in 2021 as compared to the same period in 2020. Cash provided by financing activities was$635.1 million and$331.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase is primarily a result of the Company's issuances of 2,875,000 shares of common stock through a public equity offering inSeptember 2021 resulting in net proceeds of$348.8 million and an increase in sales of shares of common stock under the Company's continuous equity offering programs during the nine months endedSeptember 30, 2021 resulting in net proceeds of$458.2 million as compared to the net proceeds of$155.8 million during the nine months endedSeptember 30, 2020 , partially offset by increased dividends paid. Also contributing to this increase is a reduction in the net repayment of the Company's line of credit during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . 35
-------------------------------------------------------------------------------- Note 6 and Note 7 to the consolidated financial statements include details related to the Company's unsecured line of credit, term notes, mortgages, and other indebtedness. Note 13 to the consolidated financial statements includes details of our shareholders' equity and activity related thereto.
Our line of credit facility and term notes have an investment grade rating from Standard and Poor's (BBB) and Moody's (Baa2).
Future acquisitions, our expansion and enhancement program, and share repurchases are expected to be funded with draws on our line of credit, issuance of common and preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program and/or share repurchases.
ACQUISITION AND DISPOSITION OF PROPERTIES
During the nine months endedSeptember 30, 2021 , the Company acquired 62 self-storage facilities comprising 4.3 million square feet inAlabama (7),Arizona (4),California (1),Colorado (1),Florida (14),Georgia (7),Kentucky (1),New Hampshire (4),New Jersey (5),New York (1),North Carolina (3),Ohio (1),Oklahoma (2),South Carolina (3),Texas (6), andWashington (2) for a total purchase price of$869.8 million , which is net of the Company's equity in the profit from the sale of theNew York store and threeGeorgia stores purchased from unconsolidated joint ventures. Based on the trailing financial information of the entities from which the self-storage facilities were acquired, the weighted average capitalization rate for these acquisitions was 3.6%. As discussed further in Note 5 and Note 10, the Company holds a 5% ownership interest in the joint venture from which one of the self-storage facilities was acquired and a 20% ownership interest in the joint venture from which three of the self-storage facilities were acquired. Additionally, 19 of these facilities were managed by the Company for third parties prior to acquisition. In 2020, the Company acquired 40 self-storage facilities comprising 3.1 million square feet inCalifornia (8),Florida (6),Georgia (1),Missouri (1),New Jersey (7),New York (1),Ohio (6),Pennsylvania (4),South Carolina (1), andTexas (5) for a total purchase price of$532.6 million . One of these acquired self-storage facilities resulted from the Company acquiring the remaining 15% of a joint venture. Additionally, one of these facilities was managed by the Company for a third party prior to acquisition. Based on the trailing financial information of the entities from which the self-storage facilities were acquired, the weighted average capitalization rate for these acquisitions was 5.0%. We may acquire additional stabilized or newly constructed properties in 2021, however, there is no assurance that the Company will do so. Additionally, there can be no assurance that if significant additional opportunities were to arise, we would be able to raise capital at a reasonable cost to allow us to take advantage of such opportunities. AtSeptember 30, 2021 , the Company was under contract to acquire 33 self-storage facilities for an aggregate purchase price of$548.9 million . In addition to the 33 self-storage facilities under contract atSeptember 30, 2021 , subsequent toSeptember 30, 2021 , the Company entered into contracts to acquire an additional 20 self-storage facilities for an aggregate purchase price of$322.4 million . The Company acquired 13 facilities subsequent toSeptember 30, 2021 for an aggregate purchase price of$234.5 million . The purchases of the remaining 40 self-storage facilities are subject to customary conditions to closing, and there is no assurance that these facilities will be acquired.
The Company did not sell or otherwise dispose of any properties during the three
and nine months ended
As part of our ongoing strategy to improve overall operating efficiencies and portfolio quality, we may seek to sell self-storage facilities to third-parties or joint venture partners in 2021.
FUTURE ACQUISITION AND DEVELOPMENT PLANS
Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations or to expand into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2021, including potential acquisitions by unconsolidated joint ventures. During the nine months endedSeptember 30, 2021 , we added 94,000 square feet to existing properties for a total cost of approximately$10.2 million . We plan to complete a total of$30 million to$35 million of additional expansions and enhancements to our existing facilities in 2021, of which$21.8 million was paid as ofSeptember 30, 2021 . We also expect to continue investing in capital expenditures on our properties. This includes roofing, paving, and remodeling of store offices. For the nine months endedSeptember 30, 2021 , we invested approximately$23.0 million in such improvements and we expect to invest approximately$6 million to$10 million for the remainder of 2021. 36
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REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that we satisfy certain requirements, including distributing at least 90% of our REIT taxable income for a taxable year. These distributions must be made in the year to which they relate, or in the following year if declared before we file our federal income tax return, and if they are paid not later than the date of the first regular dividend of the following year. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends.
Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.
UMBRELLA PARTNERSHIP REIT
We are formed as anUmbrella Partnership Real Estate Investment Trust ("UPREIT") and, as such, have the ability to issue Operating Partnership Units in exchange for properties sold by independent owners. By utilizing such Units as currency in facility acquisitions, we may obtain more favorable pricing or terms due to the seller's ability to partially defer their income tax liability. As ofSeptember 30, 2021 , 344,531 common Units and 3,590,603 preferred Units are outstanding. These Units had been issued in exchange for self-storage properties at the request of the sellers.
INTEREST RATE RISK
The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control. We do not carry any unsecured floating rate debt atSeptember 30, 2021 . Therefore, based on our outstanding debt balances atSeptember 30, 2021 , a 100 basis point increase in interest rates would not have an effect on our annual interest expense. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
INFLATION
We do not believe that inflation has had or will have a direct effect on our operations. Substantially all of the leases at our facilities are on a month-to-month basis which provides us with the opportunity to increase rental rates in a timely manner in response to any potential future inflationary pressures.
SEASONALITY
Our revenues typically have been higher in the third and fourth quarters, primarily because self-storage facilities tend to experience greater occupancy during the late spring, summer and early fall months due to the greater incidences of residential moves and college student activity during these periods. However, we believe that our customer mix, diverse geographic locations, rental structure and expense structure provide adequate protection against undue fluctuations in cash flows and net revenues during off-peak seasons. Thus, we do not expect seasonality to materially affect distributions to shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 15 to the financial statements.
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