UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the fiscal year ended
or
For the transition period from to .
Commission File Number:
(Exact name of Registrant as specified in its charter)
|
|
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) (Zip Code)
| |
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
|
|
|
|
|
|
|
Title of Class |
| Trading Symbol |
| Name of exchange on which registered |
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
Securities registered pursuant to Section 12(g) of the Act: None (Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ]No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | |
[X] | [ ] | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]No
The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2019:
Common Shares, $0.10 Par Value Per Share – $
As of February 21, 2020, there were
DOCUMENTS INCORPORATED BY REFERENCE
PART I
ITEM 1.Business
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects," "believes," "anticipates," "should," "estimates" and similar expressions.
These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1, Item 1A, "Risk Factors" and in our other filings with the Securities and Exchange Commission (the “SEC”) including:
general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development, acquisition, and expansion of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;
risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;
the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
the risk that our existing self-storage facilities may be at a disadvantage in competing with newly developed facilities with more visual and customer appeal;
difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage properties that we acquire directly or through the acquisition of entities that own and operate self-storage facilities;
increased reliance on Google as a customer acquisition channel;
risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, changes in tax laws, and local and global economic uncertainty that could adversely affect our earnings and cash flows;
risks related to our participation in joint ventures;
the impact of the legal and regulatory environment, including changes in federal, state, and local laws and regulations governing environmental issues, taxes, our tenant reinsurance business, pricing of our self-storage space, and labor;
risks of increased tax expense associated either with a possible failure by us to qualify as a real estate investment trust (“REIT”), or with challenges to the determination of taxable income for our taxable REIT subsidiaries;
risks due to a potential November 2020 California ballot initiative (or other equivalent actions) that could remove the property tax protections of Proposition 13 with respect to our California real estate and result in substantial increases in our California property tax expense;
changes in United States (“U.S.”) federal or state tax laws related to the taxation of REITs and other corporations;
security breaches or a failure of our networks, systems or technology could adversely impact our operations or our business, customer, and employee relationships or result in fraudulent payments;
risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;
difficulties in raising capital at a reasonable cost;
delays and cost overruns on our projects to develop or expand our facilities;
ongoing litigation and other legal and regulatory actions that may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business; and
economic uncertainty due to the impact of war or terrorism.
These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.
General
Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland REIT, was organized in 1980.
At December 31, 2019, our principal business activities were as follows:
(i)Self-storage Operations: We acquire, develop, own and operate self-storage facilities, which offer storage spaces for lease on a month-to-month basis, for personal and business use. We are the largest owner and operator of self-storage facilities in the U.S. At December 31, 2019, we have direct and indirect equity interests in 2,483 self-storage facilities that we consolidate (an aggregate of 169 million net rentable square feet of space) located in 38 states within the U.S. operating under the “Public Storage” brand name.
(ii)Ancillary Operations: We reinsure policies against losses to goods stored by customers in our self-storage facilities and sell merchandise, primarily locks and cardboard boxes, at our self-storage facilities.
(iii)Investment in PS Business Parks: We have a 42% equity interest in PS Business Parks, Inc. (“PSB”), a publicly held REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial parks. At December 31, 2019, PSB owns and operates 27.6 million rentable square feet of commercial space.
(iv)Investment in Shurgard: We have a 35% equity interest in Shurgard Self Storage SA (“Shurgard”), a public company traded on Euronext Brussels under the “SHUR” symbol, which owns 234 self-storage facilities (13 million net rentable square feet) located in seven countries in Western Europe operated under the “Shurgard” brand name. We believe Shurgard is the largest owner and operator of self-storage facilities in Western Europe.
We also manage 55 self-storage facilities for third parties as of December 31, 2019. In order to further increase our economies of scale and leverage our brand, in 2018 we began an effort to expand the number of facilities we manage, through a dedicated internal sales, administration, and implementation team. During the year ended December 31, 2019, we added 22 facilities to our third party management platform. At December 31, 2019, we are under contract to manage 27 additional facilities, currently under construction, following their completion. It is uncertain how many third party managed facilities we will add to our platform over time. We also own 0.9 million net rentable square feet of commercial space which is managed primarily by PSB.
For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur U.S. federal income tax if we distribute 100% of our “REIT taxable income” (generally, net rents and gains from real property, dividends, and interest) 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 met these requirements in all periods presented herein and we expect to continue to elect and qualify as a REIT.
We report annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants. We also report quarterly to the SEC on Form 10-Q, which includes unaudited financial statements. We expect to continue such reporting.
On our website, www.publicstorage.com, we make available, free of charge, our Annual Reports on Form 10- K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K.
Competition
We believe that our customers generally store their goods within a three to five mile radius of their home or business. Our facilities compete with nearby self-storage facilities owned by other operators using marketing channels similar to ours, including Internet advertising, signage, and banners and offer services similar to ours. As a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.
In the last three years, there has been a marked increase in development of new self-storage facilities in many of the markets where we operate, due to the favorable economics of developing new properties. These newly developed facilities compete with many of the facilities we own, negatively impacting our occupancies, rental rates, and rental growth. This increase in supply has been most notable in Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, Miami, New York, and Portland.
Ownership and operation of self-storage facilities is highly fragmented. As the largest owner of self-storage facilities, we believe that we own approximately 7% of the self-storage square footage in the U.S. and that collectively the five largest self-storage owners in the U.S. own approximately 16%, with the remaining 84% owned by regional and local operators.
The high level of ownership fragmentation in the industry is partially attributable to the relative simplicity of managing a local self-storage facility, such that small-scale owners can operate self-storage facilities at a basic level of profitability without significant managerial or operational infrastructure. However, we believe that the economies of scale inherent in this business result in our being able to operate self-storage facilities at a materially higher level
of cash flow per square foot than other operators without our scale. See “Business Attributes” below for further discussion of these economies of scale.
While this fragmentation offers us opportunities to acquire additional facilities over time, and our scale allows us to extract more cash flow from the properties we acquire, we compete for facilities that are marketed for sale with a wide variety of institutions and other investors who also view self-storage facilities as attractive investments. The amount of capital available for real estate investments greatly influences the competition for ownership interests in facilities and, by extension, the yields that we can achieve on newly acquired investments.
Recently, larger national operators (including ourselves) are offering to manage facilities owned by third parties on their platform for a fee (“Third Party Management”), and Google is offering a more convenient platform for small operators to compete with larger operators in paid search bidding campaigns to drive web traffic and increase reservations. These two developments have the potential to diminish the competitive advantage we have versus smaller owner/operators. The extent to which this trend becomes impactful is dependent on (i) how many smaller operators will choose to avail themselves of Third Party Management, (ii) the extent to which large national operators seek to increase the number of properties under Third Party Management and (iii) the extent to which smaller operators are attracted to Google’s marketing platform and are able to improve the efficacy of their marketing.
We generally own facilities in major markets. We believe that we have significant market share and concentration in major metropolitan centers, with approximately 70% of our 2019 same-store revenues generated in the 20 Metropolitan Statistical Areas (each, an “MSA”, as defined by the U.S. Census Bureau) with the highest population levels. We believe this is a competitive advantage relative to other self-storage operators, which do not have our geographic concentration and market share in the major MSAs.
Business Attributes
We believe that we possess several primary business attributes that permit us to compete effectively:
Centralized information networks: Our centralized reporting and information network enables us to identify changing market conditions and operating trends as well as analyze customer data and, on an automated basis, quickly change each of our individual properties’ pricing and promotions, as well as to drive marketing spending such as the relative level of bidding for various paid search terms on paid search engines.
Convenient shopping experience: Customers can conveniently shop for available storage space, reviewing attributes such as facility location, size, amenities such as climate-control, as well as pricing, through the following marketing channels:
Our Desktop and Mobile Websites: The online marketing channel is a key source of customers. Approximately 75% of our move-ins in 2019 were sourced through our website and we believe that many of our other customers who reserved directly through our call center or arrived at a facility and moved in without a reservation, have reviewed our pricing and availability online through our websites. We seek to regularly update the structure, layout, and content of our website in order to enhance our placement in “unpaid” search in Google and related websites, to improve the efficiency of our bids in “paid” search campaigns, and to maximize users’ likelihood of reserving space on our website.
Our Call Center: Our call center is staffed by skilled sales specialists. Customers reach our call center by calling our advertised toll-free telephone numbers provided on search engines or our website. We believe giving customers the option to interact with a call center agent, despite the higher marginal cost relative to a reservation made on our website, enhances our ability to close sales with potential customers.
Our Properties: Customers can also shop at any one of our facilities. Property managers access the same information that is available on our website and to our call center agents, and can inform
the customer of available space at that site or our other nearby storage facilities. Property managers are trained to maximize the conversion of such “walk in” shoppers into customers.
Managerial economies of scale: The size and scope of our operations have enabled us to achieve high operating margins and a low level of administrative costs relative to revenues through the centralization of many functions, such as facility maintenance, employee compensation and benefits programs, revenue management, as well as the development and documentation of standardized operating procedures. We also believe that our major market concentration provides managerial efficiencies stemming from having a large percentage of our facilities in close proximity to each other.
Marketing economies of scale: Our major-market concentration relative to the fragmented ownership and operation of the rest of the industry, combined with our well-recognized brand name, improves our prominence in unpaid online search results for self-storage and reduces our average cost per “click” for multiple-keyword advertising. Such concentration and the resulting volume enables us to efficiently leverage systematic bidding strategies to maximize our return on investment across multiple keywords.
Brand name recognition: We believe that the “Public Storage” brand name is the most recognized and established name in the self-storage industry, due to our national reach in major markets in 38 states, our highly visible facilities, and our facilities’ distinct orange colored doors and signage. We believe the “Public Storage” name is one of the most frequently used search terms used by customers using Internet search engines for self-storage. We believe that the “Shurgard” brand, used by Shurgard, is a well-established and valuable brand in Europe. We believe that the awareness of our brand name results in a high percentage of potential storage customers considering our facilities relative to other operators.
Growth and Investment Strategies
Our ongoing growth strategies consist of: (i) improving the operating performance of our existing self-storage facilities, (ii) acquiring more facilities, (iii) developing new facilities and adding more self-storage space to our existing facilities, (iv) participating in the growth of our investment in PSB, and (v) participating in the growth of our investment in Shurgard. While our long-term strategy includes each of these elements, in the short run the level of growth in our asset base in any period is dependent upon the cost and availability of capital, as well as the relative attractiveness of available investment alternatives.
From time to time we explore expansion of our activities to other countries. Any such strategic expansion would most likely involve acquiring an interest in an existing operator’s platform. There can be no assurance that any such expansion will occur in the future or the timing thereof.
Improve the operating performance of existing facilities: We seek to increase the net cash flow of our existing self-storage facilities through maximizing revenues and controlling operating costs. We seek to maximize revenues through striking the appropriate balance between occupancy and rates to new and existing tenants, by regularly adjusting (i) our promotional and other discounts, (ii) the rental rates we charge to new and existing customers, and (iii) our marketing spending and intensity. We inform these pricing and marketing decisions by observing their impact on web and call center traffic, reservations, move-ins, move-outs, tenant length of stay, and other indicators of response. We also seek to control operating costs and provide a favorable experience to new, existing, and potential customers by leveraging information technology and our economies of scale, effectively overseeing our customer-facing and back-office property management personnel, and by providing convenient shopping options for the customer.
Acquire properties owned by others in the U.S.: We seek to capitalize on the fragmentation of the self-storage business through acquiring attractively priced, well-located existing self-storage facilities. We believe our presence in and knowledge of substantially all of the major markets in the U.S. enhances our ability to identify attractive acquisition opportunities. Data on the rental rates and occupancy levels of our existing facilities provide us an advantage in evaluating the potential of acquisition opportunities. Our aggressiveness in bidding for particular marketed facilities depends upon many factors including the potential for future growth, the quality of construction and location, the cash flow we expect from the facility when operated on our platform, how well the facility fits into
our current geographic footprint, as well as our return on capital expectations. From January 1, 2015 through December 31, 2019, we acquired an aggregate of 163 facilities from third parties at an aggregate cost of $1.4 billion. We will continue to seek to acquire properties in 2020; however, there is significant competition to acquire existing facilities, and self-storage owners’ desire to sell is based upon many variables, including potential reinvestment returns, expectations of future growth, estimated value, the cost of debt financing, as well as personal considerations. As a result, there can be no assurance as to the level of facilities we may acquire.
Develop new self-storage facilities and expand existing facilities: The development of new self-storage locations and the expansion of existing facilities has been an important source of growth. Since the beginning of 2013, we have 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. At December 31, 2019, we had a development pipeline to develop 12 new self-storage facilities and expand 35 existing self-storage facilities, which will add approximately 4.4 million net rentable square feet, at a cost of $619.2 million. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations, challenges in obtaining building permits for self-storage activities in certain municipalities, as well as challenges in sourcing quality construction materials, labor, and design elements.
Participate in the growth of PS Business Parks, Inc.: Our investment in PSB provides diversification into another asset type. PSB is a stand-alone public company traded on the NYSE. As of December 31, 2019, we have a 42% equity interest in PSB.
PSB seeks to grow its asset base in its existing markets as well as increase the cash flows from its owned portfolio. As of December 31, 2019, PSB owned and operated approximately 27.6 million rentable square feet of commercial space, and had an enterprise value of approximately $6.7 billion (based upon the trading price of PSB’s common stock combined with the liquidation value of its preferred stock as of December 31, 2019).
Participate in the growth of Shurgard: We believe Shurgard is the largest self-storage company in Western Europe. It owns and operates 234 self-storage facilities with approximately 13 million net rentable square feet in: France (principally Paris), Sweden (principally Stockholm), the United Kingdom (principally London), the Netherlands, Denmark (principally Copenhagen), Belgium (principally Brussels) and Germany. On October 15, 2018, Shurgard completed an initial global offering (the “Offering”) of 25.0 million of its common shares for €575 million in gross proceeds, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. As a result of the Offering (we did not acquire any additional common shares or sell any of our existing shares in the Offering), our equity interest in Shurgard decreased from 49% to 35.2%.
Customer awareness and availability of self-storage is significantly lower in Europe than in the U.S. However, with more awareness and product supply, we believe there is potential for increased demand for storage space in Europe. We believe Shurgard can capitalize on potential increased demand through the development of new facilities and acquiring existing facilities. From January 1, 2014 through December 31, 2019, Shurgard acquired 39 facilities from third parties for approximately $398.1 million, and has opened 10 development properties at a total cost of approximately $122.9 million. At December 31, 2019, Shurgard had contracts to acquire six properties and had six properties under development.
Financial Profile and Sources of Growth Capital
Capital Constraints as a REIT: While being a REIT allows us to minimize the payment of federal and state income tax expense, we are required to distribute 100% of our taxable income to our shareholders. This requirements limits cash flow from operations that can be retained and reinvested in the business, increasing our reliance upon raising capital to fund growth.
Access to Capital: 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 and Standard
& Poor’s. Our senior debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile and ratings enable us to effectively access both the public and private capital markets to raise capital.
While we must distribute our taxable income, we are nonetheless able to retain operating cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures. In recent years, we have retained approximately $200 million to $300 million per year in cash flow. Capital needs in excess of retained cash flow are met with: (i) preferred equity, (ii) medium and long-term debt, and (iii) common equity. We select among these sources of capital based upon relative cost, availability, the desire for leverage, and potential constraints caused by certain features of capital sources, such as debt covenants. We view our line of credit, as well as short-term bank loans, as bridge financing.
We could also raise capital through joint venture financing or the sale of properties, however, we have no current plans to use these sources of capital.
Preferred equity: Preferred equity is an important source of long-term capital. While preferred equity’s coupon rates generally exceed interest rates on long-term debt, we believe the issuance of preferred equity is a favorable source of capital when available because it does not require repayment and, at our option, we can redeem the security after five years if, for example, market coupon rates have declined and we can reissue new securities at a lower rate.
Notwithstanding these favorable characteristics, the rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time, and the amount that can be issued in any particular offering is generally limited to approximately $300 million at any one point in time, because demand for these securities comes primarily from retail investors rather than institutional investors.
The level of preferred equity outstanding has remained relatively constant, totaling $4.3 billion at December 31, 2014 and $4.1 billion at December 31, 2019. However, during this timeframe, we have regularly redeemed preferred shares pursuant to our redemption option, and issued new preferred equity at lower rates, reducing the average coupon rate from 5.88% at December 31, 2014 to 5.12% at December 31, 2019.
As of February 25, 2020, we believe that the market coupon rate for preferred securities approximates 4.75%. As of February 25, 2020, we have the option to redeem, with 30 days’ notice, the following series of preferred securities: our 5.375% Series V Preferred Shares ($495 million), our 5.200% Series W Preferred Shares ($500 million), and our 5.200% Series X Preferred Shares ($225 million). Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities.
Medium and Long-Term Debt: We have increased our debt outstanding from $64 million at December 31, 2014 to $1.9 billion at December 31, 2019, and on January 24, 2020, we issued an additional €500 million ($551.6 million) of senior unsecured debt. Our $2.5 billion of debt outstanding at February 25, 2020 has an average interest rate of approximately 2.43%. While we have increased our use of debt as a capital source, and have broad powers to issue debt without a vote by our preferred or common shareholders, we expect to continue to remain conservatively capitalized and not subject ourselves to significant refinancing risk through effective “laddering” of our maturities.
Common equity: Except in connection with mergers, most notably a merger in 2006 with Shurgard Storage Centers, we have not raised capital through the issuance of common equity because lower cost alternatives have been available. However, we believe that the market for our common equity is liquid, with average trading volume in 2019 of approximately 885,000 common shares per day and, as a result, common equity is a significant potential source of capital.
Bridge financing: We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing, along with short-term bank loans, until we are able to raise longer-term capital. As of
December 31, 2019, there were no borrowings outstanding on our revolving line of credit and no short-term bank loans.
Joint Venture Financing: We have participated in joint ventures with institutional investors in the past to acquire, develop, and operate self-storage facilities, most notably our joint venture to own Shurgard, prior to its Offering. Any future uses of joint venture financing will be based upon, among other considerations, the relative cost of joint venture financing as compared to other sources of capital. We do not have any current plans to utilize joint venture financing.
Sale of Properties: Generally, we have disposed of self-storage facilities only when compelled to do so through condemnation proceedings. Because we believe that we are an optimal operator of self-storage facilities, we have generally found that we cannot obtain sufficient value in selling properties because potential buyers cannot extract as much cash flow from the properties as we can. As a result, we do not presently expect to raise significant capital selling self-storage facilities; however, there can be no assurance that we will not.
Investments in Real Estate and Unconsolidated Real Estate Entities
Investment Policies and Practices with respect to our investments: Following are our investment practices and policies which, though we do not anticipate any significant alteration, can be changed by our board of trustees (the “Board”) without a shareholder vote:
Our investments primarily consist of direct ownership of self-storage facilities, as well as partial interests in entities we control that own self-storage facilities that we manage under the “Public Storage” brand name in the U.S. Our investments in self-storage facilities are described in more detail in Item 2, “Properties,” below.
We have an ownership interest in Shurgard, which owns storage facilities located in Europe under the “Shurgard” brand name.
Additional acquired interests in real estate will primarily include the acquisition of properties from third parties, as well as to a lesser extent, partial interests in entities in which we already have an interest.
To a lesser extent, we have interests in existing commercial properties (described in Item 2, “Properties”), containing commercial and industrial rental space, primarily through our investment in PSB.
Facilities Owned by Unconsolidated Real Estate Entities
At December 31, 2019, we had ownership interests in PSB and Shurgard (each discussed above), which we do not control or consolidate.
PSB and Shurgard’s debt has no recourse to us. See Note 4 to our December 31, 2019 financial statements for further disclosure regarding our investments in PSB and Shurgard. In addition, PSB’s public filings are available at its website, www.psbusinessparks.com and on the SEC website, and Shurgard’s public filings and publicly reported information can be obtained on its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu.
Canadian self-storage facilities owned by Tamara Hughes Gustavson
At December 31, 2019, Tamara Hughes Gustavson, a member of our Board of Trustees, owned and controlled 63 self-storage facilities in Canada. These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a royalty-free, non-exclusive basis. We have no ownership interest in these facilities and we do not own or operate any facilities in Canada. If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storage” name in Canada. We have a
right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of these facilities if their owners agree to sell them. Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately $1.5 million, $1.3 million and $1.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our right to continue receiving these premiums may be qualified.
Limitations on Debt
Our revolving credit facility, U.S. Dollar Notes and Euro Notes contain various customary financial covenants, including limitations on our ability to encumber our properties with mortgages and limitations on the level of indebtedness. We believe we complied with each of these covenants as of December 31, 2019.
Employees
We had approximately 5,900 employees in the U.S. at December 31, 2019 who are engaged primarily in property operations.
Seasonality
We experience minor seasonal fluctuations in the demand for self-storage space, with demand and rental rates generally higher in the summer months than in the winter months. We believe that these fluctuations result in part from increased moving activity during the summer months.
Insurance
We carry property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles. Our deductible for general liability is $2.0 million per occurrence. Our annual deductible for property loss is $25.0 million per occurrence. This deductible decreases to $5.0 million once we reach $35.0 million in aggregate losses for occurrences that exceed $5.0 million. Insurance carriers’ aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.
We reinsure a program that provides insurance to our customers from an independent third-party insurer. This program covers customer claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit. We reinsure all risks in this program, but purchase insurance to cover this exposure for a limit of $15.0 million for losses in excess of $5.0 million per occurrence. We are subject to licensing requirements and regulations in several states. Customers participate in the program at their option. At December 31, 2019, there were approximately 935,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $3.2 billion.
ITEM 1A. Risk Factors
In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company. This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Item 1, “Business.”
We have significant exposure to real estate risk.
Since our business consists primarily of acquiring, developing, and operating real estate, we are subject to risks related to the ownership and operation of real estate that could result in reduced revenues, increased expenses, increased capital expenditures, or increased borrowings, which could negatively impact our operating results, cash flow available for distribution or reinvestment, and our stock price:
Natural disasters or terrorist attacks could cause damage to our facilities, resulting in increased costs and reduced revenues. Natural disasters, such as earthquakes, fires, hurricanes and floods, or terrorist attacks could cause significant damage to our facilities and require significant repair costs, and make facilities temporarily uninhabitable, thereby reducing our revenues. Damage and business interruption losses could exceed the aggregate limits of our insurance coverage. In addition, because we self-insure a portion of our risks, losses below a certain level may not be covered by insurance. See Note 13 to our December 31, 2019 financial statements for a description of the risks of losses that are not covered by third-party insurance contracts. We may not have sufficient insurance coverage for losses caused by a terrorist attack, or such insurance may not be maintained, available or cost-effective. In addition, significant natural disasters, terrorist attacks, threats of future terrorist attacks, or resulting wider armed conflicts could have negative impacts on self-storage demand and/or our revenues.
Consequences of climate change, including severe weather events, and the steps taken to prevent climate change, could result in increased capital expenditures, increased expenses, and reduced revenues: Direct and indirect impacts of climate change, such as increased destructive weather events, fires, reduced lifespans and population reduction, reduced natural habitats, water, food, arable land, and other resources, as well as resulting armed conflicts, could increase our costs or reduce demand for our self-storage facilities. Governmental, political, and societal pressure could (i) require costly changes to future newly developed facilities, or require retrofitting of our existing facilities, to reduce carbon emissions through multiple avenues including changes to insulation, space configuration, lighting, heating, and air conditioning, (ii) increase energy costs as a result of switching to less carbon-intensive, but more expensive, sources of energy to operate our facilities, and (iii) result in consumers reducing their individual carbon footprints by owning fewer durable material consumer goods, collectibles, and other such items requiring storage, resulting in a reduced demand for our self-storage space.
Operating costs, including property taxes, could increase. We could be subject to increases in insurance premiums, property or other taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating expenses due to various factors such as inflation, labor shortages, commodity and energy price increases, weather, increases to minimum wage rates, changes to governmental safety and real estate use limitations, as well as other governmental actions. Our property tax expense, which totaled approximately $280.5 million during the year ended December 31, 2019, generally depends upon the assessed value of our real estate facilities as determined by assessors and government agencies, and accordingly could be subject to substantial increases if such agencies changed their valuation approaches or opinions or if new laws are enacted, especially if new approaches are adopted or laws are enacted that result in increased property tax assessments in states or geographies where we have a high concentration of facilities. See also “We have exposure to increased property tax in California” below.
The acquisition of existing properties or self-storage operating companies is subject to risks that may adversely affect our growth and financial results. We have acquired self-storage facilities from third parties in the past, and we expect to continue to do so in the future. We face significant competition for suitable acquisition properties from other real estate investors. As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased. Failures or unexpected circumstances in integrating facilities that we acquire directly or via the acquisition of operating companies into our operations, or circumstances we did not detect or anticipate during due diligence, such as environmental matters, needed repairs or deferred maintenance, customer collection issues, assumed liabilities, turnover of critical personnel involved in acquired operating companies, or the effects of increased property tax following reassessment of a newly-acquired property, as well as the general risks of real estate investment and mergers and acquisitions, could jeopardize realization of the anticipated earnings from an acquisition.
Development of self-storage facilities can subject us to risks. At December 31, 2019, we have a pipeline of development projects totaling $619.2 million (subject to contingencies), and we expect to continue to seek additional development projects. There are significant risks involved in developing self-storage facilities, such as delays or cost increases due to changes in or failure to meet government or regulatory requirements, failure of revenue to meet our underwriting estimates, weather issues, unforeseen site conditions, or personnel problems. Self-storage space is generally not pre-leased, and rent-up of newly developed space can be delayed or ongoing cash flow yields can be reduced due to competition, reductions in storage demand, or other factors.
There is significant competition among self-storage operators and from other storage alternatives. Our self-storage facilities generate most of our revenue and earnings. Competition in the local market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates, and operating expenses. Development of self-storage facilities has increased in recent years, which has intensified competition and will continue to do so as newly developed facilities are opened. Development of self-storage facilities by other operators could continue to increase, due to increases in availability of funds for investment or other reasons, and further intensify competition.
Our newly developed and expanded facilities, and facilities that we manage for third party owners, may negatively impact the revenues of our existing facilities. We continue to develop new self-storage facilities and expand our existing self-storage facilities. In addition, we are seeking to increase the number of self-storage facilities that we manage for third party owners in exchange for a fee, many of which are in the process of stabilization and are in proximity to our existing stabilized self-storage facilities. In order to hasten the fill-up of these new facilities, we aggressively price such space during the fill-up period. While we believe that this aggressive pricing allows us to increase our market share relative to our competitors and increase the cash flows of these properties, such pricing and the added capacity may also negatively impact our existing stabilized self-storage facilities that are in proximity to these unstabilized facilities.
Many of our existing self-storage facilities may be at a competitive disadvantage to newly developed facilities. There is a significant level of development of new self-storage facilities, by us and other operators. These newly developed facilities are generally of high quality, with a more fresh and vibrant appearance, more amenities such as climate control, more attractive office configurations, newer elements, and a more imposing and attractive retail presence as compared to many of our existing stabilized self-storage facilities, some of which were built as much as 50 years ago. Such qualitative differentials may negatively impact our ability to compete with these facilities for new tenants and our existing tenants may move to newly developed facilities.
We may incur significant liabilities from environmental contamination or moisture infiltration. Existing or future laws impose or may impose liability on us to clean up environmental contamination on or around properties that we currently or previously owned or operated, even if we were not responsible for or aware of the environmental contamination or even if such environmental contamination occurred prior to our involvement with the property. We have conducted preliminary environmental assessments on most of our properties, which have not identified any material liabilities. These assessments, commonly referred to as “Phase 1 Environmental Assessments,” include an investigation (excluding soil or groundwater sampling or analysis) and a review of publicly available information regarding the site and other nearby properties.
We are also subject to potential liability relating to moisture infiltration, which can result in mold or other damage to our or our customers’ property, as well as potential health concerns. When we receive a complaint or otherwise become aware that an air quality concern exists, we implement corrective measures and seek to work proactively with our customers to resolve issues, subject to our contractual limitations on liability for such claims.
We are not aware of any environmental contamination or moisture infiltration related liabilities that could be material to our overall business, financial condition, or results of operation. However, we may not have detected all material liabilities, we could acquire properties with material undetected liabilities, or new conditions could arise or develop at our properties, any of which could result in a cash settlement or adversely affect our ability to sell, lease, operate, or encumber affected facilities.
Economic conditions can adversely affect our business, financial condition, growth and access to capital.
Our revenues and operating cash flow can be negatively impacted by reductions in employment and population levels, household and disposable income, and other general economic factors that lead to a reduction in demand for rental space in each of the markets in which we operate.
Our ability to raise capital to fund our activities may be adversely affected by challenging market conditions. In periods when the capital and credit markets experience significant volatility, the amounts, sources, and cost of
capital available to us may be adversely affected. If we were unable to raise capital at reasonable rates, prospective earnings growth through expanding our asset base could be limited.
We have exposure to European operations through our ownership in Shurgard.
We own approximately 35% of the common shares of Shurgard, and this investment has a $339.9 million book value and a $1.2 billion market value (based upon the closing trading price of Shurgard’s common stock) at December 31, 2019. We recognized $15.5 million in equity in earnings, and received $23.1 million in dividends, in 2019, with respect to Shurgard.
Shurgard, as an owner, operator, and developer of self-storage facilities, is subject to many of the same risks we are with respect to self-storage. However, through our investment in Shurgard, we are exposed to additional risks unique to the various European markets Shurgard operates in which may adversely impact our business and financial results, many of which are referred to in Shurgard’s public filings. These risks include the following:
Currency risks: Currency fluctuations can impact the fair value of our investment in Shurgard, our equity earnings, our ongoing dividends, and any other related repatriations of cash.
Legislative, tax, and regulatory risks: Shurgard is subject to a variety of local, national, and pan European laws and regulations related to permitting and land use, the environment, labor, and other areas, as well as income, property, sales, value added and employment tax laws. These laws can be difficult to apply or interpret and can vary in each country or locality, and are subject to unexpected changes in their form and application due to regional, national, or local political uncertainty and other factors. Such changes, or Shurgard’s failure to comply with these laws, could subject it to penalties or other sanctions, adverse changes in business processes, as well as potentially adverse income tax, property tax, or other tax burdens.
Impediments to capital repatriation could negatively impact the realization of our investment in Shurgard: Laws in Europe and the U.S. may create, impede, or increase our cost to repatriate distributions received from Shurgard or proceeds from the sale of Shurgard’s shares.
Risks of collective bargaining and intellectual property: Collective bargaining, which is prevalent in certain areas in Europe, could negatively impact Shurgard’s labor costs or operations. Many of Shurgard’s employees participate in various national unions.
Potential operating and individual country risks: Economic slowdowns or extraordinary political or social change in the countries in which it operates have posed, and could continue to pose, challenges or result in future reductions of Shurgard’s operating cash flows.
Liquidity of our ownership stake: We have no plans to liquidate our interest in Shurgard. However, while Shurgard is a publicly held entity, if we chose to, our ability to liquidate our shares in Shurgard in an efficient manner could be limited by the level of Shurgard’s public “float” relative to any ownership stake we sought to sell. Our existing relationship with our legacy joint venture partner may place further contractual limitations on our ability to sell all of the shares we own if we desired to do so.
Impediments of Shurgard’s public ownership structure: Shurgard’s strategic decisions, involving activities such as borrowing money, capital contributions, raising capital from third parties, as well as selling or acquiring significant assets, are determined by its board of directors. As a result, Shurgard may be precluded from taking advantage of opportunities that we would find attractive but that we may not be able to pursue economically separately, or it could take actions that we do not agree with.
We have exposure to commercial property risk through our ownership in PSB.
We own approximately 42% of the common equity of PSB, and this investment has a $427.9 million book value and a $2.4 billion market value (based upon the closing trading price of PSB’s common stock) at December 31, 2019. We recognized $54.1 million in equity in earnings, and received $60.7 million in dividends, in 2019, with respect to PSB.
PSB, as an owner, operator, and developer of real estate, is subject to many of the same risks we are with respect to real estate. However, we may be exposed to other risks as a result of PSB’s ownership specifically of commercial facilities. These risks are set forth in PSB’s Form 10-K for the year ended December 31, 2019, under “Item 1A. Risk Factors.”
The Hughes Family could significantly influence us and take actions adverse to other shareholders.
At December 31, 2019, B. Wayne Hughes, our former Chairman and his family, which includes his daughter, Tamara Hughes Gustavson and his son, B. Wayne Hughes, Jr., who are both members of our Board of Trustees (collectively, the “Hughes Family”), owned approximately 14.1% of our aggregate outstanding common shares. Our declaration of trust permits the Hughes Family to own up to 35.66% of our outstanding common shares while it generally restricts the ownership by other persons and entities to 3% of our outstanding common shares unless our Board of Trustees grants an ownership waiver, as has occurred in certain cases for large mutual fund companies. Consequently, the Hughes Family may significantly influence matters submitted to a vote of our shareholders, including electing trustees, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, which may result in an outcome that may not be favorable to other shareholders.
Takeover attempts or changes in control could be thwarted, even if beneficial to shareholders.
In certain circumstances, shareholders might desire a change of control or acquisition of us, in order to realize a premium over the then-prevailing market price of our shares or for other reasons. However, the following could prevent, deter, or delay such a transaction:
Provisions of Maryland law may impose limitations that may make it more difficult for a third party to negotiate or effect a business combination transaction or control share acquisition with Public Storage. Currently, the Board has opted not to subject the Company to these provisions of Maryland law, but it could choose to do so in the future without shareholder approval.
To protect against the loss of our REIT status due to concentration of ownership levels, our declaration of trust generally limits the ability of a person, other than the Hughes Family or “designated investment entities” (each as defined in our declaration of trust), to own, actually or constructively, more than 3% of our outstanding common shares or 9.9% of the outstanding shares of any class or series of preferred or equity shares. Our Board may grant, and has previously granted, a specific exemption. These limits could discourage, delay or prevent a transaction involving a change in control of the Company not approved by our Board.
Similarly, current provisions of our declaration of trust and powers of our Board could have the same effect, including (1) limitations on removal of trustees, (2) restrictions on the acquisition of our shares of beneficial interest, (3) the power to issue additional common shares, preferred shares or equity shares on terms approved by the Board without obtaining shareholder approval, (4) the advance notice provisions of our bylaws and (5) the Board’s ability under Maryland law, without obtaining shareholder approval, to implement takeover defenses that we may not yet have and to take, or refrain from taking, other actions that could have the effect of delaying, deterring or preventing a transaction or a change in control.
If we failed to qualify as a REIT, we would have to pay substantial income taxes.
REITs are subject to a range of complex organizational and operational requirements. A qualifying REIT does not generally incur federal income tax on its net income that is distributed to its shareholders. Our REIT status is also dependent upon the ongoing REIT qualification of PSB as a result of our substantial ownership interest in it. We believe we have qualified as a REIT and we intend to continue to maintain our REIT status.
There can be no assurance that we qualify or will continue to qualify as a REIT, because of the highly technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified issues in prior periods, or changes in our circumstances, as well as share ownership limits in our articles of incorporation that do not necessarily ensure that our shareholder base is sufficiently diverse for us to qualify as a REIT. For any year we fail to qualify as a REIT, unless certain relief provisions apply (the granting of such relief could nonetheless result in significant excise or penalty taxes), we would not be allowed a deduction for dividends paid, we would be subject to corporate tax on our taxable income, and generally we would not be allowed to elect REIT status until the fifth year after such a disqualification. Any taxes, interest, and penalties incurred would reduce our cash available for distributions to shareholders and could negatively affect our stock price. However, for years in which we failed to qualify as a REIT, we would not be subject to REIT rules that require us to distribute substantially all of our taxable income to our shareholders.
Holders of our preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of shares of our common stock.
Holders of our preferred shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common stock. Upon liquidation, holders of our preferred shares will receive a liquidation preference of $25,000 per share (or $25.00 per depositary share) plus any accrued and unpaid distributions before any payment is made to the common shareholders. These preferences may limit the amount received by our common shareholders either from ongoing distributions or upon liquidation. In addition, our preferred shareholders have the right to elect two additional directors to our Board whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive.
We are increasingly dependent upon Google to source our customers.
Approximately 59% of our new storage customers in 2019 were sourced directly or indirectly through “unpaid” search and “paid” search campaigns on Google. We believe that the vast majority of customers searching for self-storage use Google at some stage in their shopping experience. Google is providing tools to allow smaller and less sophisticated operators to bid for search terms, increasing competition for self-storage search terms. The predominance of Google in the shopping experience, as well as Google’s enabling of additional competitors to bid for placements in self-storage search terms, may reduce the number of new customers that we can procure, and/or increase our costs to obtain new customers.
Preferred Shareholders are subject to certain risks.
Holders of our preferred shares have preference rights over our common shareholders with respect to liquidation and distributions, which give them some assurance of continued payment of their stated dividend rate, and receipt of their principal upon liquidation of the Company or redemption of their securities. However, holders of our Preferred Shares should consider the following risks:
The Company has in the past, and could in the future, issue or assume additional debt. Preferred shareholders would be subordinated to the interest and principal payments of such debt, which would increase the risk that there would not be sufficient funds to pay distributions or liquidation amounts to the preferred shareholders.
The Company has in the past, and could in the future, issue additional preferred shares that, while pari passu to the existing preferred shares, increases the risk that there would not be sufficient funds to pay distributions to the preferred shareholders.
While the Company has no plans to do so, if the Company were to lose its REIT status or no longer elect REIT status, it would no longer be required to distribute its taxable income to maintain REIT status. If, in such a circumstance, the Company ceased paying dividends, unpaid distributions to the preferred shareholders would continue to accumulate. The preferred shareholders would have the ability to elect two additional members to serve on our Board of Trustees until the arrearage was cured. The preferred shareholders would not receive any compensation (such as interest) for the delay in the receipt of distributions, and it is possible that the arrearage could accumulate indefinitely.
Changes in tax laws could negatively impact us.
The United States Treasury Department and Congress frequently review federal income tax legislation, regulations and other guidance. We cannot predict whether, when, or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us or our shareholders.
Changes made by the Tax Cuts and Jobs Act (the “TCJA”), signed into law on December 22, 2017, limit our ability to deduct compensation in excess of $1 million paid to certain senior executives. This could require us to increase distributions to our shareholders in the future in order to avoid paying tax and to maintain our REIT status.
We may pay some taxes, reducing cash available for shareholders.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, foreign, state and local taxes on our income and property. Since January 1, 2001, certain consolidated corporate subsidiaries of the Company have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, and are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments, and ongoing intercompany arrangements could have to change, resulting in higher ongoing tax payments. To the extent the Company is required to pay federal, foreign, state or local taxes or federal penalty taxes due to existing laws or changes thereto, we will have less cash available for distribution to shareholders.
In addition, certain local and state governments have imposed taxes on self-storage rent. While in most cases those taxes are paid by our customers, they increase the cost of self-storage rental to our customers and can negatively impact our revenues. Other local and state governments may impose self-storage rent taxes in the future.
We have exposure to increased property tax in California.
Approximately $580 million of our 2019 net operating income is from our properties in California, and we incurred approximately $42 million in related property tax expense. Due to the impact of Proposition 13, which generally limits increases in assessed values to 2% per year, the assessed value and resulting property tax we pay is less than it would be if the properties were assessed at current values. From time to time, proposals have been made to reduce the beneficial impact of Proposition 13, particularly with respect to commercial and industrial (non-residential) real estate, which would include self-storage facilities. In late 2018, an initiative qualified for California’s November 2020 statewide ballot that would create a “split roll,” generally making Proposition 13’s protections only applicable to residential real estate. The sponsors of the original initiative are attempting to qualify a revised proposal that has a similar impact in terms of property taxes, but may have a higher change of passage. If the revised initiative is qualified, it will replace the first initiative on the November 2020 ballot. If the original or replacement initiative were to be adopted, it would end the beneficial effect of Proposition 13 for our properties, and our property tax expense could increase substantially, adversely affecting our cash flow from operations and net income.
We cannot predict whether (i) the revised initiative will qualify to replace the first qualified initiative, (ii) the initiative that ends up on the November 2020 ballot will pass or (iii) other changes to Proposition 13 may be proposed or adopted in the future.
We are exposed to ongoing litigation and other legal and regulatory actions, which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business.
We have over 5,900 employees, more than 1.4 million customers, and we conduct business at facilities with 169 million net rentable square feet of storage space. As a result, we are subject to the risk of legal claims and proceedings (including class actions) and regulatory enforcement actions in the ordinary course of our business and otherwise, and we could incur significant liabilities and substantial legal fees as a result of these actions. Resolution of these claims and actions may divert time and attention by our management could involve payment of damages or expenses by us, all of which may be significant, and could damage our reputation and our brand. In addition, any such resolution could involve our agreement to terms that restrict the operation of our business. The results of legal proceedings cannot be predicted with certainty. We cannot guarantee losses incurred in connection with any current or future legal or regulatory proceedings or actions will not exceed any provisions we may have set aside in respect of such proceedings or actions or will not exceed any available insurance coverage. The impact of any such legal claims, proceedings, and regulatory enforcement actions and could negatively impact our operating results, cash flow available for distribution or reinvestment, and/or the price of our common shares.
In addition, through exercising their authority to regulate our activities, governmental agencies can otherwise negatively impact our business by increasing costs or decreasing revenues.
We are heavily dependent on computer systems, telecommunications and the Internet to process transactions, make payments, summarize results and manage our business. The failure or disruption of our computer and communications systems could significantly harm our business.
We are heavily dependent upon automated information technology and Internet commerce, with more than half of our new customers coming from the telephone or over the Internet. We centrally manage significant components of our operations with our computer systems, including our financial information, and we also rely extensively on third-party vendors to retain data, process transactions and provide other systems services. These systems are subject to damage or interruption from power outages, computer and telecommunications failures, hackers, computer worms, viruses and other destructive or disruptive security breaches and catastrophic events. Such incidents could also result in significant costs to repair or replace such networks or information systems, as well as actual monetary losses in case of a breach that resulted in fraudulent payments or other cash transactions. As a result, our operations could be severely impacted by a natural disaster, terrorist attack, attack by hackers, acts of vandalism, data theft, misplaced or lost data, programming or human error, or other circumstance that results in a significant outage of our systems or those of our third party providers, despite our use of back up and redundancy measures.
If our confidential information is compromised or corrupted, including as a result of a cybersecurity breach, our reputation and business relationships could be damaged, which could adversely affect our financial condition and operating results.
In the ordinary course of our business we acquire and store sensitive data, including personally identifiable information of our prospective and current customers and our employees. The secure processing and maintenance of this information is critical to our operations and business strategy. Although we believe we have taken commercially reasonable steps to protect the security of our confidential information, information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyberattacks. Despite our security measures, we have experienced security breaches due to cyberattacks and additional breaches could occur in the future. In these cases, our information technology and infrastructure could be vulnerable and our or our customers’ or employees’ confidential information could be compromised or misappropriated. Any such breach could result in serious and harmful consequences for us or our tenants.
Our confidential information may also be compromised due to programming or human error or malfeasance.
We must continually evaluate and adapt our systems and processes to address the evolving threat landscape, and therefore there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business from multiple regulatory agencies at the local, state, federal, or international level, compliance with those requirement could also result in additional costs, or we could fail to comply with those requirements due to various reasons such as not being aware of them.
Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, any of which could adversely affect our results of operations, reputation and competitive position. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue leasing our self-storage facilities. Such events could lead to lost future revenues and adversely affect our results of operations and could result in remedial and other costs, fines or lawsuits, which could be in excess of any available insurance that we have procured.
We are subject to California’s new privacy law which will require us to incur compliance costs and may subject us to litigation that may affect our operating results and financial condition.
The California Consumer Privacy Act (the “CCPA”) went into effect on January 1, 2020. The CCPA requires, among other things, companies that collect personal information about California residents to make new disclosures to those residents about their data collection, use and sharing practices, allows residents to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. However, regulations from the California Attorney General have not been finalized, and it is expected that additional amendments to the CCPA will be introduced in 2020. It therefore remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted. While we believe we have developed processes to comply with CCPA requirements, a regulatory agency may not agree with certain of our implementation decisions, which could subject us to litigation, regulatory actions or changes to our business practices that could increase costs or reduce revenues. Other states have also considered or are considering privacy laws similar to the CCPA. Similar laws may be implemented in other jurisdictions that we do business in and in ways that may be more restrictive than the CCPA, increasing the cost of compliance, as well as the risk of noncompliance, on our business.
Our tenant reinsurance business is subject to governmental regulation which could reduce our profitability or limit our growth.
We hold Limited Lines Self-Service Storage Insurance Agent licenses from a number of individual state departments of insurance and are subject to state governmental regulation and supervision. Our continued ability to maintain these Limited Lines Self-Service Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with related rules and regulations. The regulatory authorities in each jurisdiction generally have broad discretion to grant, renew and revoke licenses and approvals, to promulgate, interpret, and implement regulations, and to evaluate compliance with regulations through periodic examinations, audits and investigations of the affairs of insurance agents. As a result of regulatory or private action in any jurisdiction, we may be temporarily or permanently suspended from continuing some or all of our reinsurance activities, or otherwise fined or penalized or suffer an adverse judgment, which could reduce our net income.
ITEM 1B.Unresolved Staff Comments
None.
ITEM 2.Properties
At December 31, 2019, we had controlling ownership interests in 2,483 self-storage facilities located in 38 states within the U.S.:
|
|
|
|
| At December 31, 2019 | ||
| Number of Storage Facilities |
| Net Rentable Square Feet (in thousands) |
|
|
|
|
California |
|
|
|
Southern | 250 |
| 18,356 |
Northern | 179 |
| 11,271 |
Texas | 311 |
| 23,761 |
Florida | 295 |
| 20,312 |
Illinois | 126 |
| 7,952 |
Georgia | 113 |
| 7,625 |
Washington | 100 |
| 6,960 |
North Carolina | 93 |
| 6,824 |
Virginia | 104 |
| 6,455 |
Colorado | 75 |
| 5,532 |
New York | 67 |
| 4,650 |
Minnesota | 57 |
| 4,249 |
New Jersey | 58 |
| 3,863 |
Maryland | 62 |
| 3,761 |
South Carolina | 63 |
| 3,654 |
Ohio | 49 |
| 3,199 |
Arizona | 47 |
| 3,103 |
Michigan | 45 |
| 3,094 |
Indiana | 39 |
| 2,451 |
Missouri | 38 |
| 2,236 |
Tennessee | 35 |
| 2,228 |
Oregon | 39 |
| 2,040 |
Pennsylvania | 28 |
| 1,957 |
Massachusetts | 27 |
| 1,875 |
Nevada | 27 |
| 1,818 |
Oklahoma | 22 |
| 1,533 |
Kansas | 21 |
| 1,268 |
Other states (12 states) | 113 |
| 6,881 |
|
|
|
|
Total (a) | 2,483 |
| 168,908 |
|
|
|
|
(a)See Schedule III: Real Estate and Accumulated Depreciation in the Company’s 2019 financials, for a summary of land, building, accumulated depreciation, square footage, and number of properties by market.
We seek to maximize our facilities’ cash flow through the regular review and adjustment of rents charged and promotions granted to our existing and new incoming customers, and controlling expenses. For the year ended December 31, 2019, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 90.9% and $17.02, respectively.
At December 31, 2019, 27 of our facilities with a net book value of $106 million were encumbered by an aggregate of $27 million in mortgage notes payable.
We have no specific policy as to the maximum size of any one particular self-storage facility. However, no individual facility involves, or is expected to involve, 1% or more of our total assets, gross revenues or net income.
Description of Self-Storage Facilities: Self-storage facilities, which comprise the majority of our investments, offer accessible storage space for personal and business use at a relatively low cost. A user rents a fully enclosed space, securing the space with their lock, which is for the user's exclusive use and to which only the user has access. Property managers operate the facility and are supervised by district managers. Some self-storage facilities also include rentable uncovered parking areas for vehicle storage. Space is rented on a month-to-month basis and rental rates vary according to the location of the property, the size of the storage space and other characteristics that affect the relative attractiveness of each particular space, such as whether the space has “drive-up” access, its proximity to elevators, or if the space is climate controlled. All of our self-storage facilities are operated under the "Public Storage" brand name.
Users include individuals from virtually all demographic groups, as well as businesses. Individuals usually store furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods. Businesses normally store excess inventory, business records, seasonal goods, equipment and fixtures.
The configuration of self-storage facilities has evolved over time. The oldest facilities are comprised generally of multiple single-story buildings, and have on average approximately 500 primarily “drive up” spaces per facility, and a small rental office. The most prevalent recently constructed facilities have higher density footprints with large, multi-story buildings with climate control and generally up to 1,000 self-storage spaces, a more imposing and visible retail presence, and a prominent and large rental office designed to appeal to customers as an attractive and retail-focused “store.” Our self-storage portfolio includes facilities with characteristics of the oldest facilities, characteristics of the most recently constructed facilities, and those with characteristics of both older and recently constructed facilities. Most spaces have between 25 and 400 square feet and an interior height of approximately eight to 12 feet.
We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months. We believe that these fluctuations result in part from increased demand from moving activity during the summer months and incremental demand from college students.
Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S. Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments.
Competition from other self-storage facilities is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.
We believe that self-storage facilities, upon achieving stabilized occupancy levels of approximately 90%, have attractive characteristics consisting of high profit margins, a broad tenant base, low levels of capital expenditures to maintain their condition and appearance and excellent returns on invested capital. Historically, upon reaching stabilization, our U.S. self-storage facilities have generally shown a high degree of stability in generating cash flows.
Description of Commercial Properties: We have an interest in PSB, which, as of December 31, 2019, owns and operates approximately 27.6 million rentable square feet of commercial space in six states. At December 31, 2019, the $427.9 million book value and $2.4 billion market value, respectively, of our investment in PSB represents approximately 4% and 21%, respectively, of our total book value assets. We also directly own 0.9 million net rentable square feet of commercial space managed primarily by PSB.
The commercial properties owned by PSB consist primarily of flex, multi-tenant office and industrial space. Flex space is defined as buildings that are configured with a combination of office and warehouse space and can be designed to fit a wide variety of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space).
Environmental Matters: We accrue environmental assessments and estimated remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated. Our current practice is to conduct environmental investigations in connection with property acquisitions. Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would be material to our overall business, financial condition, or results of operations.
ITEM 3.Legal Proceedings
We are subject to contingent losses as a result of being a party to various claims, complaints, and legal proceedings. However, we believe that there is a remote likelihood that the resolution of these contingencies will result in a material loss or have a material adverse affect on our financial condition, results of operations or liquidity.
ITEM 4.Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Common Shares of beneficial interest (the “Common Shares”) (NYSE: PSA) have been listed on the NYSE since October 19, 1984. As of February 21, 2020, there were approximately 11,573 holders of record of our 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. From the inception of the repurchase program through February 25, 2020, we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million. Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of December 31, 2019. 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.
Refer to Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” for information about our equity compensation plans.
ITEM 6.Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, | |||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
|
| (Amounts in thousands, except share and per share data) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | $ | 2,846,823 |
| $ | 2,754,280 |
| $ | 2,668,528 |
| $ | 2,560,549 |
| $ | 2,381,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations |
| 796,783 |
|
| 739,722 |
|
| 707,978 |
|
| 669,083 |
|
| 635,502 |
Depreciation and amortization |
| 512,918 |
|
| 483,646 |
|
| 454,526 |
|
| 433,314 |
|
| 426,008 |
General and administrative |
| 71,983 |
|
| 118,720 |
|
| 82,882 |
|
| 83,656 |
|
| 88,177 |
Interest expense |
| 45,641 |
|
| 32,542 |
|
| 12,690 |
|
| 4,210 |
|
| 610 |
|
| 1,427,325 |
|
| 1,374,630 |
|
| 1,258,076 |
|
| 1,190,263 |
|
| 1,150,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other increase (decrease) to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income |
| 28,436 |
|
| 26,442 |
|
| 18,771 |
|
| 15,138 |
|
| 16,544 |
Equity in earnings of unconsolidated real |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate entities |
| 69,547 |
|
| 103,495 |
|
| 75,655 |
|
| 56,756 |
|
| 50,937 |
Foreign currency exchange gain (loss) |
| 7,829 |
|
| 18,117 |
|
| (50,045) |
|
| 17,570 |
|
| 306 |
Casualty loss |
| - |
|
| - |
|
| (7,789) |
|
| - |
|
| - |
Gain on sale of real estate |
| 341 |
|
| 37,903 |
|
| 1,421 |
|
| 689 |
|
| 18,503 |
Gain due to Shurgard public offering |
| - |
|
| 151,616 |
|
| - |
|
| - |
|
| - |
Net income |
| 1,525,651 |
|
| 1,717,223 |
|
| 1,448,465 |
|
| 1,460,439 |
|
| 1,317,689 |
Net income allocated to noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity interests |
| (5,117) |
|
| (6,192) |
|
| (6,248) |
|
| (6,863) |
|
| (6,445) |
Net income allocable to Public Storage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders | $ | 1,520,534 |
| $ | 1,711,031 |
| $ | 1,442,217 |
| $ | 1,453,576 |
| $ | 1,311,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions | $ | 8.00 |
| $ | 8.00 |
| $ | 8.00 |
| $ | 7.30 |
| $ | 6.50 |
Net income – Basic | $ | 7.30 |
| $ | 8.56 |
| $ | 6.75 |
| $ | 6.84 |
| $ | 6.10 |
Net income – Diluted | $ | 7.29 |
| $ | 8.54 |
| $ | 6.73 |
| $ | 6.81 |
| $ | 6.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 174,287 |
|
| 173,969 |
|
| 173,613 |
|
| 173,091 |
|
| 172,699 |
Diluted |
| 174,530 |
|
| 174,297 |
|
| 174,151 |
|
| 173,878 |
|
| 173,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets | $ | 11,365,444 |
| $ | 10,928,270 |
| $ | 10,732,892 |
| $ | 10,130,338 |
| $ | 9,778,232 |
Total debt | $ | 1,902,493 |
| $ | 1,412,283 |
| $ | 1,431,322 |
| $ | 390,749 |
| $ | 319,016 |
Total preferred equity | $ | 4,065,000 |
| $ | 4,025,000 |
| $ | 4,025,000 |
| $ | 4,367,500 |
| $ | 4,055,000 |
Public Storage shareholders’ equity | $ | 9,062,911 |
| $ | 9,119,478 |
| $ | 8,940,009 |
| $ | 9,411,910 |
| $ | 9,170,641 |
Permanent noncontrolling interests’ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity | $ | 16,756 |
| $ | 25,250 |
| $ | 24,360 |
| $ | 29,744 |
| $ | 26,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided by operating activities | $ | 2,067,643 |
| $ | 2,063,637 |
| $ | 1,972,889 |
| $ | 1,945,248 |
| $ | 1,748,126 |
Used in investing activities | $ | (897,360) |
| $ | (515,912) |
| $ | (737,064) |
| $ | (699,023) |
| $ | (455,982) |
Used in financing activities | $ | (1,120,735) |
| $ | (1,619,588) |
| $ | (992,219) |
| $ | (1,148,826) |
| $ | (1,391,283) |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements and notes thereto.
Critical Accounting Policies
Our MD&A discusses our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our December 31, 2019 financial statements, primarily Note 2, summarize our significant accounting policies.
We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.
Income Tax Expense: We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements.
In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income.
Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.
Allocating Purchase Price for Acquired Real Estate Facilities: We estimate the fair values of land and buildings for purposes of allocating the aggregate purchase price of acquired properties. The related estimation processes involve significant judgment. We estimate the fair value of acquired buildings by determining the current cost to build new purpose-built self-storage facilities in the same location, and adjusting those costs for the actual age, quality, condition, amenities, and configuration of the buildings acquired. We estimate the fair value of acquired land by considering the most directly comparable recently transacted land sales (“Land Comps”) and adjusting the
transacted values for differentials to the acquired land such as location quality, parcel size, and date of sale, in order to derive the estimated value of the underlying acquired land. These adjustments to the Land Comps require significant judgment, particularly when there is a low volume of Land Comps or the available Land Comps lack similarity to the acquired property in proximity, date of sale, or location quality. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, as well as the level of land and buildings on our balance sheet.
Overview
Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities.
Most of our facilities compete with other well-managed and well-located competitors within the local trade area, which is generally a three to five mile radius. In addition to local competition, we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.
In the last three years, there has been a marked increase in development of new self-storage facilities in many of the markets where we operate, due to the favorable economics of developing new properties. These newly developed facilities compete with many of the facilities we own, negatively impacting our occupancies, rental rates, and rental growth. This increase in supply has been most notable in Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, Miami, New York, and Portland.
The quality of the new supply may also allow these new facilities to compete more effectively with existing self-storage assets. Much of this new supply, including our own, represents “fifth generation” facilities which often have a more fresh and vibrant appearance, more amenities such as climate control, more attractive office configurations, newer elements, and a more imposing and attractive retail presence as compared to the existing stock of self-storage facilities which were built over the last 50 years.
In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed “fifth generation” facilities), we have commenced a comprehensive program to rebrand our properties, in order to develop more pronounced, attractive, and clearly identifiable color schemes and signage, as well as to upgrade the configuration and layout of the offices and other customer zones to improve the customer experience. This program has initially been concentrated in properties located in a limited number of markets. The extent to which we continue this program in additional markets, and the relative scope of work, will depend in part upon the results of the initial implementation of the program.
In addition to managing our existing facilities for organic growth, we plan on growing through the acquisition and development of new facilities and expanding our existing self-storage facilities. Since the beginning of 2013 through December 31, 2019, we acquired a total of 340 facilities with 23.8 million net rentable square feet from third parties for approximately $3.1 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.6 billion, adding approximately 15.1 million net rentable square feet.
Subsequent to December 31, 2019, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities, with approximately 1.1 million net rentable square feet, for $245.3 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.
At December 31, 2019, we had a development pipeline to develop 12 new self-storage facilities and expand 35 existing self-storage facilities, which will add approximately 4.4 million net rentable square feet at a cost of $619.2 million. We expect to continue to seek additional development projects; however, the level of such activity
may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities.
We believe that our development and redevelopment activities generate favorable risk-adjusted returns over the long run. However, in the short run, our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses included in general and administrative expense. We believe the level of dilution incurred in 2019 will continue at similar levels in 2020.
On October 15, 2018, Shurgard Self Storage SA (“Shurgard”) completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard issued 25.0 million of its common shares to third parties at a price of €23 per share, for €575 million in gross proceeds. The gross proceeds were used to repay short-term borrowings, invest in real estate assets, and for other corporate purposes. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to approximately 35% as a result of the Offering. See “Investment in Shurgard” below for more information.
As of December 31, 2019, we expect capital resources over the next year of approximately $1.7 billion, which exceeds our currently identified capital needs of approximately $722.6 million. Our expected capital resources include: (i) $409.7 million of cash as of December 31, 2019, (ii) $484.1 million of available borrowing capacity on our revolving line of credit, (iii) $545.2 million in net proceeds from the public issuance of senior Euro-denominated notes and (iv) approximately $200 million to $250 million of expected retained operating cash flow in the next year. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.
Our currently identified capital needs consist primarily of $245.3 million in property acquisitions currently under contract and $477.3 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 months. We have no substantial principal payments on debt until 2022. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential capital needs could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or mergers and acquisition activities such as a potential acquisition of National Storage REIT described in Note 15, “Subsequent Events” to our December 31, 2019 financial statements; however, there can be no assurance of any such activities transpiring in the near or longer term.
See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.
Results of Operations
Operating results for 2019 and 2018
In 2019, net income allocable to our common shareholders was $1,272.8 million or $7.29 per diluted common share, compared to $1,488.9 million or $8.54 per diluted common share in 2018 representing a decrease of $216.1 million or $1.25 per diluted common share. The decrease is due primarily to (i) $183.1 million in aggregate gains due to Shurgard’s initial public offering and the sale of our facility in West London to Shurgard in October 2018, (ii) our $37.7 million equity share of gains recorded by PS Business Parks during 2018, (iii) a $10.3 million decrease due to the impact of foreign currency exchange gains associated with our euro denominated debt and (iv) a $32.7 million allocation to our preferred shareholders associated with our preferred share redemption activities in 2019. These impacts were offset partially by a $30.1 million increase in self-storage net operating income (described below) and a reduction in general and administrative expense attributable to $30.7 million in incremental share-based compensation expense in 2018 for the planned retirement of our former CEO and CFO.
The $30.1 million increase in self-storage net operating income is a result of a $2.6 million increase in our Same Store Facilities and $27.5 million increase in our non-Same Store Facilities. Revenues for the Same Store
Facilities increased 1.4% or $33.3 million in 2019 as compared to 2018, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 5.0% or $30.6 million in 2019 as compared to 2018, due primarily to 47.2% ($15.3 million) increase in marketing expenses and increased property taxes. The increase in net operating income of $27.5 million for the non-Same Store Facilities is due primarily to the impact of facilities acquired in 2018 and 2019 and the fill-up of recently developed and expanded facilities.
Operating results for 2018 and 2017
In 2018, net income allocable to our common shareholders was $1,488.9 million or $8.54 per diluted common share, compared to $1,171.6 million or $6.73 per diluted common share in 2017 representing an increase of $317.3 million or $1.81 per diluted common share. The increase is due primarily to (i) $183.1 million in aggregate gains due to Shurgard’s initial public offering and the sale of our facility in West London to Shurgard, (ii) a $47.1 million increase in self-storage net operating income (described below), (iii) our $37.7 million equity share of gains recorded by PS Business Parks in 2018, (iv) a $68.2 million increase due to the impact of foreign currency exchange gains and losses associated with our euro denominated debt, (v) a $29.3 million allocation to preferred shareholders associated with preferred share redemptions in 2017 and (vi) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in 2017. These impacts were offset partially by a $36.1 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our former CEO and CFO in 2018 as a result of their retirement on December 31, 2018 and the reversal of share-based compensation accruals forfeited by retiring senior executive officers in 2017.
The $47.1 million increase in self-storage net operating income is a result of a $14.8 million increase in our Same Store Facilities and $32.3 million increase in our non-Same Store Facilities. Revenues for the Same Store Facilities increased 1.4% or $32.5 million in 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 3.0% or $17.6 million in 2018 as compared to 2017, due primarily to increased property taxes. The increase in net operating income of $32.3 million for the non-Same Store Facilities is due primarily to the impact of facilities acquired in 2018 and 2017 and the fill-up of recently developed and expanded facilities.
Funds from Operations and Core Funds from Operations
Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents GAAP net income before depreciation and amortization, which is excluded because it is based upon historical costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.
For the year ended December 31, 2019, FFO was $10.58 per diluted common share, as compared to $10.45 and $9.70 per diluted common share for the years ended December 31, 2018 and 2017, respectively, representing an increase in 2019 of 1.2%, or $0.13 per diluted common share, as compared to 2018.
The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Year Ended December 31, | |||||||
| 2019 |
| 2018 |
| 2017 | |||
| (Amounts in thousands, except per share data) | |||||||
Reconciliation of Diluted Earnings per Share to |
|
|
|
|
|
|
|
|
FFO per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share | $ | 7.29 |
| $ | 8.54 |
| $ | 6.73 |
Eliminate amounts per share excluded from FFO: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 3.32 |
|
| 3.21 |
|
| 3.00 |
Gains on sale of real estate investments |
|
|
|
|
|
|
|
|
and Shurgard IPO, including our equity |
|
|
|
|
|
|
|
|
share from investments |
| (0.03) |
|
| (1.30) |
|
| (0.03) |
FFO per share | $ | 10.58 |
| $ | 10.45 |
| $ | 9.70 |
|
|
|
|
|
|
|
|
|
Computation of FFO per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareholders | $ | 1,272,767 |
| $ | 1,488,900 |
| $ | 1,171,609 |
Eliminate items excluded from FFO: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 511,413 |
|
| 483,646 |
|
| 454,526 |
Depreciation from unconsolidated |
|
|
|
|
|
|
|
|
real estate investments |
| 71,725 |
|
| 79,868 |
|
| 71,931 |
Depreciation allocated to noncontrolling |
|
|
|
|
|
|
|
|
interests and restricted share unitholders |
| (4,208) |
|
| (3,646) |
|
| (3,567) |
Gains on sale of real estate investments and |
|
|
|
|
|
|
|
|
Shurgard IPO, including our equity share |
|
|
|
|
|
|
|
|
from investments and other |
| (5,896) |
|
| (227,332) |
|
| (4,908) |
FFO allocable to common shares | $ | 1,845,801 |
| $ | 1,821,436 |
| $ | 1,689,591 |
Diluted weighted average common shares |
| 174,530 |
|
| 174,297 |
|
| 174,151 |
FFO per share | $ | 10.58 |
| $ | 10.45 |
| $ | 9.70 |
We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities, (iii) acceleration of accruals or reduction of accruals due to the departure of senior executives, and (iv) certain other non-cash and/or nonrecurring income or expense items. We review Core FFO per share to evaluate our ongoing operating performance and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.
The following table reconciles FFO per share to Core FFO per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Percentage |
|
|
|
|
|
|
| Percentage |
|
|
|
|
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per share |
| $ | 10.58 |
| $ | 10.45 |
| 1.2% |
| $ | 10.45 |
| $ | 9.70 |
| 7.7% | ||||
Eliminate the per share impact of items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
excluded from Core FFO, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
our equity share from investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency exchange (gain) loss |
|
| (0.04) |
|
| (0.10) |
|
|
|
| (0.10) |
|
| 0.29 |
|
| ||||
Application of EITF D-42 |
|
| 0.21 |
|
| - |
|
|
|
| - |
|
| 0.19 |
|
| ||||
Casualty losses and tenant claims |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
due to hurricanes |
|
| - |
|
| - |
|
|
|
| - |
|
| 0.07 |
|
| ||||
Shurgard - IPO costs and casualty loss |
|
| - |
|
| 0.03 |
|
|
|
| 0.03 |
|
| - |
|
| ||||
(Forfeiture)/Acceleration of share- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
based compensation expense due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
to the departure of senior executives |
|
| (0.01) |
|
| 0.18 |
|
|
|
| 0.18 |
|
| (0.03) |
|
| ||||
Other items |
|
| 0.01 |
|
| - |
|
|
|
| - |
|
| 0.01 |
|
| ||||
Core FFO per share |
| $ | 10.75 |
| $ | 10.56 |
| 1.8% |
| $ | 10.56 |
| $ | 10.23 |
| 3.2% | ||||
Analysis of Net Income by Reportable Segment
The following discussion and analysis is presented and organized in accordance with Note 11 to our December 31, 2019 financial statements, “Segment Information.” Accordingly, refer to the table presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments.
Self-Storage Operations
Our self-storage operations are analyzed in four groups: (i) the 2,159 facilities that we have owned and operated on a stabilized basis since January 1, 2017 (the “Same Store Facilities”), (ii) 103 facilities we acquired after December 31, 2016 (the “Acquired facilities”), (iii) 141 facilities that have been newly developed or expanded, or that we are in the process of expanding at December 31, 2019 (the “Newly developed and expanded facilities”) and (iv) 80 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2017 (the “Other non-same store facilities”). See Note 11 to our December 31, 2019 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Storage Operations |
|
|
|
|
|
|
|
|
| ||||||
Summary | Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
|
|
|
| Percentage |
|
|
|
|
|
|
| Percentage | ||
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | ||||
| (Dollar amounts and square footage in thousands) | ||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities | $ | 2,394,572 |
| $ | 2,361,298 |
| 1.4% |
| $ | 2,361,298 |
| $ | 2,328,833 |
| 1.4% |
Acquired facilities |
| 59,206 |
|
| 33,871 |
| 74.8% |
|
| 33,871 |
|
| 5,577 |
| 507.3% |
Newly developed and expanded facilities |
| 150,571 |
|
| 121,694 |
| 23.7% |
|
| 121,694 |
|
| 99,864 |
| 21.9% |
Other non-same store facilities |
| 80,203 |
|
| 80,744 |
| (0.7)% |
|
| 80,744 |
|
| 78,159 |
| 3.3% |
|
| 2,684,552 |
|
| 2,597,607 |
| 3.3% |
|
| 2,597,607 |
|
| 2,512,433 |
| 3.4% |
Cost of operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| 641,918 |
|
| 611,273 |
| 5.0% |
|
| 611,273 |
|
| 593,637 |
| 3.0% |
Acquired facilities |
| 22,472 |
|
| 11,810 |
| 90.3% |
|
| 11,810 |
|
| 2,006 |
| 488.7% |
Newly developed and expanded facilities |
| 63,360 |
|
| 47,870 |
| 32.4% |
|
| 47,870 |
|
| 36,810 |
| 30.0% |
Other non-same store facilities |
| 24,829 |
|
| 24,778 |
| 0.2% |
|
| 24,778 |
|
| 25,180 |
| (1.6)% |
|
| 752,579 |
|
| 695,731 |
| 8.2% |
|
| 695,731 |
|
| 657,633 |
| 5.8% |
Net operating income (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| 1,752,654 |
|
| 1,750,025 |
| 0.2% |
|
| 1,750,025 |
|
| 1,735,196 |
| 0.9% |
Acquired facilities |
| 36,734 |
|
| 22,061 |
| 66.5% |
|
| 22,061 |
|
| 3,571 |
| 517.8% |
Newly developed and expanded facilities |
| 87,211 |
|
| 73,824 |
| 18.1% |
|
| 73,824 |
|
| 63,054 |
| 17.1% |
Other non-same store facilities |
| 55,374 |
|
| 55,966 |
| (1.1)% |
|
| 55,966 |
|
| 52,979 |
| 5.6% |
Total net operating income |
| 1,931,973 |
|
| 1,901,876 |
| 1.6% |
|
| 1,901,876 |
|
| 1,854,800 |
| 2.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| (389,737) |
|
| (382,864) |
| 1.8% |
|
| (382,864) |
|
| (382,326) |
| 0.1% |
Acquired facilities |
| (34,980) |
|
| (23,809) |
| 46.9% |
|
| (23,809) |
|
| (5,668) |
| 320.1% |
Newly developed and expanded facilities |
| (54,065) |
|
| (45,851) |
| 17.9% |
|
| (45,851) |
|
| (36,848) |
| 24.4% |
Other non-same store facilities |
| (34,136) |
|
| (31,122) |
| 9.7% |
|
| (31,122) |
|
| (29,684) |
| 4.8% |
Total depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense |
| (512,918) |
|
| (483,646) |
| 6.1% |
|
| (483,646) |
|
| (454,526) |
| 6.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| 1,362,917 |
|
| 1,367,161 |
| (0.3)% |
|
| 1,367,161 |
|
| 1,352,870 |
| 1.1% |
Acquired facilities |
| 1,754 |
|
| (1,748) |
| (200.3)% |
|
| (1,748) |
|
| (2,097) |
| (16.6)% |
Newly developed and expanded facilities |
| 33,146 |
|
| 27,973 |
| 18.5% |
|
| 27,973 |
|
| 26,206 |
| 6.7% |
Other non-same store facilities |
| 21,238 |
|
| 24,844 |
| (14.5)% |
|
| 24,844 |
|
| 23,295 |
| 6.6% |
Total net income | $ | 1,419,055 |
| $ | 1,418,230 |
| 0.1% |
| $ | 1,418,230 |
| $ | 1,400,274 |
| 1.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| 2,159 |
|
| 2,159 |
| - |
|
| 2,159 |
|
| 2,159 |
| - |
Acquired facilities |
| 103 |
|
| 59 |
| 74.6% |
|
| 59 |
|
| 34 |
| 73.5% |
Newly developed and expanded facilities |
| 141 |
|
| 130 |
| 8.5% |
|
| 130 |
|
| 112 |
| 16.1% |
Other non-same store facilities |
| 80 |
|
| 81 |
| (1.2)% |
|
| 81 |
|
| 82 |
| (1.2)% |
|
| 2,483 |
|
| 2,429 |
| 2.2% |
|
| 2,429 |
|
| 2,387 |
| 1.8% |
Net rentable square footage at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store facilities |
| 139,315 |
|
| 139,315 |
| - |
|
| 139,315 |
|
| 139,315 |
| - |
Acquired facilities |
| 6,968 |
|
| 3,743 |
| 86.2% |
|
| 3,743 |
|
| 2,114 |
| 77.1% |
Newly developed and expanded facilities |
| 16,533 |
|
| 12,807 |
| 29.1% |
|
| 12,807 |
|
| 10,608 |
| 20.7% |
Other non-same store facilities |
| 6,092 |
|
| 6,182 |
| (1.5)% |
|
| 6,182 |
|
| 6,125 |
| 0.9% |
|
| 168,908 |
|
| 162,047 |
| 4.2% |
|
| 162,047 |
|
| 158,162 |
| 2.5% |
(a)Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our December 31, 2019 financial statements for a reconciliation of NOI to our total net income for all periods presented.
Net operating income from our self-storage operations has increased 1.6% in 2019 as compared to 2018 and 2.5% in 2018 as compared to 2017. These increases are due primarily to the acquisition and development of new facilities and the fill-up of unstabilized facilities.
Same Store Facilities
The Same Store Facilities consist of facilities that have been owned and operated on a stabilized level of occupancy, revenues and cost of operations since January 1, 2017. Accordingly, our Same Store Facilities exclude (i) facilities acquired after December 31, 2016, (ii) newly developed or expanded facilities, (iii) facilities under expansion by December 31, 2019, (iv) facilities whose operating trends are significantly affected by factors such as casualty events, and (v) facilities which were otherwise not stabilized at December 31, 2016 (such as recently developed facilities acquired from third parties before December 31, 2016). The composition of our Same Store Facilities allows us to more effectively evaluate the ongoing performance of our self-storage portfolio in 2017, 2018, and 2019 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. We believe the Same Store information is used by investors and REIT analysts in a similar manner.
The following table summarizes the historical operating results of these 2,159 facilities (139.3 million net rentable square feet) that represent approximately 82% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data for the Same Store Facilities (2,159 facilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
|
|
|
| Percentage |
|
|
|
|
|
|
| Percentage | ||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollar amounts in thousands, except weighted average amounts) | ||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income | $ | 2,290,721 |
| $ | 2,258,099 |
| 1.4% |
| $ | 2,258,099 |
| $ | 2,225,727 |
| 1.5% |
Late charges and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative fees |
| 103,851 |
|
| 103,199 |
| 0.6% |
|
| 103,199 |
|
| 103,106 |
| 0.1% |
Total revenues (a) |
| 2,394,572 |
|
| 2,361,298 |
| 1.4% |
|
| 2,361,298 |
|
| 2,328,833 |
| 1.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes |
| 233,453 |
|
| 223,088 |
| 4.6% |
|
| 223,088 |
|
| 212,565 |
| 5.0% |
On-site property manager |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payroll |
| 118,450 |
|
| 115,531 |
| 2.5% |
|
| 115,531 |
|
| 114,212 |
| 1.2% |
Supervisory payroll |
| 37,771 |
|
| 37,179 |
| 1.6% |
|
| 37,179 |
|
| 40,222 |
| (7.6)% |
Repairs and maintenance |
| 50,032 |
|
| 48,488 |
| 3.2% |
|
| 48,488 |
|
| 48,735 |
| (0.5)% |
Utilities |
| 42,209 |
|
| 43,457 |
| (2.9)% |
|
| 43,457 |
|
| 41,771 |
| 4.0% |
Marketing |
| 47,622 |
|
| 32,344 |
| 47.2% |
|
| 32,344 |
|
| 30,251 |
| 6.9% |
Other direct property costs |
| 63,572 |
|
| 62,042 |
| 2.5% |
|
| 62,042 |
|
| 59,990 |
| 3.4% |
Allocated overhead |
| 48,809 |
|
| 49,144 |
| (0.7)% |
|
| 49,144 |
|
| 45,891 |
| 7.1% |
Total cost of operations (a) |
| 641,918 |
|
| 611,273 |
| 5.0% |
|
| 611,273 |
|
| 593,637 |
| 3.0% |
Net operating income |
| 1,752,654 |
|
| 1,750,025 |
| 0.2% |
|
| 1,750,025 |
|
| 1,735,196 |
| 0.9% |
Depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense |
| (389,737) |
|
| (382,864) |
| 1.8% |
|
| (382,864) |
|
| (382,326) |
| 0.1% |
Net income | $ | 1,362,917 |
| $ | 1,367,161 |
| (0.3)% |
| $ | 1,367,161 |
| $ | 1,352,870 |
| 1.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (before depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
and amortization expense) |
| 73.2% |
|
| 74.1% |
| (1.2)% |
|
| 74.1% |
|
| 74.5% |
| (0.5)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average for the period: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Square foot occupancy |
| 93.5% |
|
| 93.1% |
| 0.4% |
|
| 93.1% |
|
| 93.7% |
| (0.6)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rental income per (b): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Occupied square foot | $ | 17.60 |
| $ | 17.41 |
| 1.1% |
| $ | 17.41 |
| $ | 17.05 |
| 2.1% |
Available square foot | $ | 16.45 |
| $ | 16.21 |
| 1.5% |
| $ | 16.21 |
| $ | 15.97 |
| 1.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square foot occupancy |
| 91.8% |
|
| 91.3% |
| 0.5% |
|
| 91.3% |
|
| 91.1% |
| 0.2% |
Annual contract rent per |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
occupied square foot (c) | $ | 18.12 |
| $ | 18.03 |
| 0.5% |
| $ | 18.03 |
| $ | 17.82 |
| 1.2% |
(a)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.
(b)Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.
(c)Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in the lease agreement upon move-in and we adjust them from time to time with notice. Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.
Analysis of Same Store Revenue
Revenues generated by our Same Store Facilities increased by 1.4% each in 2019 as compared to 2018 and in 2018 as compared to 2017, due primarily to increases of 1.1% and 2.1% in realized annual rent per occupied square foot in 2019 and 2018, respectively, as compared to the previous year.
Same Store revenue growth is lower than long-term historical averages due to softness in demand for our storage space, which has led to lower move-in rental rates for new tenants (see below). We attribute some of this softness to local economic conditions and, in some markets most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, Miami, New York and Portland, increased supply of newly constructed self-storage facilities.
Same Store weighted average square foot occupancy remained strong at 93.5%, 93.1% and 93.7% during 2019, 2018 and 2017.
We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on the Internet and other channels in order to generate sufficient move-in volume to replace tenants that vacate.
Annual contract rent per foot for customers moving in was $13.63, $14.09, and $14.54 in 2019, 2018, and 2017, respectively, and the related square footage for the space they moved into was 102.7 million, 104.4 million, and 109.4 million, respectively. Annual contract rent per foot for customers moving out was $16.12, $16.19, and $16.01 in 2019, 2018, and 2017, respectively, and the related square footage for the space they moved out of was 102.1 million, 104.1 million, and 111.1 million, respectively.
In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer. Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $77.4 million, $81.6 million, and $86.9 million for 2019, 2018, and 2017, respectively.
Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage.
We typically increase rental rates to our long-term tenants (generally, those that have been with us for at least a year) once per year. As a result, the number of long-term tenants we have in our facilities is an important factor in our revenue growth. The level of rate increases to long-term tenants is based upon balancing the additional revenue from the increase against the negative impact of incremental move-outs.
Throughout 2018 and 2019, we have had an increased average length of stay and fewer move-outs. The increased average length of stay contributed to an increased beneficial effect of rent increases to existing tenants, due to more long-term customers that were eligible for rate increases. However, this was offset partially by the impact of
lower move-in rates and resulting increased “rent roll down” for new tenants relative to existing tenants that moved out. The extent to which the net positive impact of these trends will continue in 2020 is uncertain at this time.
We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in 2020, with rental growth in 2020 coming primarily from continued annual rent increases to existing tenants.
However, such short-term current trends can be limited in their ability to suggest future revenue growth. Other factors affecting revenue growth can be volatile and hard to predict, such as (i) the level of consumer demand, (ii) competition from newly developed and existing facilities, (iii) the length of stay of our existing customers, and (iv) local and state laws and regulations that can limit, and have limited, the rents we can charge to new tenants or the extent to which we can increase rents to existing tenants.
We are continuing to take a number of actions to improve demand into our system, including increasing marketing spend on the Internet and offering lower rental rates to new customers.
Analysis of Same Store Cost of Operations
Cost of operations (excluding depreciation and amortization) increased 5.0% in 2019 as compared to 2018, and 3.0% in 2018 as compared to 2017, due primarily to increased property tax and marketing expense.
Property tax expense increased 4.6% in 2019 as compared to 2018, and 5.0% in 2018 as compared to 2017. We expect property tax expense growth of approximately 5.0% in 2020 due primarily to higher assessed values (excluding the potential impact of the California initiative noted below) and, to a lesser extent, increased tax rates.
As a result of Proposition 13, which limits increases in assessed values to 2% per year, the assessed value and property taxes we pay in California is less than it would be if the properties were assessed at current values. An initiative on California’s November 2020 statewide ballot, if approved by voters, could result in the reassessment of our California properties and substantially increase our property tax expense. It is uncertain (i) whether an initiative will pass, and (ii) if it does pass, the timing and level of the reassessment and related property tax increases. See “Risk Factors – We have exposure to increased property tax in California” for further information such as our aggregate net operating income and property tax expense in California.
On-site property manager payroll expense increased 2.5% in 2019 as compared to 2018 and 1.2% in 2018 as compared to 2017. These increases were due primarily to higher wage rates, offset partially by lower hours worked in 2018. We have been impacted by a tight labor market across the country, as well as increases in minimum wages in certain jurisdictions. We expect continued wage rate increases in 2020 due to tighter labor markets.
Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, increased 1.6% in 2019 as compared to 2018 due primarily to higher wage rates and decreased 7.6% in 2018 as compared to 2017 due to reductions in headcount offset by higher wage rates. We expect inflationary increases in wage rates and increased headcount in 2020.
Repairs and maintenance expense increased 3.2% in 2019 as compared to 2018 and decreased 0.5% in 2018 as compared to 2017. Repair and maintenance costs include snow removal expense totaling $4.0 million, $3.6 million, and $3.1 million in 2019, 2018, and 2017, respectively. Excluding snow removal costs, repairs and maintenance increased 2.6% in 2019 as compared to 2018 and decreased 1.7% in 2018 as compared to 2017.
Repairs and maintenance expense levels are dependent upon many factors such as (i) sporadic occurrences such as accidents, damage, and equipment malfunctions, (ii) short-term local supply and demand factors for material and labor, and (iii) weather conditions, which can impact costs such as snow removal, roof repairs, and HVAC maintenance and repairs. Accordingly, it is difficult to estimate future repairs and maintenance expense.
Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense decreased 2.9% in 2019 as compared to 2018 and increased 4.0% in 2018 as compared to 2017. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable. We are making investments in energy saving technology such as solar power and LED lights which should generate favorable returns on investment in the form of lower utility usage. However, the actual reduction experienced in 2020 will be relatively modest, based upon the expected level of and timing of such investments.
Marketing expense is comprised principally of Internet advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprised primarily of keyword search fees assessed on a “per click” basis, varies based upon demand for self-storage space, the quantity of people inquiring about self-storage through online search, occupancy levels, the number and aggressiveness of bidding competitors and other factors. These factors are volatile; accordingly, Internet advertising can increase or decrease significantly in the short-term. Marketing expense increased 47.2% in 2019 as compared to 2018 and 6.9% in 2018 as compared to 2017. These increases are due primarily to higher Internet advertising spending, as we have sought to attract more customers for our space and cost per click for keyword search terms increased due to more keyword bidding competition from existing self-storage owners and operators, including owners of newly developed facilities and nontraditional storage providers. We expect continued increases in 2020.
Other direct property costs include administrative expenses specific to each self-storage facility, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, tenant mailings, credit card fees, and the cost of operating each property’s rental office. These costs increased 2.5% in 2019 as compared to 2018 and 3.4% in 2018 as compared to 2017. We continue to experience increased credit card fees due to a long-term trend of more customers paying with credit cards rather than cash, checks, or other methods of payment with lower transaction costs. We expect inflationary increases in other direct property costs in 2020.
Allocated overhead represents administrative expenses for shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions include information technology support, hardware, and software, as well as centralized administration of payroll, benefits, training, repairs and maintenance, customer service, pricing and marketing, operational accounting and finance, and legal costs. These amounts also include the costs of senior executives responsible for these processes (other than our Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead decreased 0.7% in 2019 as compared to 2018 and increased 7.1% in 2018 as compared to 2017. The increase in 2018 as compared to 2017 was due to increased headcount and information technology expenses. We expect minimal increases in allocated overhead in 2020.
Analysis of Same Store Depreciation and Amortization
Depreciation and amortization for Same Store Facilities increased 1.8% in 2019 as compared to 2018 and 0.1% in 2018 as compared to 2017. We expect modest increases in depreciation expense in 2020 due to elevated levels of capital expenditures.
Quarterly Financial Data
The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Quarter Ended |
|
|
| ||||||||||
| March 31 |
| June 30 |
| September 30 |
| December 31 |
| Entire Year | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Amounts in thousands, except for per square foot amounts) | |||||||||||||
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 | $ | 586,004 |
| $ | 599,244 |
| $ | 611,227 |
| $ | 598,097 |
| $ | 2,394,572 |
2018 | $ | 577,310 |
| $ | 587,793 |
| $ | 604,705 |
| $ | 591,490 |
| $ | 2,361,298 |
2017 | $ | 566,136 |
| $ | 579,443 |
| $ | 598,402 |
| $ | 584,852 |
| $ | 2,328,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of operations: |
|
|
|
|
|
|
|
|
|
|
|
| ||
2019 | $ | 168,359 |
| $ | 166,913 |
| $ | 170,865 |
| $ | 135,781 |
| $ | 641,918 |
2018 | $ | 162,034 |
| $ | 158,857 |
| $ | 160,543 |
| $ | 129,839 |
| $ | 611,273 |
2017 | $ | 156,854 |
| $ | 155,239 |
| $ | 156,392 |
| $ | 125,152 |
| $ | 593,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 | $ | 64,945 |
| $ | 65,671 |
| $ | 65,450 |
| $ | 37,387 |
| $ | 233,453 |
2018 | $ | 61,858 |
| $ | 62,571 |
| $ | 62,373 |
| $ | 36,286 |
| $ | 223,088 |
2017 | $ | 59,214 |
| $ | 59,579 |
| $ | 59,149 |
| $ | 34,623 |
| $ | 212,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repairs and maintenance: |
|
|
|
|
|
|
|
|
|
|
|
| ||
2019 | $ | 13,369 |
| $ | 11,687 |
| $ | 12,785 |
| $ | 12,191 |
| $ | 50,032 |
2018 | $ | 12,124 |
| $ | 12,081 |
| $ | 11,855 |
| $ | 12,428 |
| $ | 48,488 |
2017 | $ | 12,179 |
| $ | 11,951 |
| $ | 12,005 |
| $ | 12,600 |
| $ | 48,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing: |
|
|
|
|
|
|
|
|
|
|
|
| ||
2019 | $ | 8,751 |
| $ | 12,084 |
| $ | 13,934 |
| $ | 12,853 |
| $ | 47,622 |
2018 | $ | 6,855 |
| $ | 8,090 |
| $ | 8,221 |
| $ | 9,178 |
| $ | 32,344 |
2017 | $ | 7,175 |
| $ | 8,577 |
| $ | 7,346 |
| $ | 7,153 |
| $ | 30,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVPAF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 | $ | 16.08 |
| $ | 16.48 |
| $ | 16.79 |
| $ | 16.44 |
| $ | 16.45 |
2018 | $ | 15.84 |
| $ | 16.17 |
| $ | 16.60 |
| $ | 16.23 |
| $ | 16.21 |
2017 | $ | 15.53 |
| $ | 15.92 |
| $ | 16.41 |
| $ | 16.04 |
| $ | 15.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average realized annual rent per occupied square foot: |
|
|
| |||||||||||
2019 | $ | 17.38 |
| $ | 17.53 |
| $ | 17.82 |
| $ | 17.66 |
| $ | 17.60 |
2018 | $ | 17.19 |
| $ | 17.23 |
| $ | 17.69 |
| $ | 17.55 |
| $ | 17.41 |
2017 | $ | 16.71 |
| $ | 16.85 |
| $ | 17.38 |
| $ | 17.26 |
| $ | 17.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average occupancy levels for the period: |
|
|
|
|
|
|
|
| ||||||
2019 |
| 92.5% |
|
| 94.0% |
|
| 94.2% |
|
| 93.1% |
|
| 93.5% |
2018 |
| 92.1% |
|
| 93.8% |
|
| 93.8% |
|
| 92.5% |
|
| 93.1% |
2017 |
| 92.9% |
|
| 94.4% |
|
| 94.4% |
|
| 92.8% |
|
| 93.7% |
Analysis of Market Trends
The following table sets forth selected market trends in our Same Store Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | |||
| (Amounts in thousands, except for weighted average data) | ||||||||||||||
Market (number of facilities, |
|
|
|
|
|
|
|
|
| ||||||
square footage in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles (204, 14.1) | $ | 362,057 |
| $ | 352,672 |
| 2.7% |
| $ | 352,672 |
| $ | 340,987 |
| 3.4% |
San Francisco (127, 7.9) |
| 203,195 |
|
| 199,162 |
| 2.0% |
|
| 199,162 |
|
| 194,614 |
| 2.3% |
New York (86, 6.0) |
| 151,526 |
|
| 148,676 |
| 1.9% |
|
| 148,676 |
|
| 144,875 |
| 2.6% |
Washington DC (88, 5.4) |
| 113,607 |
|
| 110,642 |
| 2.7% |
|
| 110,642 |
|
| 110,670 |
| (0.0)% |
Seattle-Tacoma (83, 5.5) |
| 107,639 |
|
| 106,261 |
| 1.3% |
|
| 106,261 |
|
| 104,394 |
| 1.8% |
Miami (81, 5.7) |
| 112,734 |
|
| 114,428 |
| (1.5)% |
|
| 114,428 |
|
| 113,710 |
| 0.6% |
Atlanta (98, 6.4) |
| 85,885 |
|
| 84,450 |
| 1.7% |
|
| 84,450 |
|
| 82,663 |
| 2.2% |
Chicago (128, 8.1) |
| 118,293 |
|
| 117,094 |
| 1.0% |
|
| 117,094 |
|
| 119,859 |
| (2.3)% |
Dallas-Ft. Worth (98, 6.2) |
| 82,281 |
|
| 83,155 |
| (1.1)% |
|
| 83,155 |
|
| 85,562 |
| (2.8)% |
Orlando-Daytona (69, 4.3) |
| 60,640 |
|
| 59,901 |
| 1.2% |
|
| 59,901 |
|
| 57,627 |
| 3.9% |
Houston (78, 5.3) |
| 67,962 |
|
| 71,266 |
| (4.6)% |
|
| 71,266 |
|
| 70,805 |
| 0.7% |
Philadelphia (56, 3.5) |
| 59,120 |
|
| 56,747 |
| 4.2% |
|
| 56,747 |
|
| 55,064 |
| 3.1% |
Tampa (50, 3.3) |
| 46,083 |
|
| 46,377 |
| (0.6)% |
|
| 46,377 |
|
| 45,751 |
| 1.4% |
West Palm Beach (37, 2.4) |
| 43,959 |
|
| 43,630 |
| 0.8% |
|
| 43,630 |
|
| 42,909 |
| 1.7% |
Portland (42, 2.2) |
| 40,163 |
|
| 40,622 |
| (1.1)% |
|
| 40,622 |
|
| 41,096 |
| (1.2)% |
All other markets (834, 53.0) |
| 739,428 |
|
| 726,215 |
| 1.8% |
|
| 726,215 |
|
| 718,247 |
| 1.1% |
Total revenues | $ | 2,394,572 |
| $ | 2,361,298 |
| 1.4% |
| $ | 2,361,298 |
| $ | 2,328,833 |
| 1.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles | $ | 298,725 |
| $ | 292,281 |
| 2.2% |
| $ | 292,281 |
| $ | 283,333 |
| 3.2% |
San Francisco |
| 163,878 |
|
| 162,202 |
| 1.0% |
|
| 162,202 |
|
| 159,265 |
| 1.8% |
New York |
| 107,992 |
|
| 107,351 |
| 0.6% |
|
| 107,351 |
|
| 104,815 |
| 2.4% |
Washington DC |
| 84,329 |
|
| 82,745 |
| 1.9% |
|
| 82,745 |
|
| 83,452 |
| (0.8)% |
Seattle-Tacoma |
| 84,315 |
|
| 83,375 |
| 1.1% |
|
| 83,375 |
|
| 82,638 |
| 0.9% |
Miami |
| 84,269 |
|
| 87,277 |
| (3.4)% |
|
| 87,277 |
|
| 87,222 |
| 0.1% |
Atlanta |
| 63,630 |
|
| 62,519 |
| 1.8% |
|
| 62,519 |
|
| 61,091 |
| 2.3% |
Chicago |
| 63,228 |
|
| 64,906 |
| (2.6)% |
|
| 64,906 |
|
| 70,143 |
| (7.5)% |
Dallas-Ft. Worth |
| 56,623 |
|
| 58,461 |
| (3.1)% |
|
| 58,461 |
|
| 61,332 |
| (4.7)% |
Orlando-Daytona |
| 44,116 |
|
| 44,066 |
| 0.1% |
|
| 44,066 |
|
| 42,465 |
| 3.8% |
Houston |
| 42,380 |
|
| 47,071 |
| (10.0)% |
|
| 47,071 |
|
| 46,473 |
| 1.3% |
Philadelphia |
| 41,773 |
|
| 40,097 |
| 4.2% |
|
| 40,097 |
|
| 39,188 |
| 2.3% |
Tampa |
| 32,416 |
|
| 33,378 |
| (2.9)% |
|
| 33,378 |
|
| 33,048 |
| 1.0% |
West Palm Beach |
| 32,192 |
|
| 32,397 |
| (0.6)% |
|
| 32,397 |
|
| 31,702 |
| 2.2% |
Portland |
| 30,511 |
|
| 31,548 |
| (3.3)% |
|
| 31,548 |
|
| 32,191 |
| (2.0)% |
All other markets |
| 522,277 |
|
| 520,351 |
| 0.4% |
|
| 520,351 |
|
| 516,838 |
| 0.7% |
Total net operating income | $ | 1,752,654 |
| $ | 1,750,025 |
| 0.2% |
| $ | 1,750,025 |
| $ | 1,735,196 |
| 0.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | |||
Weighted average square foot |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupancy: |
| ||||||||||||||
Los Angeles |
| 95.2% |
|
| 95.0% |
| 0.2% |
|
| 95.0% |
|
| 95.5% |
| (0.5)% |
San Francisco |
| 94.3% |
|
| 94.4% |
| (0.1)% |
|
| 94.4% |
|
| 95.2% |
| (0.8)% |
New York |
| 94.1% |
|
| 94.3% |
| (0.2)% |
|
| 94.3% |
|
| 94.3% |
| 0.0% |
Washington DC |
| 93.4% |
|
| 92.4% |
| 1.1% |
|
| 92.4% |
|
| 92.7% |
| (0.3)% |
Seattle-Tacoma |
| 93.1% |
|
| 93.2% |
| (0.1)% |
|
| 93.2% |
|
| 94.3% |
| (1.2)% |
Miami |
| 93.0% |
|
| 92.9% |
| 0.1% |
|
| 92.9% |
|
| 93.6% |
| (0.7)% |
Atlanta |
| 93.0% |
|
| 93.2% |
| (0.2)% |
|
| 93.2% |
|
| 93.5% |
| (0.3)% |
Chicago |
| 92.1% |
|
| 90.3% |
| 2.0% |
|
| 90.3% |
|
| 91.2% |
| (1.0)% |
Dallas-Ft. Worth |
| 92.0% |
|
| 91.4% |
| 0.7% |
|
| 91.4% |
|
| 92.9% |
| (1.6)% |
Orlando-Daytona |
| 94.1% |
|
| 94.5% |
| (0.4)% |
|
| 94.5% |
|
| 95.0% |
| (0.5)% |
Houston |
| 89.7% |
|
| 90.9% |
| (1.3)% |
|
| 90.9% |
|
| 91.8% |
| (1.0)% |
Philadelphia |
| 95.3% |
|
| 94.9% |
| 0.4% |
|
| 94.9% |
|
| 94.6% |
| 0.3% |
Tampa |
| 92.6% |
|
| 92.9% |
| (0.3)% |
|
| 92.9% |
|
| 94.0% |
| (1.2)% |
West Palm Beach |
| 93.9% |
|
| 93.8% |
| 0.1% |
|
| 93.8% |
|
| 94.7% |
| (1.0)% |
Portland |
| 94.0% |
|
| 94.0% |
| 0.0% |
|
| 94.0% |
|
| 95.3% |
| (1.4)% |
All other markets |
| 93.5% |
|
| 92.9% |
| 0.6% |
|
| 92.9% |
|
| 93.4% |
| (0.5)% |
Total weighted average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
square foot occupancy |
| 93.5% |
|
| 93.1% |
| 0.4% |
|
| 93.1% |
|
| 93.7% |
| (0.6)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rent per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupied square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles | $ | 26.11 |
| $ | 25.47 |
| 2.5% |
| $ | 25.47 |
| $ | 24.46 |
| 4.1% |
San Francisco |
| 26.73 |
|
| 26.14 |
| 2.3% |
|
| 26.14 |
|
| 25.29 |
| 3.4% |
New York |
| 26.05 |
|
| 25.51 |
| 2.1% |
|
| 25.51 |
|
| 24.88 |
| 2.5% |
Washington DC |
| 21.51 |
|
| 21.27 |
| 1.1% |
|
| 21.27 |
|
| 21.06 |
| 1.0% |
Seattle-Tacoma |
| 20.20 |
|
| 19.94 |
| 1.3% |
|
| 19.94 |
|
| 19.31 |
| 3.3% |
Miami |
| 20.31 |
|
| 20.63 |
| (1.6)% |
|
| 20.63 |
|
| 20.35 |
| 1.4% |
Atlanta |
| 13.44 |
|
| 13.15 |
| 2.2% |
|
| 13.15 |
|
| 12.85 |
| 2.3% |
Chicago |
| 15.17 |
|
| 15.33 |
| (1.0)% |
|
| 15.33 |
|
| 15.56 |
| (1.5)% |
Dallas-Ft. Worth |
| 13.63 |
|
| 13.88 |
| (1.8)% |
|
| 13.88 |
|
| 14.05 |
| (1.2)% |
Orlando-Daytona |
| 14.12 |
|
| 13.90 |
| 1.6% |
|
| 13.90 |
|
| 13.31 |
| 4.4% |
Houston |
| 13.52 |
|
| 14.01 |
| (3.5)% |
|
| 14.01 |
|
| 13.79 |
| 1.6% |
Philadelphia |
| 16.65 |
|
| 16.04 |
| 3.8% |
|
| 16.04 |
|
| 15.62 |
| 2.7% |
Tampa |
| 14.12 |
|
| 14.13 |
| (0.1)% |
|
| 14.13 |
|
| 13.78 |
| 2.5% |
West Palm Beach |
| 18.50 |
|
| 18.37 |
| 0.7% |
|
| 18.37 |
|
| 17.91 |
| 2.6% |
Portland |
| 18.52 |
|
| 18.71 |
| (1.0)% |
|
| 18.71 |
|
| 18.64 |
| 0.4% |
All other markets |
| 14.20 |
|
| 14.03 |
| 1.2% |
|
| 14.03 |
|
| 13.80 |
| 1.7% |
Total realized rent per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupied square foot | $ | 17.60 |
| $ | 17.41 |
| 1.1% |
| $ | 17.41 |
| $ | 17.05 |
| 2.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Facilities Operating Trends by Market (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | |||
REVPAF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles | $ | 24.87 |
| $ | 24.20 |
| 2.8% |
| $ | 24.20 |
| $ | 23.36 |
| 3.6% |
San Francisco |
| 25.20 |
|
| 24.67 |
| 2.1% |
|
| 24.67 |
|
| 24.07 |
| 2.5% |
New York |
| 24.50 |
|
| 24.05 |
| 1.9% |
|
| 24.05 |
|
| 23.45 |
| 2.6% |
Washington DC |
| 20.09 |
|
| 19.65 |
| 2.2% |
|
| 19.65 |
|
| 19.52 |
| 0.7% |
Seattle-Tacoma |
| 18.81 |
|
| 18.57 |
| 1.3% |
|
| 18.57 |
|
| 18.21 |
| 2.0% |
Miami |
| 18.88 |
|
| 19.16 |
| (1.5)% |
|
| 19.16 |
|
| 19.05 |
| 0.6% |
Atlanta |
| 12.50 |
|
| 12.25 |
| 2.0% |
|
| 12.25 |
|
| 12.01 |
| 2.0% |
Chicago |
| 13.97 |
|
| 13.84 |
| 0.9% |
|
| 13.84 |
|
| 14.19 |
| (2.5)% |
Dallas-Ft. Worth |
| 12.54 |
|
| 12.68 |
| (1.1)% |
|
| 12.68 |
|
| 13.05 |
| (2.8)% |
Orlando-Daytona |
| 13.29 |
|
| 13.14 |
| 1.1% |
|
| 13.14 |
|
| 12.64 |
| 4.0% |
Houston |
| 12.13 |
|
| 12.73 |
| (4.7)% |
|
| 12.73 |
|
| 12.66 |
| 0.6% |
Philadelphia |
| 15.86 |
|
| 15.22 |
| 4.2% |
|
| 15.22 |
|
| 14.77 |
| 3.0% |
Tampa |
| 13.08 |
|
| 13.13 |
| (0.4)% |
|
| 13.13 |
|
| 12.96 |
| 1.3% |
West Palm Beach |
| 17.37 |
|
| 17.23 |
| 0.8% |
|
| 17.23 |
|
| 16.96 |
| 1.6% |
Portland |
| 17.40 |
|
| 17.58 |
| (1.0)% |
|
| 17.58 |
|
| 17.75 |
| (1.0)% |
All other markets |
| 13.28 |
|
| 13.03 |
| 1.9% |
|
| 13.03 |
|
| 12.88 |
| 1.2% |
Total REVPAF | $ | 16.45 |
| $ | 16.21 |
| 1.5% |
| $ | 16.21 |
| $ | 15.97 |
| 1.5% |
We believe that our geographic diversification and scale across substantially all major metropolitan markets in the U.S. provides some insulation from localized economic effects and enhances the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics.
Acquired Facilities
The Acquired Facilities represent 103 facilities that we acquired in 2017, 2018, and 2019. As a result of the stabilization process and timing of when these facilities were acquired, year-over-year changes can be significant.
The following table summarizes operating data with respect to the Acquired Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUIRED FACILITIES |
|
|
| ||||||||||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
| 2019 |
| 2018 |
| Change (a) |
| 2018 |
| 2017 |
| Change (a) | ||||||
| ($ amounts in thousands, except for per square foot amounts) | ||||||||||||||||
Revenues (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions | $ | 30,473 |
| $ | 28,704 |
| $ | 1,769 |
| $ | 28,704 |
| $ | 5,577 |
| $ | 23,127 |
2018 Acquisitions |
| 16,029 |
|
| 5,167 |
|
| 10,862 |
|
| 5,167 |
|
| - |
|
| 5,167 |
2019 Acquisitions |
| 12,704 |
|
| - |
|
| 12,704 |
|
| - |
|
| - |
|
| - |
Total revenues |
| 59,206 |
|
| 33,871 |
|
| 25,335 |
|
| 33,871 |
|
| 5,577 |
|
| 28,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
| 10,203 |
|
| 9,669 |
|
| 534 |
|
| 9,669 |
|
| 2,006 |
|
| 7,663 |
2018 Acquisitions |
| 7,197 |
|
| 2,141 |
|
| 5,056 |
|
| 2,141 |
|
| - |
|
| 2,141 |
2019 Acquisitions |
| 5,072 |
|
| - |
|
| 5,072 |
|
| - |
|
| - |
|
| - |
Total cost of operations |
| 22,472 |
|
| 11,810 |
|
| 10,662 |
|
| 11,810 |
|
| 2,006 |
|
| 9,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
| 20,270 |
|
| 19,035 |
|
| 1,235 |
|
| 19,035 |
|
| 3,571 |
|
| 15,464 |
2018 Acquisitions |
| 8,832 |
|
| 3,026 |
|
| 5,806 |
|
| 3,026 |
|
| - |
|
| 3,026 |
2019 Acquisitions |
| 7,632 |
|
| - |
|
| 7,632 |
|
| - |
|
| - |
|
| - |
Net operating income |
| 36,734 |
|
| 22,061 |
|
| 14,673 |
|
| 22,061 |
|
| 3,571 |
|
| 18,490 |
Depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense |
| (34,980) |
|
| (23,809) |
|
| (11,171) |
|
| (23,809) |
|
| (5,668) |
|
| (18,141) |
Net income (loss) | $ | 1,754 |
| $ | (1,748) |
| $ | 3,502 |
| $ | (1,748) |
| $ | (2,097) |
| $ | 349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square foot occupancy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
| 89.4% |
|
| 90.9% |
|
| (1.7)% |
|
| 90.9% |
|
| 87.2% |
|
| 4.2% |
2018 Acquisitions |
| 82.6% |
|
| 79.6% |
|
| 3.8% |
|
| 79.6% |
|
| - |
|
| - |
2019 Acquisitions |
| 73.6% |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 80.7% |
|
| 85.9% |
|
| (6.1)% |
|
| 85.9% |
|
| 87.2% |
|
| (1.5)% |
Annual contract rent per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occupied square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions | $ | 15.40 |
| $ | 14.81 |
|
| 4.0% |
|
| 14.81 |
|
| 14.60 |
|
| 1.4% |
2018 Acquisitions |
| 11.98 |
|
| 11.10 |
|
| 7.9% |
|
| 11.10 |
|
| - |
|
| - |
2019 Acquisitions |
| 12.27 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
| $ | 13.30 |
| $ | 13.31 |
|
| (0.1)% |
| $ | 13.31 |
| $ | 14.60 |
|
| (8.8)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
| 34 |
|
| 34 |
|
| - |
|
| 34 |
|
| 34 |
|
| - |
2018 Acquisitions |
| 25 |
|
| 25 |
|
| - |
|
| 25 |
|
| - |
|
| 25 |
2019 Acquisitions |
| 44 |
|
| - |
|
| 44 |
|
| - |
|
| - |
|
| - |
|
| 103 |
|
| 59 |
|
| 44 |
|
| 59 |
|
| 34 |
|
| 25 |
Net rentable square feet (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
2017 Acquisitions |
| 2,206 |
|
| 2,114 |
|
| 92 |
|
| 2,114 |
|
| 2,114 |
|
| - |
2018 Acquisitions |
| 1,629 |
|
| 1,629 |
|
| - |
|
| 1,629 |
|
| - |
|
| 1,629 |
2019 Acquisitions |
| 3,133 |
|
| - |
|
| 3,133 |
|
| - |
|
| - |
|
| - |
|
| 6,968 |
|
| 3,743 |
|
| 3,225 |
|
| 3,743 |
|
| 2,114 |
|
| 1,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUIRED FACILITIES (Continued) | As of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Costs to acquire (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions (c) | $ | 291,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Acquisitions |
| 181,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Acquisitions |
| 429,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 902,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.
(c)Acquisition costs includes i) $149.8 million paid for 22 facilities acquired from third parties, ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and iii) the $6.3 million historical book value of our existing investment in the legacy institutional partnership.
We believe that our economies of scale in marketing and operations allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities.
The facilities included above under “2017 acquisitions,” “2018 acquisitions,” and “2019 acquisitions” have an aggregate of approximately 7.0 million net rentable square feet, including 0.9 million in Texas, 0.8 million in Virginia, 0.6 million in each of Florida and Minnesota, 0.4 million in each of Georgia, Indiana, North Carolina and South Carolina, 0.3 million in each of Nebraska and Ohio, 0.2 million in each of California, Kentucky, Massachusetts, New York, Tennessee and Washington, and 0.7 million in other states.
For 2019, the weighted average annualized yield on cost, based upon net operating income, for (i) the 22 facilities acquired in 2017 from third parties was 6.1%, (ii) the 12 stabilized facilities owned by a legacy institutional partnership, with respect to the 74.25% interest we acquired was 6.1%, and (iii) the 25 properties acquired in 2018 was 4.9%. The yield for the facilities acquired in 2019 is not meaningful due to our limited ownership period.
Subsequent to December 31, 2019, we acquired or were under contract to acquire 14 self-storage facilities (four in Ohio, three in California, two each in New York and Tennessee and one each in Indiana, Massachusetts, and Nebraska) with 1.1 million net rentable square feet, for $245.3 million.
Analysis of Depreciation and Amortization of Acquired Facilities
Depreciation and amortization with respect to the Acquired Facilities totaled $35.0 million, $23.8 million and $5.7 million for 2019, 2018, and 2017, respectively. These amounts include (i) depreciation of the acquired buildings, which is recorded generally on a straight line basis over a 25 year period, and (ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to the Acquired Facilities owned at December 31, 2019, depreciation of buildings and amortization of tenant intangibles is expected to aggregate approximately $36.2 million in the year ending December 31, 2020. There will be additional depreciation and amortization of tenant intangibles with respect to new buildings that are acquired in 2020.
Developed and Expanded Facilities
The developed and expanded facilities include 81 facilities that were developed on new sites since January 1, 2013, and 60 facilities subject to expansion of their net rentable square footage. Of these expansions, 49 are completed at December 31, 2019 and 11 are currently in process at December 31, 2019.
The following table summarizes operating data with respect to the Developed and Expanded Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEVELOPED AND EXPANDED |
|
| |||||||||||||||
FACILITIES | Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
| 2019 |
| 2018 |
| Change (a) |
| 2018 |
| 2017 |
| Change (a) | ||||||
| ($ amounts in thousands, except for per square foot amounts) | ||||||||||||||||
Revenues (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 | $ | 28,331 |
| $ | 26,725 |
| $ | 1,606 |
| $ | 26,725 |
| $ | 24,910 |
| $ | 1,815 |
Developed in 2016 and 2017 |
| 43,358 |
|
| 34,233 |
|
| 9,125 |
|
| 34,233 |
|
| 17,391 |
|
| 16,842 |
Developed in 2018 and 2019 |
| 15,230 |
|
| 3,392 |
|
| 11,838 |
|
| 3,392 |
|
| - |
|
| 3,392 |
Completed Expansions |
| 49,214 |
|
| 41,879 |
|
| 7,335 |
|
| 41,879 |
|
| 41,773 |
|
| 106 |
Expansions in process |
| 14,438 |
|
| 15,465 |
|
| (1,027) |
|
| 15,465 |
|
| 15,790 |
|
| (325) |
Total revenues |
| 150,571 |
|
| 121,694 |
|
| 28,877 |
|
| 121,694 |
|
| 99,864 |
|
| 21,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 |
| 8,284 |
|
| 8,031 |
|
| 253 |
|
| 8,031 |
|
| 8,093 |
|
| (62) |
Developed in 2016 and 2017 |
| 18,188 |
|
| 17,984 |
|
| 204 |
|
| 17,984 |
|
| 11,433 |
|
| 6,551 |
Developed in 2018 and 2019 |
| 11,195 |
|
| 4,136 |
|
| 7,059 |
|
| 4,136 |
|
| - |
|
| 4,136 |
Completed Expansions |
| 21,579 |
|
| 13,756 |
|
| 7,823 |
|
| 13,756 |
|
| 13,427 |
|
| 329 |
Expansions in process |
| 4,114 |
|
| 3,963 |
|
| 151 |
|
| 3,963 |
|
| 3,857 |
|
| 106 |
Total cost of operations |
| 63,360 |
|
| 47,870 |
|
| 15,490 |
|
| 47,870 |
|
| 36,810 |
|
| 11,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 |
| 20,047 |
|
| 18,694 |
|
| 1,353 |
|
| 18,694 |
|
| 16,817 |
|
| 1,877 |
Developed in 2016 and 2017 |
| 25,170 |
|
| 16,249 |
|
| 8,921 |
|
| 16,249 |
|
| 5,958 |
|
| 10,291 |
Developed in 2018 and 2019 |
| 4,035 |
|
| (744) |
|
| 4,779 |
|
| (744) |
|
| - |
|
| (744) |
Completed Expansions |
| 27,635 |
|
| 28,123 |
|
| (488) |
|
| 28,123 |
|
| 28,346 |
|
| (223) |
Expansions in process |
| 10,324 |
|
| 11,502 |
|
| (1,178) |
|
| 11,502 |
|
| 11,933 |
|
| (431) |
Net operating income |
| 87,211 |
|
| 73,824 |
|
| 13,387 |
|
| 73,824 |
|
| 63,054 |
|
| 10,770 |
Depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense |
| (54,065) |
|
| (45,851) |
|
| (8,214) |
|
| (45,851) |
|
| (36,848) |
|
| (9,003) |
Net income | $ | 33,146 |
| $ | 27,973 |
| $ | 5,173 |
| $ | 27,973 |
| $ | 26,206 |
| $ | 1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square foot occupancy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 |
| 90.9% |
|
| 89.9% |
|
| 1.1% |
|
| 89.9% |
|
| 88.9% |
|
| 1.1% |
Developed in 2016 and 2017 |
| 78.4% |
|
| 73.5% |
|
| 6.7% |
|
| 73.5% |
|
| 52.3% |
|
| 40.5% |
Developed in 2018 and 2019 |
| 56.7% |
|
| 42.1% |
|
| 34.7% |
|
| 42.1% |
|
| - |
|
| - |
Completed Expansions |
| 62.5% |
|
| 67.0% |
|
| (6.7)% |
|
| 67.0% |
|
| 66.4% |
|
| 0.9% |
Expansions in process |
| 83.1% |
|
| 88.1% |
|
| (5.7)% |
|
| 88.1% |
|
| 88.4% |
|
| (0.3)% |
|
| 69.7% |
|
| 69.9% |
|
| (0.3)% |
|
| 69.9% |
|
| 66.4% |
|
| 5.3% |
Annual contract rent per occupied square foot: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 | $ | 16.56 |
| $ | 15.65 |
|
| 5.8% |
| $ | 15.65 |
| $ | 14.94 |
|
| 4.8% |
Developed in 2016 and 2017 |
| 13.70 |
|
| 12.28 |
|
| 11.6% |
|
| 12.28 |
|
| 12.11 |
|
| 1.4% |
Developed in 2018 and 2019 |
| 12.03 |
|
| 10.36 |
|
| 16.1% |
|
| 10.36 |
|
| - |
|
| - |
Completed Expansions |
| 13.00 |
|
| 15.40 |
|
| (15.6)% |
|
| 15.40 |
|
| 15.73 |
|
| (2.1)% |
Expansions in process |
| 21.92 |
|
| 22.25 |
|
| (1.5)% |
|
| 22.25 |
|
| 21.99 |
|
| 1.2% |
| $ | 14.06 |
| $ | 14.41 |
|
| (2.4)% |
| $ | 14.41 |
| $ | 15.03 |
|
| (4.1)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEVELOPED AND EXPANDED |
|
|
| ||||||||||||||
FACILITIES (Continued) | Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
| 2019 |
| 2018 |
| Change (a) |
|
| 2018 |
| 2017 |
| Change (a) | |||||
| (Amounts in thousands, except for number of facilities) | ||||||||||||||||
|
| ||||||||||||||||
Number of facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 |
| 20 |
|
| 20 |
|
| - |
|
| 20 |
|
| 20 |
|
| - |
Developed in 2016 and 2017 |
| 32 |
|
| 32 |
|
| - |
|
| 32 |
|
| 32 |
|
| - |
Developed in 2018 and 2019 |
| 29 |
|
| 18 |
|
| 11 |
|
| 18 |
|
| - |
|
| 18 |
Completed Expansions |
| 49 |
|
| 49 |
|
| - |
|
| 49 |
|
| 49 |
|
| - |
Expansions in process |
| 11 |
|
| 11 |
|
| - |
|
| 11 |
|
| 11 |
|
| - |
|
| 141 |
|
| 130 |
|
| 11 |
|
| 130 |
|
| 112 |
|
| 18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rentable square feet (c): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 |
| 1,877 |
|
| 1,877 |
|
| - |
|
| 1,877 |
|
| 1,877 |
|
| - |
Developed in 2016 and 2017 |
| 4,181 |
|
| 4,181 |
|
| - |
|
| 4,181 |
|
| 4,181 |
|
| - |
Developed in 2018 and 2019 |
| 3,126 |
|
| 1,954 |
|
| 1,172 |
|
| 1,954 |
|
| - |
|
| 1,954 |
Completed Expansions |
| 6,621 |
|
| 4,047 |
|
| 2,574 |
|
| 4,047 |
|
| 3,774 |
|
| 273 |
Expansions in process |
| 728 |
|
| 748 |
|
| (20) |
|
| 748 |
|
| 776 |
|
| (28) |
|
| 16,533 |
|
| 12,807 |
|
| 3,726 |
|
| 12,807 |
|
| 10,608 |
|
| 2,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Costs to develop: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2013 - 2015 | $ | 188,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2016 and 2017 |
| 497,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed in 2018 and 2019 |
| 412,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Expansions (d) |
| 381,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expansions in process (e) |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,480,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.
(b)Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.
(c)The facilities included above have an aggregate of approximately 16.5 million net rentable square feet at December 31, 2019, including 6.5 million in Texas, 2.4 million in California, 1.7 million in Florida, 1.5 million in Colorado, 0.9 million in Minnesota, 0.7 million in Washington, 0.6 million in North Carolina, 0.4 million in Arizona, 0.3 million each in Georgia and Michigan, and 1.2 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.
(e)We have a development pipeline to add 3.1 million net rentable square feet by expanding existing facilities at an aggregate cost of approximately $410.5 million, not including (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.
It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Physical occupancy can be achieved as early as two to three years following completion of the development or expansion, through offering lower rental rates during fill-up. As a result, even after achieving
high occupancy, there can still be a period of elevated revenue growth as the tenant base matures and higher rental rates are achieved. Our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses in general and administrative expense. Despite this short-term dilution, we believe that our development and expansion activities generate favorable risk-adjusted returns over the long run.
Newly Developed Facilities
The facilities included under “Developed in 2013-2015” were opened in 2013, 2014, and 2015, and we believe they have reached stabilization at December 31, 2019. The annualized yield on cost, based upon the net operating income for 2019 was 10.7%.
The facilities included under “Developed in 2016 and 2017” and “Developed in 2018 and 2019” are not stabilized with respect to occupancy or revenues at December 31, 2019, and we expect continued growth in these facilities throughout 2020 and beyond as they continue to stabilize. The annualized yields that may be achieved on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property such as consumer demand and the level of new and existing supply. Accordingly, the 10.7% yield achieved on the facilities under “Developed in 2013 - 2015” may not be indicative of the yield on cost to be achieved on these facilities.
We have 12 additional newly developed facilities in process, which will have a total of 1.3 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $208.7 million. We expect these facilities to open over the next 18 months.
Expansions of Existing Facilities
The expansion of an existing facility involves the construction of new space on an existing facility, either on existing unused land or through the demolition of existing buildings in order to facilitate densification. The construction costs for an expanded facility may include, in addition to adding space, adding amenities such as climate control to existing space, improving the visual appeal of the facility, and to a much lesser extent, the replacement of existing doors, roofs, and HVAC.
The return profile on the expansion of existing facilities differs from a new facility, due to a lack of land cost, and there can be less cash flow risk because we have more direct knowledge of the local demand for space on the site as compared to a new facility. However, expansions involve the demolition of existing revenue-generating space with the loss of the related revenues during the construction and fill-up period.
The facilities under “completed expansions” represent those facilities where the expansions have been completed at December 31, 2019. We incurred a total of $381.9 million in direct cost to expand these facilities, demolished a total of 1.0 million net rentable square feet of storage space, and built a total of 4.3 million net rentable square feet of new storage space.
The facilities under “expansions in process” represent those facilities where development is in process at December 31, 2019. We have a pipeline to add a total of 3.1 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of $410.5 million. We have already demolished 0.1 million net rentable square feet of space in connection with our expansion projects, and expect to demolish an additional 0.4 million net rentable square feet.
Analysis of Depreciation and Amortization of Developed and Expanded Facilities
Depreciation and amortization with respect to the Developed and Expanded Facilities totaled $54.1 million, $45.9 million and $36.8 million for 2019, 2018, and 2017, respectively. These amounts represent depreciation of the developed buildings and, in the case of the expanded facilities, the legacy depreciation on the existing buildings. With respect to the Developed and Expanded Facilities completed at December 31, 2019, depreciation of buildings is
expected to aggregate approximately $62.1 million in 2020. There will be additional depreciation of new buildings that are developed or expanded in 2020.
Other non-same store facilities
The “Other non-same store facilities” represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized since January 1, 2017, due primarily to casualty events such as hurricanes, floods, and fires, as well as facilities acquired from third parties prior to January 1, 2017 that were recently developed or expanded by the previous owner.
The Other non-same store facilities have an aggregate of 6.1 million net rentable square feet, including 1.1 million in Texas, 0.8 million in Oklahoma, 0.7 million in California, 0.6 million in each of Florida, Ohio and South Carolina, 0.4 million in each of New York and Washington, 0.3 million in Tennessee, and 0.6 million in other states.
The net operating income for these facilities increased from $53.0 million in 2017 to $56.0 million in 2018 and decreased from $56.0 million in 2018 to $55.4 million in 2019. During 2019, 2018, and 2017, the average occupancy for these facilities totaled 88.8%, 88.1%, and 87.7%, respectively, and the realized rent per occupied square feet totaled $14.20, $14.39, and $14.20, respectively.
Over the longer term, we expect the growth in operations of these facilities to be similar to that of our Same Store facilities. However, in the short run, year over year comparisons will vary due to the impact of the underlying events which resulted in these facilities being classified as non-same store.
Depreciation and amortization with respect to the other non-same store facilities totaled $34.1 million, $31.1 million and $29.7 million for 2019, 2018, and 2017, respectively. We expect depreciation for these facilities to in 2020 to approximate the depreciation incurred in 2019.
Ancillary Operations
Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities. The following table sets forth our ancillary operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||
| (Amounts in thousands) | ||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance premiums | $ | 131,913 |
| $ | 125,575 |
| $ | 6,338 |
| $ | 125,575 |
| $ | 122,852 |
| $ | 2,723 |
Merchandise |
| 30,358 |
|
| 31,098 |
|
| (740) |
|
| 31,098 |
|
| 33,243 |
|
| (2,145) |
Total revenues |
| 162,271 |
|
| 156,673 |
|
| 5,598 |
|
| 156,673 |
|
| 156,095 |
|
| 578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance |
| 26,202 |
|
| 25,646 |
|
| 556 |
|
| 25,646 |
|
| 30,554 |
|
| (4,908) |
Merchandise |
| 18,002 |
|
| 18,345 |
|
| (343) |
|
| 18,345 |
|
| 19,791 |
|
| (1,446) |
Total cost of operations |
| 44,204 |
|
| 43,991 |
|
| 213 |
|
| 43,991 |
|
| 50,345 |
|
| (6,354) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant reinsurance |
| 105,711 |
|
| 99,929 |
|
| 5,782 |
|
| 99,929 |
|
| 92,298 |
|
| 7,631 |
Merchandise |
| 12,356 |
|
| 12,753 |
|
| (397) |
|
| 12,753 |
|
| 13,452 |
|
| (699) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net operating income | $ | 118,067 |
| $ | 112,682 |
| $ | 5,385 |
| $ | 112,682 |
| $ | 105,750 |
| $ | 6,932 |
Tenant reinsurance operations: Our customers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary of Public Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table.
The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in consolidation and is therefore not shown in the above table.
Tenant reinsurance revenue increased $2.7 million or 2.2% from $122.9 million in 2017 to $125.6 million in 2018, and $6.3 million or 5.0% from $125.6 million in 2018 to $131.9 million in 2019. These increases are due primarily to an increase in our tenant base with respect to acquired, newly developed, and expanded facilities. Tenant reinsurance revenue with respect to the Same Store Facilities decreased $0.2 million or 0.2% from $109.3 million in 2017 to $109.1 million in 2018, and increased $2.0 million or 1.8% from $109.1 million in 2018 to $111.1 million in 2019.
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 that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the level of insured tenants, and the level of events affecting claims at particular properties (such as burglary) as well as catastrophic weather events affecting multiple properties such as hurricanes and floods. Cost of operations were $26.2 million in 2019, $25.6 million in 2018, and $30.6 million in 2017. Amounts for 2017 includes the impact of Hurricanes Harvey and Irma.
Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in 2020.
Equity in earnings of unconsolidated real estate entities
At December 31, 2019, we have equity investments in PSB and Shurgard which we account for on the equity method and record our pro-rata share of the net income of these entities for each period. The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||
|
| (Amounts in thousands) | ||||||||||||||||
Equity in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSB |
| $ | 54,090 |
| $ | 89,362 |
| $ | (35,272) |
| $ | 89,362 |
| $ | 46,544 |
| $ | 42,818 |
Shurgard |
|
| 15,457 |
|
| 14,133 |
|
| 1,324 |
|
| 14,133 |
|
| 25,948 |
|
| (11,815) |
Legacy Institutional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership (a) |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 3,163 |
|
| (3,163) |
Total equity in earnings |
| $ | 69,547 |
| $ | 103,495 |
| $ | (33,948) |
| $ | 103,495 |
| $ | 75,655 |
| $ | 27,840 |
(a)This represents our equity earnings in a legacy institutional partnership. On December 31, 2017, we acquired the 74.25% interest that we did not own in this partnership for $135.5 million. As a result, no further equity earnings will be recorded.
Investment in PSB: Throughout all periods presented, we owned 7,158,354 shares of PS Business Parks, Inc. (“PSB”) common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB, representing an aggregate approximately 42% common equity interest. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.
At December 31, 2019, PSB wholly-owned approximately 27.6 million rentable square feet of commercial space and had a 95% interest in a 395-unit apartment complex. PSB also manages commercial space that we own pursuant to property management agreements.
Equity in earnings from PSB totaled $54.1 million, $89.4 million, and $46.5 million for 2019, 2018, and 2017, respectively. Included in these amounts are i) our equity share of gains on sale of real estate totaling $4.4 million, $37.7 million and $3.1 million for 2019, 2018, and 2017, respectively, and ii) our equity share of preferred redemption charges totaling $4.6 million and $4.5 million for 2019 and 2017, respectively.
Equity in earnings from PSB, excluding the aforementioned real estate gains and preferred redemption charges, increased $2.6 million in 2019 as compared to 2018 and $3.7 million in 2018 as compared to 2017 due primarily to improved property operations. See Note 4 to our December 31, 2019 financial statements for further discussion regarding PSB. PSB’s filings and selected financial information that 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 Annual Report on Form 10-K.
Investment in Shurgard: Throughout all periods presented, we effectively owned, directly and indirectly 31.3 million Shurgard common shares. On October 15, 2018, Shurgard completed an initial global offering (the “Offering”), issuing 25.0 million of its common shares to third parties at a price of €23 per share (€575 million in gross proceeds), reducing our ownership interest from 49% to approximately 35%. Following the Offering, Shurgard’s shares trade on Euronext Brussels under the “SHUR” symbol. While we did not sell any shares in the Offering, and have no current plans to do so, we recorded a gain on disposition in 2018 totaling $151.6 million as if we had sold a proportionate share of our investment in Shurgard.
At December 31, 2019, Shurgard owned 234 self-storage facilities with approximately 13 million net rentable square feet. Shurgard pays us license fees for use of the “Shurgard” trademark, as described in more detail in Note 4 to our December 31, 2019 financial statements.
Shurgard paid €0.67 per share in dividends to its shareholders during 2019, of which our share totaled $23.1 million. During 2018, Shurgard paid a cash dividend totaling $296.7 million to its shareholders at the time, of which our 49% equity share was $145.4 million.
In 2019, 2018, and 2017, Shurgard acquired three facilities, eight facilities, and one facility, respectively, for an aggregate cost of $17.6 million, $114.5 million, and $15.5 million, respectively. In each of 2019, 2018, and 2017, Shurgard opened two newly developed facilities at an aggregate cost totaling $22.2 million, $19.6 million, and $28.8 million, respectively.
Our equity in earnings from Shurgard totaled $15.5 million, $14.1 million, and $25.9 million for 2019, 2018, and 2017, respectively. The increase of $1.4 million from 2018 to 2019 is due to (i) a $10.1 million decrease in our equity share of depreciation expense, (ii) a $5.2 million decrease in our equity share of costs due to a casualty loss occurring in 2018 and the costs of the Offering, offset partially by (iii) a reduced average equity ownership interest during 2019 due to the Offering as well as approximately $220 million in uninvested offering proceeds at December 31, 2019, and (iv) a 5.2% reduction in average exchange rates of the U.S. Dollar to the Euro. The $11.8 million decrease in 2018 as compared to 2017 is due primarily to a $6.9 million increase in our equity share of depreciation expense as well as the aforementioned casualty loss in 2018 and costs of the Offering.
Our future earnings from Shurgard will also be affected by (i) the operating results of its existing facilities, (ii) the level of development and acquisition activities, (iii) the income tax rates applicable in the various European jurisdictions in which Shurgard operates, and (iv) the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard conducts its business (principally the Euro). Shurgard expects to distribute a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate. The level of equity income in the near term will also depend on the portion of the proceeds of the Offering which remain uninvested.
Shurgard’s public filings and publicly reported information can be obtained on its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu. Information on these websites is not incorporated by reference herein and is not a part of this Annual Report on Form 10-K.
For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately 1.122 U.S. Dollars per Euro at December 31, 2019 (1.144 at December 31, 2018), and average exchange rates of 1.120 for 2019, 1.181 for 2018, and 1.129 for 2017.
Analysis of items not allocated to segments
General and administrative expense: The following table sets forth our general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Year Ended December 31, |
| Year Ended December 31, | ||||||||||||||
|
| 2019 |
| 2018 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||
|
| (Amounts in thousands) | ||||||||||||||||
| ||||||||||||||||||