PUBLIC STORAGE – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis should be read in conjunction with our financial statements and notes thereto.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") discusses our financial statements, which have been prepared in accordance withUnited States ("U.S.") generally accepted accounting principles ("GAAP"). The amounts reported in our financial statements, notes to financial statements and MD&A are affected by judgments, assumptions and estimates that we make. The notes to ourDecember 31, 2012 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 real estate investment trust ("REIT"), as defined in the Internal Revenue 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 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, our taxable REIT subsidiaries are taxable as regular corporations. To the extent that amounts paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to be in excess of amounts that would be paid under 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 determination of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions, and 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. Accruals for Operating Expenses: Certain of our expenses are estimated based upon assumptions regarding past and future trends, such as losses for workers compensation, employee health plans, and estimated claims for our tenant reinsurance program. In certain jurisdictions we do not receive property tax bills for the current fiscal year until after our earnings are finalized, and as a result, we must estimate property tax expense based upon anticipated implementation of regulations and trends. If our related estimates and assumptions are incorrect, our expenses could be misstated. Accruals for Contingencies: We are subject to business and legal liability risks due to events that have occurred, which could result in future payments. We have not accrued certain of these payments, either because they are not probable or not estimable, or because we are not aware of them. We may have to accrue additional amounts for these payments due to the results of further investigation, the litigation process, or otherwise. Such accruals could have a material adverse impact on our net income. 25 -------------------------------------------------------------------------------- Recording the fair value of acquired real estate facilities: In recording the acquisition of real estate facilities, we estimate the fair value of the land, buildings and intangible assets acquired. Such estimates are based upon many assumptions and judgments, including expected rates of return, land and building replacement costs, as well as future cash flows from the property 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 of Management's Discussion and Analysis of Operations
Our domestic self-storage facilities generated 93% of our revenues for the year endedDecember 31, 2012 , and also generated most of our net income and cash flow from operations. A large portion of management time is devoted to maximizing cash flows from our existing self-storage facilities, as well as seeking to acquire and develop additional investments in 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 effectively meet such challenges. In 2010, 2011, and 2012, we acquired an aggregate of 77 self-storage facilities from third parties for approximately$546 million , we acquired noncontrolling interests in subsidiaries owning self-storage facilities for approximately$197 million , and we invested$117 million in Shurgard Europe which it used to acquire interests in self-storage facilities. We will continue to seek to acquire additional self-storage facilities from third parties in 2013. There is significant competition to acquire existing facilities and there can be no assurance that we will be able to acquire additional facilities. Over the past three years our development activities have been minimal. We have recently expanded our development efforts due in part to the significant increase in prices being paid for existing facilities, in many cases well above the cost of developing new facilities. AtDecember 31, 2012 , we had a development pipeline of projects to expand existing self-storage facilities and develop new self-storage facilities, which will add approximately 1.3 million net rentable square feet of self-storage space. The aggregate cost of these projects is estimated at$169 million , of which$36 million had been incurred atDecember 31, 2012 , and the remaining costs will be incurred principally in 2013. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects and have hired additional personnel; however, due to the difficulty in finding projects that meet our risk-adjusted yield expectations, as well as the difficulty in obtaining building permits for self-storage activities in certain municipalities, it is uncertain as to how much additional development we will undertake in the future. We also have equity investments in Shurgard Europe, interests in commercial operations primarily through our investment in PS Business Parks, Inc. ("PSB"), and ancillary operations such as tenant reinsurance and sales of merchandise. We have no current plans to change our equity investments in Shurgard Europe or PSB; however, it is possible that we may make additional investments in these entities in the future. We believe that we are not dependent upon raising capital to fund our ongoing operations or meet our obligations. However, access to capital is important to growing our asset base. During the years endedDecember 31, 2012 and 2011, we issued approximately$1.7 billion and$863 million , respectively, of preferred securities. DuringDecember 2012 , we raised$101 million from the sale of our common shares owned by a wholly-owned subsidiary. We have no current plans to issue additional common shares. OnJanuary 16, 2013 , we issued another$500 million of preferred securities. AtDecember 31, 2012 , cash and cash equivalents totaled$17.2 million and we had$133.0 million in borrowings on our line of credit. OnJanuary 16, 2013 , we raised$485 million in net proceeds from the issuance of our 5.2% Series W Preferred Shares and repaid the outstanding borrowings on our line of credit. We have$255 million in scheduled principal repayments in 2013, including$186 million for our senior notes which mature onMarch 15, 2013 . AtDecember 31, 2012 , we have a pipeline of development projects with approximately$133 million in remaining spending. We have no other significant commitments in 2013. 26 --------------------------------------------------------------------------------
Results of Operations Operating results for 2012 as compared to 2011: For the year endedDecember 31, 2012 , net income allocable to our common shareholders was$669.7 million or$3.90 per diluted common share, compared to$561.7 million or$3.29 per diluted common share for the same period in 2011, representing an increase of$108.0 million or$0.61 per diluted common share. This increase is due to (i) improved property operations, (ii) a$19.6 million reduction in distributions to preferred shareholders due primarily to lower average coupon rates, and (iii) a$16.2 million increase resulting from foreign currency exchange gains and losses in translating our Euro-denominated loan receivable from Shurgard Europe into U.S. Dollars, offset partially by (iv) a$36.3 million decrease due to the application of EITF D-42 to our, and our equity share of PSB's, redemptions of preferred securities. Operating results for 2011 as compared to 2010: For the year endedDecember 31, 2011 , net income allocable to our common shareholders was$561.7 million or$3.29 per diluted common share, compared to$399.2 million or$2.35 per diluted common share for the same period in 2010, representing an increase of$162.5 million or$0.94 per diluted common share. This increase is due to (i) improved property operations, (ii), a$35.0 million increase due to foreign currency exchange gains and losses in translating our Euro-denominated loan receivable from Shurgard Europe into U.S. Dollars, (iii) increased equity in earnings and interest and other income from Shurgard Europe, due primarily to ShurgardEurope's acquisition of its joint venture partner's interests onMarch 2, 2011 and (iv) reduced income allocations to our Equity Shares, Series A.
Funds from Operations
Funds from Operations ("FFO") is a term defined by theNational Association of Real Estate Investment Trusts , and generally represents net income before depreciation, gains and losses, and impairment charges with respect to real estate assets. We present FFO and FFO per share because we consider FFO to be an important measure of the performance of real estate companies, as do many analysts in evaluating our Company. We believe that FFO is a helpful measure of a REIT's performance since FFO excludes depreciation, which is included in computing net income and assumes the value of real estate diminishes predictably over time. We believe that real estate values fluctuate due to market conditions and in response to inflation. FFO computations do not consider scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. FFO and FFO per share is not a substitute for our cash flow or net income per share as a measure of our liquidity or operating performance or our ability to pay dividends. Because other REITs may not compute FFO in the same manner; FFO may not be comparable among REITs. The following table reconciles from net income to FFO allocable to common shares and computes FFO per common share. Amounts previously presented for 2010 have been adjusted to eliminate impairment charges with respect to real estate assets. 27 --------------------------------------------------------------------------------
Year Ended December 31, 2012 2011 2010 (Amounts in thousands, except per share data) Computation of FFO allocable to Common Shares: Net income $ 943,035
$ 836,459
358,103 358,525 354,386
Add back - depreciation from unconsolidated real estate investments
75,648 64,677 61,110 Eliminate - gains on sale and impairment charges related to real estate investments, including discontinued operations and our equity share of unconsolidated real estate investments (14,778 ) (12,797 ) (7,573 ) FFO allocable to equity holders 1,362,008 1,246,864 1,104,037 Less allocation of FFO to: Noncontrolling equity interests (6,828 ) (15,539 ) (25,915 ) Preferred shareholders (266,937 ) (260,462 ) (240,634 ) Equity Shares, Series A - - (30,877 ) Restricted share unitholders (4,247 ) (2,817 ) (2,645 ) FFO allocable to Common Shares $ 1,083,996 $ 968,046 $ 803,966 Diluted weighted average common shares outstanding 171,664 170,750 169,772 FFO per share $ 6.31 $ 5.67 $ 4.74 In discussions with the investment community, we often discuss "Core FFO" per share, which represents FFO per share, adjusted to exclude the impact of i) foreign currency gains and losses, representing a gain of$8.9 million in 2012, and losses totaling$7.3 million and$42.3 million in 2011 and 2010, respectively, ii) EITF D-42 income allocations, including our equity share of PSB, representing a reduction of FFO totaling$68.9 million ,$32.6 million and$35.8 million in 2012, 2011 and 2010, respectively, and ii) the aggregate net impact of impairment charges with respect to non-real estate assets, contingency accruals, our equity share of PSB's lease termination benefits, and costs associated with the acquisition of real estate facilities, representing an aggregate net reduction in FFO per share of$0.02 ,$0.03 and$0.02 in 2012, 2011 and 2010, respectively. We present Core FFO per share because we believe it is a helpful measure in understanding our results of operations, as we believe that the items noted above that are included in FFO per share, but excluded from Core FFO per share, are not indicative of our ongoing earnings. We also believe that the analyst community, likewise, reviews our Core FFO (or similar measures using different terminology) when evaluating our Company. Core FFO is not a substitute for net income, earnings per share or cash flow from operations. Because other REITs may not compute Core FFO in the same manner as we do, may not use the same terminology, or may not present such a measure, Core FFO may not be comparable among REITs.
The following table reconciles from FFO per share to Core FFO per share:
Year Ended December 31, Percentage Percentage 2012 2011 Change 2011 2010 Change FFO per share $ 6.31 $ 5.67 11.3 % $ 5.67 $ 4.74 19.6 % Eliminate the per share impact of items excluded from Core FFO: Foreign currency exchange (gain) loss (0.05 ) 0.04 0.04 0.25 Application of EITF D-42 0.40 0.19 0.19 0.21 Other items, net 0.02 0.03 0.03 0.02 Core FFO per share $ 6.68 $ 5.93 12.6 % $ 5.93 $ 5.22 13.6 % 28
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Real Estate Operations Self-Storage Operations: Our self-storage operations represent 93% of our revenues for the year endedDecember 31, 2012 . Our self-storage operations are analyzed in two groups: (i) the Same Store Facilities, representing the facilities that we have owned and operated on a stabilized basis sinceJanuary 1, 2010 , and (ii) all other facilities, which are newly acquired, newly developed, or recently expanded facilities (the "Non Same Store Facilities"). Self-Storage Operations Summary Year Ended December 31, Year Ended December 31, Percentage Percentage 2012 2011 Change 2011 2010 Change (Dollar amounts in thousands) Revenues: Same Store Facilities $ 1,596,320 $ 1,522,055 4.9 % $ 1,522,055 $ 1,454,633 4.6 % Non Same Store Facilities 106,770 81,469 31.1 % 81,469 54,763 48.8 % Total rental income 1,703,090 1,603,524 6.2 % 1,603,524 1,509,396 6.2 % Cost of operations: Same Store Facilities 468,752 477,041 (1.7 )% 477,041 474,831 0.5 % Non Same Store Facilities 33,114 27,797 19.1 % 27,797 19,884 39.8 % Total cost of operations 501,866 504,838 (0.6 )% 504,838 494,715 2.0 % Net operating income (a): Same Store Facilities 1,127,568 1,045,014 7.9 % 1,045,014 979,802 6.7 % Non Same Store Facilities 73,656 53,672 37.2 % 53,672 34,879 53.9 % Total net operating income 1,201,224 1,098,686 9.3 % 1,098,686 1,014,681 8.3 % Total depreciation and amortization expense: Same Store Facilities (313,173 ) (319,033 ) (1.8 )% (319,033 ) (316,199 ) 0.9 %
Non Same Store Facilities (41,798 ) (36,282 ) 15.2 %
(36,282 ) (34,426 ) 5.4 % Total depreciation and amortization expense (354,971 ) (355,315 ) (0.1 )% (355,315 ) (350,625 ) 1.3 % Total net income $ 846,253 $ 743,371 13.8 % $ 743,371 $ 664,056 11.9 % Number of facilities at period end: Same Store Facilities 1,941 1,941 - 1,941 1,941 - Non Same Store Facilities 124 97 27.8 % 97 83 16.9 % Net rentable square footage at period end (in thousands): Same Store Facilities 122,464 122,464 - 122,464 122,464 - Non Same Store Facilities 9,173 6,997 31.1 % 6,997 5,684 23.1 %
(a) See "Net Operating Income below for further information regarding this
non-GAAP measure. 29
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Same Store Facilities
The Same Store Facilities represent those 1,941 facilities (122,464,000 net rentable square feet) that have been owned and operated on a stabilized basis sinceJanuary 1, 2010 , and therefore provide meaningful comparisons for 2010, 2011 and 2012. The following table summarizes the historical operating results of these facilities: SAME STORE FACILITIES Year Ended December 31, Year Ended December 31, Percentage Percentage 2012 2011 Change 2011 2010 Change Revenues: (Dollar amounts in thousands, except weighted average amounts) Rental income $ 1,516,152 $ 1,442,684 5.1 % $ 1,442,684 $ 1,383,232 4.3 % Late charges and administrative fees 80,168 79,371 1.0 % 79,371 71,401 11.2 % Total revenues (a) 1,596,320 1,522,055 4.9 % 1,522,055 1,454,633 4.6 % Cost of operations: Property taxes 151,605 147,259 3.0 % 147,259 144,502 1.9 % On-site property manager payroll 97,942 101,034 (3.1 )% 101,034 99,928 1.1 % Repairs and maintenance 39,998 45,237 (11.6 )% 45,237 46,201 (2.1 )% Utilities 36,255 37,732 (3.9 )% 37,732 36,299 3.9 % Media advertising 6,326 10,542 (40.0 )% 10,542 15,178 (30.5 )% Other advertising and selling expense 32,423 32,133 0.9 % 32,133 31,991 0.4 % Other direct property costs 35,257 35,937 (1.9 )% 35,937 36,810 (2.4 )% Supervisory payroll 33,144 32,038 3.5 % 32,038 29,828 7.4 % Allocated overhead 35,802 35,129 1.9 % 35,129 34,094 3.0 % Total cost of operations (a) 468,752 477,041 (1.7 )% 477,041 474,831 0.5 % Net operating income (b) 1,127,568 1,045,014 7.9 % 1,045,014 979,802 6.7 % Depreciation and amortization expense (313,173 ) (319,033 ) (1.8 )% (319,033 ) (316,199 ) 0.9 % Net income $ 814,395 $ 725,981 12.2 % $ 725,981 $ 663,603 9.4 % Gross margin (before depreciation and amortization expense) 70.6 % 68.7 % 2.8 % 68.7 % 67.4 % 1.9 % Weighted average for the period: Square foot occupancy (c) 91.8 % 91.2 % 0.7 % 91.2 % 89.8 % 1.6 % Realized annual rent, prior to late charges and administrative fees, per: Occupied square foot (d)(e) $ 13.49 $ 12.92 4.4 % $ 12.92 $ 12.58 2.7 % Available square foot ("REVPAF") (e)(f) $ 12.38 $ 11.78 5.1 % $ 11.78 $ 11.30 4.2 % Weighted average atDecember 31 : Square foot occupancy 91.4 % 89.6 % 2.0 % 89.6 % 88.7 % 1.0 % In place annual rent per occupied square foot (g) $ 14.42 $ 14.02 2.9 % $ 14.02 $ 13.65 2.7 %
a) Revenues and cost of operations do not include tenant reinsurance and retail
operations, which are included on our income statement under "ancillary revenues" and "ancillary operating expenses." b) See "Net Operating Income" below for a reconciliation of this non-GAAP
measure to our net income in our statements of income for the years ended
December 31, 2012 , 2011 and 2010.
c) Square foot occupancies represent weighted average occupancy levels over the
entire period.
d) Realized annual rent per occupied square foot is computed by dividing
annualized rental income, before late charges and administrative fees, by the
weighted average occupied square feet for the period.
e) These measures exclude late charges and administrative fees in order to
provide a better measure of our ongoing level of revenue. Late charges are
dependent upon the level of delinquency and administrative fees are dependent
upon the level of move-ins. In addition, the rates charged for late charges
and administrative fees can vary independently from rental rates. These
measures take into consideration promotional discounts, which reduce rental
income. 30
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f) Realized annual rent per available square foot ("REVPAF") is computed by
dividing annualized rental income, before late charges and administrative
fees, by the total available net rentable square feet for the period. g) In place annual rent per occupied square foot represents annualized contractual rents per occupied square foot before any reductions for
promotional discounts, and excludes late charges and administrative fees.
Analysis of Revenue Revenues generated by our Same Store Facilities increased by 4.9% in 2012 as compared to 2011 due primarily to increased average rental rates charged to our tenants. This increase was due primarily to annual rent increases for tenants that have been renting longer than one year combined with a reduction in promotional discounts given to new tenants from$96.5 million in 2011 to$87.8 million in 2012. Revenues generated by our Same Store Facilities increased by 4.6% in 2011 as compared to 2010. The increase was due primarily to a 1.6% increase in weighted average square foot occupancy and a 2.7% increase in realized rent per occupied square foot, as well as an 11.2% increase in late charges and administrative fees due primarily to increases in the fee levels charged for late payments. The increase in realized annual rent per occupied square foot includes the impact of more aggressive increases in rents charged to existing tenants in the last two quarters of 2011. Our future rental growth will be dependent upon many factors including the level of new supply of self-storage space in the markets in which we operate, demand for self-storage space, our ability to increase rental rates, the level of promotional activities, and our ability to maintain or improve our occupancy levels. We seek to maintain an average occupancy level of at least 90% throughout the year, which we believe maximizes the realized rent per available foot. We maintain occupancy by regularly adjusting rental rates and promotions offered, in order to generate sufficient move-ins to replace tenants that vacate. Demand fluctuates due to various local and regional factors, including the overall economy. 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. Our Same Store average occupancy levels increased 0.7% in 2012 as compared to 2011, due primarily to a 1.8% increase in average occupancy in the fourth quarter of 2012 as compared to the same period in 2011. This increase was driven by (i) increased move-in volumes, primarily due to more aggressive pricing in the seasonally slow fourth quarter of 2012 combined with (ii) reduced levels of tenants moving out, as compared to the same period in 2011. We expect to continue to implement aggressive pricing strategies during the first quarter of 2013 to increase occupancy levels as compared to the same period in 2012. However, we expect occupancy levels in the second, third and fourth quarters of 2013 to be flat as compared to the same periods in 2012 due to more difficult year-over-year comparisons. Increasing rental rates to tenants having a tenancy longer than one year is a key part of our rental growth. At each ofDecember 31, 2012 , 2011 and 2010, approximately 55% of our tenants had a tenancy of a year or longer. For these tenants, in place rent per occupied square foot atDecember 31, 2012 increased 4.1% as compared toDecember 31, 2011 and 4.3% atDecember 30, 2011 as compared toDecember 31, 2010 . These increases were due to rate increases passed to these tenants. We expect to pass similar rate increases to long-term tenants in 2013 as we did in 2012. Based upon current trends, we expect positive year-over-year growth in rental income to continue throughout 2013, due to improved occupancy and realized rents during the first quarter of the year and primarily from increases in realized rents during the remainder of 2013. 31 --------------------------------------------------------------------------------
Analysis of Cost of Operations
Cost of operations (excluding depreciation and amortization) decreased 1.7% in 2012 as compared to 2011. The decrease was due primarily to reductions in on-site property manager payroll, repairs and maintenance, and media advertising, offset partially by a 3.0% increase in property tax expense. Cost of operations (excluding depreciation and amortization) increased by 0.5% in 2011 as compared to 2010. The increase was due to higher property taxes, supervisory payroll, and utilities, partially offset by reduced media advertising. Property tax expense increased 3.0% in 2012 as compared to 2011, due primarily to higher assessed values. Property tax expense increased 1.9% in 2011 as compared to 2010, due primarily to higher tax rates. We expect property tax expense growth of approximately 4.0% in 2013, due primarily to higher assessed values. On-site property manager payroll expense decreased approximately 3.1% in 2012 as compared to 2011, and increased 1.1% in 2011 as compared to 2010. The decrease in 2012 was due primarily to lower incentive compensation, and the increase in 2011 was due primarily to higher incentive compensation and wage rates. We expect payroll expense to increase at a rate less than inflation in 2013. Repairs and maintenance expenditures decreased 11.6% in 2012 as compared to the same period in 2011, and decreased 2.1% in 2011 as compared to the same period in 2010. Repairs and maintenance expenditures are dependent upon several factors, such as weather, the timing of repair and maintenance needs, inflation in material and labor costs, and random events. Included in our repairs and maintenance expenditures in 2012, 2011 and 2010 was approximately$2.7 million ,$4.3 million and$6.1 million , respectively, in snow removal costs. We expect repairs and maintenance, prior to snow removal costs, to decline modestly in 2013. Snow removal costs are expected to be higher in the first quarter of 2013 as compared to the same period in 2012, due to more severe winter weather throughFebruary 25, 2013 . Snow removal costs ater the first quarter of 2013 are not determinable at this time. Utility expenses decreased 3.9% in 2012 as compared to 2011, and increased 3.9% in 2011 as compared to 2010. Utility cost levels are dependent upon changes in usage driven primarily by weather and temperature, as well as energy prices. The decrease in 2012 was driven by reduced usage caused by milder weather. The increase in 2011 was caused by higher usage from extreme temperatures, as well as higher energy prices. It is difficult to estimate future utility cost levels, because weather, temperature, and fuel prices are volatile and not predictable. Media advertising decreased 40.0% in 2012 as compared to the same period in 2011, and decreased 30.5% in 2011 as compared to 2010. Media advertising can increase or decrease significantly in the short-term in response to demand, occupancy levels, and other factors. Media advertising expenditures have declined due to higher square foot occupancies, which increased from 87.0% onDecember 31, 2009 to 91.4% atDecember 31, 2012 . We expect lower media advertising in 2013 due to current high occupancies. Other advertising and selling expense is comprised principally of yellow page, internet advertising, and the operating costs of our telephone reservation center. These costs in aggregate have remained flat in 2010, 2011 and 2012. We have phased out our yellow page advertising program as ofDecember 31, 2012 , and expect that this cost reduction will be offset by increased Internet advertising. We expect other advertising and selling expense to be flat in 2013. Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, business license costs, bank charges related to processing the properties' cash receipts, and the cost of operating each property's rental office including supplies and telephone data communication lines. Due to cost-saving measures in certain expense categories, offset by inflationary increases, we expect other direct property expenses to be flat in 2013. Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, increased 3.5% in 2012 as compared to 2011, and increased 7.4% in 2011 as compared to 2010. The increase in 2012 was due principally to increased headcount. This increase in 2011 was due primarily to higher incentives and wage rates paid to supervisory personnel. We expect growth in supervisory payroll in excess of inflation, due to higher wage rates, incentives and increased headcount. 32
-------------------------------------------------------------------------------- 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 data processing, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). The increases in 2012 and 2011 are due principally to increased headcount. We expect inflationary growth in allocated overhead in 2013. 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 amount) Total revenues: 2012 $ 383,928 $ 394,700 $ 412,641 $ 405,051 $ 1,596,320 2011 $ 366,497 $ 375,543 $ 393,819 $ 386,196 $ 1,522,055 2010 $ 353,976 $ 360,915 $ 372,125 $ 367,617 $ 1,454,633 Total cost of operations: 2012 $ 130,682 $ 121,043 $ 118,566 $ 98,461 $ 468,752 2011 $ 128,295 $ 122,776 $ 121,338 $ 104,632 $ 477,041 2010 $ 128,363 $ 122,954 $ 121,127 $ 102,387 $ 474,831 Property taxes: 2012 $ 43,058 $ 41,925 $ 40,580 $ 26,042 $ 151,605 2011 $ 41,382 $ 40,264 $ 39,550 $ 26,063 $ 147,259 2010 $ 40,420 $ 39,246 $ 39,187 $ 25,649 $ 144,502 Repairs and maintenance: 2012 $ 12,025 $ 10,585 $ 8,487 $ 8,901 $ 39,998 2011 $ 10,765 $ 10,993 $ 10,960 $ 12,519 $ 45,237 2010 $ 13,089 $ 10,693 $ 10,829 $ 11,590 $ 46,201 Media advertising: 2012 $ 3,145 $ 1,891 $ 1,239 $ 51 $ 6,326 2011 $ 4,046 $ 3,360 $ 2,144 $ 992 $ 10,542 2010 $ 5,456 $ 6,603 $ 3,119 $ - $ 15,178 REVPAF: 2012 $ 11.89 $ 12.25 $ 12.79 $ 12.59 $ 12.38 2011 $ 11.36 $ 11.64 $ 12.16 $ 11.96 $ 11.78 2010 $ 11.01 $ 11.22 $ 11.54 $ 11.41 $ 11.30 Weighted average realized annual rent per occupied square foot: 2012 $ 13.17 $ 13.23 $ 13.79 $ 13.72 $ 13.49 2011 $ 12.65 $ 12.61 $ 13.19 $ 13.26 $ 12.92 2010 $ 12.47 $ 12.34 $ 12.68 $ 12.82 $ 12.58 Weighted average occupancy levels for the period: 2012 90.3 % 92.6 % 92.7 % 91.8 % 91.8 % 2011 89.8 % 92.3 % 92.2 % 90.2 % 91.2 % 2010 88.3 % 90.9 % 91.0 % 89.0 % 89.8 % 33
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Analysis of Market Trends
The following table sets forth selected market trends in our Same Store Facilities: Year Ended December 31, Year Ended December 31, 2012 2011 Change 2011 2010 Change (Amounts in thousands, except for weighted average data) Same Store Facilities Operating Trends by Market Revenues: Los Angeles (168 facilities) $ 210,653 $ 201,945 4.3 % $ 201,945 $ 197,432 2.3 % San Francisco (125 facilities) 134,109 126,852 5.7 % 126,852 121,242 4.6 % New York (79 facilities) 105,421 100,256 5.2 % 100,256 94,342 6.3 % Chicago (124 facilities) 99,699 95,346 4.6 % 95,346 92,431 3.2 % Washington DC (72 facilities) 78,606 75,898 3.6 % 75,898 71,321 6.4 % Seattle-Tacoma (85 facilities) 76,506 73,263 4.4 % 73,263 70,380 4.1 % Miami (60 facilities) 67,468 63,568 6.1 % 63,568 60,930 4.3 % Dallas-Ft. Worth (98 facilities) 62,346 59,062 5.6 % 59,062 55,257 6.9 % Houston (80 facilities) 57,054 53,943 5.8 % 53,943 52,437 2.9 % Atlanta (89 facilities) 56,878 54,426 4.5 % 54,426 51,786 5.1 % Philadelphia (55 facilities) 43,128 41,725 3.4 % 41,725 39,389 5.9 % Denver (47 facilities) 36,596 33,749 8.4 % 33,749 32,098 5.1 %Minneapolis-St. Paul (41 facilities) 31,073 29,467 5.5 % 29,467 27,783 6.1 % Portland (42 facilities) 28,817 27,451 5.0 % 27,451 26,235 4.6 % Orlando-Daytona (45 facilities) 27,805 26,711 4.1 % 26,711 25,545 4.6 %
All other markets (731 facilities) 480,161 458,393
4.7 % 458,393 436,025 5.1 % Total revenues $ 1,596,320 $ 1,522,055 4.9 % $ 1,522,055 $ 1,454,633 4.6 % Net operating income: Los Angeles $ 166,158 $ 156,408 6.2 % $ 156,408 $ 152,334 2.7 % San Francisco 103,480 96,330 7.4 % 96,330 90,692 6.2 % New York 71,470 67,304 6.2 % 67,304 59,352 13.4 % Chicago 59,511 52,494 13.4 % 52,494 52,134 0.7 % Washington DC 59,901 56,862 5.3 % 56,862 52,038 9.3 % Seattle-Tacoma 57,092 54,244 5.3 % 54,244 51,758 4.8 % Miami 49,508 45,729 8.3 % 45,729 42,238 8.3 % Dallas-Ft. Worth 41,072 36,879 11.4 % 36,879 33,108 11.4 % Houston 37,367 34,734 7.6 % 34,734 33,216 4.6 % Atlanta 39,055 36,009 8.5 % 36,009 33,731 6.8 % Philadelphia 28,775 26,732 7.6 % 26,732 24,209 10.4 % Denver 25,769 22,521 14.4 % 22,521 21,032 7.1 % Minneapolis-St. Paul 19,920 18,309 8.8 % 18,309 16,427 11.5 % Portland 21,028 19,301 8.9 % 19,301 18,463 4.5 % Orlando-Daytona 18,980 17,455 8.7 % 17,455 16,429 6.2 % All other markets 328,482 303,703 8.2 % 303,703 282,641 7.5 % Total net operating income $ 1,127,568 $ 1,045,014 7.9 % $ 1,045,014 $ 979,802 6.7 % 34
-------------------------------------------------------------------------------- Same Store Facilities Operating Trends by Region (Continued) Year Ended December 31, Year Ended December 31, 2012 2011 Change 2011 2010 Change (Amounts in thousands, except for weighted average data) Weighted average occupancy: Los Angeles 92.6 % 92.1 % 0.5 % 92.1 % 91.3 % 0.9 % San Francisco 93.2 % 93.0 % 0.2 % 93.0 % 91.5 % 1.6 % New York 92.9 % 92.5 % 0.4 % 92.5 % 91.7 % 0.9 % Chicago 92.1 % 91.0 % 1.2 % 91.0 % 89.3 % 1.9 % Washington DC 91.9 % 92.3 % -0.4 % 92.3 % 91.3 % 1.1 % Seattle-Tacoma 91.0 % 90.7 % 0.3 % 90.7 % 90.0 % 0.8 % Miami 92.6 % 92.0 % 0.7 % 92.0 % 91.0 % 1.1 % Dallas-Ft. Worth 91.7 % 91.5 % 0.2 % 91.5 % 89.4 % 2.3 % Houston 91.8 % 89.8 % 2.2 % 89.8 % 88.9 % 1.0 % Atlanta 90.4 % 90.3 % 0.1 % 90.3 % 88.4 % 2.1 % Philadelphia 91.3 % 91.7 % -0.4 % 91.7 % 90.3 % 1.6 % Denver 94.0 % 91.8 % 2.4 % 91.8 % 90.5 % 1.4 % Minneapolis-St. Paul 91.6 % 90.5 % 1.2 % 90.5 % 88.4 % 2.4 % Portland 92.7 % 91.4 % 1.4 % 91.4 % 89.8 % 1.8 % Orlando-Daytona 91.9 % 90.1 % 2.0 % 90.1 % 88.5 % 1.8 % All other markets 91.4 % 90.6 %
0.9 % 90.6 % 89.2 % 1.6 % Total weighted average occupancy
91.8 % 91.2 %
0.7 % 91.2 % 89.8 % 1.6 %
Realized annual rent per occupied square foot: Los Angeles $ 19.19 $ 18.48 3.8 % $ 18.48 $ 18.18 1.7 % San Francisco 18.97 17.94 5.7 % 17.94 17.43 2.9 % New York 20.75 19.73 5.2 % 19.73 18.82 4.8 % Chicago 13.14 12.71 3.4 % 12.71 12.62 0.7 % Washington DC 19.76 18.96 4.2 % 18.96 18.07 4.9 % Seattle-Tacoma 14.40 13.77 4.6 % 13.77 13.37 3.0 % Miami 16.00 15.12 5.8 % 15.12 14.73 2.6 % Dallas-Ft. Worth 10.38 9.82 5.7 % 9.82 9.48 3.6 % Houston 10.67 10.29 3.7 % 10.29 10.16 1.3 % Atlanta 10.02 9.56 4.8 % 9.56 9.35 2.2 % Philadelphia 13.11 12.60 4.0 % 12.60 12.16 3.6 % Denver 12.23 11.53 6.1 % 11.53 11.16 3.3 % Minneapolis-St. Paul 11.41 10.92 4.5 % 10.92 10.61 2.9 % Portland 13.56 13.09 3.6 % 13.09 12.78 2.4 % Orlando-Daytona 10.53 10.29 2.3 % 10.29 10.09 2.0 % All other markets 11.00 10.57 4.0 % 10.57 10.26 3.0 %
Total realized rent per square foot
4.4 % $ 12.92 $ 12.58 2.7 % REVPAF: Los Angeles $ 17.77 $ 17.01 4.5 % $ 17.01 $ 16.60 2.5 % San Francisco 17.68 16.69 5.9 % 16.69 15.95 4.6 % New York 19.27 18.24 5.6 % 18.24 17.26 5.7 % Chicago 12.10 11.56 4.7 % 11.56 11.27 2.6 % Washington DC 18.15 17.50 3.7 % 17.50 16.49 6.1 % Seattle-Tacoma 13.10 12.49 4.9 % 12.49 12.03 3.8 % Miami 14.82 13.91 6.5 % 13.91 13.40 3.8 % Dallas-Ft. Worth 9.52 8.99 5.9 % 8.99 8.47 6.1 % Houston 9.79 9.24 6.0 % 9.24 9.03 2.3 % Atlanta 9.06 8.63 5.0 % 8.63 8.26 4.5 % Philadelphia 11.97 11.55 3.6 % 11.55 10.98 5.2 % Denver 11.50 10.58 8.7 % 10.58 10.09 4.9 % Minneapolis-St. Paul 10.46 9.89 5.8 % 9.89 9.37 5.5 % Portland 12.57 11.97 5.0 % 11.97 11.48 4.3 % Orlando-Daytona 9.67 9.28 4.2 % 9.28 8.93 3.9 % All other markets 10.05 9.58 4.9 % 9.58 9.15 4.7 % Total REVPAF $ 12.38 $ 11.78 5.1 % $ 11.78 $ 11.30 4.2 % 35
-------------------------------------------------------------------------------- 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 atDecember 31, 2012 represent 124 facilities that were not stabilized with respect to occupancies or rental rates sinceJanuary 1, 2010 , or were acquired sinceJanuary 1, 2010 . As a result of the stabilization process and timing of when the facilities were placed into service, year-over-year changes can be significant. In the following table, "Facilities placed into service in 2012" includes 24 facilities acquired from third parties and three facilities that we obtained control of and began consolidating in 2012. "Facilities placed into service in 2011" includes 11 facilities acquired from third parties, one facility that was newly developed, and two facilities that we obtained control of and began consolidating in 2011. "Other facilities" includes 42 facilities we acquired from third parties in 2010 and 41 other facilities that we have owned sinceJanuary 1, 2010 that are not stabilized due to the addition of more net rentable square feet or due to casualty damage.
The following table summarizes operating data with respect to these facilities:
36 -------------------------------------------------------------------------------- NON SAME STORE FACILITIES Year Ended December 31, Year Ended December 31, 2012 2011 Change 2011 2010 Change (Dollar amounts in thousands, except square foot amounts) Rental income: Facilities placed into service in 2012 $ 8,715 $ - $
8,715 $ - $ - $ - Facilities placed into service in 2011 13,302 5,914
7,388 5,914 - 5,914 Other facilities 84,753 75,555 9,198 75,555 54,763 20,792 Total rental income 106,770 81,469 25,301 81,469 54,763 26,706 Cost of operations before depreciation and amortization expense: Facilities placed into service in 2012 $ 3,446 $ - $
3,446 $ - $ - $ - Facilities placed into service in 2011 4,040 2,174
1,866 2,174 - 2,174 Other facilities 25,628 25,623 5 25,623 19,884 5,739 Total cost of operations 33,114 27,797 5,317 27,797 19,884 7,913 Net operating income before depreciation and amortization expense (a): Facilities placed into service in 2012 $ 5,269 $ - $
5,269 $ - $ - $ - Facilities placed into service in 2011 9,262 3,740
5,522 3,740 - 3,740 Other facilities 59,125 49,932
9,193 49,932 34,879 15,053 Total net operating income (a)
73,656 53,672
19,984 53,672 34,879 18,793
Depreciation and amortization expense (41,798 ) (36,282 ) (5,516 ) (36,282 ) (34,426 ) (1,856 ) Net income $ 31,858 $ 17,390 $ 14,468 $ 17,390 $ 453 $ 16,937 At December 31: Square foot occupancy: Facilities placed into service in 2012 76.5 % - - - - -
Facilities placed into service in 2011 83.4 % 75.2 %
10.9 % 75.2 % - - Other facilities 90.0 % 86.1 % 4.5 % 86.1 % 78.2 % 10.1 % 86.1 % 84.3 % 2.1 % 84.3 % 78.2 % 10.7 % In place annual rent per occupied square foot: Facilities placed into service in 2012 $ 13.31 $ - - $ - $ - -
Facilities placed into service in 2011 15.07 14.29
5.5 % 14.29 - - Other facilities 16.31 15.61 4.5 % 15.61 15.77 (1.0 )% $ 15.55 $ 15.41 0.9 % $ 15.41 $ 15.77 (2.3 )% Number of Facilities: Facilities placed into service in 2012 27 - 27 - - - Facilities placed into service in 2011 14 14 - 14 - 14 Other facilities 83 83 - 83 83 - 124 97 27 97 83 14 Net rentable square feet (in thousands): Facilities placed into service in 2012 2,091 - 2,091 - - -
Facilities placed into service in 2011 1,166 1,166
- 1,166 - 1,166 Other facilities 5,916 5,831 85 5,831 5,684 147 9,173 6,997 2,176 6,997 5,684 1,313 (a) See "Net Operating Income" below for a reconciliation of this non-GAAP
measure to our net income in our statements of income for the years ended
December 31, 2012 , 2011 and 2010. 37
-------------------------------------------------------------------------------- In 2010, 2011, and 2012, we acquired an aggregate of 77 facilities from third parties. The following table sets forth selected information with respect to these acquired properties: For the Year Ended December 31, 2012 Number of Capitalization Properties Acquisition Cost Average Occupancy Rate (a) (Dollar amounts in thousands) Properties acquired from third parties during: Last three months of 2012 10 $ 81,400 (b) (b) First nine months of 2012 14 144,100 78 % 5.3 % 2011 11 80,400 83 % 8.4 % 2010 42 239,600 89 % 10.2 % 77 $ 545,500
(a) Weighted average capitalization rate represents the net operating income
earned in 2012 divided by the acquisition cost. With respect to properties
acquired in the first nine months of 2012, the capitalization rate is based
upon annualizing the net operating income for the period we owned the properties. (b) Capitalization rate and average occupancy for these properties is not meaningful due to our limited ownership period. In 2012 and 2011, we commenced consolidating three and two facilities, respectively that were owned by entities that we had previously accounted for on the equity method of accounting. See Note 3 to ourDecember 31, 2012 financial statements for further information. AtDecember 31, 2012 , we had a development pipeline of projects to expand existing self-storage facilities and develop new self-storage facilities, which will add approximately 1.3 million net rentable square feet of self-storage space. The aggregate cost of these projects is estimated at$169 million , of which$36 million had been incurred atDecember 31, 2012 , and the remaining costs will be incurred principally in 2013. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects and have hired additional personnel; however, due to the difficulty in finding projects that meet our risk-adjusted yield expectations, as well as the difficulty in obtaining building permits for self-storage activities in certain municipalities, it is uncertain as to how much additional development we will undertake in the future. We believe that our management and operating infrastructure will result in newly acquired facilities stabilizing at a higher level of net operating income than was achieved by the previous owners. However, it can take 24 or more months for these newly acquired facilities to reach stabilization, and the ultimate levels of rent to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that our expectations with respect to these facilities will be achieved. However, we expect the Non Same Store Facilities to continue to provide earnings growth during 2013 as these facilities approach stabilized occupancy levels, and the earnings of the 2012 acquisitions are reflected in our operations for a longer period in 2013 as compared to 2012.
Equity in earnings of unconsolidated real estate entities
AtDecember 31, 2012 , we have equity investments in PSB, Shurgard Europe and various limited partnerships. We account for such investments using the equity method. Equity in earnings of unconsolidated real estate entities for 2012, 2011 and 2010 consists of our pro-rata share of the net income of these unconsolidated real estate entities for each period. The following table sets forth the significant components of equity in earnings of unconsolidated real estate entities. 38
-------------------------------------------------------------------------------- Historical summary: Year Ended December 31, Year Ended December 31, 2012 2011 Change 2011 2010 Change (Amounts in thousands) Equity in earnings: PSB $ 10,638 $ 27,781 $ (17,143 ) $ 27,781 $ 20,719 $ 7,062 Shurgard Europe 33,223 29,152 4,071 29,152 15,872 13,280 Other Investments 1,725 1,771 (46 ) 1,771 1,761 10 Total equity in earnings $ 45,586 $ 58,704 $ (13,118 ) $ 58,704 $ 38,352 $ 20,352 Investment in PSB: AtDecember 31, 2012 , we have an approximate 41% common equity interest in PSB, comprised of our ownership of 5,801,606 shares of PSB's common stock and 7,305,355 limited partnership units in PSB's underlying operating partnership. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. AtDecember 31, 2012 , PSB owned and operated 28.3 million rentable square feet of commercial space located in eight states. PSB also manages commercial space that we own pursuant to property management agreements. Equity in earnings from PSB decreased to$10.6 million in 2012, as compared to$27.8 million in 2011. This decrease was principally due to (i) the impact of PSB's redemptions of preferred securities in 2011 and 2012, which reduced income allocated to the common equity holders in 2012, and increased income allocable to the common equity holders in 2011, (ii) increased depreciation and interest expense as a result of the properties PSB acquired in 2011 and 2012, partially offset by (iii) incremental income generated by the properties PSB acquired in 2011 and 2012. See Note 4 to ourDecember 31, 2012 financial statements for selected financial information on PSB, as well as PSB's filings and selected financial information that can be accessed through theSEC , and on PSB's website, www.psbusinessparks.com. Equity in earnings from PSB increased to$27.8 million in 2011 as compared to$20.7 million in 2010. This increase was principally due to (i) incremental income generated by properties that PSB acquired in 2010 and 2011, (ii) reduced income allocations to PSB's preferred securities, due to redemptions, partially offset by (iii) increased depreciation and interest expense, as a result of 2010 and 2011 property acquisitions.
Our investment in PSB, which we plan on holding for the long-term, provides us with some diversification.
Investment in Shurgard Europe: Equity in earnings of Shurgard Europe represents our 49% equity share of Shurgard Europe's net income. AtDecember 31, 2011 and 2012, Shurgard Europe's operations are comprised of 188 wholly-owned facilities with 10.1 million net rentable square feet. Selected financial data for ShurgardEurope for 2012, 2011 and 2010 is included in Note 4 to ourDecember 31, 2012 financial statements. As described in more detail in Note 4, we receive interest income and trademark license fees from Shurgard Europe, of which 49% is classified as equity in earnings and the remaining 51% as interest and other income. Equity in earnings from Shurgard Europe increased to$33.2 million for the year endedDecember 31, 2012 from$29.2 million for the same period in 2011, representing an increase of$4.1 million . The increase is due to our equity share of (i) improved property operations, (ii) reduced interest expense due to a reduction in interest rate as a result of refinancing completed in 2011 combined with reduced average principal outstanding due to repayments during 2012, (iii) the impact of Shurgard Europe'sMarch 2, 2011 acquisition of the remaining 80% interest it did not own in two joint ventures that owned 72 self-storage facilities, partially offset by (iv) a reduction in foreign currency exchange rates when converting Euros into U.S. Dollars for reporting purposes. Equity in earnings from Shurgard Europe for the year endedDecember 31, 2011 was$29.2 million as compared to$15.9 million for the same period in 2010, representing an increase of$13.3 million . This increase was due to our equity share of (i) improved property operations, (ii) the acquisition onMarch 2, 2011 , of the remaining 80% interests it did not own in two joint ventures that owned 72 self-storage facilities, resulting in reduced allocations of income to permanent noncontrolling equity interests (and an increased allocation to Shurgard Europe), and (iii) improved foreign currency exchange rates. These items were partially offset by increased interest and general and administrative expenses. 39
-------------------------------------------------------------------------------- Shurgard Europe has a nominal development pipeline. Accordingly, at least in the short-term, our future earnings from Shurgard Europe will be affected primarily by the operating results of its existing facilities, as well as the exchange rate between the U.S. Dollar and currencies in the countries Shurgard Europe conducts its business, principally the Euro. European Same Store Facilities:The Shurgard Europe Same Store Pool represents the 162 facilities (8.6 million net rentable square feet, representing 86% of the aggregate net rentable square feet of Shurgard Europe's self-storage portfolio) that have been consolidated and operated by Shurgard Europe on a stabilized basis sinceJanuary 1, 2010 and therefore provide meaningful comparisons for 2010, 2011 and 2012. We evaluate the performance of these facilities because Shurgard Europe's ability to effectively manage stabilized facilities represents an important measure of its ability to grow its earnings over the long-term. The following table reflects 100% of the operating results of those 162 facilities, and we restate the exchange rates used in prior year's presentation to the actual exchange rates for 2012. However, only our pro rata share of the operating results for these facilities, based upon the actual exchange rates for each period, is included in "equity in earnings of unconsolidated real estate entities" on our statements of income. In Note 4 to ourDecember 31, 2012 financial statements, we disclose ShurgardEurope's consolidated operating results for the years endedDecember 31, 2012 , 2011 and 2010. Shurgard Europe's consolidated operating results include 26 additional facilities that are not Same Store Facilities, and are based upon historical exchange rates rather than constant exchange rates for each of the respective periods. 40
-------------------------------------------------------------------------------- Selected Operating Data for theShurgard Europe Same Store Pool (162 facilities): Year Ended December 31, Year Ended September 31, Percentage Percentage 2012 2011 Change 2011 2010 Change (Dollar amounts in
thousands, except weighted average data,
utilizing constant exchange rates) (a)
Revenues (including late charges and administrative fees) $ 188,115 $ 190,141 (1.1 )% $ 190,141 $ 186,805 1.8 % Less: Cost of operations (excluding depreciation and amortization expenses) 78,615 82,105 (4.3 )% 82,105 80,546 1.9 % Net operating income (b) $ 109,500 $ 108,036 1.4 % $ 108,036 $ 106,259 1.7 % Gross margin 58.2 % 56.8 % 2.5 % 56.8 % 56.9 % (0.2 )% Weighted average for the period: Square foot occupancy (c) 83.1 % 85.2 % (2.5 )% 85.2 % 84.8 % 0.5 % Realized annual rent, prior to late charges and administrative fees, per: Occupied square foot (d)(e) $ 25.80 $ 25.40 1.6 % $ 25.40 $ 25.09 1.2 % Available square foot ("REVPAF") (e)(f) $ 21.44 $ 21.64 (0.9 )% $ 21.64 $ 21.27 1.7 % Weighted average atDecember 31 : Square foot occupancy 80.9 % 83.6 %
(3.2 )% 83.6 % 84.8 % (1.4 )% In place annual rent per occupied square foot (g)
$ 29.42 $ 28.65 2.7 % $ 28.65 $ 28.03 2.2 % Total net rentable square feet (in thousands) 8,627 8,627 - 8,627 8,627 - Average Euro to the U.S. Dollar for the period (a): Constant exchange rates used herein 1.285 1.285 - 1.285 1.285 - Actual historical exchange rates 1.285 1.392 (7.7 )% 1.392 1.326 5.0 %
(a) In order to isolate changes in the underlying operations from the impact of
exchange rates, the amounts in this table are presented on a constant
exchange rate basis. The amounts for the years ended
2010 have been restated using the actual exchange rate for the year ended
December 31, 2012 .
(b) We present net operating income "NOI" of the European Same Store Facilities,
which is a non-GAAP (generally accepted accounting principles) financial
measure that excludes the impact of depreciation and amortization expense.
We believe that NOI is a meaningful measure of operating performance,
because we utilize NOI in making decisions with respect to capital
allocations, in determining current property values, in evaluating property
performance and in comparing period-to-period and market-to-market property
operating results. In addition, we believe the investment community
utilizes NOI in determining operating performance and real estate values,
and does not consider depreciation expense because it is based upon
historical cost. NOI is not a substitute for net income, net operating cash
flow, or other related GAAP financial measures, in evaluating the operating
results of the European Same Store Facilities.
(c) Square foot occupancies represent weighted average occupancy levels over the
entire period.
(d) Realized annual rent per occupied square foot is computed by dividing
annualized rental income, before late charges and administrative fees, by
the weighted average occupied square feet for the period.
(e) These measures exclude late charges and administrative fees in order to
provide a better measure of our ongoing level of revenue. Late charges are
dependent upon the level of delinquency and administrative fees are
dependent upon the level of move-ins. In addition, the rates charged for
late charges and administrative fees can vary independently from rental
rates. Realized annual rent takes into consideration promotional discounts,
which reduce rental income.
(f) Realized annual rent per available foot or "REVPAF" is computed by dividing
rental income, before late charges and administrative fees, by the total
available net rentable square feet for the period. (g) In place annual rent per occupied square foot represents annualized contractual rents per occupied square foot without reductions for
promotional discounts and excludes late charges and administrative fees.
41 -------------------------------------------------------------------------------- Net operating income increased 1.4% for the year endedDecember 31, 2012 , as compared to the same period in 2011, due to decreases in expenses offset by lower revenues. Net operating income increased 1.7% for the year endedDecember 31, 2011 , as compared to the same period in 2010, due principally to modest growth in revenue and expenses. Based upon current operating trends and metrics, we expect Shurgard Europe's Same Store Facilities to experience a year over year reduction in revenues at least during the first quarter of 2013.
See "Liquidity and Capital Resources - Shurgard Europe" for additional information on Shurgard Europe's liquidity.
Other Investments: The "Other Investments" atDecember 31, 2012 are comprised primarily of our equity in earnings from various limited partnerships that own an aggregate of 14 self-storage facilities (792,000 net rentable square feet). Our future earnings with respect to the Other Investments will be dependent upon the operating results of the facilities these entities own. See Note 4 to ourDecember 31, 2012 financial statements under the "Other Investments" for the operating results of these entities.
Ancillary Operations
Ancillary revenues and expenses include amounts associated with (i) the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S., (ii) merchandise sales, (iii) commercial property operations and (iv) management of approximately 30 facilities owned by third parties and the 14 facilities owned by the limited partnerships mentioned above. Commercial property operations are included in our commercial segment and all other ancillary revenues and costs of operations are not allocated to any segment. See Note 11 to ourDecember 31, 2012 financial statements for further information regarding our segments and for a reconciliation of these ancillary revenues and cost of operations to our net income.
The following table sets forth our ancillary operations as presented on our statements of income.
Year Ended December 31 Year Ended December 31, 2012 2011 Change 2011 2010 Change (Amounts in thousands) Ancillary Revenues: Tenant reinsurance premiums $ 77,977 $ 71,348 $
6,629 $ 71,348 $ 65,484 $ 5,864 Commercial 14,071 14,592 (521 ) 14,592 14,261 331 Merchandise and other 31,591 28,149 3,442 28,149 24,636 3,513 Total revenues 123,639 114,089 9,550 114,089 104,381 9,708 Ancillary Cost of Operations: Tenant reinsurance 14,429 13,407 1,022 13,407 10,552 2,855 Commercial 4,908 5,505 (597 ) 5,505 5,748 (243 ) Merchandise and other 18,926 18,484 442 18,484 17,389 1,095 Total cost of operations 38,263 37,396 867 37,396 33,689 3,707 Commercial depreciation 2,810 2,654 156 2,654 2,620 34 Ancillary net income: Tenant reinsurance 63,548 57,941 5,607 57,941 54,932 3,009 Commercial 6,353 6,433 (80 ) 6,433 5,893 540 Merchandise and other 12,665 9,665
3,000 9,665 7,247 2,418 Total ancillary net income
$ 82,566 $ 74,039 $
8,527
Tenant reinsurance operations: We reinsure policies offered through a non-affiliated insurance company against losses to goods stored by tenants in the domestic self-storage facilities we operate. The level of tenant reinsurance revenues is largely dependent upon the level of premiums charged for such insurance and the number of tenants that participate in the insurance program. Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. These costs are dependent primarily upon the level of losses incurred, including the level of catastrophic events, such as hurricanes, that occur and affect our properties thereby increasing tenant insurance claims. 42 -------------------------------------------------------------------------------- The increase in tenant insurance revenues in 2012 as compared to 2011, and 2011 as compared to 2010, was due primarily to (i) an increase in the number of tenants participating in the insurance program, due to a larger tenant base combined with a higher participation level, and (ii) an increase in average premium rates. On average, approximately 63%, 61%, and 58% of our tenants had such policies during 2012, 2011 and 2010, respectively. We expect less growth in the percentage of tenants with insurance policies, and approximately flat premium rates, in 2013 as compared to the growth experienced in 2012.
Commercial operations: We also operate commercial facilities, primarily the leasing of small retail storefronts and office space located on or near our existing self-storage facilities. We do not expect any significant changes in revenues or profitability from our commercial operations.
Merchandise sales and other: 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. Over the past two years our merchandise sales and margins improved primarily as a result of higher retail prices for our locks. To a much lesser extent, we manage a total of 44 self-storage facilities in the U.S. for third party owners and various unconsolidated affiliated limited partnerships for a fee.
Other Income and Expense Items
Interest and other income: Interest and other income was$22.1 million in 2012,$32.3 million in 2011 and$29.0 million in 2010, respectively. Interest and other income primarily includes interest income on loans receivable from Shurgard Europe, as well as trademark license fees received from Shurgard Europe for the use of the "Shurgard" trade name. We record 51% of the aggregate interest income and trademark license fees as interest and other income, while the remaining 49% is presented as additional equity in earnings on our statements of income. Interest and other income received from Shurgard Europe decreased from$26.7 million in 2011 to$20.0 million in 2012, due primarily to (i) interest income on a bridge loan to Shurgard Europe of approximately$2.5 million during 2011 (none in 2012), (ii) reduced interest income on our currently outstanding loan receivable from Shurgard Europe, due to lower average outstanding balance in 2012 versus 2011 and a decrease in the average exchange rate of the U.S. Dollar to the Euro from 1.392 for 2011 to 1.285 for 2012 when converting euro denominated interest on the loan into U.S. Dollars. Interest and other income from Shurgard Europe increased from$25.1 million in 2010 to$26.7 million in 2011, due primarily to (i)$2.5 million in interest earned during 2011 on the aforementioned bridge loan to Shurgard Europe, and (ii) an increase in the average exchange rate of the U.S. Dollar to the Euro from 1.326 for 2010 as to 1.392 in 2011. In 2011, we also received$1.5 million in interest and other income from our joint venture partner for funding its 51% pro rata share of Shurgard Europe's cost of the Acquired JV Interests for the period fromMarch 2, 2011 untilJune 15, 2011 . The loan receivable from Shurgard Europe is denominated in Euros, has a balance of €311.0 million ($411.0 million ) as ofDecember 31, 2012 , and matures inFebruary 2015 . Future interest income recorded in connection with this loan will be dependent upon the average outstanding balance as well as the exchange rate of the Euro versus the U.S. Dollar. All such interest has been paid currently when due and we expect the interest to continue to be paid when due with Shurgard Europe's operating cash flow. The terms of a loan payable by ShurgardEurope to a bank, with a principal amount of €160 million atDecember 31, 2012 , requires significant principal repayments through the maturity date inNovember 2014 . As a result, in 2012, there were no principal repayments on our loan, and future principal repayments on our loan will be limited until the bank loan is repaid. 43
-------------------------------------------------------------------------------- Shurgard Europe is currently considering refinancing its debt during 2013, including amounts owed to us. Depending on if, and when, any such refinancing is consummated it would result in reduced interest income due to the repayment of our loan.
During 2011 and 2010, Shurgard Europe repaid €62.7 million (
The remainder of our interest and other income is comprised primarily of interest earned on cash balances as well as sundry other income items that are received from time to time in varying amounts. Interest income on cash balances has been minimal, because rates have been at historic lows of 0.1% or less, and we expect this trend to continue in the foreseeable future. Future earnings from sundry other income items are not predictable. Depreciation and amortization: Depreciation and amortization expense was approximately stable at$357.8 million ,$358.0 million and$353.2 million for the years endedDecember 31, 2012 , 2011 and 2010, respectively. The level of future depreciation and amortization will primarily depend upon the level of acquisitions of facilities and the level of capital expenditures we incur on our facilities.
General and administrative expense: General and administrative expense for 2012, 2011, and 2010 is set forth in the following table:
Year EndedDecember 31 ,
Year Ended December 31,
2012 2011 Change 2011 2010 Change (Amounts in thousands) Share-based
compensation expense
$ 11,444 $ 12,265 Costs of senior executives 4,736 3,332 1,404 3,332 3,332 - Development and acquisition overhead 6,355 4,129 2,226 4,129 5,860 (1,731 ) Tax compliance costs and taxes paid 4,775 5,546 (771 ) 5,546 3,684 1,862 Legal costs 3,653 3,601 52 3,601 2,678 923 Public company costs 2,937 2,919 18 2,919 3,133 (214 ) Other costs 10,069 9,174 895 9,174 8,356 818 Total $ 56,837 $ 52,410 $ 4,427 $ 52,410 $ 38,487 $ 13,923 Share-based compensation expense includes the amortization of restricted share units ("RSUs") and stock options granted to employees, as well as employer taxes incurred upon vesting of RSUs and upon exercise of employee stock options. The level of share-based compensation expense varies based upon the level of grants and forfeitures. Share-based compensation cost increased in 2011 as compared to 2010 due primarily to an increase of$11.3 million related to a performance-based plan established in 2011 (the "2011 Plan"), with expense recognized on an accelerated basis over five years. Share-based compensation costs increased$0.6 million in 2012 as compared to 2011, due to additional share-based grants, offset partially by a reduction of$5.5 million with respect to the 2011 Plan. We expect share-based compensation expense to remain flat in 2013 as compared to 2012. See Note 10 to ourDecember 31, 2012 financial statements for further information on our share-based compensation.
Costs of senior executives represents the cash compensation paid to our chief executive officer and chief financial officer, and has increased due to an increase in incentive compensation paid in 2012 as compared to 2011.
Development and acquisition overhead represents the internal and external expenses of identifying, evaluating, and implementing our acquisition and development activities and varies primarily based upon the level of development and acquisition activities undertaken. Approximately$1.8 million ,$0.8 million , and$2.6 million in incremental legal, transfer tax, and other related costs were incurred in connection with the acquisition of real estate facilities in 2012, 2011 and 2010, respectively. The level of such costs to be incurred in 2013 will depend upon the level of acquisition activities, which is not determinable. We have hired additional personnel in late 2012 in connection with an expansion in our development activity, as a result we expect an increase in costs associated with development personnel. 44 -------------------------------------------------------------------------------- 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 litigation.
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 directors' costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Sarbanes-Oxley Act.
Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.
Interest expense: Interest expense was$19.8 million ,$24.2 million and$30.2 million for 2012, 2011 and 2010, respectively. Interest capitalized into real estate was nominal for all periods due to our minimal real estate development activities. The decreases in 2012 as compared to 2011, and 2011 as compared to 2010, are due primarily to principal repayments on our mortgage debt and, with respect to the 2011 decrease, repayments on our senior unsecured notes. See Note 6 to ourDecember 31, 2012 financial statements for a schedule of our notes payable balances, principal repayment requirements, and average interest rates. Foreign Exchange Gain (Loss): We recorded a foreign currency translation gain of$8.9 million in 2012 and losses of$7.3 million and$42.3 million in 2011, and 2010, respectively, representing the change in the U.S. Dollar equivalent of our Euro-based loan receivable from Shurgard Europe due to fluctuations in exchange rates. We have not entered into any agreements to mitigate the impact of currency exchange fluctuations between the U.S. Dollar and the Euro, therefore the amount of U.S. Dollars we will receive on repayment will depend upon the currency exchange rates at that time. We record the exchange gains or losses into net income each period because of our continued expectation of repayment of the loan in the foreseeable future. The U.S. Dollar exchange rate relative to the Euro was approximately 1.322, 1.295 and 1.325 atDecember 31, 2012 ,December 31, 2011 andDecember 31, 2010 , respectively. Future foreign exchange gains or losses will be dependent primarily upon the movement of the Euro relative to the U.S. Dollar, the amount owed from ShurgardEurope and our continued expectation of collecting the principal on the loan in the foreseeable future. Discontinued Operations: In addition to the revenues and cost of operations of disposed self-storage facilities, discontinued operations includes$12.1 million ,$2.7 million and$7.8 million in gains on disposition of real estate facilities in 2012, 2011 and 2010, respectively, and a$1.9 million impairment charge on real estate and intangible assets incurred in 2010. Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests decreased during 2012 as compared to the 2011, and in 2011 as compared to 2010, due primarily to our acquisition of noncontrolling interests during 2012 and 2011. Net Income Allocable to Preferred Shareholders: Allocations of net income to our preferred shareholders generally consists of allocations (i) based on distributions and (ii) in applying EITF D-42 when we redeem preferred stock. During 2012, 2011 and 2010, we have redeemed certain existing series of preferred shares and issued additional preferred shares at lower coupon rates. Net income allocable to preferred shareholders in applying EITF D-42 increased in 2012 as compared to 2011, and in 2011 as compared to 2010, due to increases in preferred share redemption activities. Net income allocable to preferred shareholders associated with distributions decreased during 2012 as compared to 2011, and 2011 as compared to 2010, due primarily to lower average dividend rates on our outstanding preferred securities. Based upon our preferred shares outstanding atDecember 31, 2012 , and including the Series W Preferred Shares which were issued onJanuary 16, 2013 , our quarterly distribution to our preferred shareholders is expected to be approximately$49.0 million . 45 --------------------------------------------------------------------------------
Net Operating Income
In our discussions above, we refer to net operating income or "NOI," which is a non-GAAP (generally accepted accounting principles) financial measure that excludes the impact of depreciation and amortization expense. We believe that NOI is a meaningful measure of operating performance, because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, in evaluating property performance and in comparing period-to-period and market-to-market property operating results. In addition, we believe the investment community utilizes NOI in determining operating performance and real estate values, and does not consider depreciation expense because it is based upon historical cost. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results. The following table reconciles NOI generated by our self-storage facilities to our net income: Year Ended December 31, 2012 2011 2010 (Amounts in thousands) Self-storage net operating income: Same Store Facilities $ 1,127,568 $ 1,045,014 $ 979,802 Non Same Store Facilities 73,656 53,672 34,879 1,201,224 1,098,686 1,014,681 Self-storage depreciation expense: Same Store Facilities (313,173 ) (319,033 ) (316,199 ) Non Same Store Facilities (41,798 ) (36,282 ) (34,426 ) (354,971 ) (355,315 ) (350,625 ) Self-storage net income: Same Store Facilities 814,395 725,981 663,603 Non Same Store Facilities 31,858 17,390 453 Total net income from self-storage 846,253 743,371 664,056 Ancillary operating revenue 123,639 114,089 104,381 Ancillary cost of operations (38,263 ) (37,396 ) (33,689 ) Commercial depreciation and amortization (2,810 ) (2,654 ) (2,620 ) General and administrative expense (56,837 ) (52,410 ) (38,487 ) Asset impairment charges - (2,186 ) (994 ) Interest and other income 22,074 32,333 29,017 Interest expense (19,813 ) (24,222 ) (30,225 ) Equity in earnings of unconsolidated real estate entities 45,586 58,704 38,352 Foreign currency exchange gain (loss) 8,876 (7,287 ) (42,264 ) Gain on real estate sales and debt retirement 1,456 10,801 827 Discontinued operations 12,874 3,316 7,760 Net income $ 943,035 $ 836,459 $ 696,114 46
--------------------------------------------------------------------------------
Liquidity and Capital Resources
We believe that our cash balances and net cash provided by our operating activities will continue to be sufficient to enable us to meet our operating expenses, debt service, capital improvements and distribution requirements to our shareholders for the foreseeable future. Operating as a REIT, our ability to retain cash flow for reinvestment is restricted. In order for us to maintain our REIT status, a substantial portion of our operating cash flow must be distributed to our shareholders (see "Requirement to Pay Distributions" below). Despite the significant distribution requirements, we have been able to retain a significant amount of our operating cash flow. The following table summarizes our ability to fund capital improvements to maintain our facilities, distributions to the noncontrolling interests, and distributions to our shareholders through the use of cash provided by operating activities. The remaining cash flow generated is available to make both scheduled and optional principal payments on debt and for reinvestment. For the Year Ended December 31, 2012 2011 2010 (Amount in thousands)
Net cash provided by operating activities (a)
Capital improvements to real estate facilities (67,737 ) (69,777 ) (77,500 ) Remaining operating cash flow available for distributions to equity holders 1,217,922 1,133,675 1,015,721 Distributions paid to: Noncontrolling interests (5,945 ) (14,314 ) (24,542 ) Common shareholders and restricted share unitholders ($4.40 per share for 2012,$3.65 per share for 2011 and $3.05 per share for 2010) (753,913 )
(621,369 ) (516,894 ) Preferred and Equity Shares, Series A shareholders (205,241 ) (224,877 ) (237,876 )
Cash from operations available for principal payments on debt and reinvestment (b) $ 252,823 $
273,115
(a) Represents net cash provided by operating activities for each respective
year as presented in our
(b) We present cash from operations available for principal payments on debt and
reinvestment because we believe it is an important measure to evaluate our
ongoing liquidity. This measure is not a substitute for cash flows from
operations or net cash flows in evaluating our liquidity, ability to repay
our debt, or to meet our distribution requirements.
Our financial profile is characterized by a low level of debt-to-total-capitalization. We expect to fund our long-term growth strategies and debt obligations with (i) retained operating cash flows, (ii) depending upon market conditions, proceeds from the issuance of common or preferred equity, and (iii) in the case of acquisitions of facilities, the assumption of existing debt. In general, our strategy is to continue to finance our growth with permanent capital, either retained operating cash flow or capital raised through the issuance of common or preferred equity to the extent that market conditions are favorable. We have elected to use predominantly preferred securities in our capital structure as a form of leverage despite the fact that the dividend rates of our preferred securities exceed the prevailing market interest rates on conventional debt. We have chosen this method of financing for the following reasons: (i) under the REIT structure, a significant amount of operating cash flow needs to be distributed to our shareholders, making it difficult to repay debt with operating cash flow alone, (ii) our perpetual preferred shares have no sinking fund requirement or maturity date and do not require redemption, all of which eliminate future refinancing risks, (iii) after the end of a non-call period, we have the option to redeem the preferred shares at any time, which enables us to refinance higher coupon preferred shares with new preferred shares at lower rates if appropriate, (iv) preferred shares do not contain covenants, thus allowing us to maintain significant financial flexibility, and (v) dividends on the preferred shares can be applied to satisfy our REIT distribution requirements. 47
-------------------------------------------------------------------------------- Our credit ratings on each of our series of preferred shares are "A3" by Moody's, "BBB+" by Standard & Poor's and "A-" by Fitch Ratings. In recent years, we have been one of the largest and most frequent issuers of preferred stock in the U.S. Summary of Current Cash Balances and Short-term Capital Commitments: AtDecember 31, 2012 , cash and cash equivalents totaled$17.2 million and we had$133.0 million in borrowings on our line of credit. OnJanuary 16, 2013 , we raised$485 million in net proceeds from the issuance of our 5.2% Series W Preferred Shares and repaid the outstanding borrowings on our line of credit. We have$255 million in scheduled principal repayments in 2013, including$186 million for our senior notes which mature onMarch 15, 2013 . As noted below, we have a pipeline of development projects with approximately$133 million</money> in remaining spending. We have no other significant commitments in 2013. Access to Additional Capital : We have a revolving line of credit for borrowings up to$300 million which expiresMarch 21, 2017 , with no outstanding borrowings atFebruary 25, 2013 . We seldom borrow on the line of credit and generally view borrowings on the line as a means to bridge capital needs until we are able to refinance them with permanent capital. When seeking capital, we select the lowest-cost form of permanent capital. For at least the last ten years, we have raised cash proceeds for growth and other corporate purposes primarily through the issuance of preferred securities, while we have issued common shares only in connection with mergers and acquisitions of interests in real estate entities, with one exception. InDecember 2012 , we raised$101 million from the sale of common shares owned by a wholly-owned subsidiary, which was done to efficiently liquidate that subsidiary. We have no current plans to issue common shares for cash proceeds. During periods of favorable market conditions, we have generally been able to raise capital from the issuance of preferred securities at an attractive cost of capital. During the years endedDecember 31, 2012 and 2011, we issued approximately$1.7 billion and$862.5 million , respectively, of preferred securities and onJanuary 16, 2013 , we issued another$500.0 million of preferred securities. The net proceeds from these issuances were generally used to fund the redemptions of higher rate preferred securities and thus lower our cost of capital with respect to our overall outstanding preferred securities. During 2013, due to the favorable market conditions, we expect to continue to issue preferred securities with the likelihood that we will build our cash reserves for future investments. Debt Service Requirements: As ofDecember 31, 2012 , our outstanding debt totaled approximately$468.8 million , including$133 million outstanding on our line of credit. OnJanuary 16, 2013 , we repaid the remaining outstanding balance on our line of credit. Approximate principal maturities of our other unsecured and secured debt are as follows (amounts in thousands): Unsecured debt Secured debt Total 2013 $ 186,460 $ 68,116 $ 254,576 2014 - 35,127 35,127 2015 - 30,009 30,009 2016 - 10,065 10,065 2017 - 1,003 1,003 Thereafter - 5,048 5,048 $ 186,460 $ 149,368 $ 335,828 The unsecured debt of$186.5 million is due onMarch 15, 2013 . Our remaining debt maturities are nominal compared to our annual cash from operations available for debt repayment. We intend to repay the debt at maturity and not seek to refinance it with additional debt.
Our portfolio of real estate facilities is substantially unencumbered. At
48 -------------------------------------------------------------------------------- Capital Improvement Requirements: Capital improvements include major repairs or replacements to elements of our facilities, which keep the facilities in good operating condition and maintain their visual appeal to the customer. Capital improvements do not include costs relating to the development of new facilities or the expansion of net rentable square footage of existing facilities. We incurred capital improvements totaling$67.7 million during 2012. During 2013, we expect to incur approximately$72 million for capital improvements and expect to fund such improvements with operating cash flow. For the last three years, our capital expenditures have ranged between approximately$0.55 and $0.60 per net rentable square foot per year. Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue 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. Aggregate REIT qualifying distributions paid during 2012 totaled$959.2 million , consisting of$205.2 million to preferred shareholders and$753.9 million to common shareholders and restricted share unitholders. We estimate the annual distribution requirements with respect to our Preferred Shares outstanding atDecember 31, 2012 , including the Series W Preferred Shares issued onJanuary 16, 2013 , to be approximately$196 million per year. OnFebruary 21, 2013 , ourBoard of Trustees declared a regular common quarterly dividend of$1.25 per common share, representing an increase of 13.6% from the previous regular common dividend of$1.10 per common share. 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 operating cash flow. We are obligated to pay distributions to noncontrolling interests in our consolidated subsidiaries based upon the available operating cash flows of the respective subsidiary. We estimate annual distributions of approximately$6.3 million with respect to such non-controlling interests outstanding atDecember 31, 2012 .
Acquisition Activities: During 2013, we will continue to seek to acquire self-storage facilities from third parties; however, it is difficult to estimate the amount of third party acquisitions we will undertake.
Development Activities: AtDecember 31, 2012 , we had a development pipeline of projects to expand existing self-storage facilities and develop new self-storage facilities, which will add approximately 1.3 million net rentable square feet of self-storage space. The aggregate cost of these projects is estimated at$169 million , of which$36 million had been incurred atDecember 31, 2012 , and the remaining costs will be incurred principally in 2013. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects and have hired additional personnel; however, due to the difficulty in finding projects that meet our risk-adjusted yield expectations, as well as the difficulty in obtaining building permits for self-storage activities in certain municipalities, it is uncertain as to how much additional development we will undertake in the future. Shurgard Europe: We have a 49% interest in Shurgard Europe and our institutional partner owns the remaining 51% interest. As ofDecember 31, 2012 , ShurgardEurope had two loans outstanding; (i) €159.5 million due to a bank and (ii) €311.0 million due to Pubic Storage. The loan due toPublic Storage (totaling$411.0 million U.S Dollars) bears interest at a fixed rate of 9.0% per annum and maturesFebruary 15, 2015 . The loan can be prepaid in part or in full at any time without penalty. This loan is denominated in Euros and is translated to U.S. Dollars for financial statement purposes. 49 -------------------------------------------------------------------------------- The bank loan requires significant principal reduction through the maturity date inNovember 2014 . As a result, in 2012, there were no principal repayments on our loan, and future principal repayments on our loan will be limited until the bank loan is repaid. Further, consistent with prior years, we do not expect to receive cash distributions from Shurgard Europe with respect to our 49% equity interest for the foreseeable future. Redemption of Preferred Securities: We have no other series of preferred shares that are redeemable beforeApril 2015 and none of our preferred securities are redeemable at the option of the holders. Repurchases of Company's Common Shares: Our Board of Trustees has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During 2012, we did not repurchase any of our common shares. From the inception of the repurchase program throughFebruary 25, 2013 , we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately$679.1 million . 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.
Contractual Obligations
Our significant contractual obligations atDecember 31, 2012 and their impact on our cash flows and liquidity are summarized below for the years endingDecember 31 (amounts in thousands): Total 2013 2014 2015
2016 2017 Thereafter
Long-term debt (1) $ 351,925 $ 264,023 $ 38,533 $ 31,358 $ 10,851 $ 1,324 $ 5,836 Line of credit (2) 133,064 133,064 - - - - - Operating leases (3) 74,681 4,731 4,615 3,661 3,567 2,722 55,385 Construction and purchase commitments 14,828 12,392 2,436 - - - - Total $ 574,498 $ 414,210 $ 45,584 $ 35,019 $ 14,418 $ 4,046 $ 61,221
(1) Amounts include principal and interest payments (all of which are
fixed-rate) on our notes payable based on their contractual terms. See Note
6 to our
on our notes payable. (2) Amounts represent borrowings under our$300 million revolving line of credit, which were repaid inJanuary 2013 . See Note 6 to our December 31,
2012 financial statements for additional information on our line of credit.
(3) We lease land, equipment and office space under various operating
leases. Certain leases are cancelable; however, significant penalties would
be incurred upon cancellation. Amounts reflected above consider continuance
of the lease without cancellation.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding atDecember 31, 2012 , including the Series W Preferred Shares issued onJanuary 16, 2013 , to be approximately$196 million per year. Dividends are paid when and if declared by ourBoard of Trustees and accumulate if not paid. We have no other series of preferred shares that are redeemable beforeApril 2015 and none of our preferred securities are redeemable at the option of the holders.
Off-Balance Sheet Arrangements: At
50
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LPL FINANCIAL HOLDINGS INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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