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PUBLIC STORAGE – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding 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. Such forward-looking statements include statements relating to our 2022 outlook and all underlying assumptions, our expected acquisition, disposition, development and redevelopment activity, supply and demand for our self-storage facilities, the consummation of PSB's recently announced merger transaction and the related consequences to the Company, information relating to operating trends in our markets, expectations regarding operating expenses, including property tax changes, our strategic priorities, expectations with respect to financing activities, rental rates, cap rates and yields, leasing expectations, our credit ratings, and all other statements other than statements of historical fact. Such statements are based on management's beliefs and assumptions made based on information currently available to management. 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 "outlook," "guidance," "expects," "believes," "anticipates," "should," "estimates," and similar expressions. These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Factors and risks that may impact future results and performance include, but are not limited to, the risk that the PSB merger will not be consummated on the existing terms or at all, and those factors and risks described in Part 1, Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission (the "SEC") onFebruary 22, 2022 and in our other filings with theSEC including. These include changes in demand for our facilities, impacts of natural disasters, adverse changes in laws and regulations including governing property tax, evictions, rental rates, minimum wage levels and insurance, adverse economic effects from the COVID-19 pandemic, international military conflicts, or similar events impacting public health and/or economic activity, increases in the costs of our primary customer acquisition channels, unfavorable foreign currency rate fluctuations, changes in federal or state tax laws related to the taxation of REITs, and security breaches, including ransomware, or a failure of our networks, systems or technology. 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 cautionary statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether because of new information, new estimates, or other factors, events or circumstances after the date of these forward-looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.
Critical Accounting Estimates
The preparation of consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") requires us to make judgments, assumptions, and estimates that affect the amounts reported. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenues, and expenses that are not readily apparent from other sources. During the three months endedMarch 31, 2022 , there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 21 --------------------------------------------------------------------------------
Overview
Our self-storage operations generate most of our net income and our earnings growth is impacted by the levels of growth within our Same Store Facilities (as defined below) as well as within our Acquired Facilities and Newly Developed and Expanded Facilities (both as defined below). Accordingly, a significant portion of management's time is devoted to maximizing cash flows from our existing self-storage facility portfolio. During the three months endedMarch 31, 2022 , revenues generated by our Same Store Facilities increased by 15.8% ($102.1 million ), as compared to the same period in 2021, while Same Store cost of operations increased by 3.6% ($6.5 million ). Demand and operating trends have continued to improve, leading to increases in our self-storage rental rates and reduction in marketing expense while maintaining high levels of occupancy. In addition to managing our existing facilities for organic growth, we have grown and plan to continue to grow through the acquisition and development of new facilities and expansion of our existing self-storage facilities. Since the beginning of 2020, we acquired a total of 304 facilities with 27.7 million net rentable square feet for$6.0 billion , and within our non-same store portfolio have developed and expanded self-storage space for a total cost of$1.4 billion , adding 16.6 million net rentable square feet. During the three months endedMarch 31, 2022 , net operating income generated by our Acquired Facilities and Newly Developed and Expanded Facilities increased 241.8% ($67.9 million ), as compared to the same period in 2021. Our strong financial profile continues to enable effective access to capital markets in order to support our growth. During the three months endedMarch 31, 2022 , we raised$250 million in a public offering of our preferred shares. In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed facilities), we have embarked on our multi-year Property of Tomorrow program to (i) rebrand our properties with more pronounced, attractive, and clearly identifiable color schemes and signage, (ii) enhance the energy efficiency of our properties, and (iii) upgrade the configuration and layout of the offices and other customer zones to improve the customer experience. We expect to complete the program by the end of 2025. We expect to spend approximately$180 million over 2022 on this effort. Refer to Note 15. Subsequent Events for information regarding PSB's recently announced merger transaction, including with respect to anticipated cash proceeds, tax treatment and a related distribution to our common shareholders. The transaction is expected to close in the third quarter of 2022, subject to approval by PSB's stockholders and other customary closing conditions. Following consummation of the transaction, our future operating results will no longer reflect contributions from our investment in PSB. 22 --------------------------------------------------------------------------------
Results of Operations
Operating Results for the Three Months Ended
For the three months endedMarch 31, 2022 , net income allocable to our common shareholders was$464.1 million or$2.63 per diluted common share, compared to$385.8 million or$2.21 per diluted common share in 2021, representing an increase of$78.3 million or$0.42 per diluted common share. The increase is due primarily to (i) a$167.3 million increase in self-storage net operating income and (ii) our$23.6 million equity share of gains on sale of real estate recorded by PS Business Parks, Inc. in 2022, partially offset by (iii) a$75.3 million increase in depreciation and amortization expense, (iv) a$17.9 million increase in interest expense, (v) a$10.0 million decrease in foreign currency exchange gains associated with our Euro denominated notes payable, and (vi) a$9.4 million gain on sale of real estate recognized in the three months endedMarch 31, 2021 . The$167.3 million increase in self-storage net operating income in the three months endedMarch 31, 2022 as compared to the same period in 2021 is a result of a$95.6 million increase in our Same Store Facilities and a$71.7 million increase in our non-same store facilities. Revenues for the Same Store Facilities increased 15.8% or$102.1 million in the three months endedMarch 31, 2022 as compared to 2021, due primarily to higher realized annual rent per available square foot. Cost of operations for the Same Store Facilities increased by 3.6% or$6.5 million in the three months endedMarch 31, 2022 as compared to 2021, due primarily to (i) a 4.8% ($3.2 million ) increase in property tax expense, (ii) a 19.0% ($2.5 million ) increase in repairs and maintenance expense, and (iii) a 17.5% ($2.3 million ) increase in centralized management costs, partially offset by (iv) a 23.1% ($3.4 million ) decrease in marketing expense. The increase in net operating income of$71.7 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2021 and the fill-up of recently developed and expanded facilities.
Funds from Operations and Core Funds from Operations
Funds from Operations ("FFO") and FFO per share are non-GAAP measures defined by
the National Association of Real Estate Investment Trusts and are considered
helpful measures of REIT performance by REITs and many REIT analysts. FFO
represents net income before depreciation and amortization, which is excluded
because it is based upon historical costs and assumes that building values
diminish ratably over time, while we believe that real estate values fluctuate
due to market conditions. FFO also excludes gains or losses on sale of real
estate assets and real estate impairment charges, which are also based upon
historical costs and are impacted by historical depreciation. FFO and FFO per
share are not a substitute for net income or earnings per share. FFO is not a
substitute for net cash flow in evaluating our liquidity or ability to pay
dividends, because it excludes investing and financing activities presented on
our consolidated 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
share as compared to
representing an increase of 24.4%, or
We also present "Core FFO" and "Core FFO per share," non-GAAP measures that
represent FFO and FFO per share excluding the impact of (i) foreign currency
exchange gains and losses, (ii) charges related to the redemption of preferred
securities, and (iii) certain other non-cash and/or nonrecurring income or
expense items primarily representing, with respect to the periods presented
below, our equity share of the impact of severance of senior executive and
casualties from our equity investees. We review Core FFO and Core FFO per share
to evaluate our ongoing operating performance and we believe they are used by
investors and REIT analysts in a similar manner. However, Core FFO and Core FFO
per share are not substitutes for net income and net income per share. Because
other REITs may not compute Core FFO or Core FFO per share in the same manner as
we do, may not use the same terminology or may not present such measures, Core
FFO and Core FFO per share may not be comparable among REITs.
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The following table reconciles net income to FFO and Core FFO and reconciles
diluted earnings per share to FFO per share and Core FFO per share:
Three Months Ended
2022 2021 Percentage Change
(Amounts in thousands, except per share data)
Reconciliation of Net Income to FFO and Core FFO:
Net income allocable to common shareholders $ 464,124 $ 385,810 20.3 %
Eliminate items excluded from FFO:
Depreciation and amortization 220,795
145,869
Depreciation from unconsolidated real estate investments 18,037
17,933
Depreciation allocated to noncontrolling interests and
restricted share unitholders
(1,657) (971)
Gains on sale of real estate investments, including our
equity share from investments
(25,095)
(9,387)
FFO allocable to common shares$ 676,204 $ 539,254 25.4 %
Eliminate the impact of items excluded from Core FFO,
including our equity share from investments:
Foreign currency exchange gain
(35,377)
(45,385)
Other items 2,547 (349) Core FFO allocable to common shares$ 643,374 $ 493,520 30.4 %
Reconciliation of Diluted Earnings per Share to FFO per
Share and Core FFO per Share:
Diluted Earnings per share
$ 2.63$ 2.21 19.0 % Eliminate amounts per share excluded from FFO: Depreciation and amortization 1.35 0.93
Gains on sale of real estate investments, including our
equity share from investments
(0.15)
(0.06)
FFO per share $ 3.83$ 3.08 24.4 %
Eliminate the per share impact of items excluded from
Core FFO, including our equity share from investments:
Foreign currency exchange gain
(0.20) (0.26) Other items 0.02 - Core FFO per share $ 3.65$ 2.82 29.4 % Diluted weighted average common shares 176,336
174,840
Analysis of Net Income - Self-Storage Operations
Our self-storage operations are analyzed in four groups: (i) the 2,282 facilities that we have owned and operated on a stabilized basis sinceJanuary 1, 2020 (the "Same Store Facilities"), (ii) 304 facilities we acquired sinceJanuary 1, 2020 (the "Acquired Facilities"), (iii) 145 facilities that have been newly developed or expanded, or that will commence expansion byDecember 31, 2022 (the "Newly Developed and Expanded Facilities"), and (iv) 66 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates sinceJanuary 1, 2020 (the "Other Non-same Store Facilities"). See Note 13 to ourMarch 31, 2022 consolidated financial statements "Segment Information," for a reconciliation of the amounts in the tables below to our total net income. 24 -------------------------------------------------------------------------------- Self-Storage Operations Summary Three
Months Ended
2022 2021 Percentage Change
(Dollar amounts and square footage in thousands)
Revenues:
Same Store Facilities $ 749,270 $ 647,200 15.8 %
Acquired Facilities 86,371 11,123 676.5 %
Newly Developed and Expanded Facilities 60,076 41,477 44.8 %
Other Non-Same Store Facilities 21,298 16,547 28.7 %
917,015 716,347 28.0 %
Cost of operations:
Same Store Facilities 187,929 181,419 3.6 %
Acquired Facilities 31,031 7,177 332.4 %
Newly Developed and Expanded Facilities 19,417 17,335 12.0 %
Other Non-Same Store Facilities 7,117 6,174 15.3 %
245,494 212,105 15.7 %
Net operating income (a):
Same Store Facilities 561,341 465,781 20.5 %
Acquired Facilities 55,340 3,946 1302.4 %
Newly Developed and Expanded Facilities 40,659 24,142 68.4 %
Other Non-Same Store Facilities 14,181 10,373 36.7 %
Total net operating income 671,521 504,242 33.2 %
Depreciation and amortization expense:
Same Store Facilities (113,251) (110,663) 2.3 %
Acquired Facilities (84,465) (11,473) 636.2 %
Newly Developed and Expanded Facilities (14,627) (15,269) (4.2) %
Other Non-Same Store Facilities (9,785) (9,454) 3.5 %
Total depreciation and amortization expense (222,128) (146,859) 51.3 %
Net income (loss):
Same Store Facilities 448,090 355,118 26.2 %
Acquired Facilities (29,125) (7,527) 286.9 %
Newly Developed and Expanded Facilities 26,032 8,873 193.4 %
Other Non-Same Store Facilities 4,396 919 378.3 %
Total net income $ 449,393 $ 357,383 25.7 %
Number of facilities at period end:
Same Store Facilities 2,282 2,282 -
Acquired Facilities 304 77 294.8 %
Newly Developed and Expanded Facilities 145 138 5.1 %
Other Non-Same Store Facilities 66 66 -
2,797 2,563 9.1 %
Net rentable square footage at period end:
Same Store Facilities 149,476 149,476 -
Acquired Facilities 27,686 6,162 349.3 %
Newly Developed and Expanded Facilities 16,641 15,240 9.2 %
Other Non-Same Store Facilities 5,315 5,287 0.5 %
199,118 176,165 13.0 %
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-------------------------------------------------------------------------------- (a)Net operating income or "NOI" is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, operating cash flow, or other related financial measures, in evaluating our operating results. See Note 13 to ourMarch 31, 2022 consolidated financial statements for a reconciliation of NOI to our total net income for all periods presented.
Same Store Facilities
The Same Store Facilities consist of facilities we have owned and operated on a stabilized level of occupancy, revenues, and cost of operations sinceJanuary 1, 2020 . Our Same Store Facilities increased from 2,274 facilities atDecember 31, 2021 to 2,282 atMarch 31, 2022 . The composition of our Same Store Facilities allows us more effectively to evaluate the ongoing performance of our self-storage portfolio in 2020, 2021, and 2022 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. We believe investors and analysts use Same Store information in a similar manner. However, because other REITs may not compute Same Store Facilities in the same manner as we do, may not use the same terminology or may not present such a measure, Same Store Facilities may not be comparable among REITs. The following table summarizes the historical operating results of these 2,282 facilities (149.5 million net rentable square feet) that represent approximately 75% of the aggregate net rentable square feet of ourU.S. consolidated self-storage portfolio atMarch 31, 2022 . It includes various measures and detail that we do not include in the analysis of the developed, acquired, and other non-same store facilities, due to the relative magnitude and importance of the Same Store Facilities relative to our other self-storage facilities. 26 --------------------------------------------------------------------------------
Selected Operating Data for the Same Store Facilities (2,282 facilities)
Three Months Ended March 31,
2022 2021 Percentage Change
(Dollar amounts in thousands, except for per square foot data)
Revenues (a):
Rental income $ 725,433 $ 627,153 15.7%
Late charges and administrative fees 23,837 20,047 18.9%
Total revenues 749,270 647,200 15.8%
Direct cost of operations (a):
Property taxes 70,004 66,782 4.8%
On-site property manager payroll 30,700 28,744 6.8%
Repairs and maintenance 15,490 13,021 19.0%
Utilities 11,446 10,796 6.0%
Marketing 11,240 14,610 (23.1)%
Other direct property costs 20,066 18,364 9.3%
Total direct cost of operations 158,946 152,317 4.4%
Direct net operating income (b) 590,324 494,883 19.3%
Indirect cost of operations (a):
Supervisory payroll (9,567) (10,330) (7.4)%
Centralized management costs (15,557) (13,237) 17.5%
Share-based compensation (3,859) (5,535) (30.3)%
Net operating income 561,341 465,781 20.5%
Depreciation and amortization expense (113,251) (110,663) 2.3%
Net income $ 448,090 $ 355,118 26.2%
Gross margin (before indirect costs, depreciation
and amortization expense) 78.8% 76.5% 3.0%
Gross margin (before depreciation and amortization
expense)
74.9% 72.0% 4.0%
Weighted average for the period:
Square foot occupancy 95.6% 95.6% -%
Realized annual rental income per (c):
Occupied square foot $ 20.29 $ 17.54 15.7%
Available square foot $ 19.40 $ 16.78 15.6%
At March 31:
Square foot occupancy 95.1% 95.9% (0.8)%
Annual contract rent per occupied square foot (d) $ 20.84 $ 17.97 16.0%
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(a)Revenues and cost of operations do not include tenant reinsurance and
merchandise sale revenues and expenses generated at the facilities. See
"Ancillary Operations" below for more information.
(b)Direct net operating income ("Direct NOI"), a subtotal within NOI, is a
non-GAAP financial measure that excludes the impact of supervisory payroll,
centralized management costs and share-based compensation in addition to
depreciation and amortization expense. We utilize direct net operating income in
evaluating property performance and in evaluating property operating trends as
compared to our competitors.
(c)Realized annual rent per occupied square foot is computed by dividing rental
income, before late charges and administrative fees, by the weighted average
occupied square feet for the period. Realized annual rent per available square
foot ("REVPAF") is computed by dividing rental income, before late charges and
administrative fees, by the total available net rentable square feet for the
period. These measures exclude late charges and administrative fees in order to
provide a better measure of our ongoing level of revenue. Late charges are
dependent upon the level of delinquency and administrative fees are dependent
upon the level of move-ins. In addition, the rates charged for late charges and
administrative fees can vary independently from rental rates. These measures
take into consideration promotional discounts, which reduce rental income.
(d)Annual contract rent represents the agreed upon monthly rate that is paid by
our tenants in place at the time of measurement. Contract rates are initially
set in the lease agreement upon move-in and we adjust them from time to time
with notice. Contract rent excludes other fees that are charged on a per-item
basis, such as late charges and administrative fees, does not reflect the impact
of promotional discounts, and does not reflect the impact of rents that are
written off as uncollectible.
Analysis of Same Store Revenue
We believe a balanced occupancy and rate strategy maximizes our revenues over time. We regularly adjust rental rates and promotional discounts offered (generally, "$1.00 rent for the first month"), as well as our marketing efforts to maximize revenue from new tenants to replace tenants that vacate. We typically increase rental rates to our long-term tenants (generally, those who have been with us for at least a year) every six to twelve months. As a result, the number of long-term tenants we have in our facilities is an important factor in our revenue growth. The level of rate increases to long-term tenants is based upon evaluating the additional revenue from the increase against the negative impact of incremental move-outs, by considering the customer's in-place rent and prevailing market rents, among other factors.
Revenues generated by our Same Store Facilities increased 15.8% in the three
months ended
primarily to a 15.7% increase in realized annual rent per occupied square foot.
Our growth in revenues, realized annual rent per occupied square foot, and REVPAF for the three months endedMarch 31, 2022 as compared to the same period in 2021 was evident in each of our markets. Our weighted average square foot occupancy remained strong across our markets for the three months endedMarch 31, 2022 . The increase of realized annual rent per occupied square foot in the three months endedMarch 31, 2022 as compared to the same period in 2021 was due to (i) rate increases to existing long-term tenants in substantially all of our markets in 2022 as compared to curtailed increases in certain markets in 2021, combined with (ii) a 15.1% year over year increase in average rates per square foot charged to new tenants moving in as a result of strong customer demand across all markets. AtMarch 31, 2022 , annual contract rent per occupied square foot was 16.0% higher as compared toMarch 31, 2021 . We experienced high occupancy levels throughout the first three months of 2022. Our average square foot occupancy levels remained unchanged on a year over year basis at 95.6% during the three months endedMarch 31, 2022 . Move-out volumes increased 5.0% and move-in volumes decreased 4.9% in the three months endedMarch 31, 2022 as compared to the same period in 2021, leading to a lower square foot occupancy atMarch 31, 2022 of 95.1% as compared to 95.9% atMarch 31, 2021 . Move-out volumes were impacted by rental rate increases to our existing tenants, while move-in volumes were impacted by the higher rental rates charged to new tenants in the three months endedMarch 31, 2022 as compared to the same period in 2021. Average length of stay increased in the three months endedMarch 31, 2022 as compared to the same period in 2021, which supported revenue growth through rate increases to long-term tenants. With strong occupancy, we reduced promotional discounts given to new move-in customers for the three months endedMarch 31, 2022 by 43.7% as compared to the same period in 2021. Demand historically has been higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants have typically been 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. 28 -------------------------------------------------------------------------------- We expect continued revenue growth for the remainder of 2022 supported by consistently high customer demand and a stable tenant base leading to increasing realized annual rent per occupied square foot while maintaining a high level of occupancy.
Late Charges and Administrative Fees
Late charges and administrative fees increased 18.9% for the three months endedMarch 31, 2022 as compared to the same period in 2021, due to (i) higher late charges collected on delinquent accounts and to a lesser extent (ii) higher administrative charge per move-in.
Selected Key Statistical Data
The following table sets forth average annual contract rent per square foot and total square footage for tenants moving in and moving out during the three months endedMarch 31, 2022 and 2021. It also includes promotional discounts, which vary based upon the move-in contractual rates, move-in volume, and percentage of tenants moving in who receive the discount. Three Months Ended March 31, 2022 2021 Change (Amounts in thousands, except for per square foot amounts) Tenants moving in during the period: Average annual contract rent per square foot $ 17.15$ 14.90 15.1% Square footage 23,366 24,561 (4.9)%
Contract rents gained from move-ins
9.5% Promotional discounts given $ 9,339$ 16,577 (43.7)% Tenants moving out during the period: Average annual contract rent per square foot $ 19.35$ 16.21 19.4% Square footage 22,933 21,849 5.0%
Contract rents lost from move-outs
25.3%
Analysis of Same Store Cost of Operations
Cost of operations (excluding depreciation and amortization) increased 3.6% in the three months endedMarch 31, 2022 as compared to the same period in 2021, due primarily to increased property tax expense, repairs and maintenance expense and centralized management costs, partially offset by decreased marketing expense. Property tax expense increased 4.8% in the three months endedMarch 31, 2022 as compared to the same period in 2021, as a result of higher recently assessed values. We expect property tax expense growth of approximately 5.0% in the remainder of 2022. On-site property manager payroll expense increased 6.8% in the three months endedMarch 31, 2022 as compared to the same period in 2021. The increase is primarily due to wage increases effective in late 2021 in response to competitive labor conditions experienced in most geographical markets, partially offset by a year-over-year decline in hours worked due to staffing reductions from revisions to other operational processes. We expect on-site property manager payroll expense to further increase in the remainder of 2022 as compared to 2021 due in part to continued competitive labor conditions. Repairs and maintenance expense increased 19.0% in the three months endedMarch 31, 2022 as compared to the same period in 2021. Repairs and maintenance expense includes snow removal costs totaling$3.3 million and$2.0 million in the three months endedMarch 31, 2022 and 2021, respectively. Excluding snow removal costs, repairs and maintenance expense increased 10.2% in in the three months endedMarch 31, 2022 as compared to the same period in 2021. Repairs and maintenance expense levels are dependent upon many factors such as (i) damage and equipment malfunctions, (ii) short-term local supply and demand factors for material and labor, and (iii) weather conditions, which can impact costs such as snow removal, roof repairs, and HVAC maintenance and repairs. 29 -------------------------------------------------------------------------------- Marketing expense includes Internet advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprising keyword search fees assessed on a "per click" basis, varies based upon demand for self-storage space, the quantity of people inquiring about self-storage through online search, occupancy levels, the number and aggressiveness of bidding competitors, and other factors. These factors are volatile; accordingly, Internet advertising can increase or decrease significantly in the short-term. We decreased marketing expense by 23.1% in the three months endedMarch 31, 2022 as compared to the same period in 2021 due primarily to lower volume of paid search programs we utilized given strong demand and high occupancies in many of our same store properties. Centralized management costs represents administrative and cash compensation expenses for shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions include information technology support, hardware, and software, as well as centralized administration of payroll, benefits, training, facilities management, customer service, pricing and marketing, operational accounting and finance, and legal costs. Centralized management costs increased 17.5% in the three months endedMarch 31, 2022 as compared to the same period in 2021. The increase was due primarily to an increase in technology and data team costs that support property operations. We expect increases in centralized management costs in the remainder of 2022 due to continued investment in our technology and data platforms that support our property operations. Share-based compensation expense includes the amortization of restricted share units and stock options granted to management personnel who directly and indirectly supervise the on-site property managers, as well as those employees responsible for providing shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions are listed above under centralized management costs. 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 each grant. Share-based compensation decreased 30.3% in the three months endedMarch 31, 2022 as compared to the same period in 2021. The decrease in 2022 is due primarily to higher expense recognized in 2021 for certain performance-based awards estimated to achieve above-target results. 30 --------------------------------------------------------------------------------
Analysis of Market Trends
The following tables set forth selected market trends in our Same Store
Facilities:
Same Store Facilities Operating Trends by Market
As of March 31, 2022 Three Months Ended March 31,
Number Square Realized Rent per Realized Rent per
of Feet Occupied Square Foot Average Occupancy Available Square Foot
Facilities (millions)
2022 2021 Change 2022 2021 Change 2022 2021 Change
Los Angeles 212 15.3 $ 29.45 $ 26.34 11.8 % 97.8 % 97.9 % (0.1) % $ 28.79 $ 25.77 11.7 %
San Francisco 128 7.8 29.89 26.96 10.9 % 96.0 % 97.5 % (1.5) % 28.70 26.28 9.2 %
New York 90 6.4 28.96 26.39 9.7 % 95.5 % 96.0 % (0.5) % 27.66 25.33 9.2 %
Miami 83 5.8 25.81 20.46 26.1 % 96.9 % 96.3 % 0.6 % 25.02 19.71 26.9 %
Seattle -Tacoma 86 5.7 23.61 20.60 14.6 % 95.0 % 94.9 % 0.1 % 22.43 19.54 14.8 %
Washington DC 90 5.5 24.13 21.36 13.0 % 94.0 % 95.1 % (1.2) % 22.69 20.32 11.7 %
Atlanta 101 6.6 16.17 13.33 21.3 % 94.9 % 94.6 % 0.3 % 15.34 12.61 21.6 %
Dallas-Ft. Worth 106 7.0 16.18 13.58 19.1 % 95.3 % 94.8 % 0.5 % 15.42 12.87 19.8 %
Chicago 129 8.1 18.01 15.42 16.8 % 94.5 % 94.9 % (0.4) % 17.03 14.62 16.5 %
Houston 95 6.8 14.87 12.68 17.3 % 94.1 % 93.5 % 0.6 % 14.00 11.86 18.0 %
Orlando-Daytona 70 4.5 16.48 13.73 20.0 % 96.2 % 95.3 % 0.9 % 15.85 13.09 21.1 %
Philadelphia 56 3.5 19.82 17.49 13.3 % 96.0 % 96.7 % (0.7) % 19.03 16.92 12.5 %
West Palm Beach 37 2.6 23.64 19.27 22.7 % 97.1 % 96.3 % 0.8 % 22.95 18.56 23.7 %
Tampa 51 3.4 17.60 14.11 24.7 % 95.8 % 95.6 % 0.2 % 16.86 13.48 25.1 %
Charlotte 50 3.8 13.92 11.41 22.0 % 95.5 % 94.8 % 0.7 % 13.29 10.81 22.9 %
All other markets 898 56.7 16.88 14.47 16.7 % 95.4 % 95.4 % - % 16.10 13.80 16.7 %
Totals 2,282 149.5 $ 20.29 $ 17.54 15.7 % 95.6 % 95.6 % - % $ 19.40 $ 16.78 15.6 %
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Same Store Facilities Operating Trends by Market (Continued)
Three Months Ended March 31,
Revenues ($000 's) Direct Expenses ($000 's) Indirect Expenses ($000 's) Net Operating Income ($000 's)
2022 2021 Change 2022 2021 Change 2022 2021 Change 2022 2021 Change
Los Angeles $ 112,345 $ 100,330 12.0 % $ 15,778 $ 15,320 3.0 % $ 2,900 $ 2,961 (2.1) % $ 93,667 $ 82,049 14.2 %
San Francisco 57,158 52,087 9.7 % 8,834 8,555 3.3 % 1,710 1,807 (5.4) % 46,614 41,725 11.7 %
New York 45,608 41,818 9.1 % 12,194 11,264 8.3 % 1,368 1,463 (6.5) % 32,046 29,091 10.2 %
Miami 37,591 29,759 26.3 % 6,841 6,470 5.7 % 1,059 1,134 (6.6) % 29,691 22,155 34.0 %
Seattle -Tacoma 32,807 28,550 14.9 % 5,935 5,922 0.2 % 1,011 1,084 (6.7) % 25,861 21,544 20.0 %
Washington DC 32,377 28,938 11.9 % 7,217 6,834 5.6 % 1,039 1,097 (5.3) % 24,121 21,007 14.8 %
Atlanta 26,762 21,992 21.7 % 5,070 4,810 5.4 % 1,258 1,289 (2.4) % 20,434 15,893 28.6 %
Dallas-Ft. Worth 27,928 23,345 19.6 % 6,384 6,380 0.1 % 1,158 1,202 (3.7) % 20,386 15,763 29.3 %
Chicago 35,827 30,751 16.5 % 14,901 12,520 19.0 % 1,587 1,502 5.7 % 19,339 16,729 15.6 %
Houston 24,700 20,898 18.2 % 6,788 6,737 0.8 % 1,117 1,159 (3.6) % 16,795 13,002 29.2 %
Orlando-Daytona 18,400 15,220 20.9 % 3,689 3,545 4.1 % 919 853 7.7 % 13,792 10,822 27.4 %
Philadelphia 17,500 15,521 12.8 % 4,183 3,850 8.6 % 690 723 (4.6) % 12,627 10,948 15.3 %
West Palm Beach 15,594 12,622 23.5 % 3,140 2,867 9.5 % 488 543 (10.1) % 11,966 9,212 29.9 %
Tampa 14,822 11,894 24.6 % 3,133 2,999 4.5 % 623 634 (1.7) % 11,066 8,261 34.0 %
Charlotte 13,202 10,750 22.8 % 2,378 2,315 2.7 % 613 572 7.2 % 10,211 7,863 29.9 %
All other markets 236,649 202,725 16.7 % 52,481 51,929 1.1 % 11,443 11,079 3.3 % 172,725 139,717 23.6 %
Totals $ 749,270 $ 647,200 15.8 % $ 158,946 $ 152,317 4.4 % $ 28,983 $ 29,102 (0.4) % $ 561,341 $ 465,781 20.5 %
32
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Acquired Facilities
The Acquired Facilities represent 304 facilities that we acquired in 2020, 2021,
and 2022. As a result of the stabilization process and timing of when these
facilities were acquired (and resulting reclassification to Same-Store
Facilities), year-over-year changes can be significant. The following table
summarizes operating data with respect to the Acquired Facilities:
ACQUIRED FACILITIES Three Months Ended March 31,
2022 2021 Change (a)
($ amounts in thousands, except for per square foot amounts)
Revenues (b):
2020 Acquisitions $ 17,068 $ 10,291 $ 6,777
2021 Acquisitions 68,825 832 67,993
2022 Acquisitions 478 - 478
Total revenues 86,371 11,123 75,248
Cost of operations (b):
2020 Acquisitions 6,814 6,626 188
2021 Acquisitions 23,898 551 23,347
2022 Acquisitions 319 - 319
Total cost of operations 31,031 7,177 23,854
Net operating income:
2020 Acquisitions 10,254 3,665 6,589
2021 Acquisitions 44,927 281 44,646
2022 Acquisitions 159 - 159
Net operating income 55,340 3,946 51,394
Depreciation and amortization expense (84,465) (11,473) (72,992)
Net loss $ (29,125) $ (7,527) $ (21,598)
At March 31:
Square foot occupancy:
2020 Acquisitions 89.8% 73.1% 22.8%
2021 Acquisitions 82.3% 67.6% 21.7%
2022 Acquisitions 43.5% - -
82.6% 72.2% 14.4%
Annual contract rent per occupied square
foot:
2020 Acquisitions $ 15.27 $ 12.40 23.1%
2021 Acquisitions 15.87 13.64 16.3%
2022 Acquisitions 12.80 - -
$ 15.71 $ 12.60 24.7%
Number of facilities:
2020 Acquisitions 62 62 -
2021 Acquisitions 232 15 217
2022 Acquisitions 10 - 10
304 77 227
Net rentable square feet (in thousands):
2020 Acquisitions 5,075 5,075 -
2021 Acquisitions 21,830 1,087 20,743
2022 Acquisitions 781 - 781
27,686 6,162 21,524
33
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ACQUIRED FACILITIES (Continued)
As of
March 31, 2022
Costs to acquire (in thousands):
2020 Acquisitions $ 796,065
2021 Acquisitions 5,115,276
2022 Acquisitions 127,703
$ 6,039,044
(a)Represents the percentage change with respect to square foot occupancy and
annual contract rent per occupied square foot, and the absolute nominal change
with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and
merchandise sale revenues and expenses generated at the facilities. See
"Ancillary Operations" below for more information.
During 2021, we acquired the ezStorage portfolio, consisting of 48 properties (4.1 million net rentable square feet) for acquisition cost of$1.8 billion , which includes 47 self-storage facilities and one property that is under construction. Included in the Acquisition results in the table above are revenues of$24.0 million , NOI of$18.6 million (including Direct NOI of$19.4 million ), and average square footage occupancy of 88.0% for the three months endedMarch 31, 2022 . During 2021, we acquired the All Storage portfolio, consisting of 56 properties (7.5 million net rentable square feet) for$1.5 billion , with 55 properties closed in the fourth quarter of 2021 and one property closed inFebruary 2022 . Included in the Acquisition results in the table above are revenues of$16.8 million , NOI of$10.5 million (including Direct NOI of$11.2 million ), and average square footage occupancy of 77.3% for the three months endedMarch 31, 2022 .
Subsequent to
eleven self-storage facilities across nine states with 0.9 million net rentable
square feet, for
34 --------------------------------------------------------------------------------
Developed and Expanded Facilities
The developed and expanded facilities include 54 facilities that were developed on new sites sinceJanuary 1, 2017 , and 91 facilities expanded to increase their net rentable square footage. Of these expansions, 51 were completed before 2021, 17 were completed in 2021 or 2022, and 23 are currently in process atMarch 31, 2022 . The following table summarizes operating data with respect to the Developed and Expanded Facilities:
DEVELOPED AND EXPANDED FACILITIES
Three Months Ended March 31,
2022 2021 Change (a)
($ amounts in thousands, except for per square foot amounts)
Revenues (b):
Developed in 2017 $ 7,942 $ 6,043 $ 1,899
Developed in 2018 8,293 6,053 2,240
Developed in 2019 3,626 2,338 1,288
Developed in 2020 1,482 369 1,113
Developed in 2021 1,429 4 1,425
Expansions completed before 2021 21,416 14,271 7,145
Expansions completed in 2021 or 2022 8,637 5,010 3,627
Expansions in process 7,251 7,389 (138)
Total revenues 60,076 41,477 18,599
Cost of operations (b):
Developed in 2017 2,628 2,504 124
Developed in 2018 2,555 2,561 (6)
Developed in 2019 1,368 1,408 (40)
Developed in 2020 428 399 29
Developed in 2021 855 83 772
Expansions completed before 2021 7,601 7,076 525
Expansions completed in 2021 or 2022 2,362 1,523 839
Expansions in process 1,620 1,781 (161)
Total cost of operations 19,417 17,335 2,082
Net operating income (loss):
Developed in 2017 5,314 3,539 1,775
Developed in 2018 5,738 3,492 2,246
Developed in 2019 2,258 930 1,328
Developed in 2020 1,054 (30) 1,084
Developed in 2021 574 (79) 653
Expansions completed before 2021 13,815 7,195 6,620
Expansions completed in 2021 or 2022 6,275 3,487 2,788
Expansions in process 5,631 5,608 23
Net operating income 40,659 24,142 16,517
Depreciation and amortization expense (14,627) (15,269) 642
Net income $ 26,032 $ 8,873 $ 17,159
35
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DEVELOPED AND EXPANDED FACILITIES
(Continued)
As of March 31,
2022 2021 Change (a)
($ amounts in thousands, except for per square foot amounts)
Square foot occupancy:
Developed in 2017 92.1% 92.9% (0.9)%
Developed in 2018 88.6% 89.6% (1.1)%
Developed in 2019 88.4% 88.2% 0.2%
Developed in 2020 92.0% 55.7% 65.2%
Developed in 2021 67.4% 13.1% 414.5%
Expansions completed before 2021 87.6% 80.2% 9.2%
Expansions completed in 2021 or 2022 85.1% 95.6% (11.0)%
Expansions in process 86.2% 91.4% (5.7)%
87.2% 84.9% 2.7%
Annual contract rent per occupied square
foot:
Developed in 2017 $ 16.79 $ 12.94 29.8%
Developed in 2018 18.06 13.41 34.7%
Developed in 2019 15.54 10.61 46.5%
Developed in 2020 19.08 11.20 70.4%
Developed in 2021 15.28 14.25 7.2%
Expansions completed before 2021 14.31 10.83 32.1%
Expansions completed in 2021 or 2022 20.32 18.61 9.2%
Expansions in process 22.87 20.63 10.9%
$ 16.91 $ 13.17 28.4%
Number of facilities:
Developed in 2017 16 16 -
Developed in 2018 18 18 -
Developed in 2019 11 11 -
Developed in 2020 3 3 -
Developed in 2021 6 1 5
Expansions completed before 2021 51 51 -
Expansions completed in 2021 or 2022 17 15 2
Expansions in process 23 23 -
145 138 7
Net rentable square feet (in thousands)
(c):
Developed in 2017 2,040 2,040 -
Developed in 2018 2,069 2,069 -
Developed in 2019 1,057 1,057 -
Developed in 2020 347 347 -
Developed in 2021 681 200 481
Expansions completed before 2021 6,877 6,877 -
Expansions completed in 2021 or 2022 2,133 1,133 1,000
Expansions in process 1,437 1,517 (80)
16,641 15,240 1,401
36
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As of
March 31, 2022
Costs to develop (in thousands):
Developed in 2017 $ 239,871
Developed in 2018 262,187
Developed in 2019 150,387
Developed in 2020 42,063
Developed in 2021 115,632
Expansions completed before 2021 (d)
478,659
Expansions completed in 2021 or 2022 (d) 123,499
$ 1,412,298
(a)Represents the percentage change with respect to square foot occupancy and
annual contract rent per occupied square foot, and the absolute nominal change
with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and
merchandise sales generated at the facilities. See "Ancillary Operations" below
for more information.
(c)The facilities included above have an aggregate of approximately 16.6 million net rentable square feet atMarch 31, 2022 , including 5.0 million inTexas , 2.8 million inFlorida , 2.2 million inCalifornia , 1.5 million inColorado , 1.2 million inMinnesota , 0.9 million inNorth Carolina , 0.6 million inMichigan , 0.4 million in each ofMissouri andWashington , 0.3 million in each ofNew Jersey ,South Carolina andVirginia and 0.7 million in other states. (d)These amounts only include the direct cost incurred to expand and renovate these facilities, and do not include (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period. It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Physical occupancy can be achieved as early as two to three years following completion of the development or expansion through offering lower rental rates during fill-up. As a result, even after achieving high occupancy, there can still be a period of elevated revenue growth as the tenant base matures and higher rental rates are achieved. We believe that our development and redevelopment activities generate favorable risk-adjusted returns over the long run. However, in the short run, our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses included in general and administrative expense. We typically underwrite new developments to stabilize at approximately an 8.0% NOI yield on cost. Our developed facilities have thus far leased up as expected and are at various stages of their revenue stabilization periods. The actual annualized yields that we may achieve on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property and the level of new and existing supply. The facilities under "expansions completed" represent those facilities where the expansions have been completed atMarch 31, 2022 . We incurred a total of$602.2 million in direct cost to expand these facilities, demolished a total of 1.1 million net rentable square feet of storage space, and built a total of 5.7 million net rentable square feet of new storage space. AtMarch 31, 2022 , we had 26 additional facilities in development, which will have a total of 2.2 million net rentable square feet of storage space and have an aggregate development cost totaling approximately$406.1 million . We expect these facilities to open over the next 18 to 24 months. The facilities under "expansion in process" represent those facilities where construction is in process atMarch 31, 2022 , and together with additional expansion activities primarily related to our Same Store Facilities atMarch 31, 2022 , we expect to add a total of 2.6 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of$427.7 million . 37 --------------------------------------------------------------------------------
Other Non-Same Store Facilities
The "Other Non-Same Store Facilities" represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized sinceJanuary 1, 2020 , including facilities under fill-up as well as facilities damaged in casualty events such as hurricanes, floods, and fires. The Other Non-Same Store Facilities have an aggregate of 5.3 million net rentable square feet, including 1.1 million inTexas , 0.6 million in each ofFlorida andWashington , 0.4 million in each ofCalifornia andVirginia , 0.3 million in each ofIndiana andSouth Carolina , 0.2 million in each ofGeorgia ,Kentucky ,Massachusetts andTennessee and 0.8 million in other states. During the three months endedMarch 31, 2022 and 2021, the average occupancy for these facilities totaled 91.7% and 90.6%, respectively, and the realized rent per occupied square foot totaled$16.90 and$13.23 , respectively.
Depreciation and amortization expense
Depreciation and amortization expense for Self-Storage Operations increased$75.3 million in the three months endedMarch 31, 2022 as compared to the same period in 2021, primarily due to newly acquired facilities of$5.1 billion in 2021. We expect continued increases in depreciation expense in the remainder of 2022 as a result of elevated levels of capital expenditures and new facilities that are acquired, developed or expanded in the remainder of 2022. 38 --------------------------------------------------------------------------------
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, sale of merchandise at our self-storage facilities, and management
of property owned by unrelated third parties. The following table sets forth our
ancillary operations:
Three Months Ended March 31,
2022 2021 Change
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums $ 45,195 $ 39,681 $ 5,514
Merchandise 6,871 7,036 (165)
Third party property management 4,364 4,198 166
Total revenues 56,430 50,915 5,515
Cost of operations:
Tenant reinsurance 7,277 7,824 (547)
Merchandise 3,904 3,966 (62)
Third party property management 4,334 4,528 (194)
Total cost of operations 15,515 16,318 (803)
Net operating income (loss):
Tenant reinsurance 37,918 31,857 6,061
Merchandise 2,967 3,070 (103)
Third party property management 30 (330) 360
Total net operating income $ 40,915 $ 34,597 $ 6,318
Tenant reinsurance operations: Tenant reinsurance premium revenue increased
$5.5 million or 13.9% in the three months ended March 31, 2022 over the same
period in 2021 as a result of higher average premiums and an increase in our
tenant base with respect to acquired, newly developed, and expanded facilities
and the third party properties we manage. Tenant reinsurance premium revenue
generated from tenants at our Same-Store Facilities were $34.4 million and
$33.2 million in the three months ended March 31, 2022 and 2021, respectively,
representing a 3.6% increase.
We expect future growth will come primarily from customers of newly acquired and
developed facilities, as well as additional tenants at our existing unstabilized
self-storage facilities.
Cost of operations primarily includes claims paid as well as claims adjustment
expenses. Claims expenses vary based upon the number of insured tenants and the
volume of events which drive covered customer losses, such as burglary, as well
as catastrophic weather events affecting multiple properties such as hurricanes
and floods.
Merchandise sales: Sales of locks, boxes, and packing supplies at our
self-storage facilities are 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 2022.
Third-party property management: AtMarch 31, 2022 , we managed 97 facilities for unrelated third parties, and were under contract to manage 64 additional facilities including 58 facilities that are currently under construction. During the three months endedMarch 31, 2022 , we added 15 facilities to the program, acquired one facility from the program, and had five properties exit the program due to sales to other buyers. While we expect this business to increase in scope and size, we do not expect any significant changes in overall profitability of this business in the near term as we seek new properties to manage and are in the earlier stages of fill-up for newly managed properties. 39 --------------------------------------------------------------------------------
Analysis of items not allocated to segments
Equity in earnings of unconsolidated real estate entities
For all periods presented, we have equity investments in PSB and Shurgard, which
we account for using the equity method and record our pro-rata share of the net
income of these entities. The following table, and the discussion below, sets
forth our equity in earnings of unconsolidated real estate entities:
Three Months Ended March 31,
2022 2021 Change
(Amounts in thousands)
Equity in earnings:
PSB $ 36,886 $ 14,476 $ 22,410
Shurgard 6,538 4,980 1,558
Total equity in earnings $ 43,424 $ 19,456 $ 23,968
Investment in PSB: Throughout all periods presented, we owned 7,158,354 shares
of PS Business Parks, Inc. ("PSB") common stock and 7,305,355 limited
partnership units in an operating partnership controlled by PSB, representing an
approximate 41% common equity interest in PSB as of March 31, 2022 (41% as of
December 31, 2021 ). The limited partnership units are convertible at our option,
subject to certain conditions, on a one-for-one basis into PSB common stock.
At March 31, 2022 , PSB wholly-owned approximately 27 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.
Included in our equity earnings from PSB for the three months ended March 31,
2022 is our equity share of gains on sale of real estate totaling $23.6 million
(none for the same period in 2021). For the three months ended March 31, 2022
and 2021, our share of earnings from PSB contributed $25.5 million and $24.2
million , respectively, to Core FFO.
On April 24, 2022 , PSB entered into an Agreement and Plan of Merger (the "Merger
Agreement") whereby affiliates of Blackstone Real Estate ("Blackstone") will
acquire all outstanding shares of PSB's common stock for $187.50 per share in
cash. Subject to the terms and conditions set forth in the Merger Agreement,
each share of PSB common stock and each common unit of partnership interest will
be converted into the right to receive an amount in cash equal to $187.50 ,
without interest. If the transaction is consummated, we expect to (i) receive
approximately $2.7 billion of cash proceeds in exchange for the approximate 41%
common equity interest we hold in PSB, (ii) recognize an approximate $2.2
billion gain on the sale of our equity investment in PSB in the Consolidated
Statement of Income, and (iii) distribute a $2.3 billion estimated tax gain on
the sale to our common shareholders. The merger transaction is expected to close
in the third quarter of 2022, however, the merger transaction is subject to
customary closing conditions, including approval by PSB's common stockholders.
Pursuant to a support agreement entered into with PSB and Blackstone , we have
committed to vote our equity interests in favor of the transaction, subject to
certain conditions.
PSB's filings and selected financial information, including discussion of the
factors that affect its earnings, can be accessed through the SEC , and on PSB's
website, www.psbusinessparks.com. Information on this website is not
incorporated by reference herein and is not a part of this Quarterly Report on
Form 10-Q.
Investment in Shurgard: Throughout all periods presented, we effectively owned,
directly and indirectly, 31,268,459 Shurgard common shares, representing an
approximate 35% equity interest in Shurgard. Shurgard's common shares trade on
Euronext Brussels under the "SHUR" symbol.
At March 31, 2022 , Shurgard owned 254 self-storage facilities with approximately
14 million net rentable square feet. Shurgard pays us license fees for use of
the Shurgard® trademark, as described in more detail in Note 4 to our March 31,
2022 consolidated financial statements.
Shurgard's public filings and publicly reported information, including
discussion of the factors that affect its earnings, can be obtained on its
website, https://corporate.shurgard.eu and on the website of the Luxembourg
Stock
40 --------------------------------------------------------------------------------
Exchange, http://www.bourse.lu. Information on these websites is not
incorporated by reference herein and is not a part of this Quarterly Report on
Form 10-Q.
For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately1.111 U.S. Dollars per Euro atMarch 31, 2022 (1.134 atDecember 31, 2021 ), and average exchange rates of 1.122 and 1.205 for the three months endedMarch 31, 2022 and 2021, respectively. General and administrative expense: The following table sets forth our general and administrative expense: Three Months Ended March 31, 2022 2021 Change (Amounts in thousands) Share-based compensation expense $ 8,798 $ 7,680 $ 1,118 Development and acquisition costs 2,840 1,807 1,033 Tax compliance costs and taxes paid 2,734 1,609 1,125 Legal costs 240 1,143 (903) Corporate management costs 5,846 4,176 1,670 Other costs 2,611 3,159 (548) Total $ 23,069 $ 19,574 $ 3,495
Share-based compensation expense includes the amortization of restricted share
units and stock options granted to certain corporate employees and trustees.
Share-based compensation expense for management personnel who directly and indirectly supervise the on-site property managers, as well as those employees responsible for providing shared general corporate functions to the extent their efforts are devoted to self-storage operations, are included as self-storage cost of operations. See "Same Store Facilities" for further information. 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 each grant. Share-based compensation expense classified as general and administrative expense increased$1.1 million in the three months endedMarch 31, 2022 as compared to the same period in 2021 due primarily to accelerated compensation expense recognized for awards granted to corporate management personnel who are eligible for immediate vesting of their outstanding awards upon retirement. 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$4.3 million and$3.2 million for the three months endedMarch 31, 2022 and 2021, respectively, in development costs that were capitalized to newly developed and redeveloped self-storage facilities. Interest and other income: Interest and other income is comprised of the revenue and cost associated with our commercial operations, interest earned on cash balances, and trademark license fees received from Shurgard, as well as sundry other income items that are received from time to time in varying amounts. For the three months endedMarch 31, 2022 and 2021, we recognized$3.4 million and$2.9 million interest and other income, respectively. Amounts attributable to commercial operations was$2.1 million and$2.0 million in the three months endedMarch 31, 2022 and 2021, respectively. Excluding the aforementioned amounts attributable to our commercial operations, interest and other income increased$0.4 million from the three months endedMarch 31, 2021 to the same period in 2022. Interest expense: For the three months endedMarch 31, 2022 and 2021, we incurred$34.3 million and$16.2 million , respectively, of interest on our outstanding notes payable. In determining interest expense, these amounts were offset by capitalized interest of$1.2 million and$0.9 million during each of the three months endedMarch 31, 2022 and 2021, respectively, associated with our development activities. The increase of interest expense in the three months endedMarch 31, 2022 as compared to the same period in 2021 is due to our issuances of debt. AtMarch 31, 2022 , we had$7.4 billion of notes payable outstanding, with a weighted average interest rate of approximately 1.8%. 41 -------------------------------------------------------------------------------- Foreign Currency Exchange Gain: For the three months endedMarch 31, 2022 and 2021, we recorded foreign currency gains of$35.4 million and$45.4 million , respectively, representing the changes in theU.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates. The Euro was translated at exchange rates of approximately1.111 U.S. Dollars per Euro atMarch 31, 2022 , 1.134 atDecember 31, 2021 , 1.173 atMarch 31, 2021 and 1.226 atDecember 31, 2020 . Future gains and losses on foreign currency will be dependent upon changes in the relative value of the Euro to theU.S. Dollar and the level of Euro-denominated notes payable outstanding. Gain on Sale of Real Estate: In the three months endedMarch 31, 2021 , we recorded gains on sale of real estate totaling$9.4 million (none in the three months endedMarch 31, 2022 ), in connection with the complete sale of a real estate facility pursuant to eminent domain proceeding inSaint Louis, Missouri .
Liquidity and Capital Resources
Overview
As ofMarch 31, 2022 , our expected material cash requirements for the next twelve months and thereafter comprised (i) contractually obligated expenditures, including payments of principal and interest; (ii) other essential expenditures, including property operating expenses, maintenance capital expenditures and dividends paid in accordance with REIT distribution requirements; and (iii) opportunistic expenditures, including acquisitions and developments and repurchases of our securities. We expect to satisfy these cash requirements through operating cash flow and opportunistic debt and equity financing.
Sources of Capital
While operating as a REIT allows us to minimize the payment ofU.S. federal corporate income tax expense, we are required to distribute at least 90% of our taxable income to our shareholders. Notwithstanding this requirement, we are nonetheless able to retain operating cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures. Our annual operating retained cash flow increased from$200 million to$300 million per year in recent years to approximately$700 million in 2021. We anticipate retained operating cash flow over the next twelve months will be similar to 2021. The REIT distribution requirement limits cash flow from operations that can be retained and reinvested in the business, increasing our reliance upon raising capital to fund growth. Capital needs in excess of retained cash flow are met with: (i) medium and long-term debt, (ii) preferred equity, and (iii) common equity. We select among these sources of capital based upon relative cost, availability, the desire for leverage, and considering potential constraints caused by certain features of capital sources, such as debt covenants. We view our line of credit, as well as any short-term bank loans, as bridge financing. Because raising capital is important to our growth, we endeavor to maintain a strong financial profile characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody's andStandard & Poor's . Our senior notes payable has an "A" credit rating byStandard & Poor's and "A2" by Moody's. Our credit ratings on each of our series of preferred shares are "A3" by Moody's and "BBB+" byStandard & Poor's . Our credit profile enable 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 are able to use as temporary "bridge" financing until we are able to raise longer term capital. As ofMarch 31, 2022 andMay 3, 2022 , there were no borrowings outstanding on the revolving line of credit; however, we do have approximately$21.2 million of outstanding letters of credit which limits our borrowing capacity to$478.8 million . Our line of credit matures onApril 19, 2024 . We believe that we have significant financial flexibility to adapt to changing conditions and opportunities and we have significant access to sources of capital including debt and preferred equity. Based upon our substantial current liquidity relative to our capital requirements noted below, we would not expect any potential capital market dislocations to have a material impact upon our expected capital and growth plans over the next 12 months. However, if capital market conditions were to change significantly in the long run, our access to or cost of debt and preferred equity capital could be negatively impacted and potentially affect future investment activities. 42 -------------------------------------------------------------------------------- We believe that our cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing cash requirements for interest payments on debt, maintenance capital expenditures and distributions to our shareholders for the foreseeable future. Our expected capital resources include: (i)$940.5 million of cash as ofMarch 31, 2022 and (ii) approximately$700.0 million of expected retained operating cash flow over the next twelve months. In addition, upon the consummation of the PSB merger, which PSB has announced is expected to close in the third quarter of 2022, we expect to receive approximately$2.7 billion of cash proceeds. The transaction will generate a tax gain of approximately$2.3 billion which, in order to satisfy our REIT qualification distribution requirements, we expect to distribute to our shareholders.
Over the long term, to the extent that our capital needs exceed our capital
resources, 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.
Cash Requirements
The following summarizes our expected material cash requirements which comprise (i) contractually obligated expenditures, (ii) other essential expenditures, and (iii) opportunistic expenditures. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties. Required Debt Repayments: As ofMarch 31, 2022 , the principal outstanding on our debt totaled approximately$7.5 billion , consisting of$23.0 million of secured notes payable,$1.7 billion of Euro-denominated unsecured notes payable and$5.8 billion ofU.S. Dollar denominated unsecured notes payable. Approximate principal maturities and interest payments are as follows (amounts in thousands): Remainder of 2022$ 595,837 2023 136,252 2024 924,590 2025 377,965 2026 1,251,728 Thereafter 4,987,294$ 8,273,666 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$91.3 million in the first three months of 2022 and are expected to approximate$300 million for the year endingDecember 31, 2022 . In addition to standard capital repairs of building elements reaching the end of their useful lives, our capital expenditures in recent years have included incremental expenditures to enhance the competitive position of certain of our facilities relative to local competitors pursuant to a multi-year program. Such investments include development of more pronounced, attractive, and clearly identifiable color schemes and signage, upgrades to the configuration and layout of the offices and other customer zones to improve the customer experience. We spent approximately$42 million in the first three months of 2022 and expect to spend$180 million in 2022 on this effort. In addition, we have made investments in LED lighting and the installation of solar panels, which approximated$15 million for the three months endedMarch 31, 2022 and we expect to spend$30 million in 2022. We believe that these incremental investments improve customer satisfaction, the attractiveness and competitiveness of our facilities to new and existing customers and, in the case of LED lighting and solar panels, reduce operating costs. Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. For each taxable year in which we qualify for taxation as a REIT, we will not be subject toU.S. federal corporate income tax on our "REIT taxable income" (generally, taxable income subject to specified adjustments, 43 --------------------------------------------------------------------------------
including a deduction for dividends paid and excluding our net capital gain)
that is distributed to our shareholders. We believe we have met these
requirements in all periods presented herein, and we expect to continue to
qualify as a REIT.
OnApril 28, 2022 , our Board declared a regular common quarterly dividend of$2.00 per common share totaling approximately$350 million , which will be paid at the end ofJune 2022 . Our consistent, long-term dividend policy has been to distribute 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.
The annual distribution requirement with respect to our Preferred Shares
outstanding at
As discussed above, in connection with the PSB merger transaction, we expect to
distribute approximately
transaction to our common shareholders.
Real Estate Investment Activities: We continue to seek to acquire additional self-storage facilities from third parties. Subsequent toMarch 31, 2022 , we acquired or were under contract to acquire eleven self-storage facilities for a total purchase price of$147.2 million . Five of these properties are under construction and expected to close as they are completed in the remainder of 2022 and the first quarter of 2023.
We are actively seeking to acquire additional facilities. However, future
acquisition volume will depend upon whether additional owners will be motivated
to market their facilities, which will in turn depend upon factors such as
economic conditions and the level of seller confidence.
As ofMarch 31, 2022 , we had development and expansion projects at a total cost of approximately$833.8 million . Costs incurred throughMarch 31, 2022 were$337.6 million , with the remaining cost to complete of$496.2 million expected to be incurred primarily in the next 18 to 24 months. Some of these projects are subject to contingencies such as entitlement approval. We expect to continue to seek to add projects to maintain and increase our robust pipeline. Our ability to do so continues to be challenged by various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations, and challenges in obtaining building permits for self-storage facilities in certain municipalities. Property Operating Expenses: The direct and indirect cost of our operations impose significant cash requirements. Direct operating costs include property taxes, on-site property manager payroll, repairs and maintenance, utilities and marketing. Indirect operating costs include supervisory payroll and centralized management costs. The cash requirements from these operating costs will vary year to year based on, among other things, changes in the size of our portfolio and changes in property tax rates and assessed values, wage rates and marketing costs in our markets. 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 ofMay 3, 2022 , we have no series of preferred securities that are eligible for redemption, at our option and with 30 days' notice. See Note 9 to ourMarch 31, 2022 consolidated financial statements for the redemption dates of all of our series of preferred shares. Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities. None of our preferred securities are redeemable at the option of the holders. Repurchases of Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three months endedMarch 31, 2022 , we did not repurchase any of our common shares. From the inception of the repurchase program throughMay 3, 2022 , 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. 44
--------------------------------------------------------------------------------
RenaissanceRe Reports Q1 2022 Net Loss Attributable to Common Shareholders of $394.4 Million; Operating Income Available to Common Shareholders of $151.9 Million. Poised to Deliver Shareholder Value Across Underwriting, Fees and Investments.
MERCURY GENERAL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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