UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
September 30
, 201
8
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
____________
to
____________.
Commission File Number:
001-33519
PUBLIC STORAGE
(Exact name of registrant as specified in its charter)
|
|
Maryland
|
95-3551121
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
|
|
701 Western Avenue, Glendale, California
|
91201-2349
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant’s telephone number, including area code:
(818) 244-8080
.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
Large accelerated
filer
|
Accelerated
filer
|
Non-accelerated
filer
|
Smaller reporting
company
|
Emerging growth
company
|
[X]
|
[ ]
|
[ ]
|
[ ]
|
[ ]
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of the registrant’s outstanding common shares of beneficial interest, as
of
October
29
, 201
8
:
Common Shares of beneficial interest, $.10 par
value per
share –
174,
36
4
,
490
shares
PUBLIC STORAGE
INDEX
|
|
|
PART I
|
FINANCIAL INFORMATION
|
Pages
|
|
|
|
Item 1.
|
Financial Statements (Unaudited)
|
|
|
|
|
|
Balance Sheets at
September 30
, 201
8
and December 31, 201
7
|
1
|
|
|
|
|
Statements of Income for the
Three
and
Nine
Months
Ended
September 30
, 201
8
and 201
7
|
2
|
|
|
|
|
Statements of Comprehensive Income for the
Three
and
Nine
Months
Ended
September 30
, 201
8
and 201
7
|
3
|
|
|
|
|
Statement of Equity for the
Nine
Months
E
nded
September 30
, 201
8
|
4
|
|
|
|
|
Statements of Cash Flows for the
Nine
Months
E
nded
September 30
, 201
8
and 201
7
|
5-6
|
|
|
|
|
Condensed Notes to Financial Statements
|
7-29
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
30-56
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
57
|
|
|
|
Item 4.
|
Controls and Procedures
|
57
|
|
|
|
PART II
|
OTHER INFORMATION
(Items 3, 4 and 5 are not applicable)
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
58
|
|
|
|
Item 1A.
|
Risk Factors
|
58
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
58
|
|
|
|
Item 6.
|
Exhibits
|
59
|
|
|
|
PUBLIC STORAGE
BALANCE SHEETS
(Amounts in thousands, except share data)
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
432,525
|
|
$
|
433,376
|
Real estate facilities, at cost:
|
|
|
|
|
|
Land
|
|
4,027,764
|
|
|
3,947,123
|
Buildings
|
|
11,108,129
|
|
|
10,718,866
|
|
|
15,135,893
|
|
|
14,665,989
|
Accumulated depreciation
|
|
(6,041,262)
|
|
|
(5,700,331)
|
|
|
9,094,631
|
|
|
8,965,658
|
Construction in process
|
|
253,719
|
|
|
264,441
|
|
|
9,348,350
|
|
|
9,230,099
|
|
|
|
|
|
|
Investments in unconsolidated real estate entities
|
|
619,405
|
|
|
724,173
|
Goodwill and other intangible assets, net
|
|
209,317
|
|
|
214,957
|
Other assets
|
|
138,343
|
|
|
130,287
|
Total assets
|
$
|
10,747,940
|
|
$
|
10,732,892
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
1,417,945
|
|
$
|
1,431,322
|
Accrued and other liabilities
|
|
409,973
|
|
|
337,201
|
Total liabilities
|
|
1,827,918
|
|
|
1,768,523
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Public Storage shareholders’ equity:
|
|
|
|
|
|
Preferred Shares,
$0.01
par value,
100,000,000
shares authorized,
|
|
|
|
|
|
161,000
shares
issued
(in series) and
outstanding
, (
161,000
at
|
|
|
|
|
|
December 31, 2017), at liquidation preference
|
|
4,025,000
|
|
|
4,025,000
|
Common Shares,
$0.10
par value,
650,000,000
shares authorized,
|
|
|
|
|
|
174,059,645
shares
issued
and
outstanding
(
173,853,370
shares at
|
|
|
|
|
|
December 31, 2017)
|
|
17,406
|
|
|
17,385
|
Paid-in capital
|
|
5,697,308
|
|
|
5,648,399
|
Accumulated deficit
|
|
(760,284)
|
|
|
(675,711)
|
Accumulated other comprehensive loss
|
|
(84,339)
|
|
|
(75,064)
|
Total Public Storage shareholders’ equity
|
|
8,895,091
|
|
|
8,940,009
|
Noncontrolling interests
|
|
24,931
|
|
|
24,360
|
Total equity
|
|
8,920,022
|
|
|
8,964,369
|
Total liabilities and equity
|
$
|
10,747,940
|
|
$
|
10,732,892
|
See accompanying notes.
1
PUBLIC STORAGE
STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage facilities
|
$
|
666,616
|
|
$
|
646,238
|
|
$
|
1,943,359
|
|
$
|
1,878,215
|
Ancillary operations
|
|
39,752
|
|
|
40,123
|
|
|
118,461
|
|
|
118,005
|
|
|
706,368
|
|
|
686,361
|
|
|
2,061,820
|
|
|
1,996,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage cost of operations
|
|
183,637
|
|
|
173,315
|
|
|
545,700
|
|
|
516,488
|
Ancillary cost of operations
|
|
11,907
|
|
|
17,304
|
|
|
33,648
|
|
|
39,611
|
Depreciation and amortization
|
|
124,516
|
|
|
113,320
|
|
|
362,272
|
|
|
334,426
|
General and administrative
|
|
27,429
|
|
|
22,311
|
|
|
90,278
|
|
|
62,331
|
|
|
347,489
|
|
|
326,250
|
|
|
1,031,898
|
|
|
952,856
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
358,879
|
|
|
360,111
|
|
|
1,029,922
|
|
|
1,043,364
|
Interest and other income
|
|
7,020
|
|
|
4,569
|
|
|
18,892
|
|
|
12,722
|
Interest expense
|
|
(8,094)
|
|
|
(2,389)
|
|
|
(24,589)
|
|
|
(4,553)
|
Equity in earnings of unconsolidated real estate entities
|
|
17,771
|
|
|
17,218
|
|
|
90,529
|
|
|
57,235
|
Foreign currency exchange gain (loss)
|
|
2,612
|
|
|
(13,446)
|
|
|
12,738
|
|
|
(44,452)
|
Casualty loss
|
|
-
|
|
|
(7,789)
|
|
|
-
|
|
|
(7,789)
|
Gain on sale of real estate
|
|
1,401
|
|
|
-
|
|
|
1,825
|
|
|
975
|
Net income
|
|
379,589
|
|
|
358,274
|
|
|
1,129,317
|
|
|
1,057,502
|
Allocation to noncontrolling interests
|
|
(1,562)
|
|
|
(1,600)
|
|
|
(4,491)
|
|
|
(4,684)
|
Net income allocable to Public Storage shareholders
|
|
378,027
|
|
|
356,674
|
|
|
1,124,826
|
|
|
1,052,818
|
Allocation of net income to:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shareholders - distributions
|
|
(54,080)
|
|
|
(61,055)
|
|
|
(162,238)
|
|
|
(182,457)
|
Preferred shareholders - redemptions (Note 8)
|
|
-
|
|
|
(14,692)
|
|
|
-
|
|
|
(29,330)
|
Restricted share units
|
|
(1,268)
|
|
|
(1,210)
|
|
|
(3,790)
|
|
|
(3,502)
|
Net income allocable to common shareholders
|
$
|
322,679
|
|
$
|
279,717
|
|
$
|
958,798
|
|
$
|
837,529
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.85
|
|
$
|
1.61
|
|
$
|
5.51
|
|
$
|
4.83
|
Diluted
|
$
|
1.85
|
|
$
|
1.61
|
|
$
|
5.50
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
173,975
|
|
|
173,715
|
|
|
173,933
|
|
|
173,560
|
Diluted weighted average common shares outstanding
|
|
174,348
|
|
|
174,240
|
|
|
174,240
|
|
|
174,128
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
2
PUBLIC STORAGE
STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
379,589
|
|
$
|
358,274
|
|
$
|
1,129,317
|
|
$
|
1,057,502
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate foreign currency exchange gain (loss)
|
2,874
|
|
|
(6,176)
|
|
|
3,463
|
|
|
(24,219)
|
Adjust for aggregate foreign currency exchange
|
|
|
|
|
|
|
|
|
|
|
(gain) loss included in net income
|
|
(2,612)
|
|
|
13,446
|
|
|
(12,738)
|
|
|
44,452
|
Other comprehensive income (loss):
|
|
262
|
|
|
7,270
|
|
|
(9,275)
|
|
|
20,233
|
Total comprehensive income
|
|
379,851
|
|
|
365,544
|
|
|
1,120,042
|
|
|
1,077,735
|
Allocation to noncontrolling interests
|
|
(1,562)
|
|
|
(1,600)
|
|
|
(4,491)
|
|
|
(4,684)
|
Comprehensive income allocable to
|
|
|
|
|
|
|
|
|
|
|
|
Public Storage shareholders
|
$
|
378,289
|
|
$
|
363,944
|
|
$
|
1,115,551
|
|
$
|
1,073,051
|
See accompanying notes.
3
PUBLIC STORAGE
STATEMENT OF EQUITY
(Amounts in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Public Storage
|
|
|
|
|
|
|
Preferred
|
|
Common
|
|
Paid-in
|
|
Accumulated
|
|
Comprehensive
|
|
Shareholders’
|
|
Noncontrolling
|
|
Total
|
|
Shares
|
|
Shares
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Equity
|
|
Interests
|
|
Equity
|
Balances at December 31, 2017
|
$
|
4,025,000
|
|
$
|
17,385
|
|
$
|
5,648,399
|
|
$
|
(675,711)
|
|
$
|
(75,064)
|
|
$
|
8,940,009
|
|
$
|
24,360
|
|
$
|
8,964,369
|
Issuance of common shares in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share-based compensation (
206,275
shares) (Note 10)
|
-
|
|
|
21
|
|
|
7,922
|
|
|
-
|
|
|
-
|
|
|
7,943
|
|
|
-
|
|
|
7,943
|
Share-based compensation expense, net of cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
paid in lieu of common shares (Note 10)
|
-
|
|
|
-
|
|
|
40,987
|
|
|
-
|
|
|
-
|
|
|
40,987
|
|
|
-
|
|
|
40,987
|
Contributions by noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,342
|
|
|
1,342
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,129,317
|
|
|
-
|
|
|
1,129,317
|
|
|
-
|
|
|
1,129,317
|
Net income allocated to noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,491)
|
|
|
-
|
|
|
(4,491)
|
|
|
4,491
|
|
|
-
|
Distributions to equity holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (Note 8)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(162,238)
|
|
|
-
|
|
|
(162,238)
|
|
|
-
|
|
|
(162,238)
|
Noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,262)
|
|
|
(5,262)
|
Common shares and restricted share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
$6.00
per share)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,047,161)
|
|
|
-
|
|
|
(1,047,161)
|
|
|
-
|
|
|
(1,047,161)
|
Other comprehensive loss (Note 2)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,275)
|
|
|
(9,275)
|
|
|
-
|
|
|
(9,275)
|
Balances at September 30, 2018
|
$
|
4,025,000
|
|
$
|
17,406
|
|
$
|
5,697,308
|
|
$
|
(760,284)
|
|
$
|
(84,339)
|
|
$
|
8,895,091
|
|
$
|
24,931
|
|
$
|
8,920,022
|
See accompanying notes.
4
PUBLIC STORAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
1,129,317
|
|
$
|
1,057,502
|
Adjustments to reconcile net income to net cash flows
|
|
|
|
|
|
from operating activities:
|
|
|
|
|
|
Gain on real estate investment sales
|
|
(1,825)
|
|
|
(975)
|
Assets damaged due to hurricanes
|
|
-
|
|
|
3,286
|
Depreciation and amortization
|
|
362,272
|
|
|
334,426
|
Equity in earnings of unconsolidated real estate entities
|
|
(90,529)
|
|
|
(57,235)
|
Distributions from retained earnings of unconsolidated
|
|
|
|
|
|
real estate entities
|
|
94,325
|
|
|
39,887
|
Foreign currency exchange (gain) loss
|
|
(12,738)
|
|
|
44,452
|
Share-based compensation expense
|
|
51,836
|
|
|
25,505
|
Other
|
|
45,678
|
|
|
55,671
|
Total adjustments
|
|
449,019
|
|
|
445,017
|
Net cash flows from operating activities
|
|
1,578,336
|
|
|
1,502,519
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures to maintain real estate facilities
|
|
(92,530)
|
|
|
(84,797)
|
Construction in process
|
|
(256,592)
|
|
|
(240,482)
|
Acquisition of real estate facilities and intangible assets
|
(107,775)
|
|
|
(81,676)
|
Distributions in excess of retained earnings from
|
|
|
|
|
|
unconsolidated real estate entities
|
|
91,927
|
|
|
-
|
Proceeds from sale of real estate investments
|
|
3,390
|
|
|
5,596
|
Net cash flows from investing activities
|
|
(361,580)
|
|
|
(401,359)
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments on notes payable
|
|
(1,329)
|
|
|
(1,267)
|
Issuance of notes payable
|
|
-
|
|
|
992,129
|
Issuance of preferred shares
|
|
-
|
|
|
561,177
|
Issuance of common shares
|
|
7,943
|
|
|
34,754
|
Redemption of preferred shares
|
|
-
|
|
|
(922,500)
|
Cash paid upon vesting of restricted share units
|
|
(10,849)
|
|
|
(12,409)
|
Acquisition of noncontrolling interests
|
|
-
|
|
|
(14,425)
|
Contributions by noncontrolling interests
|
|
1,342
|
|
|
1,066
|
Distributions paid to Public Storage shareholders
|
|
(1,209,399)
|
|
|
(1,227,597)
|
Distributions paid to noncontrolling interests
|
|
(5,262)
|
|
|
(5,540)
|
Net cash flows from financing activities
|
|
(1,217,554)
|
|
|
(594,612)
|
Net cash flows from operating, investing, and financing activities
|
|
(798)
|
|
|
506,548
|
Net effect of foreign exchange translation
|
|
(143)
|
|
|
(165)
|
(Decrease) increase in cash, equivalents, and restricted cash
|
$
|
(941)
|
|
$
|
506,383
|
|
|
|
|
|
|
See accompanying notes.
5
PUBLIC STORAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Cash, equivalents, and restricted cash at beginning of the period:
|
|
|
|
|
|
Cash and equivalents
|
$
|
433,376
|
|
$
|
183,688
|
Restricted cash included in other assets
|
|
22,677
|
|
|
28,885
|
|
$
|
456,053
|
|
$
|
212,573
|
|
|
|
|
|
|
Cash, equivalents, and restricted cash at end of the period:
|
|
|
|
|
|
Cash and equivalents
|
$
|
432,525
|
|
$
|
694,233
|
Restricted cash included in other assets
|
|
22,587
|
|
|
24,723
|
|
$
|
455,112
|
|
$
|
718,956
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and
|
|
|
|
|
|
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
Real estate facilities, net of accumulated depreciation
|
$
|
170
|
|
$
|
(595)
|
Investments in unconsolidated real estate entities
|
|
9,045
|
|
|
(19,613)
|
Notes payable
|
|
(12,821)
|
|
|
44,262
|
Accumulated other comprehensive gain (loss)
|
|
3,463
|
|
|
(24,219)
|
|
|
|
|
|
|
Accrued development costs and capital expenditures:
|
|
|
|
|
|
Capital expenditures to maintain real estate facilities
|
|
(877)
|
|
|
2,272
|
Construction in process
|
|
(10,819)
|
|
|
(10,527)
|
Accrued and other liabilities
|
|
11,696
|
|
|
8,255
|
See accompanying notes.
6
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
1.
Description of the Business
Public Storage (referred to herein as “the Company
,”
“we
,”
“us
,”
or “our”), a Maryland real estate investment trust (“REIT”), was organized in 1980. Our principal business activities include the ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, ancillary activities such as merchandise sales and tenant reinsurance to the tenants at our self-storage facilities, as well as the acquisition and development of additional self-storage space.
At
September 30
, 2018
, we have direct and indirect equity interests in
2,
4
18
self-storage facilities (with approximately
1
6
1
million net rentable square feet) located in
38
states in the United States (“U.S.”) operating under the “Public Storage” name. We also own
one
self-storage facility in London, England and we have a
49%
interest in
Shurgard Self Storage SA (“
Shurgard Europe
”)
, which owns
2
2
7
self-storage facilities (with approximately
12
million net rentable square feet) located in
seven
Western European countries, all operating under the “Shurgard” name. We also have direct and indirect eq
uity interests in approximately
29
million net rentable square feet of commercial space located in
seven
states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name. At
September 30
,
2018
, we
have an approximate
42%
common equity interest in PSB.
See Note 1
3
‘Subsequent Events” for further information on an initial global offering of Shurgard Europe’s shares.
Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 1
2
) are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.).
2.
Summary of Significant Accounting Policies
Basis of Presentation
We have prepared the accompanying interim financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Accounting Standards Codification of the Financial Accounting Standards Board (“FASB”), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, the interim financial statements presented herein reflect all adjustments, of a normal recurring nature, that are necessary to fairly present the interim financial statements. Because they do not include all of the disclosures required by GAAP for complete annual financial statements, these interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Consolidation and Equity Method of Accounting
We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest. We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE. We have no involvement with any material VIEs. We consolidate all other entities when we control them through voting shares or contractual rights. The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries,” and we eliminate intercompany transactions and balances.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
We account for our investments in entities that we do not consolidate but have significant influence over using the equity method of accounting. These entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”, eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary. Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities.
When we begin consolidating an entity, we
reflect our
preexisting equity interest
at book value
. All changes in consolidation status are
reflected prospectively.
Collectively, at
September 30
,
2018, the Company and the Subsidiaries own
2,4
18
self-storage facilities in the U.S.,
one
self-storage facility in London, England and
three
commercial facilities in the U.S. At
September
30
,
2018, the Unconsolidated Real Estat
e Entities are comprised
of PSB and
Shurgard Europe.
Use of Estimates
The financial statements and accompanying notes reflect our estimates and assumptions. Actual results could differ from those estimates and assumptions.
Income Taxes
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 if we distribute
100%
of our REIT taxable income each year, 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 merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations. We also incur income and other taxes in certain states, which are included in general and administrative expense.
We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of
September 30
,
2018, we had
no
tax benefits that were not recognized.
Real Estate Facilities
Real estate facilities are recorded at cost. We capitalize all costs incurred to acquire, develop, construct, renovate and improve facilities, including interest and property taxes incurred during the construction period. We allocate the net acquisition cost of acquired real estate facilities to the underlying land, buildings, and identified intangible assets based upon their respective individual estimated fair values.
Costs associated with dispositions of real estate, as well as repairs and maintenance costs, are expensed as incurred. We depreciate buildings and improvements on a straight-line basis over estimated useful lives ranging generally between
5
to
25
years.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Other Assets
Other assets primarily consist of rents receivable from our tenants, prepaid expenses and restricted cash
.
Accrued and Other Liabilities
Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll, accrued tenant reinsurance losses, and contingent loss accruals when probable and estimable. We believe the fair value of our accrued and other liabilities approximates book value, due to the short period until repayment. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.
Cash Equivalents, Marketable Securities and Other Financial Instruments
Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition. Cash and equivalents which are restricted from general corporate use are included in other assets. We believe that the book value of all such financial instruments for all periods presented approximates fair value, due to the short period to maturity.
Fair Value
As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Our estimates of fair value involve considerable judgment and are not necessarily indicative of the amounts that could be realized in current market exchanges.
We estimate the fair value of our cash and equivalents, marketable securities, other assets, debt, and other liabilities by
discounting the related future cash flows at a rate based upon
quoted interest rates for securities that have similar characteristics such as credit
quality and time to maturity. S
uch quoted interest rates are referred to generally as “Level 2” inputs.
Currency and Credit Risk
Financial instruments that are exposed to credit risk consist primarily of cash and equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash. Cash equivalents we invest in are either money market funds with a rating of at least AAA by Standard & Poor’s, commercial paper that is rated A1 by Standard & Poor’s or deposits with highly rated commercial banks.
At
September 30
,
2018, due primarily to our investment in Shurgard Europe (Note 4) and our notes payable denominated in Euros (Note 6), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar.
Goodwill and Other Intangible Assets
Intangible assets are comprised of goodwill, the “Shurgard” trade name, acquired customers in place, and leasehold interests in land.
Goodwill totaled
$174.6
million at
September 30
,
2018 and December 31, 2017. The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
$18.8
million at
September 30
,
2018 and December 31, 2017. Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.
Acquired customers in place and leasehold interests in land are finite-lived assets and are amortized relative to the benefit of the
customers in place or the benefit to land lease expense to each period. At
September
30
,
2018, these intangibles had a net book value of
$
1
5.9
million (
$
21.5
million at December 31, 2017). Accumulated amortization totaled
$
29
.
0
million at
September 30
,
2018 (
$31.
0
million at December 31, 2017), and amortization expense of
$
12.7
million and
$
11.9
million was recorded in the
nine months
ended
September 30
,
2018 and 2017, respectively. The estimated future amortization expense for our finite-lived intangible assets at
September 30
,
2018 is approximately
$
3
.
3
million in the remainder of 2018,
$
6
.
3
million in 2019 and
$
6
.
3
million thereafter. During the
nine months
ended
September 30
,
2018, intangibles increased
$
7
.
1
million in connection with the acquisition
of self-storage facilities (Note 3).
Evaluation of Asset Impairment
We evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.
We evaluate our investments in unconsolidated real estate entities for impairment on a quarterly basis. We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.
We evaluate goodwill for impairment annually and whenever relevant events, circumstances and other related factors indicate that fair value of the related reporting unit may be less than the carrying amount. If we determine that the fair value of the reporting unit exceeds the aggregate carrying amount, no impairment charge is recorded. Otherwise, we record an impairment charge to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.
We evaluate other indefinite-lived intangible assets, such as the “Shurgard” trade name for impairment at least annually and whenever relevant events, circumstances and other related factors indicate that the fair value is less than the carrying amount. When we conclude that it is likely that the asset is not impaired, we do not record an impairment charge and no further analysis is performed. Otherwise, we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value.
No
impairments were recorded in any of our evaluations for any period presented herein.
Casualty Loss
We record casualty losses for a) the book value of assets destroyed and b) incremental repair, clean-up, and other costs associated with the casualty. Insurance proceeds are recorded as a reduction in casualty loss when all uncertainties of collection are satisfied.
During the three and nine months ended September 30, 2017, we incurred casualty losses totaling $7.8 million, comprised of
$3.3
million in book value of assets damaged and
$4.5
million in repairs and maintenance incurred in connection with Hurricanes Harvey and Irma.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Revenue and Expense Recognition
Revenues from self-storage facilities, which are primarily composed of rental income earned pursuant to month-to-month leases, as well as associated late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. Ancillary revenues and interest and other income are recognized when earned.
We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. Cost of operations (including advertising expenditures), general and administrative expense, and interest expense are expensed as incurred.
Foreign Currency Exchange Translation
The local currency (primarily the Euro) is the functional currency for our interests in foreign operations. The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period. When financial
instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings. The Euro was translated at exchange rates of approximately
1.
16
0
U.S. Dollars per Euro at
September 30
,
2018 (
1.
198
at December 31, 2017), and average exchange rates of
1.
16
2
and
1.
175
for the three months ended
September 30
,
2018 and 2017, respectively
, and average exchange rates of
1.
194
and
1.
113
for the
nine months
ended
September 30
, 2018 and 2017, respectively
. Cumulative translation adjustments, to the extent not included in cumulative net income
, are included in equity as a component of accumulated other comprehensive income (loss).
Comprehensive Income
Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period. The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in Shurgard Europe and our unsecured notes denominated in Euros.
Recent
Accounting Pronouncements and Guidance
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606),
which requires revenue to be based upon the consideration expected from customers for promised goods or services
.
In February 2017, t
he FASB issued
ASU
2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
,
which
provides
guidance with respect to the sale of real estate facilities. The new standards permit either the retrospective or cumulative effects transition method. We adopted the new standards effective January 1, 2018 utilizing the modified retrospective transition method applied to open contracts. The new standards did not have a material impact on our results of operations or financial condition, primarily because most of our revenue is from rental revenue
from self-storage facilities
,
and included in self-storage facilities revenue on our statements of income,
which the new standards do not address, and because we do not provide any material products and services to our customers or sell material amounts of our real estate facilities.
The remainder of our revenues are composed of elements that are either covered by the new standards but not impacted, or
are
not covered by the new standards.
In February 2016, the FASB issued ASU 2016-02,
Leases,
which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard, effective on January 1, 2019, requires a
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief
effective
January 1, 201
9 with a cumulative effect through December 31, 2018 recorded through retained earnings.
The Company is currently assessing the impact of the guidance on our financial statements. However, we do not believe this standard will have a material impact on our results of operations or financial condition, because substantially all of our lease revenues are derived from month-to-month self-storage leases, and we do not have material amounts of lease expense.
In May 2017, the FASB issued ASU 2017-09,
Stock Compensation: Scope of Modification Accounting,
to
increase
clarity
and consistency of practice
and re
duce
cost and complexity when
modifying the terms
of
share-based award
s
.
We prospectively adopted this guidance effective January 1, 2018, with no material impact on our financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230) - Restricted Cash
, which primarily requires the statement of cash flows to explain not only the change in cash and equivalents, but also the change in restricted cash. The standard is effective on January 1, 2018, with early adoption permitted and requires the use of the retrospective transition method.
The Company early adopted the new guidance during the fourth quarter of 2017 and, accordingly, net cash
flows from
investing activities
de
creased by
$4,162
,000
for the
nine months
ended
September 30
,
2017 as compared to the current presentation
on the statement of cash flows
.
Net Income per Common Share
Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation”), and (iii) the remaining net income is allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings.
Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders presented on the face of our income statement, divided by (i) in the case of basic net income per common share, weighted average common shares, and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock options outstanding (Note 10). The following table reconciles from basic to diluted common shares outstanding
(amounts in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding
|
|
173,975
|
|
|
173,715
|
|
|
173,933
|
|
|
173,560
|
|
Net effect of dilutive stock options -
|
|
|
|
|
|
|
|
|
|
|
|
|
based on treasury stock method
|
|
373
|
|
|
525
|
|
|
307
|
|
|
568
|
|
Diluted weighted average common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding
|
|
174,348
|
|
|
174,240
|
|
|
174,240
|
|
|
174,128
|
3.
Real Estate Facilities
Activity in real estate facilities during the
nine months
ended
September 30
,
2018
is as follows:
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2018
|
|
|
(Amounts in thousands)
|
|
Operating facilities, at cost:
|
|
|
|
Beginning balance
|
$
|
14,665,989
|
|
Capital expenditures to maintain real estate facilities
|
93,407
|
|
Acquisitions
|
|
100,632
|
|
Dispositions
|
|
(1,686)
|
|
Developed or redeveloped facilities opened for operation
|
278,133
|
|
Impact of foreign exchange rate changes
|
|
(582)
|
|
Ending balance
|
|
15,135,893
|
|
Accumulated depreciation:
|
|
|
|
Beginning balance
|
|
(5,700,331)
|
|
Depreciation expense
|
|
(341,464)
|
|
Dispositions
|
|
121
|
|
Impact of foreign exchange rate changes
|
|
412
|
|
Ending balance
|
|
(6,041,262)
|
|
Construction in process:
|
|
|
|
Beginning balance
|
|
264,441
|
|
Current development
|
|
267,411
|
|
Developed or redeveloped facilities opened for operation
|
(278,133)
|
|
Ending balance
|
|
253,719
|
|
Total real estate facilities at September 30, 2018
|
$
|
9,348,350
|
During the
nine months
ended
September 30
,
2018
, we acquired
16
self-storage facilities (
1.0
million
net rentable square feet), for a total cost of
$
107
.
8
million
in cash
, of which
$
7
.
1
million was allocated to intangible assets. We completed development and redevelopment activities
costing
$
278.1
million
during the
nine months
ended
September 30
,
2018
, adding
2
.
4
million
net rentable square feet of self-storage space. Construction in process at
September 30
,
2018
consists of projects to develop new self-storage facilities and redevelop existing self-storage facilities, which will
bui
ld
5
.
4
million
net rentable square feet of storage space at an aggregate estimated cost of approximately
$
596
.
4
million. During the
nine months
ended
September 30
,
2018
, we sold portions of real estate facilities in connection with eminent domain proceedings for
$
3.
4
million in cash proceeds
and recorded a related gain on
sale of
real estate of approximately
$
1
.
8
million
.
4.
Investments in Unconsolidated Real Estate Entities
The following table sets forth our investments in, and equity in earnings of, the Unconsolidated Real Estate Entities (amounts in thousands):
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
Investments in Unconsolidated Real Estate Entities at
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
PSB
|
$
|
433,809
|
|
$
|
400,133
|
|
Shurgard Europe
|
|
185,596
|
|
|
324,040
|
|
Total
|
$
|
619,405
|
|
$
|
724,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings of Unconsolidated Real Estate Entities for the
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
PSB
|
$
|
13,008
|
|
$
|
9,261
|
|
$
|
73,451
|
|
$
|
35,694
|
|
Shurgard Europe
|
|
4,763
|
|
|
7,243
|
|
|
17,078
|
|
|
19,484
|
|
Legacy Institutional
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
-
|
|
|
714
|
|
|
-
|
|
|
2,057
|
|
Total
|
$
|
17,771
|
|
$
|
17,218
|
|
$
|
90,529
|
|
$
|
57,235
|
During the
nine months
ended
September 30
, 2018 and 2017, we received cash distributions from our investments in the Unconsolidated
Real Estate Entities totaling
$
186
.
3
million and
$
39
.
9
million, respectively.
For the nine months ended September 30, 2018, $
91.9
million of the distributions received exceeded the retained earnings of the Unconsolidated Real Estate Entities and are presented as an investing activity
on our statement of cash flows.
At
Sep
tember
30
, 2018, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $
66.
8
million (
$67.3
million at December 31, 2017). This differential is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets. Such amortization was approximately
$
1.1
million and
$
1
.
0
million during the
nine months
ended
September
30
, 2018 and 2017, respectively.
Investment in PSB
PSB is a REIT traded on the New York Stock Exchange. We have an approximate
42%
common equity interest in PSB as of
September 30
, 2018 and December 31, 2017, comprised of our ownership of
7,158,354
shares of PSB’s common stock and
7,305,355
limited partnership units (“LP Units”) in an operating partnership controlled by PSB. The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.
Based upon the closing price at
September 30
, 2018 (
$1
27.09
per share of PSB common stock), the shares and units we owned had a market value of approximately
$1.
8
billion. At
September
30
, 2018, the adjusted tax basis of our investment
in PSB approximates book value.
The following table sets forth selected financial information of PSB. The amounts represent all of PSB’s balances and not our pro-rata share.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
(Amounts in thousands)
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
Revenues
|
$
|
309,391
|
|
$
|
300,342
|
|
Costs of operations
|
|
(95,910)
|
|
|
(92,962)
|
|
Depreciation and amortization
|
|
(73,505)
|
|
|
(70,465)
|
|
General and administrative
|
|
(7,099)
|
|
|
(7,019)
|
|
Other items
|
|
1,575
|
|
|
(1,131)
|
|
Gains on sale of real estate
|
|
85,283
|
|
|
5,074
|
|
Net income before allocation to preferred shareholders
|
|
|
|
|
|
|
and restricted share unitholders
|
|
219,735
|
|
|
133,839
|
|
Allocations to preferred shareholders and
|
|
|
|
|
|
|
restricted share unitholders
|
|
(40,513)
|
|
|
(45,954)
|
|
Net income allocated to common shareholders
|
|
|
|
|
|
|
and LP Unitholders
|
$
|
179,222
|
|
$
|
87,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (primarily real estate)
|
$
|
2,063,377
|
|
$
|
2,100,159
|
|
Preferred stock called for redemption
|
|
-
|
|
|
130,000
|
|
Other liabilities
|
|
85,978
|
|
|
80,223
|
|
Equity:
|
|
|
|
|
|
|
Preferred stock
|
|
959,750
|
|
|
959,750
|
|
Common equity and LP units
|
|
1,017,649
|
|
|
930,186
|
Investment in Shurgard Europe
For all periods presented, we
owned
31,268,459
shares of Shurgard Europe representing
49%
of the shares outstanding
and our joint venture partner own
ed
the remaining
shares
.
See Note 13 “Subsequent Events” for further information on an initial global offering of Shurgard Europe’s common shares.
Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income and 49% of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark. The remaining
51%
of the license fees are classified as interest and other income on our income statement.
During the three months ended September 30, 2018, Shurgard Europe paid a cash dividend to its shareholders, of which our equity share was
$145.4
million.
Changes in foreign currency exchange rates decreased our investment in Shurgard Europe by approximately
$
9.
0
million and increased it by $
19
.
6
million in the
nine months
ended
September 30
, 2018 and 2017, respectively
.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods, rather than our pro rata share.
Our equity earnings in Shurgard Europe are based upon our acquired book basis under GAAP, while Shurgard’s separate financial statements are presented in accordance with International Financial Reporting Standards (“IFRS”). For Shurgard Europe, the primary difference between IFRS and GAAP is the use of fair value accounting for its real estate under IFRS, while GAAP presents real estate at historical cost. Net income is affected by the corresponding periodic changes in the fair value of real estate under IFRS, as compared to the recognition of periodic depreciation expense under GAAP, combined with the related net impact upon deferred income tax expense.
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
|
Self-storage and ancillary revenues
|
$
|
213,746
|
|
$
|
194,973
|
|
|
Self-storage and ancillary cost of operations
|
|
(78,242)
|
|
|
(72,233)
|
|
|
Depreciation and amortization
|
|
(55,429)
|
|
|
(45,194)
|
|
|
General and administrative
|
|
(8,729)
|
|
|
(8,971)
|
|
|
Interest expense on third party debt
|
|
(16,860)
|
|
|
(15,465)
|
|
|
Trademark license fee payable to Public Storage
|
|
(2,139)
|
|
|
(1,947)
|
|
|
Income tax expense
|
|
(18,618)
|
|
|
(12,622)
|
|
|
Gain on real estate investment sale
|
|
1,969
|
|
|
-
|
|
|
Other, net (a)
|
|
(2,984)
|
|
|
(725)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
32,714
|
|
$
|
37,816
|
|
|
Average exchange rates of Euro to the U.S. Dollar
|
|
1.194
|
|
|
1.113
|
|
|
|
|
|
|
|
|
|
|
(a) Amounts for the nine months ended September 30, 2018 include
$2,971,000
in incremental
|
|
|
costs incurred with respect to Shurgard Europe's initial global offering. See Note 13.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Total assets (primarily self-storage facilities)
|
$
|
1,406,216
|
|
$
|
1,416,477
|
|
|
Total debt to third parties
|
|
976,217
|
|
|
726,617
|
|
|
Other liabilities
|
|
169,089
|
|
|
143,638
|
|
|
Equity
|
|
260,910
|
|
|
546,222
|
|
|
|
|
|
|
|
|
|
|
Exchange rate of Euro to U.S. Dollar
|
|
1.160
|
|
|
1.198
|
|
See Note 1
3
“Subsequent Events” for further information on an initial global offering of Shurgard Europe’s
common
shares.
5.
Credit Facility
We have a revolving credit a
greement (the “Credit Facility”) with a
$500
million borrowing limit, which expires on
March 31
,
2020
. Amounts drawn on the Credit Facility bear annual interest at rates ranging from LIBOR plus
0.850%
to LIBOR plus
1.450%
depending upon the ratio of our Total Indebtedness to Gross Asset Value (as defined in the Credit Facility) (LIBOR plus
0.850%
at
September 30
,
2018). We are also required to
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
pay a quarterly facility fee ranging from
0.080%
per annum to
0.250%
per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value (
0.080%
per annum at
September 30
,
2018). At
September 30
,
2018 and
October 3
0
,
2018
, we had
no
outstanding borrowings under this Credit Facility. We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling
$16.1
million
at
September 30
,
2018 and December 31, 2017. The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at
September 30
,
2018.
6.
Notes Payable
Our notes payable at
September 30
,
2018
and December 31, 2017
a
re set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts at September 30, 2018
|
|
|
|
Coupon
|
|
Effective
|
|
|
|
|
Unamortized
|
|
|
Book
|
|
|
Fair
|
|
|
Book Value at
|
|
Rate
|
|
Rate
|
|
|
Principal
|
|
Costs
|
|
|
Value
|
|
|
Value
|
|
|
December 31, 2017
|
|
|
|
|
|
($ amounts in thousands)
|
U.S. Dollar Denominated Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes due
September 2022
|
2.370%
|
|
2.483%
|
|
$
|
500,000
|
|
$
|
(2,079)
|
|
$
|
497,921
|
|
$
|
481,073
|
|
$
|
497,525
|
Notes due
September 2027
|
3.094%
|
|
3.218%
|
|
|
500,000
|
|
|
(4,736)
|
|
|
495,264
|
|
|
470,494
|
|
|
494,868
|
|
|
|
|
|
|
1,000,000
|
|
|
(6,815)
|
|
|
993,185
|
|
|
951,567
|
|
|
992,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Denominated Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes due
April 2024
|
1.540%
|
|
1.540%
|
|
|
116,046
|
|
|
-
|
|
|
116,046
|
|
|
119,349
|
|
|
119,795
|
Notes due
November 2025
|
2.175%
|
|
2.175%
|
|
|
280,849
|
|
|
-
|
|
|
280,849
|
|
|
294,039
|
|
|
289,921
|
|
|
|
|
|
|
396,895
|
|
|
-
|
|
|
396,895
|
|
|
413,388
|
|
|
409,716
|
Mortgage Debt
, secured by
30
real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate facilities with a net book
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of
$113.9
million
|
4.020%
|
|
3.971%
|
|
|
27,865
|
|
|
-
|
|
|
27,865
|
|
|
28,589
|
|
|
29,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,424,760
|
|
$
|
(6,815)
|
|
$
|
1,417,945
|
|
$
|
1,393,544
|
|
$
|
1,431,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar Denominated Unsecured Debt
On
September 18, 2017
, we issued, in a public offering,
two
tranches each totaling $
500.0
million of U.S. Dollar denominated unsecured notes (the “U.S. Dollar Notes”). In connection with the offering, we incurred a total of
$7.9
million in costs, which is reflected as a reduction in the principal amount and amortized, using the effective interest method, over the term of each respective note. Interest on the U.S. Dollar Notes is payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2018.
The U.S. Dollar Notes have various financial covenants, all of which we were in compliance with at
September 30
,
2018
. Included in these covenants are a) a maximum Debt to Total
Assets of
65%
(
4.3
%
at
September 30
,
2018
) and b) a minimum ratio of Adjusted EBITDA to Interest Expense of
1.5x
(
66.8
x
for the twelve months ended
September 30
,
2018
)
as well as covenants limiting the amount we can encumber
our properties with mortgage debt.
Euro Denominated Unsecured Debt
Our euro denominated unsecured notes (the “Euro Notes”) are payable to institutional investors. The Euro Notes consist of
two
tranches, (i)
€242.0
million issued on
November 3, 2015
for
$264.3
million in net
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
proceeds upon converting the Euros to U.S. Dollars and
(ii)
€100.0
million issued on
April 12, 2016
for
$113.6
million in net proceeds upon converting the Euros to U.S. Dollars. Interest is payable semi-annually.
The Euro Notes have various customary financial covenants, all of which we were in compliance with at
September
30
,
2018
.
We reflect changes in the U.S. Dollar equivalent of the amount payable, as a result of changes in foreign exchange rates as “
foreign currency exchange
gain (
loss
)
” on our income statement (
gains
of
$
2
.
6
million and
$
12
.
7
million for the three
and
nine months
ended
September 30
,
2018
, respectively
,
as compared to losses of
$13
.
4
million and
$44
.
5
million
for
the same periods in 2017, respectively
)
.
Mortgage Debt
Our non-recourse mortgage debt was assumed in connection with property acquisitions, and recorded at fair value with any premium or discount to the stated note balance amortized using the effective interest method.
At
September 30
,
2018, the
related
contractual interest rates are fixed, ranging between
2.9%
and
7.1%
, and mature between
November 2018
and
September 2028
.
At
September 30
,
2018, approximate principal maturities of our Notes Payable are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
Mortgage
|
|
|
|
Debt
|
|
Debt
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
$
|
-
|
|
$
|
9,916
|
|
$
|
9,916
|
2019
|
|
-
|
|
|
1,505
|
|
|
1,505
|
2020
|
|
-
|
|
|
1,585
|
|
|
1,585
|
2021
|
|
-
|
|
|
1,503
|
|
|
1,503
|
2022
|
|
500,000
|
|
|
2,071
|
|
|
502,071
|
Thereafter
|
|
896,895
|
|
|
11,285
|
|
|
908,180
|
|
$
|
1,396,895
|
|
$
|
27,865
|
|
$
|
1,424,760
|
Weighted average effective rate
|
|
2.6%
|
|
|
4.0%
|
|
|
2.6%
|
Cash paid for
interest totaled
$
2
7.3
million and
$
7.
6
million for the
nine months
ended
September 30
,
2018
and 2017
, respectively. Interest capitalized as real estate totaled
$
3
.
5
million and
$3
.
1
million for the
nine months
ended
September 30
,
2018
and 201
7
, respectively
.
7
.
Noncontrolling Interests
At
September 30
,
2018
, the noncontrolling interests represent (i) third-party equity interests in subsidiaries
owning
1
6
operating self-storage facilities and
s
ix
self-storage facilities that are under construction and (ii)
231,978
partnership units held by third-parties in a subsidiary that are convertible on a
one
-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder (collectively, the “Noncontrolling Interests”). At
September 30
,
2018
, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary. During
the
nine months
ended
September
30
,
2018
and 201
7
, we allocated a total of
$
4
.
5
million and
$
4
.
7
million, respectively, of income to these interests; and we paid $
5
.
3
million and
$
5
.
5
million, respectively
, in distributions to these interests.
During
the
nine months
ended
September 30
,
2017
, we acquired Noncontrolling Interests for
$
14.4
million
(
none
for the
nine months
ended
September 30
,
2018),
in cash,
of
which
$7.7
million
was allocated
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
to Paid-in capital
and
$6.7
million as a reduction to Noncontrolling Interests.
During
the
nine months
ended
September 30
,
2018
and 2017
, Nonco
ntrolling Interests contributed
$
1
.
3
million
and
$1.
1
million
, respectively,
t
o our subsidiaries
.
8
.
Shareholders’ Equity
Preferred Shares
At
September 30
,
2018
and
December 31, 201
7
, we had the following series of Cumulative Preferred Shares (“Preferred Shares”) outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
At December 31, 2017
|
|
Series
|
|
Earliest Redemption Date
|
|
Dividend Rate
|
|
Shares Outstanding
|
|
Liquidation Preference
|
|
Shares Outstanding
|
|
Liquidation Preference
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
Series U
|
|
6/15/2017
|
|
5.625%
|
|
11,500
|
|
$
|
287,500
|
|
11,500
|
|
$
|
287,500
|
|
Series V
|
|
9/20/2017
|
|
5.375%
|
|
19,800
|
|
|
495,000
|
|
19,800
|
|
|
495,000
|
|
Series W
|
|
1/16/2018
|
|
5.200%
|
|
20,000
|
|
|
500,000
|
|
20,000
|
|
|
500,000
|
|
Series X
|
|
3/13/2018
|
|
5.200%
|
|
9,000
|
|
|
225,000
|
|
9,000
|
|
|
225,000
|
|
Series Y
|
|
3/17/2019
|
|
6.375%
|
|
11,400
|
|
|
285,000
|
|
11,400
|
|
|
285,000
|
|
Series Z
|
|
6/4/2019
|
|
6.000%
|
|
11,500
|
|
|
287,500
|
|
11,500
|
|
|
287,500
|
|
Series A
|
|
12/2/2019
|
|
5.875%
|
|
7,600
|
|
|
190,000
|
|
7,600
|
|
|
190,000
|
|
Series B
|
|
1/20/2021
|
|
5.400%
|
|
12,000
|
|
|
300,000
|
|
12,000
|
|
|
300,000
|
|
Series C
|
|
5/17/2021
|
|
5.125%
|
|
8,000
|
|
|
200,000
|
|
8,000
|
|
|
200,000
|
|
Series D
|
|
7/20/2021
|
|
4.950%
|
|
13,000
|
|
|
325,000
|
|
13,000
|
|
|
325,000
|
|
Series E
|
|
10/14/2021
|
|
4.900%
|
|
14,000
|
|
|
350,000
|
|
14,000
|
|
|
350,000
|
|
Series F
|
|
6/2/2022
|
|
5.150%
|
|
11,200
|
|
|
280,000
|
|
11,200
|
|
|
280,000
|
|
Series G
|
|
8/9/2022
|
|
5.050%
|
|
12,000
|
|
|
300,000
|
|
12,000
|
|
|
300,000
|
|
Total Preferred Shares
|
|
|
|
161,000
|
|
$
|
4,025,000
|
|
161,000
|
|
$
|
4,025,000
|
The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Except under certain conditions and as noted below, holders of the Preferred Shares will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to
six
quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect
two
additional members to ser
ve on our board of trustees (our
“Board”) until the arrearage has been cured. At
September 30
,
2018
, there were
no
dividends in arrears.
Except under certain conditions relating to the Company’s qualification as a REIT, the Preferred Shares are not redeemable prior to the dates indicated on the table above. On or after the respective dates, each of the series of Preferred Shares is redeemable at our option, in whole or in part, at
$25.00
per depositary share, plus accrued and unpaid dividends. Holders of the Preferred Shares cannot require us to redeem such shares.
Upon issuance of our Preferred Shares, we classify the liquidation value as preferred equity on our balance sheet with any issuance costs recorded as a reduction to Paid-in capital.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
On June 2, 2017, we issued
11.2
million depositary shares, each representing
1/1
,000 of a share of our
5.150%
Series F Preferred Shares, at an issuance price of
$25.00
per depositary share, for a total of
$280.0
million in gross proceeds, and we incurred
$8.9
million in issuance costs.
On August 9, 2017, we issued
12.0
million depositary shares, each representing
1/1
,000 of a share of our
5.050%
Series G Preferred Shares, at an issuance price of
$25.00
per depositary share, for a total of
$300.0
million in gross proceeds, and we incurred
$9.9
million in issuance costs.
In June 2017, we called for redemption of, and on July 26, 2017, we redeemed our
5.900%
Series S Preferred Shares, at par. We recorded a
$14.6
million allocation of income from our common shareholders to the holders of o
ur Preferred Shares in the
nine months
ended
September 30
, 2017 in connection with this redemption.
In August 2017, we called for redemption of, and on September 28, 2017, we redeemed our
5.750%
Series T Preferred Shares, at par. We recorded a
$14.7
million allocation of income from our common shareholders to the holders of our Preferred Shares in the three and nine months ended September 30, 2017 in connection with this redemption.
Dividends
Common
share dividends, including amounts paid to our restricted share unitholders, totaled
$
349
.
2
million (
$2.00
per share) and
$
348
.
6
million (
$
2
.0
0
per share) for the three months ended
September 30
,
2018
and 2017
, respectively
, and
$
1
.0
b
illion (
$
6
.00
per share) and
$
1.0
billion
(
$
6
.00
per share) for the
nine months
ended
September 30
, 2018 and 2017, respectively
. Preferred share dividends totaled $
54
.1
million an
d $61.1
million for the three months ended
September 30
,
2018
and 201
7
, respectively
, and $
1
62
.2
million and $
182.5
million for the
nine months
ended
September 30
, 2018 and 2017, respectively
.
9
.
Related Party Transactions
B. Wayne Hughes, our former Chairman and his family, including his daughter Tamara Hughes Gustavson and his son B. Wayne Hughes, Jr., who are both members of our Board, collectively own
approximately
14.3%
of
our common shares outstanding at
September 30
,
2018
.
At
September 30
,
2018
, B. Wayne Hughes and Tamara Hughes Gustavson together owned and controlle
d
5
8
self
-storage facilities in Canada. These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a roy
alty-free, non-exclusive basis.
We have
no
ownership interest in these facilities and we do not own or operate any facilities in Canada. If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storag
e” name in Canada
. We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of
these facilities
if the
ir owners agree to sell them. Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately
$
980
,000
and
$752
,000
for the
nine months
ended
September 30
,
2018
and 2017
, respectively. Our right to continue receiving
these premiums may be qualified.
10
.
Share-Based Compensation
Under various share-based compensation plans and under terms established by our Board or a committee thereof, we grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, and key employees.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Stock options and RSUs are considered “granted” and “outstanding” as the terms are used herein, when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock, and (iv) it is probable that any performance conditions will be met.
We amortize the grant-date fair value of awards as compensation expense over the service period, which begins on the grant date and ends on the vesting date. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).
In amortizing share-based compensation expense, we do not estimate future forfeitures in advance. Instead, we reverse previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment.
In February 2018, we announced that our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees. For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire. Accordingly, all remaining share-based compensation expense for these
two
executives will now be amortized by the end of 2018.
See also “net i
ncome per common share” in Note
2 for further discussion regarding the impact of RSUs and stock options on our net income per common share and income allocated to common shareholders.
Stock Options
Stock options vest
ratably
over a
three
to
five
-year period, expire
ten
years after the grant date, and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options.
Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation.
For the
three
and
nine months
ended
September 30
,
2018
, we recorded
$
4
.
0
million
and
$
10
.
9
million, respectively,
in compensation expense related to stock options, as compared to
$
2
.
3
million
and
$5
.
1
million
, for the same period
s
in 201
7
.
Amounts for the
three
and
nine months
ended
September 30
,
2018
include
$
1
.8
million
and
$
5
.
3
million, respectively,
in connection with the acceleration of amortization
of
grants to our CEO and CFO
noted above
.
Amounts
for the
nine months
ended
September 30
, 2017 reflect a reduction in compensation expense of
$0.8
million related to stock options for
feited during the
periods.
During the
nine months
ended
September 30
,
2018
,
20
0
,000
stock options were granted,
136
,
805
options were exercised and
8,000
options were forfeited. A total of
2,
464
,
1
12
stock options were outstanding at
September 30
,
2018
(
2,408
,917
at December 31, 2017
)
and have an average exercise price of
$
199
.
64
.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Restricted Share Units
RSUs generally vest ratably over a
five
to
eight
-year period from the grant date. The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting.
The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares.
During the
nine months
ended
September 30
,
2018
,
63
,
3
9
5
RSUs were granted,
50
,
975
RSUs were forfeited and
121
,
191
RSUs vested. This vesting resulted in the issuance of
69
,
470
common shares. In addition, tax deposi
ts totaling
$1
0
.
9
million (
$12
.
4
mil
lion for the same period in 2017
) were made on behalf of employees in exchange for
51
,
721
common shares withheld upon vesting. A total of
690
,
358
RSUs
were outstanding at
September 30
,
2018
(
799,129
at December
31, 2017
)
.
A to
tal of
$
1
4
.
7
million and
$
41
.
9
million in RSU expense was recorded for the
three
and
nine months
ended
September 30
,
2018
,
respectively,
which includes approximately
$
0.
1
million
and
$
1.0
million i
n employer taxes incurred upon vesting
, as compared to
$
10.7
million
and
$
21
.
1
million
for the same period
s
in 2017, which includes approximately
$0.
1
million
and
$0.
7
million, respectively,
in employer taxes incurred upon vesting
.
Amounts for the three
and
nine months
ended
September 30
,
2018
include
$
5
.
3
million
and
$
17
.
3
million, respectively,
in connection with the acceleration of amortization on grants to our CEO and CFO
as discussed above
.
Amounts for the
nine months
ended
September 30
, 2017 reflect
a reduction in compensation expense of
$4.6
million
related RSUs
forfeited during the per
iod
.
1
1
.
Segment Information
Our reportable segments reflect the significant components of our operations where discrete financial information is evaluated separately by our chief operating decision maker (“CODM”). We organize our segments based primarily upon the nature of the underlying products and services, as well as the drivers of profitability growth. The net income for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2. The amounts not attributable to reportable segments are aggregated under “other items not allocated to segments.”
Following is a description of and basis for presentation for each of our reportable segments.
Self-Storage Operations
The Self-Storage Operations segment reflects the rental operations from all self-storage facilities we own. Our CODM reviews the net operating income (“NOI”) of this segment, which represents the related revenues less cost of operations (prior to depreciation expense), in assessing performance and making resource allocation decisions. The presentation in the tables below sets forth the NOI of this segment, as well as the depreciation expense for this segment, which while reviewed by our CODM and included in net income, is not considered by the CODM in assessing performance and decision making. For all periods presented, substantially all of our real estate facilities, goodwill and other intangible assets, other assets, and accrued and other liabilities are associated with the Self-Storage Operations segment.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Ancillary Operations
The Ancillary Operations segment reflects the sale of merchandise and reinsurance of policies against losses to goods stored by our self-storage tenants, activities which are incidental to our primary self-storage rental activities. Our CODM reviews the NOI of these operations in assessing performance and making resource allocation decisions.
Investment in PSB
This segment represents our 42% equity interest in PSB, a publicly-traded REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial space. PSB has a separate management team that makes its financing, capital allocation, and other significant decisions. In making resource allocation decisions with respect to our investment in PSB, the CODM reviews PSB’s net income, which is detailed in PSB’s periodic filings with the
SE
C
, and i
s included in Note 4. The segment presentation in the tables below includes our equity earnings from PSB.
Investment in Shurgard Europe
This segment represents our
49
% equity interest in Shurgard Europe, which owns and operates self-storage facilities located in
seven
countries in Western Europe. Shurgard Europe has a separate management team reporting to our CODM and our joint venture partner. In making resource allocation decisions with respect to our investment in Shurgard Europe, the CODM reviews Shurgard Europe’s net income, which is detailed in Note 4. The segment presentation below includes our equity earnings from Shurgard Europe.
Presentation of Segment Information
The following tables reconcile NOI (as applicable) and net income of each segment to our consolidated net income (amounts in thousands):
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations
|
|
Ancillary Operations
|
|
Investment in PSB
|
|
Investment in Shurgard Europe
|
|
Other Items Not Allocated to Segments
|
|
Total
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
$
|
666,616
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
666,616
|
Ancillary operations
|
|
-
|
|
|
39,752
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,752
|
|
|
666,616
|
|
|
39,752
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
706,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
183,637
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
183,637
|
Ancillary operations
|
|
-
|
|
|
11,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,907
|
|
|
183,637
|
|
|
11,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
195,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
482,979
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
482,979
|
Ancillary operations
|
|
-
|
|
|
27,845
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
27,845
|
|
|
482,979
|
|
|
27,845
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
510,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(124,516)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(124,516)
|
General and administrative
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,429)
|
|
|
(27,429)
|
Interest and other income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,020
|
|
|
7,020
|
Interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,094)
|
|
|
(8,094)
|
Equity in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated real estate entities
|
|
-
|
|
|
-
|
|
|
13,008
|
|
|
4,763
|
|
|
-
|
|
|
17,771
|
Foreign currency exchange gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,612
|
|
|
2,612
|
Gain on sale of real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,401
|
|
|
1,401
|
Net income (loss)
|
$
|
358,463
|
|
$
|
27,845
|
|
$
|
13,008
|
|
$
|
4,763
|
|
$
|
(24,490)
|
|
$
|
379,589
|
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations
|
|
Ancillary Operations
|
|
Investment in PSB
|
|
Investment in Shurgard Europe
|
|
Other Items Not Allocated to Segments
|
|
Total
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
$
|
646,238
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
646,238
|
Ancillary operations
|
|
-
|
|
|
40,123
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,123
|
|
|
646,238
|
|
|
40,123
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
686,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
173,315
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
173,315
|
Ancillary operations
|
|
-
|
|
|
17,304
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,304
|
|
|
173,315
|
|
|
17,304
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
190,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
472,923
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
472,923
|
Ancillary operations
|
|
-
|
|
|
22,819
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22,819
|
|
|
472,923
|
|
|
22,819
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
495,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(113,320)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(113,320)
|
General and administrative
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(22,311)
|
|
|
(22,311)
|
Interest and other income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,569
|
|
|
4,569
|
Interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,389)
|
|
|
(2,389)
|
Equity in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated real estate entities
|
-
|
|
|
-
|
|
|
9,261
|
|
|
7,243
|
|
|
714
|
|
|
17,218
|
Foreign currency exchange loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,446)
|
|
|
(13,446)
|
Casualty loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,789)
|
|
|
(7,789)
|
Net income (loss)
|
$
|
359,603
|
|
$
|
22,819
|
|
$
|
9,261
|
|
$
|
7,243
|
|
$
|
(40,652)
|
|
$
|
358,274
|
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations
|
|
Ancillary Operations
|
|
Investment in PSB
|
|
Investment in Shurgard Europe
|
|
Other Items Not Allocated to Segments
|
|
Total
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
$
|
1,943,359
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,943,359
|
Ancillary operations
|
|
-
|
|
|
118,461
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
118,461
|
|
|
1,943,359
|
|
|
118,461
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,061,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
545,700
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
545,700
|
Ancillary operations
|
|
-
|
|
|
33,648
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
33,648
|
|
|
545,700
|
|
|
33,648
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
579,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
1,397,659
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,397,659
|
Ancillary operations
|
|
-
|
|
|
84,813
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
84,813
|
|
|
1,397,659
|
|
|
84,813
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,482,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(362,272)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(362,272)
|
General and administrative
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(90,278)
|
|
|
(90,278)
|
Interest and other income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,892
|
|
|
18,892
|
Interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,589)
|
|
|
(24,589)
|
Equity in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated real estate entities
|
-
|
|
|
-
|
|
|
73,451
|
|
|
17,078
|
|
|
-
|
|
|
90,529
|
Foreign currency exchange gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,738
|
|
|
12,738
|
Gain on sale of real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,825
|
|
|
1,825
|
Net income (loss)
|
$
|
1,035,387
|
|
$
|
84,813
|
|
$
|
73,451
|
|
$
|
17,078
|
|
$
|
(81,412)
|
|
$
|
1,129,317
|
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations
|
|
Ancillary Operations
|
|
Investment in PSB
|
|
Investment in Shurgard Europe
|
|
Other Items Not Allocated to Segments
|
|
Total
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
$
|
1,878,215
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,878,215
|
Ancillary operations
|
|
-
|
|
|
118,005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
118,005
|
|
|
1,878,215
|
|
|
118,005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,996,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
516,488
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
516,488
|
Ancillary operations
|
|
-
|
|
|
39,611
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,611
|
|
|
516,488
|
|
|
39,611
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
556,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage operations
|
|
1,361,727
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,361,727
|
Ancillary operations
|
|
-
|
|
|
78,394
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
78,394
|
|
|
1,361,727
|
|
|
78,394
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,440,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(334,426)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(334,426)
|
General and administrative
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(62,331)
|
|
|
(62,331)
|
Interest and other income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,722
|
|
|
12,722
|
Interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,553)
|
|
|
(4,553)
|
Equity in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated real estate entities
|
-
|
|
|
-
|
|
|
35,694
|
|
|
19,484
|
|
|
2,057
|
|
|
57,235
|
Foreign currency exchange loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(44,452)
|
|
|
(44,452)
|
Casualty loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,789)
|
|
|
(7,789)
|
Gain on sale of real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
975
|
|
|
975
|
Net income (loss)
|
$
|
1,027,301
|
|
$
|
78,394
|
|
$
|
35,694
|
|
$
|
19,484
|
|
$
|
(103,371)
|
|
$
|
1,057,502
|
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
1
2
.
Commitments and Contingencies
Contingent Losses
We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.
Insurance and Loss Exposure
We
carry
property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles.
Our d
educti
ble
for general liability
is
$2.0
million
per occurrence.
Our
annual
deductibles for property
losses
are
$25.0
million
for first occurrence
with an aggregate of
$35.0
million
for
multiple
occurrences
and
$5.0
million per occurrence thereafter.
Insurance carriers’
aggregate limits on these policies of
$75.0
million for property losses and
$102.0
million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.
We reinsure a program that provides insurance to our customers from an independent third-party insurer. This program covers
customer
claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of
$5,000
per storage unit.
We reinsure all risks in this program, but purchase insurance to cover this exposure for a limit of
$15
.0
million for losses in excess of
$5.0
million per occurrence.
We are subject to licensing requirements and regulations in several states.
Customers participate in the program at their option.
At
September 30
,
2018
, there were
approximately
924
,000
certificates held by our self-storage customers, representing aggregate coverage of approximately
$2.
9
billion
.
Construction
Commitments
We have construction commitments
representing future expected payments for construction under contract totaling
$
209
.
2
million at
September 30
,
2018. We expect to pay approximately
$
36.6
million
in the remainder of 2018,
$
146.7
milli
on in 2019
and
$25.9
million in 2020
for these construction
commit
ments.
13.
Subsequent Events
Subsequent to
September 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions)
nine
s
elf-storage facilities, with
585
,000
net rentable square feet, for
$
79
.
7
million.
On October 15, 2018, Shurgard
Europe
completed an
i
nitial
g
lobal
o
ffering (the “Offering”) of its common
shares
, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued
21.7
million of its shares to third parties at a price of
€23
per share, for
€500
million in gross proceeds. There is a potential “green shoe” for an additional
€75
million in gross proceeds
at
€23
per share
. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to
36.6%
as a result of the Offering
(
35.2%
if the “green shoe” option is exercised)
. While we did not sell any of our shares in the Offering, we will record a gain on disposition in t
he three months ending December
31, 2018, as if we had sold a proportionate share of our investment in Shurgard Europe.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
On October 18, 2018, we sold our property in West London to Shurgard Europe
for
$42.
1
million
. We
will record a
gain on disposit
i
o
n
in
the three months ending December 31, 2018.
ITEM
2
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified
by the use of the words “expects,” “believes,” “anticipates,” “
shou
ld,” “estimates”
and similar expressions.
These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements.
Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1,
Item 1A, “Risk Factors”
in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2018 and in our other filings with the SEC including:
|
·
|
|
general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;
|
|
·
|
|
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;
|
|
·
|
|
the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
|
|
·
|
|
difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;
|
|
·
|
|
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 regulatory environment as well as national, state and local laws and regulations including, without limitation, those governing environmental, taxes, our tenant reinsurance business and labor, and risks related to the impact of new laws and regulations;
|
|
·
|
|
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;
|
|
·
|
|
changes in United States (“U.S.”) federal or state tax laws related to the taxation of REITs and other corporations;
|
|
·
|
|
security breaches or a failure of our networks, systems or technology could adversely impact our
business
, customer and employee relationships;
|
|
·
|
|
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 in the development process;
|
|
·
|
|
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 as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.
Critical Accounting Policies
Our MD&A discusses our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our
September 30
,
2018 financial statements, primarily Note 2, summarize our significant accounting policies.
We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.
Income Tax Expense:
We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements.
In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income.
Impairment of Long-Lived Assets:
The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accrual for Uncertain and Contingent Liabilities:
We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and
our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.
Accounting for Acquired Real Estate Facilities:
We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, and (iv) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.
Overview
Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities.
Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.
We plan on
growing organically as well as
through the
acquisition and development of new
facilities
and expanding our existing self-storage facilities
. Since the beginning of 2013 through
September 30
,
2018, we acquired a total of
287
facilities with
20.0
million net rentable square feet from third parties for approximately $
2.6
billion, and we opened newly developed and
expanded
self-storage space for a total cost of $
1.2
b
illion, adding approximately
10.7
million
net rentable
square feet.
Subsequent to
September 30
,
2018, we acquired or were under contract to acquire
(subject to customary closing conditions)
nine
s
elf-storage facilities for $
79.7
million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.
As of
September 30
,
2018, we had additional development and redevelopment projects
to
build
approximately
5.4
million net rentable square feet at a total cost of approximately $
596.4
million. We expect to continue to seek additional development projects; however, the level of such activity may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in
certain municipalities.
We believe that our development and redevelopment activities are beneficial to our business over the long run. However, in the short run, such activities dilute our earnings due to the three to four year period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the cost, combined with related overhead expenses flowing through general and administrative expense. We believe this dilution will increase in the remainder of 2018 and beyond, because of an increased level of net rentable square feet being added to our portfolio due to continued development and redevelopment efforts.
On July 13, 2018, we received a cash distribution from
Shurgard Self Storage SA (“
Shurgard Europe
”)
totaling $145.4 million.
On September 18, 2017, we completed a public offering of $1.0 billion in aggregate principal amount of unsecured notes in two equal tranches (collectively, the “U.S. Dollar Notes”), one maturing in September 2022 bearing interest at 2.370%, and another maturing in September 2027 bearing interest at 3.094%. This was our first public offering of debt, which should also serve to facilitate future offerings.
On October 15, 2018, Shurgard Europe completed an
i
nitial
g
lobal
o
ffering (the “Offering”)
of its common shares
, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 21.7 million of its common shares to third parties at a price of €23 per share, for €500 million in gross proceeds.
There is a potential “green shoe” for an additional €75 million in gross proceeds
at €23 per share
.
The gross proceeds were used
to repay short-term borrowings,
invest in real estate assets, and for
other corporate purposes. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 36.6% as a result of the Offering
(35.2% assuming exercise of the “green shoe” option)
.
W
e
did not sell any shares in the O
ffering
. See “Investment in
Shurgard Europe
” below for more information
.
As of
September 30
,
2018, our capital resources over the next year are expected to be
approximately
$
1.2
billion which exceeds our current planned capital needs over the next year of approximately $
433.4
million. Our c
apital resources include: (i) $432
.
5
million of cash as of
September 30
,
2018, (ii) $483.9 million of available borrowing
capacity on our revolving line of credit,
(iii) $
42.1
million
cash
f
ro
m the sale of our West London/Kensington self-storage facility to
Shurgard Europe on
October 18
, 2018, and (iv
) a
pproximately $200 million to $25
0 million of expected retained operating cash flow for the next twelve months. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.
Our planned capital needs over the next
year consist of (i) $
342.7
million of remaining spend on our current development pipeline, (ii) $
79.7
million in property acquisitions currently under contract, and (iii) $
11.
0
million in principal repayments on existing debt. Our capital n
eeds may increase
over the next year as we expect
to add projects to
our development pipeline and acquire additional properties. In addition to other investment activities, we
may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.
See
Liquidity and Capital Resources
for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.
Results of Operations
Operating Results for the Three Months Ended
September 30
, 2018
For the three months ended September 30, 2018, net income allocable to our common shareholders was $322.7 million or $1.85 per diluted common share, compared to $279.7 million or $1.61 per diluted common share in 2017 representing an increase of $43.0 million or $0.24 per diluted common share. The increase is due primarily to (i) a $10.1 million increase in self-storage net operating income (described below), (ii) a $16.1 million increase due to the impact of foreign currency exchange gains and losses associated with our euro
denominated debt, (iii) a $14.7
million allocation to preferred shareholders associated with preferred share redemptions in the three months ended September 30, 2017, and (iv) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in the three months ended September 30, 2017. These i
mpacts
were offset partially by a $7.1 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our CEO and CFO in 2018 as a result of their upcoming retirement.
The $10.1 million increase in self-storage net operating income is a result of a $2.5 million increase in our Same Store Facilities (as defined below) and a $7.6 million increase in our Non Same Store Facilities (as defined below). Revenues for the Same Store Facilities increased 1.2% or $6.6 million in t
he three months ended September
30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 2.8% or $4.1 million in t
he three months ended September
30, 2018 as compared to 2017, due primarily to increased property taxes. The increase in net operating in
come of $7.6
million for the Non Same Store Facilities is due primarily to the impact of 153 self-storage facilities acquired and developed since January 2016.
Operating Results for the
Nine Months
Ended
September 30
, 2018
For the nine months ended September 30, 2018, net income allocable to our
common shareholders was $958.8
million or $5.50 per diluted common share, compared to $837.5 million or $4.81
per diluted common share
in
2017 representing an increase of $121.3
million or $0.69 per diluted common share. The increase is due primarily to (i) a $35.9 million increase in self-storage net operating income (
described below), (ii) our $34.9
million equity share of gains recorded by PS Business Parks in the nine months ended September 30, 2018, (iii) a $57.2 million increase due to the impact of foreign currency exchange gains and losses associated with our euro denominated debt, (iv) a $29.3 million allocation to preferred shareholders associated with preferred share redemptions in
the nine months ended September
30, 2017, and (v) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in the nine months ended September 30, 2017. These
impacts
were offset partially by a $28.0 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our CEO and CFO in 2018 as a result of their upcoming retirement and the reversal of share-based compensation accruals forfeited by retiring executives in 2017.
The $35.9 million increase in self-storage net operating income is a result of a $13.7 million increase in our Same Store Facilities and $22.2 million increase in our Non Same Store Facilities. Revenues for the Same Store Facilities increased 1.6% or $26.6 million in the nine months ended September 30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 2.9% or $12.9 million in the nine months ended September 30, 2018 as compared to 2017, due primarily to increased property taxes. The increase in net operating income of $22.2 million for the Non Same Store Facilities is due primarily to the impact of 153 self-storage facilities acquired and developed since January 2016.
Funds from Operations and Core Funds from Operations
Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents net income before real estate depreciation, which is excluded because it is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical real estate costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons
among REITs may not be helpful.
For
the three months ended
September 30
,
2018,
FFO was $
2.6
6
per diluted co
mmon share, as compared to $2.35
for the same period in 2017, representing an increase of 1
3
.
2
%, or $0.
31
per diluted common share.
For
the
nine months
ended
September 30
, 2018,
FFO was $
7
.
68
per diluted common share, as compared to $
7.00
for the same period in 2017, representing an increase of
9.7
%, or $
0.
68
per diluted
common share.
The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
(Amounts in thousands, except per share data)
|
Reconciliation of Diluted Earnings per Share to
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
1.85
|
|
$
|
1.61
|
|
$
|
5.50
|
|
$
|
4.81
|
Eliminate amounts per share excluded from FFO:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
0.82
|
|
|
0.75
|
|
|
2.40
|
|
|
2.21
|
Gains on sale of real estate investments,
|
|
|
|
|
|
|
|
|
|
|
|
|
including our equity share from
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(0.01)
|
|
|
(0.01)
|
|
|
(0.22)
|
|
|
(0.02)
|
FFO per share
|
|
$
|
2.66
|
|
$
|
2.35
|
|
$
|
7.68
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of FFO per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
|
$
|
322,679
|
|
$
|
279,717
|
|
$
|
958,798
|
|
$
|
837,529
|
Eliminate items excluded from FFO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
124,516
|
|
|
113,320
|
|
|
362,272
|
|
|
334,426
|
Depreciation from unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
real estate investments
|
|
|
19,615
|
|
|
18,054
|
|
|
58,238
|
|
|
52,635
|
Depreciation allocated to noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
interests and restricted share unitholders
|
|
|
(892)
|
|
|
(858)
|
|
|
(2,824)
|
|
|
(2,657)
|
Gains on sale of real estate investments,
|
|
|
|
|
|
|
|
|
|
|
|
|
including our equity share from
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(1,766)
|
|
|
-
|
|
|
(37,530)
|
|
|
(3,077)
|
FFO allocable to common shares
|
|
$
|
464,152
|
|
$
|
410,233
|
|
$
|
1,338,954
|
|
$
|
1,218,856
|
Diluted weighted average common shares
|
|
|
174,348
|
|
|
174,240
|
|
|
174,240
|
|
|
174,128
|
FFO per share
|
|
$
|
2.66
|
|
$
|
2.35
|
|
$
|
7.68
|
|
$
|
7.00
|
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 se
curities
,
(iii) acceleration
of accruals
due to the upcoming retirement of our CEO and CFO and reversals of
accruals with respect to share-
based awards forfeited by retiring senior executive officers
, and (iv) certain other non-cash and/or nonrecurring income or expense items
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per share
|
$
|
2.66
|
|
$
|
2.35
|
|
13.2%
|
|
$
|
7.68
|
|
$
|
7.00
|
|
9.7%
|
Eliminate the per share impact of items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluded from Core FFO, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
our equity share from investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange (gain) loss
|
(0.01)
|
|
|
0.08
|
|
|
|
|
(0.07)
|
|
|
0.26
|
|
|
Application of EITF D-42
|
|
-
|
|
|
0.10
|
|
|
|
|
-
|
|
|
0.18
|
|
|
Casualty losses and tenant claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due to hurricanes
|
|
-
|
|
|
0.07
|
|
|
|
|
-
|
|
|
0.07
|
|
|
Acceleration (reversal) of share-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation expense due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
executive officer retirement
|
|
0.04
|
|
|
-
|
|
|
|
|
0.13
|
|
|
(0.03)
|
|
|
Other items
|
|
0.01
|
|
|
0.01
|
|
|
|
|
0.01
|
|
|
-
|
|
|
Core FFO per share
|
$
|
2.70
|
|
$
|
2.61
|
|
3.4%
|
|
$
|
7.75
|
|
$
|
7.48
|
|
3.6%
|
Analysis of Net Income by Reportable Segment
The following discussion and analysis is presented and organized in accordance with Note 11 to our
September 30
,
2018 financial statements, “Segment Information.” Accordingly, refer to the tables presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments.
Self-Storage Operations
Our self-storage operations are analyzed in two groups: (
i)
the
2,04
6
facilities that we have owned and operated on a stabilized basis since January 1, 2016 (the “Same Store Facilities”), and (ii) all other facilities, which are newl
y acquired, newly developed,
recently redeveloped
, or are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2016
(the “Non Same Store
Facilities”). See Note 11 to our
September 30
,
2018 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
(Dollar amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities
|
$
|
574,523
|
|
$
|
567,969
|
|
1.2%
|
|
$
|
1,680,855
|
|
$
|
1,654,263
|
|
1.6%
|
Non Same Store Facilities
|
|
92,093
|
|
|
78,269
|
|
17.7%
|
|
|
262,504
|
|
|
223,952
|
|
17.2%
|
|
|
666,616
|
|
|
646,238
|
|
3.2%
|
|
|
1,943,359
|
|
|
1,878,215
|
|
3.5%
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities
|
|
152,206
|
|
|
148,079
|
|
2.8%
|
|
|
456,426
|
|
|
443,513
|
|
2.9%
|
Non Same Store Facilities
|
|
31,431
|
|
|
25,236
|
|
24.5%
|
|
|
89,274
|
|
|
72,975
|
|
22.3%
|
|
|
183,637
|
|
|
173,315
|
|
6.0%
|
|
|
545,700
|
|
|
516,488
|
|
5.7%
|
Net operating income (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities
|
|
422,317
|
|
|
419,890
|
|
0.6%
|
|
|
1,224,429
|
|
|
1,210,750
|
|
1.1%
|
Non Same Store Facilities
|
|
60,662
|
|
|
53,033
|
|
14.4%
|
|
|
173,230
|
|
|
150,977
|
|
14.7%
|
Total net operating income
|
|
482,979
|
|
|
472,923
|
|
2.1%
|
|
|
1,397,659
|
|
|
1,361,727
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
Same Store Facilities
|
|
(92,481)
|
|
|
(90,103)
|
|
2.6%
|
|
|
(270,625)
|
|
|
(266,552)
|
|
1.5%
|
Non Same Store Facilities
|
|
(32,035)
|
|
|
(23,217)
|
|
38.0%
|
|
|
(91,647)
|
|
|
(67,874)
|
|
35.0%
|
Total depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
(124,516)
|
|
|
(113,320)
|
|
9.9%
|
|
|
(362,272)
|
|
|
(334,426)
|
|
8.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities
|
|
329,836
|
|
|
329,787
|
|
0.0%
|
|
|
953,804
|
|
|
944,198
|
|
1.0%
|
Non Same Store Facilities
|
|
28,627
|
|
|
29,816
|
|
(4.0)%
|
|
|
81,583
|
|
|
83,103
|
|
(1.8)%
|
Total net income
|
$
|
358,463
|
|
$
|
359,603
|
|
(0.3)%
|
|
$
|
1,035,387
|
|
$
|
1,027,301
|
|
0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities at period end:
|
|
|
|
|
|
Same Store Facilities
|
|
|
|
|
|
|
|
|
|
2,046
|
|
|
2,046
|
|
-
|
Non Same Store Facilities
|
|
|
|
|
|
|
|
|
|
373
|
|
|
317
|
|
17.7%
|
Net rentable square footage at period end (in thousands):
|
|
|
Same Store Facilities
|
|
|
|
|
|
|
|
|
|
131,180
|
|
|
131,180
|
|
-
|
Non Same Store Facilities
|
|
|
|
|
|
|
|
|
|
29,679
|
|
|
25,164
|
|
17.9%
|
|
(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, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our
September 30
,
2018 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
%
and
2.6
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017. These increases
are due to higher revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities.
Same Store Facilities
The Same Store
Facilities represent those facilities that have been owned and operated at a stabilized level of occupancy, revenues and cost of operations since January 1, 201
6
. We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 201
6
, 201
7
, and 201
8
.
We believe the Same Store information is used by investors and
REIT
analysts in a similar manner. The Same Store pool
de
creased from
2,048
facilities at
June
30
,
2018
to 2,046 at September 30, 2018
. The following table summarizes the historical operating results of these
2,04
6
facilities (131.
2
million net rentable square feet) that represent approximately 8
2
%
of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio
at
September 30
,
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data for the Same Store Facilities (2,046 facilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
2018
|
|
2017
|
|
Change
|
|
(Dollar amounts in thousands, except weighted average amounts)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
549,234
|
|
$
|
542,535
|
|
1.2%
|
|
$
|
1,607,298
|
|
$
|
1,580,888
|
|
1.7%
|
Late charges and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative fees
|
|
25,289
|
|
|
25,434
|
|
(0.6)%
|
|
|
73,557
|
|
|
73,375
|
|
0.2%
|
Total revenues (a)
|
|
574,523
|
|
|
567,969
|
|
1.2%
|
|
|
1,680,855
|
|
|
1,654,263
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes
|
|
59,004
|
|
|
55,822
|
|
5.7%
|
|
|
176,501
|
|
|
167,685
|
|
5.3%
|
On-site property manager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payroll
|
|
28,608
|
|
|
28,530
|
|
0.3%
|
|
|
85,066
|
|
|
83,541
|
|
1.8%
|
Supervisory payroll
|
|
8,928
|
|
|
9,611
|
|
(7.1)%
|
|
|
27,802
|
|
|
29,628
|
|
(6.2)%
|
Repairs and maintenance
|
|
11,251
|
|
|
11,407
|
|
(1.4)%
|
|
|
34,367
|
|
|
34,478
|
|
(0.3)%
|
Utilities
|
|
10,871
|
|
|
10,697
|
|
1.6%
|
|
|
31,238
|
|
|
30,238
|
|
3.3%
|
Advertising and selling
|
7,814
|
|
|
6,966
|
|
12.2%
|
|
|
22,027
|
|
|
21,885
|
|
0.6%
|
Other direct property costs
|
|
14,814
|
|
|
14,169
|
|
4.6%
|
|
|
44,350
|
|
|
42,670
|
|
3.9%
|
Allocated overhead
|
|
10,916
|
|
|
10,877
|
|
0.4%
|
|
|
35,075
|
|
|
33,388
|
|
5.1%
|
Total cost of operations (a)
|
|
152,206
|
|
|
148,079
|
|
2.8%
|
|
|
456,426
|
|
|
443,513
|
|
2.9%
|
Net operating income
|
|
422,317
|
|
|
419,890
|
|
0.6%
|
|
|
1,224,429
|
|
|
1,210,750
|
|
1.1%
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
(92,481)
|
|
|
(90,103)
|
|
2.6%
|
|
|
(270,625)
|
|
|
(266,552)
|
|
1.5%
|
Net income
|
$
|
329,836
|
|
$
|
329,787
|
|
0.0%
|
|
$
|
953,804
|
|
$
|
944,198
|
|
1.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (before depreciation
|
|
|
|
|
|
|
and amortization expense)
|
73.5%
|
|
|
73.9%
|
|
(0.5)%
|
|
|
72.8%
|
|
|
73.2%
|
|
(0.5)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average for the period:
|
|
|
|
|
|
Square foot occupancy
|
94.0%
|
|
|
94.6%
|
|
(0.6)%
|
|
|
93.4%
|
|
|
94.1%
|
|
(0.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rental income per (b):
|
|
|
|
|
|
Occupied square foot
|
$
|
17.83
|
|
$
|
17.49
|
|
1.9%
|
|
$
|
17.49
|
|
$
|
17.08
|
|
2.4%
|
Available square foot
|
$
|
16.75
|
|
$
|
16.54
|
|
1.3%
|
|
$
|
16.34
|
|
$
|
16.07
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square foot occupancy
|
|
|
|
|
|
|
|
|
|
92.1%
|
|
|
93.2%
|
|
(1.2)%
|
Annual contract rent per
|
|
|
|
|
|
occupied square foot (c)
|
|
|
|
|
|
|
|
|
$
|
18.30
|
|
$
|
18.04
|
|
1.4%
|
|
(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 dependen
t upon the level of delinquency
and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.
|
|
(c)
|
|
Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in t
he lease agreement upon move-in
and we adjust them from time to time with notice. Contract
rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.
|
Analysis of Same Store Revenue
Revenues generated by our Same Store Facilities increased by
1.
2
%
and
1.
6
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017, due primarily to
increase
s
of
1.9
%
and
2.
4
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017 in realized annual rental income
per occupied square foot.
Year-over-year growth in our Same
Store revenues has declined fro
m
2
.4
% for the three months ended
September 30
,
2017 as compared to the same period in 2016, to
1.
2
% for the three months ended
September 30
,
2018 as compared to the same period in 2017. Growth trends decelerated
from September 30, 2017 through September 30, 2018,
with year over year revenue
growth at
2.2% for the three months ended December 31, 2017
,
2.1% for the
three months ended March 31, 2018
and 1.6% for three months ended June 30, 2018
. We are experiencing softness in demand in substantially all of our major markets, which has led to lower
move-in volumes combined with a lack of pricing power with respect to new tenants. We attribute some of this softness to local economic conditions a
nd, in some markets
,
most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston,
New York
and
Portland
, increased
supply of newly constructed self-storage facilities.
Same Store weighted average square foot occupancy
was 94.0% and
93.4
% during the three
and
nine months
ended
September 30
,
2018
,
respectively,
as compared to
94.6
%
and 9
4
.
1
%
for the same period
s
in 2017, as move-
in
volume declined in the three
and
nine months
ended
September 30
,
2018 as compared to the same period
s
in 2017, partially
offset by
lower
move-
out
volume.
We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts in order to generate sufficient move-in volume to replace tenants that vacate.
Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. Rental rate increases to existing tenants in the three
and
nine months
ended
September 30
,
2018 have been similar to the same period
s
in 2017, and we expect rate increases to existing tenants in the remainder of 2018 to be similar to the same period in 2017.
Annual contract rent per occu
pied foot
increased
1
.
4
% from
September 30
,
2017 to
September 30
,
2018, as compared
to a 3.1% increase from December 31, 2016 to December 31, 2017. These year-over-year increases were primarily driven by annual rate increases given to existing tenants, partially offset by the net impact of replacing vacating tenants with new tenants with lower contract rates, or “rent roll down.” The reduction in the year over year growth in
annual
contract
rent per occupied foot
from 3.1%
at the beginning of the year to
1
.
4
% at the end of the quarter
is due primarily to
increase
d
rent roll down.
During the three months ended
September 30
,
2018, the annual contract rent for tenants who moved in decreased
2.1
% to $1
4
.
76
per foot as compared to $1
5
.
08
for the same period in 2017, and the annual contract rent for tenants
who moved out increased 0.7
% to $16.64
per foot as compared to $
16.52
per foot
for the same period in 2017.
During the
nine months
ended
September 30
,
2018, the annual contract rent for tena
nts who moved in decreased 2.9
% to $
14.3
7
per foot as compared to $14.
80
for the same period in 2017, and the annual contract rent for t
en
ants who moved out increased 1.7% to $16.35
per foot as compared to $1
6
.
08
per foot
for the same period in 2017.
In order to
stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer. Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $
18.5
million and $
58
.
7
million for the three
and
nine months
ended
September 30
,
2018
, respectively, as compared to $
2
1
.
7
million and $
62
.
5
million
for the same periods in 2017
and are recorded as a reduction to revenue.
The decrease in move-in discoun
ts for the three and nine month
periods is due primarily to lower average move-in contractual rates as well as a reduced volume of move-ins.
Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including
the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage.
We believe rental growth in the remainder of 2018 will come primarily from continued annual rent increases to existing tenants. Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants.
We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in the remainder of 2018. However, there can be no assurance of continued revenue growth, because current trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors. Such factors include initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, the level of consumer demand, competition from newly developed facilities and the degree and timing of rate increases previously passed to existing tenants.
We are taking a number of actions to improve demand into our system, including (i) increasing marketing spend on the Internet, and (ii) reducing rental rates and continuing to offer promotional discounts to new tenants. Even if these actions are successful in improving demand into our system, in at least the near term, we believe these actions may have a negative impact on our revenue trends due to
lower
initial rental rates.
Analysis of Same Store Cost of Operations
Cost of operations (excluding depreciation and amortization) increased
2.
8
%
and
2.9
%
in the three
and
nine months
ended
September 30
,
2018
, respectively
,
as compared to the same perio
ds
in 2017, due primarily to
in
creased property tax expense
.
Property tax expense increased
5.
7
% and 5.
3
% in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017, due primarily to higher assessed values. We expect property tax expense growth of
approximately
5.
7
% in the remainder of 2018 due primarily to higher assessed values.
On-site property manager payroll expense increased
0.3
%
and
1.8
% in the three and
nine months
ended
September 30
, 2018, respectively, as compared to the same periods in 2017
, due primarily to higher wage rates. We expect on-site property manager payroll
expense to increase on an inflationary basis in the remainder of 2018.
Supervisory
payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased
7
.1
%
and
6.2
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017
, due primarily to
lower
headcount.
We expect
similar decreases
in the remainder of 2018.
Repairs and ma
intenance expense
de
creased
1.
4
%
and 0.
3
%
in the three
and
nine months
ended
September
30
,
2018
, respectively,
as compared to the same period
s
in 2017
. Repair and maintenance costs include sn
ow removal expense totaling $2.8
million
in the
nine months
ended
September 30
,
2018
as compared to
$2.2 million for
the same period in 2017
(none in each of the three month periods ended September 30, 2018 and 2017)
. Excluding snow removal costs, repairs and maintenance decreased 2.
1
%
in the
nine months
ended
September 30
,
2018
as compared to the same period in 2017
.
Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events. We expect inflationary increases in repairs and maintenance expense in the remainder of 2018, excluding snow removal expense, which is primarily weather dependent and not predictable.
Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in
usage levels are driven primarily by weather and temperature. Utility expense increased
1.6
%
and
3.3
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017
. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable.
Advertising and selling expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center. Advertising and selling expense varies based upon demand, occupancy levels, and other factors. Television and Internet advertising, in particular, can increase or decrease significantly in the short term. Advertising and selling
expenses in
creased
12.2
% and
0.6
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017
, due primarily to
increased
Internet
marketing expenditures partially offset by
, with respect to the nine month period,
de
creased
television advertising spending
.
In the remainder of 2018, we
expect advertising and selling expense
to increase over the same period in 2017,
at a level
similar to the increase experienced in the three months ended September 30, 2018
.
Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office. These
costs increased
4
.
6
% and 3.
9
%
in the three
and
nine months
ended
September 30
,
2018
, respectively,
as compared to the same period
s
in 2017
, due to
higher rates
on
data communication lines
and increased credit card fees
.
We expect inflationary increases in other direct property costs in the remainder of 2018.
Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations. Such functions include information technology, human
resources, operational accounting and finance, marketing, and costs of senior
executives (other than the Chief Executive Officer
(
“
CEO”)
and Chief Financial Officer
(
“
CFO”)
, which are included in general and administrative expense). Allocated overhead increased
0
.
4
%
and 5.1
%
in the three and
nine months
ended
September 30
, 2018, respectively, as compared to the same periods in 2017,
due
primarily
to increased information technology expenses. We expect greater than inflationary increases in allocated overhead in the remainder of 2018 due primarily to increased information technology expenses.
Analysis of Same Store Depreciation and Amortization
Depreciation and amortization for Same Store Facilities
in
creased
2.6
%
and 1.5
% i
n the three
and
nine months
ended
September 30
,
2018
, respectively
,
as compared to the same
period
s
in 201
7
. We expect depreciation to be flat in the remainder of 201
8 as compared to the same period
in 201
7
.
The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Entire Year
|
|
(Amounts in thousands, except for per square foot amounts)
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
548,116
|
|
$
|
558,216
|
|
$
|
574,523
|
|
|
|
|
|
|
2017
|
$
|
536,618
|
|
$
|
549,676
|
|
$
|
567,969
|
|
$
|
555,164
|
|
$
|
2,209,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
153,532
|
|
$
|
150,688
|
|
$
|
152,206
|
|
|
|
|
|
|
2017
|
$
|
148,577
|
|
$
|
146,857
|
|
$
|
148,079
|
|
$
|
118,261
|
|
$
|
561,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
58,359
|
|
$
|
59,138
|
|
$
|
59,004
|
|
|
|
|
|
|
2017
|
$
|
55,831
|
|
$
|
56,032
|
|
$
|
55,822
|
|
$
|
32,320
|
|
$
|
200,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repairs and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
11,523
|
|
$
|
11,593
|
|
$
|
11,251
|
|
|
|
|
|
|
2017
|
$
|
11,684
|
|
$
|
11,387
|
|
$
|
11,407
|
|
$
|
11,969
|
|
$
|
46,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and selling expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
6,516
|
|
$
|
7,697
|
|
$
|
7,814
|
|
|
|
|
|
|
2017
|
$
|
6,792
|
|
$
|
8,127
|
|
$
|
6,966
|
|
$
|
6,794
|
|
$
|
28,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVPAF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
15.97
|
|
$
|
16.31
|
|
$
|
16.75
|
|
|
|
|
|
|
2017
|
$
|
15.63
|
|
$
|
16.03
|
|
$
|
16.54
|
|
$
|
16.17
|
|
$
|
16.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average realized annual rent per occupied square foot:
|
|
|
|
2018
|
$
|
17.30
|
|
$
|
17.35
|
|
$
|
17.83
|
|
|
|
|
|
|
2017
|
$
|
16.79
|
|
$
|
16.95
|
|
$
|
17.49
|
|
$
|
17.37
|
|
$
|
17.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average occupancy levels for the period:
|
|
|
|
|
|
|
|
|
2018
|
|
92.3%
|
|
|
94.0%
|
|
|
94.0%
|
|
|
|
|
|
|
2017
|
|
93.1%
|
|
|
94.6%
|
|
|
94.6%
|
|
|
93.1%
|
|
|
93.8%
|
Analysis of
Market
Trends
The following table sets forth
selected market
trends in our Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
Change
|
|
(Amounts in thousands, except for weighted average data)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles (197 facilities)
|
$
|
86,462
|
|
$
|
84,141
|
|
2.8%
|
|
$
|
253,420
|
|
$
|
244,445
|
|
3.7%
|
San Francisco (124 facilities)
|
|
49,390
|
|
|
48,444
|
|
2.0%
|
|
|
144,406
|
|
|
140,660
|
|
2.7%
|
New York (82 facilities)
|
|
36,002
|
|
|
35,173
|
|
2.4%
|
|
|
105,047
|
|
|
102,137
|
|
2.8%
|
Seattle-Tacoma (81 facilities)
|
|
27,029
|
|
|
26,795
|
|
0.9%
|
|
|
78,520
|
|
|
76,846
|
|
2.2%
|
Washington DC (82 facilities)
|
|
27,063
|
|
|
27,182
|
|
(0.4)%
|
|
|
78,773
|
|
|
79,055
|
|
(0.4)%
|
Miami (73 facilities)
|
|
24,689
|
|
|
24,057
|
|
2.6%
|
|
|
72,838
|
|
|
71,596
|
|
1.7%
|
Chicago (129 facilities)
|
|
30,081
|
|
|
30,872
|
|
(2.6)%
|
|
|
88,485
|
|
|
90,734
|
|
(2.5)%
|
Atlanta (98 facilities)
|
|
21,642
|
|
|
21,118
|
|
2.5%
|
|
|
63,025
|
|
|
61,657
|
|
2.2%
|
Houston (70 facilities)
|
|
16,461
|
|
|
16,189
|
|
1.7%
|
|
|
49,149
|
|
|
48,230
|
|
1.9%
|
Dallas-Ft. Worth (77 facilities)
|
|
16,040
|
|
|
16,700
|
|
(4.0)%
|
|
|
47,682
|
|
|
48,940
|
|
(2.6)%
|
Philadelphia (57 facilities)
|
|
14,818
|
|
|
14,420
|
|
2.8%
|
|
|
42,870
|
|
|
41,765
|
|
2.6%
|
Orlando-Daytona (64 facilities)
|
|
14,030
|
|
|
13,461
|
|
4.2%
|
|
|
40,992
|
|
|
39,239
|
|
4.5%
|
West Palm Beach (38 facilities)
|
|
11,888
|
|
|
11,516
|
|
3.2%
|
|
|
34,940
|
|
|
34,022
|
|
2.7%
|
Tampa (47 facilities)
|
|
11,228
|
|
|
11,048
|
|
1.6%
|
|
|
33,053
|
|
|
32,493
|
|
1.7%
|
Portland (41 facilities)
|
|
10,144
|
|
|
10,327
|
|
(1.8)%
|
|
|
29,788
|
|
|
30,080
|
|
(1.0)%
|
All other markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(786 facilities)
|
|
177,556
|
|
|
176,526
|
|
0.6%
|
|
|
517,867
|
|
|
512,364
|
|
1.1%
|
Total revenues
|
$
|
574,523
|
|
$
|
567,969
|
|
1.2%
|
|
$
|
1,680,855
|
|
$
|
1,654,263
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
71,157
|
|
$
|
69,770
|
|
2.0%
|
|
$
|
208,556
|
|
$
|
201,742
|
|
3.4%
|
San Francisco
|
|
40,110
|
|
|
39,558
|
|
1.4%
|
|
|
116,782
|
|
|
114,045
|
|
2.4%
|
New York
|
|
25,494
|
|
|
24,876
|
|
2.5%
|
|
|
72,998
|
|
|
71,329
|
|
2.3%
|
Seattle-Tacoma
|
|
21,295
|
|
|
21,253
|
|
0.2%
|
|
|
61,019
|
|
|
60,161
|
|
1.4%
|
Washington DC
|
|
20,282
|
|
|
20,572
|
|
(1.4)%
|
|
|
57,974
|
|
|
58,922
|
|
(1.6)%
|
Miami
|
|
17,337
|
|
|
16,803
|
|
3.2%
|
|
|
50,905
|
|
|
50,304
|
|
1.2%
|
Chicago
|
|
16,094
|
|
|
17,517
|
|
(8.1)%
|
|
|
46,364
|
|
|
50,281
|
|
(7.8)%
|
Atlanta
|
|
16,028
|
|
|
15,540
|
|
3.1%
|
|
|
45,894
|
|
|
44,888
|
|
2.2%
|
Houston
|
|
10,771
|
|
|
10,643
|
|
1.2%
|
|
|
32,389
|
|
|
32,093
|
|
0.9%
|
Dallas-Ft. Worth
|
|
10,714
|
|
|
11,370
|
|
(5.8)%
|
|
|
31,736
|
|
|
32,818
|
|
(3.3)%
|
Philadelphia
|
|
10,527
|
|
|
10,279
|
|
2.4%
|
|
|
29,903
|
|
|
29,616
|
|
1.0%
|
Orlando-Daytona
|
|
10,118
|
|
|
9,692
|
|
4.4%
|
|
|
29,381
|
|
|
28,124
|
|
4.5%
|
West Palm Beach
|
|
8,865
|
|
|
8,468
|
|
4.7%
|
|
|
25,820
|
|
|
24,995
|
|
3.3%
|
Tampa
|
|
7,942
|
|
|
7,792
|
|
1.9%
|
|
|
23,244
|
|
|
22,847
|
|
1.7%
|
Portland
|
|
7,855
|
|
|
8,121
|
|
(3.3)%
|
|
|
22,903
|
|
|
23,283
|
|
(1.6)%
|
All other markets
|
|
127,728
|
|
|
127,636
|
|
0.1%
|
|
|
368,561
|
|
|
365,302
|
|
0.9%
|
Total net operating income
|
$
|
422,317
|
|
$
|
419,890
|
|
0.6%
|
|
$
|
1,224,429
|
|
$
|
1,210,750
|
|
1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
2018
|
|
2017
|
|
Change
|
Weighted average square foot
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupancy:
|
|
|
|
|
|
|
|
|
|
Los Angeles
|
|
95.4%
|
|
|
96.0%
|
|
(0.6)%
|
|
|
95.3%
|
|
|
95.8%
|
|
(0.5)%
|
San Francisco
|
|
94.8%
|
|
|
95.5%
|
|
(0.7)%
|
|
|
94.8%
|
|
|
95.5%
|
|
(0.7)%
|
New York
|
|
95.1%
|
|
|
95.2%
|
|
(0.1)%
|
|
|
94.5%
|
|
|
94.4%
|
|
0.1%
|
Seattle-Tacoma
|
|
94.5%
|
|
|
95.8%
|
|
(1.4)%
|
|
|
93.6%
|
|
|
94.9%
|
|
(1.4)%
|
Washington DC
|
|
93.6%
|
|
|
93.9%
|
|
(0.3)%
|
|
|
92.6%
|
|
|
93.2%
|
|
(0.6)%
|
Miami
|
|
93.0%
|
|
|
93.5%
|
|
(0.5)%
|
|
|
92.8%
|
|
|
93.5%
|
|
(0.7)%
|
Chicago
|
|
92.0%
|
|
|
92.4%
|
|
(0.4)%
|
|
|
90.3%
|
|
|
91.7%
|
|
(1.5)%
|
Atlanta
|
|
94.2%
|
|
|
94.4%
|
|
(0.2)%
|
|
|
93.3%
|
|
|
93.7%
|
|
(0.4)%
|
Houston
|
|
90.6%
|
|
|
92.5%
|
|
(2.1)%
|
|
|
91.2%
|
|
|
91.0%
|
|
0.2%
|
Dallas-Ft. Worth
|
|
92.0%
|
|
|
93.9%
|
|
(2.0)%
|
|
|
91.8%
|
|
|
93.8%
|
|
(2.1)%
|
Philadelphia
|
|
95.4%
|
|
|
95.2%
|
|
0.2%
|
|
|
94.8%
|
|
|
94.9%
|
|
(0.1)%
|
Orlando-Daytona
|
|
94.8%
|
|
|
95.4%
|
|
(0.6)%
|
|
|
94.8%
|
|
|
95.2%
|
|
(0.4)%
|
West Palm Beach
|
|
94.3%
|
|
|
94.8%
|
|
(0.5)%
|
|
|
94.3%
|
|
|
94.8%
|
|
(0.5)%
|
Tampa
|
|
93.7%
|
|
|
94.7%
|
|
(1.1)%
|
|
|
93.4%
|
|
|
94.4%
|
|
(1.1)%
|
Portland
|
|
94.3%
|
|
|
95.5%
|
|
(1.3)%
|
|
|
94.4%
|
|
|
95.7%
|
|
(1.4)%
|
All other markets
|
|
94.0%
|
|
|
94.5%
|
|
(0.5)%
|
|
|
93.3%
|
|
|
93.9%
|
|
(0.6)%
|
Total weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
square foot occupancy
|
|
94.0%
|
|
|
94.6%
|
|
(0.6)%
|
|
|
93.4%
|
|
|
94.1%
|
|
(0.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rent per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupied square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
26.18
|
|
$
|
25.27
|
|
3.6%
|
|
$
|
25.60
|
|
$
|
24.52
|
|
4.4%
|
San Francisco
|
|
26.74
|
|
|
25.97
|
|
3.0%
|
|
|
26.06
|
|
|
25.17
|
|
3.5%
|
New York
|
|
25.58
|
|
|
24.96
|
|
2.5%
|
|
|
25.06
|
|
|
24.40
|
|
2.7%
|
Seattle-Tacoma
|
|
20.40
|
|
|
19.91
|
|
2.5%
|
|
|
19.95
|
|
|
19.23
|
|
3.7%
|
Washington DC
|
|
21.75
|
|
|
21.57
|
|
0.8%
|
|
|
21.33
|
|
|
21.07
|
|
1.2%
|
Miami
|
|
20.05
|
|
|
19.54
|
|
2.6%
|
|
|
19.78
|
|
|
19.31
|
|
2.4%
|
Chicago
|
|
15.36
|
|
|
15.70
|
|
(2.2)%
|
|
|
15.36
|
|
|
15.54
|
|
(1.2)%
|
Atlanta
|
|
13.41
|
|
|
13.07
|
|
2.6%
|
|
|
13.14
|
|
|
12.81
|
|
2.6%
|
Houston
|
|
14.49
|
|
|
14.09
|
|
2.8%
|
|
|
14.35
|
|
|
14.13
|
|
1.6%
|
Dallas-Ft. Worth
|
|
13.45
|
|
|
13.71
|
|
(1.9)%
|
|
|
13.38
|
|
|
13.44
|
|
(0.4)%
|
Philadelphia
|
|
16.48
|
|
|
16.06
|
|
2.6%
|
|
|
16.00
|
|
|
15.59
|
|
2.6%
|
Orlando-Daytona
|
|
14.18
|
|
|
13.58
|
|
4.4%
|
|
|
13.83
|
|
|
13.20
|
|
4.8%
|
West Palm Beach
|
|
18.91
|
|
|
18.31
|
|
3.3%
|
|
|
18.55
|
|
|
18.00
|
|
3.1%
|
Tampa
|
|
14.44
|
|
|
14.12
|
|
2.3%
|
|
|
14.22
|
|
|
13.84
|
|
2.7%
|
Portland
|
|
19.08
|
|
|
19.15
|
|
(0.4)%
|
|
|
18.68
|
|
|
18.58
|
|
0.5%
|
All other markets
|
|
14.53
|
|
|
14.34
|
|
1.3%
|
|
|
14.24
|
|
|
13.98
|
|
1.9%
|
Total realized rent per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupied square foot
|
$
|
17.83
|
|
$
|
17.49
|
|
1.9%
|
|
$
|
17.49
|
|
$
|
17.08
|
|
2.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
2018
|
|
2017
|
|
Change
|
REVPAF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles
|
$
|
24.97
|
|
$
|
24.25
|
|
3.0%
|
|
$
|
24.40
|
|
$
|
23.50
|
|
3.8%
|
San Francisco
|
|
25.36
|
|
|
24.80
|
|
2.3%
|
|
|
24.70
|
|
|
24.03
|
|
2.8%
|
New York
|
|
24.32
|
|
|
23.76
|
|
2.4%
|
|
|
23.69
|
|
|
23.03
|
|
2.9%
|
Seattle-Tacoma
|
|
19.27
|
|
|
19.07
|
|
1.0%
|
|
|
18.68
|
|
|
18.24
|
|
2.4%
|
Washington DC
|
|
20.36
|
|
|
20.26
|
|
0.5%
|
|
|
19.75
|
|
|
19.64
|
|
0.6%
|
Miami
|
|
18.66
|
|
|
18.27
|
|
2.1%
|
|
|
18.36
|
|
|
18.07
|
|
1.6%
|
Chicago
|
|
14.13
|
|
|
14.52
|
|
(2.7)%
|
|
|
13.87
|
|
|
14.24
|
|
(2.6)%
|
Atlanta
|
|
12.63
|
|
|
12.34
|
|
2.4%
|
|
|
12.26
|
|
|
12.01
|
|
2.1%
|
Houston
|
|
13.12
|
|
|
13.03
|
|
0.7%
|
|
|
13.08
|
|
|
12.86
|
|
1.7%
|
Dallas-Ft. Worth
|
|
12.38
|
|
|
12.87
|
|
(3.8)%
|
|
|
12.28
|
|
|
12.60
|
|
(2.5)%
|
Philadelphia
|
|
15.73
|
|
|
15.30
|
|
2.8%
|
|
|
15.17
|
|
|
14.80
|
|
2.5%
|
Orlando-Daytona
|
|
13.44
|
|
|
12.96
|
|
3.7%
|
|
|
13.11
|
|
|
12.57
|
|
4.3%
|
West Palm Beach
|
|
17.84
|
|
|
17.36
|
|
2.8%
|
|
|
17.49
|
|
|
17.06
|
|
2.5%
|
Tampa
|
|
13.53
|
|
|
13.37
|
|
1.2%
|
|
|
13.28
|
|
|
13.07
|
|
1.6%
|
Portland
|
|
18.00
|
|
|
18.28
|
|
(1.5)%
|
|
|
17.64
|
|
|
17.78
|
|
(0.8)%
|
All other markets
|
|
13.66
|
|
|
13.55
|
|
0.8%
|
|
|
13.28
|
|
|
13.13
|
|
1.1%
|
Total REVPAF
|
$
|
16.75
|
|
$
|
16.54
|
|
1.3%
|
|
$
|
16.34
|
|
$
|
16.07
|
|
1.7%
|
We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these
characteristics.
Non Same Store Facilities
The Non Same Store Facilities at
September 30
,
2018 represent 3
73
facilities that were not stabilized with respect to occupancies or rental
rates since January 1, 2016, or that we did not own as of January 1, 2016. As a result of the stabilization process and timing of when facilities were acquired
, developed, or redeveloped,
year-over-year changes can be significant.
The following table summarizes operating data with respect to the Non Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON SAME STORE
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
FACILITIES
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
(Dollar amounts in thousands, except square foot amounts)
|
Revenues (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
$
|
1,762
|
|
$
|
-
|
|
$
|
1,762
|
|
$
|
2,288
|
|
$
|
-
|
|
$
|
2,288
|
2017 acquisitions
|
|
7,409
|
|
|
1,735
|
|
|
5,674
|
|
|
21,385
|
|
|
2,873
|
|
|
18,512
|
2016 acquisitions
|
|
10,031
|
|
|
9,297
|
|
|
734
|
|
|
29,221
|
|
|
26,909
|
|
|
2,312
|
2016 - 2018 new developments
|
|
10,427
|
|
|
5,124
|
|
|
5,303
|
|
|
26,165
|
|
|
11,081
|
|
|
15,084
|
2013 - 2015 new developments
|
|
6,891
|
|
|
6,491
|
|
|
400
|
|
|
19,883
|
|
|
18,440
|
|
|
1,443
|
Other facilities (b)
|
|
55,573
|
|
|
55,622
|
|
|
(49)
|
|
|
163,562
|
|
|
164,649
|
|
|
(1,087)
|
Total revenues
|
|
92,093
|
|
|
78,269
|
|
|
13,824
|
|
|
262,504
|
|
|
223,952
|
|
|
38,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
678
|
|
|
-
|
|
|
678
|
|
|
865
|
|
|
-
|
|
|
865
|
2017 acquisitions
|
|
2,478
|
|
|
633
|
|
|
1,845
|
|
|
7,444
|
|
|
1,013
|
|
|
6,431
|
2016 acquisitions
|
|
3,479
|
|
|
3,364
|
|
|
115
|
|
|
10,637
|
|
|
10,348
|
|
|
289
|
2016 - 2018 new developments
|
|
6,391
|
|
|
3,191
|
|
|
3,200
|
|
|
15,383
|
|
|
8,405
|
|
|
6,978
|
2013 - 2015 new developments
|
|
2,120
|
|
|
2,275
|
|
|
(155)
|
|
|
6,317
|
|
|
6,055
|
|
|
262
|
Other facilities (b)
|
|
16,285
|
|
|
15,773
|
|
|
512
|
|
|
48,628
|
|
|
47,154
|
|
|
1,474
|
Total cost of operations
|
|
31,431
|
|
|
25,236
|
|
|
6,195
|
|
|
89,274
|
|
|
72,975
|
|
|
16,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
1,084
|
|
|
-
|
|
|
1,084
|
|
|
1,423
|
|
|
-
|
|
|
1,423
|
2017 acquisitions
|
|
4,931
|
|
|
1,102
|
|
|
3,829
|
|
|
13,941
|
|
|
1,860
|
|
|
12,081
|
2016 acquisitions
|
|
6,552
|
|
|
5,933
|
|
|
619
|
|
|
18,584
|
|
|
16,561
|
|
|
2,023
|
2016 - 2018 new developments
|
|
4,036
|
|
|
1,933
|
|
|
2,103
|
|
|
10,782
|
|
|
2,676
|
|
|
8,106
|
2013 - 2015 new developments
|
|
4,771
|
|
|
4,216
|
|
|
555
|
|
|
13,566
|
|
|
12,385
|
|
|
1,181
|
Other facilities (b)
|
|
39,288
|
|
|
39,849
|
|
|
(561)
|
|
|
114,934
|
|
|
117,495
|
|
|
(2,561)
|
Net operating income
|
|
60,662
|
|
|
53,033
|
|
|
7,629
|
|
|
173,230
|
|
|
150,977
|
|
|
22,253
|
Depreciation and
|
|
|
|
|
|
|
|
amortization expense
|
|
(32,035)
|
|
|
(23,217)
|
|
|
(8,818)
|
|
|
(91,647)
|
|
|
(67,874)
|
|
|
(23,773)
|
Net income
|
$
|
28,627
|
|
$
|
29,816
|
|
$
|
(1,189)
|
|
$
|
81,583
|
|
$
|
83,103
|
|
$
|
(1,520)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square foot occupancy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
|
|
|
|
|
|
|
|
|
83.2%
|
|
|
-
|
|
|
-
|
2017 acquisitions
|
|
|
|
|
|
|
|
|
|
|
91.9%
|
|
|
89.5%
|
|
|
2.7%
|
2016 acquisitions
|
|
|
|
|
|
|
|
|
|
|
87.8%
|
|
|
89.1%
|
|
|
(1.5)%
|
2016 - 2018 new developments
|
|
|
|
|
|
|
|
|
|
|
61.4%
|
|
|
51.3%
|
|
|
19.7%
|
2013 - 2015 new developments
|
|
|
|
|
|
|
|
|
|
|
91.2%
|
|
|
91.7%
|
|
|
(0.5)%
|
Other facilities (b)
|
|
|
|
|
|
|
|
|
|
|
85.7%
|
|
|
85.3%
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
|
|
81.8%
|
|
|
81.4%
|
|
|
0.5%
|
Annual contract rent per
|
|
|
|
|
|
|
occupied square foot:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
|
|
|
|
|
|
|
|
$
|
11.37
|
|
$
|
-
|
|
|
-
|
2017 acquisitions
|
|
|
|
|
|
|
|
|
|
|
14.77
|
|
|
10.15
|
|
|
45.5%
|
2016 acquisitions
|
|
|
|
|
|
|
|
|
|
|
10.45
|
|
|
10.10
|
|
|
3.5%
|
2016 - 2018 new developments
|
|
|
|
|
|
|
|
|
|
|
11.80
|
|
|
12.30
|
|
|
(4.1)%
|
2013 - 2015 new developments
|
|
|
|
|
|
|
|
|
|
|
15.58
|
|
|
14.72
|
|
|
5.8%
|
Other facilities (b)
|
|
|
|
|
|
|
|
|
|
|
17.13
|
|
|
17.20
|
|
|
(0.4)%
|
|
|
|
|
|
|
|
|
|
|
$
|
14.80
|
|
$
|
15.01
|
|
|
(1.4)%
|
NON SAME STORE
|
|
|
Nine Months Ended September 30,
|
FACILITIES (Continued)
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
-
|
|
|
16
|
2017 acquisitions
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
14
|
|
|
20
|
2016 acquisitions
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
55
|
|
|
-
|
2016 - 2018 new developments
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
28
|
|
|
20
|
2013 - 2015 new developments
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
20
|
|
|
-
|
Other facilities (b)
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
200
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
373
|
|
|
317
|
|
|
56
|
Net rentable square feet (in thousands):
|
|
|
|
|
|
|
2018 acquisitions
|
|
|
|
|
|
|
|
|
|
|
1,015
|
|
|
-
|
|
|
1,015
|
2017 acquisitions
|
|
|
|
|
|
|
|
|
|
|
2,114
|
|
|
830
|
|
|
1,284
|
2016 acquisitions
|
|
|
|
|
|
|
|
|
|
|
4,247
|
|
|
4,121
|
|
|
126
|
2016 - 2018 new developments
|
|
|
|
|
|
|
|
|
|
|
6,006
|
|
|
3,764
|
|
|
2,242
|
2013 - 2015 new developments
|
|
|
|
|
|
|
|
|
|
|
1,877
|
|
|
1,877
|
|
|
-
|
Other facilities (b)
|
|
|
|
|
|
|
|
|
|
|
14,420
|
|
|
14,572
|
|
|
(152)
|
|
|
|
|
|
|
|
|
|
|
|
29,679
|
|
|
25,164
|
|
|
4,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2018
|
|
|
|
|
|
|
Costs to acquire or develop:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 acquisitions
|
|
|
|
|
|
|
|
|
|
$
|
107,775
|
|
|
|
|
|
|
2017 acquisitions (c)
|
|
|
|
|
|
|
|
|
|
|
291,329
|
|
|
|
|
|
|
2016 acquisitions
|
|
|
|
|
|
|
|
|
|
|
429,123
|
|
|
|
|
|
|
2016 - 2018 new developments
|
|
|
|
|
|
|
|
|
|
|
719,483
|
|
|
|
|
|
|
2013 - 2015 new developments
|
|
|
|
|
|
|
|
|
|
|
188,049
|
|
|
|
|
|
|
Other facilities (b)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,735,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
The “Ot
her facilities”
noted above
include
other
self-storage facilities that are
not stabilized in 2016, 2017, or the first nine months of 2018 due primarily to either completed or in-process redevelopment activities, as well as casualty events which significantly impacted the operating results. It includes facilities where we recently expanded their square footage at a cost of $213.3 million, as well as facilities in the process of re
de
velopment where
we demolished 731,000 net rentable square feet of storage space. Such expansion costs are not included
in
“costs to acquire or develop” as it would not be meaningful or consistent with the amounts for the acquired and newly developed
facilities.
|
|
(c)
|
|
Acquisition costs includes i) $149.8 million paid for 22 facilities acquired from third parties, ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and iii)
the $6.3
million historical book value of our existing investment in the legacy institutional partnership.
|
The facilities included above under “2017 acquisitions” include 22 facilities acquired from third parties
and
12 stabilized facilities previously owned by a legacy institutional partnership that we began consolidating effective December 31, 2017
.
For the
nine months
ended
September 30
,
2018, the weighted average annualized yield on cost, based upon net operating income, for i) the f
acilities acquired in
2016 was
5.8
% and
ii) the 22 facilities acquired in 2017 from third parties for $149.8
million was
5.1
%. The yield for the other facilities acquired are not meaningful due to our limited ownership period in the case of facilities acquired in 2018 and our preexisting ownership interest in and management of the 12 stabilized facilities owned
by a legacy institutional partnership.
We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities.
Net operating income with respect to the “Other facilities” declined $0.6 million and $2.6 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. Such decreases are primarily due to the demolishment of 731,000 net rentable square feet of storage space due to expansion activities, offset partially by increased net operating income with respect to facilities
where
expansion
activities
are complete and the added space is filling up
. Our current pipeline of $345.8 million in redevelopment projects will result in the demolishment
of an additional 84
,000
net rentable square feet of space, and the build of an additional 3
.8
million net rentable square feet of storage space.
We believe that our real estate development activities are beneficial
to our business over the long run. However, in the short run, development activities dilute our earnings due to the three to four year period to reach a stabilized level of cash flows and the cost of capital to fund development, combined with general and administrative expenses associated with development. We believe this dilution will increase in the remainder of 2018 because of an increased level of net rentable square feet being added to our portfolio.
We expect the Non Same Store Facilities to continue to provide increased net operating income in the remainder of 2018 as these facilities approach stabilized occupancy levels and the earnings of the 2017 acquisitions are reflected in our operations for a longer period in 2018 as compared to 2017.
We also expect to increase the number and net rentable square feet of Non Same Store Facilities through development of new self-storage facilities, redevelopment of existing facilities and acquisitions of facilities.
At
September 30
,
2018,
in addition to the $345.8 million in expansion projects noted above,
we had various facilities in development (
1
.
6
million net rentable square feet) estimated to cost $
250.6
million
.
Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development
and expansion
projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining
building permits for self-storage activities in certain municipalities.
Subsequent to
September 30
,
2018, we acquired or were under contract to acquire
(subject to customary closing
conditions)
nine
self-storage fac
ilities for $79
.
7
million. We will
continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefore the dollar value of acquisitions is unpredictable.
Depreciation and
amortization with respect to the Non
Sam
e Store Facilities totaled $
32.0
million
and $
91
.
6
million in the three and
nine months
ended
September 30
,
2018, respectively
, as compared to $
23.2
million $
67
.
9
million for the same periods in 2017
. These amounts include
(
i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and
(
ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to Non Same Store Facilities owned at
September 30
,
2018, depreciation of buildings and amortization of tenant intangibles is ex
pected to total $
2
8
.
0
million and $
3
.
2
million, respectively, in the remainder of 2018. The level of future depreciation and amortization will also
depend upon the
level of acquisitions of facilities and the level o
f newly developed storage space.
Ancillary Operations
Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities. The following table sets forth our ancillary operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
(Amounts in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance premiums
|
$
|
31,734
|
|
$
|
31,175
|
|
$
|
559
|
|
$
|
94,176
|
|
$
|
92,094
|
|
$
|
2,082
|
Merchandise
|
|
8,018
|
|
|
8,948
|
|
|
(930)
|
|
|
24,285
|
|
|
25,911
|
|
|
(1,626)
|
Total revenues
|
|
39,752
|
|
|
40,123
|
|
|
(371)
|
|
|
118,461
|
|
|
118,005
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance
|
|
7,176
|
|
|
11,916
|
|
|
(4,740)
|
|
|
19,317
|
|
|
24,179
|
|
|
(4,862)
|
Merchandise
|
|
4,731
|
|
|
5,388
|
|
|
(657)
|
|
|
14,331
|
|
|
15,432
|
|
|
(1,101)
|
Total cost of operations
|
|
11,907
|
|
|
17,304
|
|
|
(5,397)
|
|
|
33,648
|
|
|
39,611
|
|
|
(5,963)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance
|
|
24,558
|
|
|
19,259
|
|
|
5,299
|
|
|
74,859
|
|
|
67,915
|
|
|
6,944
|
Merchandise
|
|
3,287
|
|
|
3,560
|
|
|
(273)
|
|
|
9,954
|
|
|
10,479
|
|
|
(525)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income
|
$
|
27,845
|
|
$
|
22,819
|
|
$
|
5,026
|
|
$
|
84,813
|
|
$
|
78,394
|
|
$
|
6,419
|
Tenant reinsurance operations:
Our
cu
s
tomers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary of Public Storage fully reinsures
such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table.
The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in
consolidation and is therefore not shown in the above table.
Tenant reinsurance revenue
s
increased
from $
31.
2
million
and $
92
.
1
million
in the three
and
nine months
ended
September 30
,
2017
, respectively,
to
$3
1
.
7
million
and
$
94.2
million during the same period
s
in 2018, due primarily to an increase in our tenant base due to newly acquired and
developed facilities.
Tenant insurance revenues include $26.1 million and $26.3 million for the three months ended September 30, 2018 and 2017, respectively, and $77.9 million and $78.2 million for the nine months ended September 30, 2018 and 2017, respectively, for the Same Store Facilities.
We expect future growth will come primarily from c
u
stomers of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities.
Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the level of insured tenants, and the level of events affecting claims at particular prop
erties (such as burglary) as well as catastrophic weather events affecting multiple properties such as hurricanes and floods.
Tenant reinsurance cost of operations for the three and nine month periods ended September 30, 2017 include
$5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma
.
Excluding these incremental hurricane related losses, tenant reinsurance cost of operations
in
creased
from $6.
7
million
and $19
.
0
million
in the three
and
nine months
ended
September 30
,
2017
, respectively,
to
$
7.2
million and
$
1
9
.
3
million
during
the same period
s
in 2018.
Merchandise sales:
We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in
the remainder of
2018.
Equity in earnings of unconsolidated real estate entities
At
September 30
,
2018, we have equity investments in PSB and Shurgard Europe, which we account for on the equity method and record our pro-rata share of the net income of these entities for each period.
The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
Equity in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB
|
$
|
13,008
|
|
$
|
9,261
|
|
$
|
3,747
|
|
$
|
73,451
|
|
$
|
35,694
|
|
$
|
37,757
|
Shurgard Europe
|
|
4,763
|
|
|
7,243
|
|
|
(2,480)
|
|
|
17,078
|
|
|
19,484
|
|
|
(2,406)
|
Legacy Institutional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership (a)
|
|
-
|
|
|
714
|
|
|
(714)
|
|
|
-
|
|
|
2,057
|
|
|
(2,057)
|
Total equity in earnings
|
$
|
17,771
|
|
$
|
17,218
|
|
$
|
553
|
|
$
|
90,529
|
|
$
|
57,235
|
|
$
|
33,294
|
|
(a)
|
|
This represents our equity earnings in a legacy institutional partnership
prior to our December 31, 2017 acquisition of the
74.25% interest that we did not own in this partnership for $135.5 million. As a result, no further equity earnings will be recorded.
|
Investment in PSB:
At
September 30
,
2018 and December 31, 2017, we had approximately a 42% common equity interest in PS Business Parks, Inc. (“PSB”), comprised of our ownership of 7,158,354 shares of PSB’s common stock
and 7,305,355 limited partnership units in an operating partnership controlled by PSB. The limited partnership units are convertible
at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.
At
September 30
,
2018, PSB
wholly-owned approximately 28 million rentable square feet of commercial space
and had a 95% interest in a 395-unit apartment complex
. PSB also manages commercial space that we own pursuant to property management agreements
.
Equity in earnings from PSB
increased $
3.7
million
and $3
7
.
8
million
in the three
and
nine months
ended
September 30
,
2018,
respectively,
as compared to the same period
s
in 2017. These increases are
due primarily to
i)
our $2.9 million equity share of PSB’s
allocation of income to its preferred stockholders in connection with the redemption of preferred stock in September 2017
, ii)
our
$34.9
million equity share of gains on sales of real estate in
the
nine months
ended
September 30
,
2018
and iii) increases for the three and nine month periods
in income
from real estate
operations
. See Note 4
to our
September 30
,
2018 financial statements for selected financial information on PSB, as well as
PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website,
www.psbusinessparks.com
.
Investment in Shurgard Europe:
At September 30, 2018, we
ha
d
a 49% equity share in Shurgard Europe’s net income. At
September 30
,
2018, Shurgard Europe’s operations are comprised of 22
7
wholly-owned facilities with 12 million net rentable square feet. See Note 4 to our
September 30
,
2018 financial statements for selected financial data on Shurgard Europe for the
nine months
ended
September 30
,
2018 and 2017
. As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe.
On June
30, 2018, Shu
rgard Europe acquired five self-
storage facilities in Sweden
for $45.7 million.
On October 15, 2018, Shurgard Europe became a publicly held entity, trading on Euronext Brussels under the symbol “SHUR”.
Its publicly reported information can be obtained on
its website,
https://corporate.shurgard.eu
and on the website of the Luxembourg Stock Exchange,
http://www.bourse.lu
.
Our equity in
earnings from Shurgard
Europe
de
creased $
2.5
million
and $2.4 million
for the three
and nine
months ended
September
30
, 2018 as compared to the same period
s
in 2017, due primarily to
our equity share of increased
depreciation
and income tax
expense
and
our $1.5
million
equity share of Shurgard Europe’s costs incurred
during the three and nine months ended September 30, 2018
in connection with an initial glo
bal offering of its shares
.
Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the
countries in which it
does business and incurs tax expense. Our equity share of such income tax expense was approximately $
3.
3
million and $
9
.
1
million
in
the
three and
nine months
ended
September 30
,
2018
, r
espectively, as compared to $2.7 million and $6.2
million
for the same periods in 2017.
On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million. The aggregate
$296.8 million
paid by
Shurgard Europe
was funded, in part, through the proceeds from a bank loan.
On October 15, 2018, Shurgard Europe completed an
i
nitial
g
lobal
o
ffering (the “Offering”)
of its common shares
, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 21.7 million of its common shares to third parties at a price of €23 per share, for €500 million in gross proceeds.
There is a potential “green shoe” for an additional €75 million in gross proceeds
at a price of €23 per share
.
The gross proceeds were used
to repay
short-term
de
b
t, fund real estate investments and for
other corporate purposes. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 36.6% as a result of the Offering
(35.2% assuming exercise of the “green shoe” option)
. While we did not sell any shares in the offering, and have no current plans to do so, we will record a gain on disposition in t
he three months ending December
31, 2018, as if we had sold a proportionate share of our investment in Shurgard Europe.
On October 18, 2018, we sold our property in West London to Shurgard
Europe for
$42.1
million, and will record a related gain on
disposition
in the three months ending December
31, 2018.
We expect a reduction in ongoing equity earnings from Shurgard Europe
due
to
(
i) the extent to which
o
ffering proceeds are not
immediately utilized to repay debt or invest in real estate
assets
and
(
ii) an increase in our equity share of depreciation due to an increased book basis of real estate associated with the
aforementioned
gain.
Shurgard
Europe
also expects to begin distributing a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate.
Our future earnings from Shurgard Europe will also be affected by
(
i) the operating results of its existing facilities
, (ii) the level of development and acquisition activities
,
(
i
i
i) income tax rates, and
(
iv)
the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro).
For purposes
of recording our equity in earnings from Shurgard Europe, the Euro was translated
at exchange rates
averaging
1.1
6
2 and 1.
175
for the three months ended
September 30
, 2018 and 2017, respectively, and
1.
194
and 1.113
for
the
nine months
ended
September 30
,
2018 and 2017, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
$
|
18,650
|
|
$
|
12,991
|
|
$
|
5,659
|
|
$
|
52,838
|
|
$
|
26,153
|
|
$
|
26,685
|
Costs of senior executives
|
|
419
|
|
|
419
|
|
|
-
|
|
|
4,405
|
|
|
5,455
|
|
|
(1,050)
|
Development and acquisition costs
|
|
1,139
|
|
|
1,655
|
|
|
(516)
|
|
|
4,680
|
|
|
6,844
|
|
|
(2,164)
|
Tax compliance costs and taxes paid
|
832
|
|
|
1,063
|
|
|
(231)
|
|
|
3,298
|
|
|
3,510
|
|
|
(212)
|
Legal costs
|
|
1,458
|
|
|
1,500
|
|
|
(42)
|
|
|
5,394
|
|
|
5,181
|
|
|
213
|
Public company costs
|
|
1,090
|
|
|
981
|
|
|
109
|
|
|
3,438
|
|
|
3,129
|
|
|
309
|
Other costs
|
|
3,841
|
|
|
3,702
|
|
|
139
|
|
|
16,225
|
|
|
12,059
|
|
|
4,166
|
Total
|
$
|
27,429
|
|
$
|
22,311
|
|
$
|
5,118
|
|
$
|
90,278
|
|
$
|
62,331
|
|
$
|
27,947
|
Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes. Share-based compensation expense varies based upon the level of grants and their related vesting and amortization periods, forfeitures, as well as the Company’s common share price on the date of grant.
In February 2018, we announced that our
CEO
and
CFO
are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees. For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire. Accordingly, all remaining share-based
compensation expense for these two executives will now be amortized by the end of 2018. Included in share-based
compensation expense for the three
and
nine months
ended
September 30
,
2018 is approximately $7.
1
million and $
22.7
million, respectively,
due to the accelerated amortization of grants to our CEO and CFO. Similar increases in share-based
compensation expense are expected in the remainder of 2018.
Share-based compensation costs in the
nine months
ended
September 30
, 2017 include a $5.4 million reversal of previously amortized costs, due to the forfeiture of share
-based compensation resulting from the retirement of certain senior executives in the quarter ended
September 30
, 2017.
See Note 10 to our
September 30
,
2018 financial statements for further information on our share-
based compensation.
Costs of senior executives represent the cash compensation paid to our chief executive officer and chief financial officer.
Development and
acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities. The amounts in the above table are net of $
2.9
million and $
9.2
million for the three
and
nine months
ended
September
30
,
2018
, respectively, and $2.
4 million and $6.5
million for the same periods in 2017
, in development costs that were capitalized to newly developed and redeveloped self-storage facilities. Development and acquisition costs are expected to remain stable in the remainder
of 2018.
Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules. Such costs vary primarily based upon the tax rates of the various states in which we do business.
Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of legal activity. The future level of legal costs is not determinable.
Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ (our “Board”) costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Sarbanes-Oxley Act of 2002.
Other costs represent
certain
professional and consulting fees, payroll
,
and overhead that are not
attributable to our property operations. Such costs vary depending upon the level of corporate activities
,
initiatives
, and other factors
and
, as such, are not predictable.
Amounts for the
nine months
ended
September 30
, 2018 include approximately $
2.4
million in costs incurred to demolish certain buildings that were damaged in flooding in 2017 and are being rebuilt
.
Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.
Interest and other income:
Interest and other income is comprised primarily of the net income from our commercial operations and property management operations and to a lesser extent interest earned on cash balances, trademark license fees received from
Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts. Amounts attributable to our commercial operations and property management operations totaled $
3.0
million and $
8
.
8
million
in
the three
and
nine months
ended
September 30
,
2018
, respectively
, as compared to $2.5 million and $7.8
million for the same periods in 2017
.
The increase in interest and other income is attributable to increased commercial operations and higher interest rates on unin
vested
cash balances.
We do not expect any significant changes in interest and
other income in the remainder of 2018.
Interest expense:
For the three
and
nine months
ended
September 30
,
2018, we incurred $
9
.
3
million and $
28.1
million, respectively, of interest on our outstanding debt
, as compare
d to $
3
.
4 million and $7
.
7
million for the same periods in 2017
. In determining interest expense, these amounts were offset
by capitalized interest of
$1.
2
million and $
3
.
5
million during the three
and
nine months
ended
September 30
,
2018, respectively, associated with our development activities
,
as compared to $1.0
million and $
3
.1 million for the same periods in 2017
. On September 18, 2017, we
completed a public offering of $1.0 billion notes (the “U.S. Dollar Notes”) bearing an average annual interest rate of 2.732%. For the three
and
nine months
ended
September 30
,
2018, we incurred interest expense
totaling
$7.1 million and
$
21
.
3
million
, respectively
,
on the U.S. Dollar Notes. At
September 30
,
2018, we had
$1.4 billion of debt outstanding, with an average interest rate of 2.6%. See Note 6 to our
September 30
,
2018 financial statements for further information on our debt balances. Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development
costs.
Foreign
Exchange
Gain (
Loss
)
:
For the three
and
nine months
ended
September 30
,
2018, we recorded foreign currency
exchange
gains of
$
2.6
million and $
1
2
.
7
million, respectively, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates
(losses of $
13.4
million and $
44
.
5
million for the same periods in 2017)
. The Euro was translated at exchange rates of approximately
1.16
0
U.S. Dollars per Euro at
September 30
, 2018,
1.
168
at
June 30
,
2018, 1.198 at December 31, 2017,
1.
181
at
September 30
, 2017,
1.142
at
June 30
,
2017 and 1.052 at December 31, 2016. Future gains and losses on foreign currency
exchange
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 and
nine months
ended
September 30
,
2018, we recorded gains
totaling
$1.4 million and
$
1.8 million
,
respectively,
and in the
nine months
ended
September 30
, 2017, we recorded gains totaling $
1.0 million
,
primarily in connection with the partial sale of real estate facilities pursuan
t to eminent domain proceedings.
We expect additional gains on disposition to be recorded in the three months ending December 31, 2018 in connection with the sale of our Kensington facility to Shurgard Europe and Shurgard Europe’s public offering of common shares (see “Investment in Shurgard Europe” above).
Casualty Loss:
The $7.8 million casualty loss on our income statements for the three and nine months ended September 30, 2017 represents $3.3 million resulting from physical damage to our facilities and $4.5 million
incurred for repairs, cleanup, and disposal with respect to Hurricanes Harvey and Irma.
Net Income Allocable to Preferred Shareholders:
Net income allocable to preferred shareholders based upon distributions decreased in the three
and
nine months
ended
September 30
,
2018 as compared to the same period
s
in 2017, due to lower average rates and lower weighted average preferred shares outstanding. Based upon our preferred shares
outstanding at
September 30
,
2018, our quarterly distribution to our preferred shareholders is expected to be approximately $54.1
million
.
Liquidity and Capital Resources
Financing Strategy:
As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important. Historically we have primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferre
d securities. Over the past three
years, we have diversified our capital sources by issuing medium term debt.
Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s. Our unsecured debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.
We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital. As of
September 30
,
2018 and
October 3
0
,
2018, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $16.1 million of outstanding letters of credit which limits our borrowing capacity to $483.9 million
.
Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of additional medium or long term debt, and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the desire for leverage, refinancing risk, and considering potential constraints caused by certain features of capital sources, such as debt covenants.
Liquidity and Capital Resource Analysis:
We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance ca
pital expenditures
and distributions to our shareholders for the foreseeable future.
As of
September 30
, 2018, our capital resources over the next year are expected to be
approximately
$1.2 billion
which exceeds our current planned capital needs over the next year of approxima
tely $
433
.
4
million. Our c
apital resources include: (i) $432
.
5
million of cash as of
September 30
, 2018, (ii) $483.9 million of available borrowing
capacity on our revolving line of credit, (iii) $
42.1
million
cash f
ro
m the sale of our West London/Kensington self-storage facility to
Shurgard Europe on
October 18
, 2018, and (iv) a
pproximately $200 million to $25
0 million of expected retained operating cash flow for the next twelve months. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.
Our planned capital needs over the next year consist of (i) $
342.7
million of remaining spend on our current development pipeline, (ii) $
79
.
7
million in property acquisitions currently under contract, and
(iii) $
11.0
million in principal repayments on existing debt. Our capital needs may increase over the next year as we expect
to add projects to our development pipeline and acquire additional properties. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.
To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.
Required Debt Repayments:
As
of
September 30
,
2018, our outstanding debt totaled approximately
$1.4 billion, consisting of $
27.9
million of secured debt, $
39
6
.
9
million of Euro-denominated unsecured debt and $1.0 billion of
U.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts
in thousands):
|
|
|
|
|
|
Remainder of 2018
|
$
|
9,916
|
2019
|
|
1,505
|
2020
|
|
1,585
|
2021
|
|
1,503
|
2022
|
|
502,071
|
Thereafter
|
|
908,180
|
|
$
|
1,424,760
|
The remaining maturities on our
debt over at least the next three
years are nominal compared to our expected annual retained operating cash flow.
Capital Expenditure Requirements:
Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.
Capital expenditures
totaled $
9
3
.
4
million in the first
nine months
of 2018, and are expected to be
between
$1
5
0
million
and $17
0 million
in 2018.
The level of our capital expenditures
are dependent
upon the results of our evaluation of the
potential upgrade of
existing HVAC equip
ment,
offices, lighting, and elevator units in certain facilities
, as well as the timing thereof
.
Requirement to Pay Distributions:
For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.
On
October 24
, 2018, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of
Dec
ember
2018. Our consistent, long-term dividend policy has been to distribute
only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash
flows from
operating activities.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at
September 30
,
2018, to be ap
proximately $216.3 million per year.
We estimate we will pay approximately $
7
.0 million per year in distributions to noncontrolling interests outstanding at
September 30
,
2018.
Real Estate Investment Activities:
Subsequent to
September 30
,
2018, we acquired or were under contract to acquire (subject to customary closing conditions)
nine
self-storage facilities for $
79.7
million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.
As of
September 30
,
2018 we had development and redevelopment projects at a total cost of approximately $
596.4
million.
C
osts incurred through
September 30
,
2018 were $
253.7
million
,
with the remaining cost to complete of $
342.7
million expected to be incurred primarily in the next 18 months. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our
risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.
Shurgard Europe:
On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million. On October 15, 2018, Shurgard Europe completed an
i
nitial
g
lobal
o
ffering (the “Offering”)
of its common shares
, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. We did not sell any of our shares in the Offering and have no current plans to do so. Shurgard Europe expect
s
to begin
distributing a
substantial portion of its earnings
to its shareholders; heretofore
we have not received regular ongoing
d
istri
butions
from Shurgard Europe.
O
n October 18, 2018, we sold our property in West London to Shurgard Europe for
$42.1
million.
Redemption of Preferred Securities
: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of
October 3
0
,
2018, we have four series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.625% Series U Preferred Shares with $287.5 million outstanding, our 5.375% Series V Preferred Shares with $495.0 million outstanding, our 5.200% Series W Preferred Shares with $500.0 million outstanding and our 5.200% Series X Preferred Shares with $225.0 million outstanding. Redemption of such preferred shares will depend upon many factors. None of our preferred securities are redeemable at the option of the holders.
Repurchases of Common Shares
: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three months ended
September 30
,
2018, we did not repurchase any of our common shares. From the inception of the repurchase program through
October
3
0
,
2018, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.
Contractual Obligations
Our significant contractual obligations at
September 30
,
2018 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
of 2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
Interest and principal payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on debt (1)
|
$
|
1,664,804
|
|
$
|
18,982
|
|
$
|
37,536
|
|
$
|
37,536
|
|
$
|
37,367
|
|
$
|
534,408
|
|
$
|
998,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (2)
|
|
81,931
|
|
|
1,060
|
|
|
4,392
|
|
|
4,586
|
|
|
4,841
|
|
|
3,966
|
|
|
63,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction commitments (3)
|
|
209,193
|
|
|
36,621
|
|
|
146,662
|
|
|
25,910
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,955,928
|
|
$
|
56,663
|
|
$
|
188,590
|
|
$
|
68,032
|
|
$
|
42,208
|
|
$
|
538,374
|
|
$
|
1,062,061
|
|
(1)
|
|
Represents contractual principal and interest payments. Amounts with respect to certain Euro-denominated debt are based upon exchange rates at
September 30
,
2018. See Note 6 to our
September 30
,
2018 financial statements for further information.
|
(2)
Represents future contractual payments on land, equipment and office space under various operating leases.
(3)
Represents future expected development spending that was under contract at
September 30
,
2018.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at
September 30
,
2018 to be
approximately $
216.3 million per
year. Dividends are paid when and if declared by our Board and accumulate if not paid.
Off-Balance Sheet Arrangements
: At
September 30
,
2018, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.
I
TEM
3.
Quantitative and Qualitative Disclosures about Market Risk
To limit our exposure to market risk, we are capitalized primarily with preferred and common equity. Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption o
ption. Our debt is
our only market-risk sensitive portion of our capital structure, which totals approximately
$1.4 billion
and
represents
15
.
9
%
of the book value of our equity at
September 30
,
2018
.
We have foreign currency exposure at
September 30
,
2018
related to i) our investment in Shurgard Europe,
with a
fair market value of $912 million (based upon the 31.3 million shares we own at the October 29, 2018 closing price on Euronext of €25.605 and an October 29, 2018 exchange rate of 1.1389)
and ii) €342.0
million ($
396
.
9
million) of Euro
-denominated unsecured notes payable.
The fair value of our fixed rate debt at
September 30
,
2018
is
approximately $1.4 billion. The table below summarizes the annual maturities of our fixed rate debt, which had a weighted average effective rate of 2.6% at
September 30
,
2018
. See Note 6 to our
September 30
,
2018
financial statements for further information
regarding our fixed rate debt (amounts in thousands
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
$
|
9,916
|
|
$
|
1,505
|
|
$
|
1,585
|
|
$
|
1,503
|
|
$
|
502,071
|
|
$
|
908,180
|
|
$
|
1,424,760
|
ITEM 4
.
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclos
ure based on the definition of “
dis
closure controls and procedures”
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. We also have investments in certain unconsolidated real estate entities and because we do not control these entities, our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level.
Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
September
30
,
201
8
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II.
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OTHER INFORMATION
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|
|
|
ITEM 1.
|
Legal Proceedings
|
We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.
In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K filed for the year ended December 31, 201
7
, in Part I, Item 1A, Risk Factors, and in our other filings with the SEC. These factors may materially affect our business, financial condition and operating results and could cause our actual results to differ materially from expectations. In addition, in considering the forward-looking statements contained in this Form 10-Q and elsewhere, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Part I, Item 2 of this Form 10-Q.
|
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Common Share Repurchases
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. From the inception of the repurchase program through
October 3
0
,
201
8
, we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million. Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of
September 30
,
201
8
. We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares.
Preferred Share Redemptions
We
ha
d no
preferred
redemptions during the three months ended
September 30
,
2018
.
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
4
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DATED:
October
3
0
,
201
8
PUBLIC STORAGE
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|
|
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By:
/s/ John Reyes
|
|
John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized officer)
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