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Public Storage - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2018

or

[   ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________.

Commission File Number:  001-33519

PUBLIC STORAGE
(Exact name of registrant as specified in its charter)



 

Maryland

95-3551121

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)



 

701 Western Avenue, Glendale, California

91201-2349

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:  (818) 244-8080.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.

[X]  Yes  [   ]  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

[X]  Yes  [   ]  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

Large accelerated
filer

Accelerated
filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

[X]

[   ]

[   ]

[   ]

[   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[   ]  Yes  [X]  No

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of July 30, 2018:

Common Shares of beneficial interest, $.10 par value per share – 174,240,424 shares

 

 


 

PUBLIC STORAGE



INDEX







 

 

PART I

FINANCIAL INFORMATION

Pages



 

 

Item 1.

Financial Statements (Unaudited)

 



 

 



Balance Sheets at June 30, 2018 and December 31, 2017



 

 



Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017



 

 



Statements of Comprehensive Income for the Three and Six Months Ended
June 30, 2018 and 2017



 

 



Statement of Equity for the Six Months Ended June 30, 2018



 

 



Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

5-6 



 

 



Condensed Notes to Financial Statements

7-27 



 

 

Item 2.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

28-54 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54 



 

 

Item 4.

Controls and Procedures

54-55 



 

 

PART II

OTHER INFORMATION (Items 3, 4 and 5 are not applicable)

 



 

 

Item 1.

Legal Proceedings

56 



 

 

Item 1A.

Risk Factors

56 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56 



 

 

Item 6.

Exhibits

57 



 

 



 



 

 

 


 

 

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)





 

 

 

 

 



June 30,

 

December 31,



2018

 

2017

ASSETS

 

(Unaudited)

 

 

 



 

 

 

 

 

Cash and equivalents

$

338,419 

 

$

433,376 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,993,027 

 

 

3,947,123 

Buildings

 

10,951,605 

 

 

10,718,866 



 

14,944,632 

 

 

14,665,989 

Accumulated depreciation

 

(5,923,687)

 

 

(5,700,331)



 

9,020,945 

 

 

8,965,658 

Construction in process

 

234,044 

 

 

264,441 



 

9,254,989 

 

 

9,230,099 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

762,247 

 

 

724,173 

Goodwill and other intangible assets, net

 

207,390 

 

 

214,957 

Other assets

 

129,917 

 

 

130,287 

Total assets

$

10,692,962 

 

$

10,732,892 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Notes payable

$

1,420,834 

 

$

1,431,322 

Accrued and other liabilities

 

351,336 

 

 

337,201 

    Total liabilities

 

1,772,170 

 

 

1,768,523 



 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

Preferred Shares, $0.01 par value, 100,000,000 shares authorized,

 

 

 

 

 

161,000 shares issued (in series) and outstanding, (161,000 at

 

 

 

 

 

December 31, 2017), at liquidation preference

 

4,025,000 

 

 

4,025,000 

Common Shares, $0.10 par value, 650,000,000 shares authorized,

 

 

 

 

 

173,937,035 shares issued and outstanding  (173,853,370 shares at

 

 

 

 

 

December 31, 2017)

 

17,394 

 

 

17,385 

Paid-in capital

 

5,673,078 

 

 

5,648,399 

Accumulated deficit

 

(735,065)

 

 

(675,711)

Accumulated other comprehensive loss

 

(84,601)

 

 

(75,064)

Total Public Storage shareholders’ equity

 

8,895,806 

 

 

8,940,009 

Noncontrolling interests

 

24,986 

 

 

24,360 

  Total equity

 

8,920,792 

 

 

8,964,369 

Total liabilities and equity

$

10,692,962 

 

$

10,732,892 

 

 

See accompanying notes.

1

 


 

 

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

645,206 

 

$

624,199 

 

$

1,276,743 

 

$

1,231,977 

Ancillary operations

 

40,322 

 

 

40,113 

 

 

78,709 

 

 

77,882 



 

685,528 

 

 

664,312 

 

 

1,355,452 

 

 

1,309,859 



 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

179,876 

 

 

171,195 

 

 

362,063 

 

 

343,173 

Ancillary cost of operations

 

11,101 

 

 

11,383 

 

 

21,741 

 

 

22,307 

Depreciation and amortization

 

119,777 

 

 

110,177 

 

 

237,756 

 

 

221,106 

General and administrative

 

31,329 

 

 

14,992 

 

 

62,849 

 

 

40,020 



 

342,083 

 

 

307,747 

 

 

684,409 

 

 

626,606 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

343,445 

 

 

356,565 

 

 

671,043 

 

 

683,253 

Interest and other income

 

6,328 

 

 

4,155 

 

 

11,872 

 

 

8,153 

Interest expense

 

(8,388)

 

 

(1,116)

 

 

(16,495)

 

 

(2,164)

Equity in earnings of unconsolidated real estate entities

 

41,963 

 

 

20,068 

 

 

72,758 

 

 

40,017 

Foreign currency exchange gain (loss)

 

21,944 

 

 

(25,440)

 

 

10,126 

 

 

(31,006)

Gain on sale of real estate

 

 -

 

 

975 

 

 

424 

 

 

975 

Net income

 

405,292 

 

 

355,207 

 

 

749,728 

 

 

699,228 

Allocation to noncontrolling interests

 

(1,490)

 

 

(1,505)

 

 

(2,929)

 

 

(3,084)

Net income allocable to Public Storage shareholders

 

403,802 

 

 

353,702 

 

 

746,799 

 

 

696,144 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders - distributions

 

(54,077)

 

 

(61,281)

 

 

(108,158)

 

 

(121,402)

Preferred shareholders - redemptions (Note 8)

 

 -

 

 

(14,638)

 

 

 -

 

 

(14,638)

Restricted share units 

 

(1,425)

 

 

(1,102)

 

 

(2,522)

 

 

(2,292)

Net income allocable to common shareholders

$

348,300 

 

$

276,681 

 

$

636,119 

 

$

557,812 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.00 

 

$

1.59 

 

$

3.66 

 

$

3.22 

Diluted

$

2.00 

 

$

1.59 

 

$

3.65 

 

$

3.20 



 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

173,932 

 

 

173,602 

 

 

173,912 

 

 

173,483 

Diluted weighted average common shares outstanding

 

174,224 

 

 

174,075 

 

 

174,186 

 

 

174,072 



 

 

 

 

 

 

 

 

 

 

 



 

 

See accompanying notes.

2

 


 

 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Net income

$

405,292 

 

$

355,207 

 

$

749,728 

 

$

699,228 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange gain (loss)

8,194 

 

 

(15,358)

 

 

589 

 

 

(18,043)

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

 

 

(gain) loss included in net income

 

(21,944)

 

 

25,440 

 

 

(10,126)

 

 

31,006 

Other comprehensive income (loss):

 

(13,750)

 

 

10,082 

 

 

(9,537)

 

 

12,963 

Total comprehensive income

 

391,542 

 

 

365,289 

 

 

740,191 

 

 

712,191 

Allocation to noncontrolling interests

 

(1,490)

 

 

(1,505)

 

 

(2,929)

 

 

(3,084)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

390,052 

 

$

363,784 

 

$

737,262 

 

$

709,107 



 



 

 

See accompanying notes.

3

 


 

 

 PUBLIC STORAGE

STATEMENT OF EQUITY

(Amounts in thousands, except share and per share amounts)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 



Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 



Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total



Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

Balances at December 31, 2017

$

4,025,000 

 

$

17,385 

 

$

5,648,399 

 

$

(675,711)

 

$

(75,064)

 

$

8,940,009 

 

$

24,360 

 

$

8,964,369 

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (83,665 shares) (Note 10)

 -

 

 

 

 

1,690 

 

 

 -

 

 

 -

 

 

1,699 

 

 

 -

 

 

1,699 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 10)

 -

 

 

 -

 

 

22,989 

 

 

 -

 

 

 -

 

 

22,989 

 

 

 -

 

 

22,989 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

752 

 

 

752 

Net income

 

 -

 

 

 -

 

 

 -

 

 

749,728 

 

 

 -

 

 

749,728 

 

 

 -

 

 

749,728 

Net income allocated to noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

(2,929)

 

 

 -

 

 

(2,929)

 

 

2,929 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 8)

 

 -

 

 

 -

 

 

 -

 

 

(108,158)

 

 

 -

 

 

(108,158)

 

 

 -

 

 

(108,158)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,055)

 

 

(3,055)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($4.00 per share)

 

 -

 

 

 -

 

 

 -

 

 

(697,995)

 

 

 -

 

 

(697,995)

 

 

 -

 

 

(697,995)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(9,537)

 

 

(9,537)

 

 

 -

 

 

(9,537)

Balances at June 30, 2018

$

4,025,000 

 

$

17,394 

 

$

5,673,078 

 

$

(735,065)

 

$

(84,601)

 

$

8,895,806 

 

$

24,986 

 

$

8,920,792 



 



 

 

See accompanying notes.

4

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)





 

 

 

 

 



Six Months Ended June 30,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Net income

$

749,728 

 

$

699,228 

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

from operating activities:

 

 

 

 

 

Gain on real estate investment sales

 

(424)

 

 

(975)

Depreciation and amortization

 

237,756 

 

 

221,106 

Equity in earnings of unconsolidated real estate entities

 

(72,758)

 

 

(40,017)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

real estate entities

 

25,288 

 

 

26,525 

Foreign currency exchange (gain) loss

 

(10,126)

 

 

31,006 

Share-based compensation expense

 

34,188 

 

 

13,162 

Other

 

14,258 

 

 

15,292 

Total adjustments

 

228,182 

 

 

266,099 

Net cash flows from operating activities

 

977,910 

 

 

965,327 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(56,642)

 

 

(52,095)

Construction in process

 

(166,040)

 

 

(164,544)

Acquisition of real estate facilities and intangible assets

(33,930)

 

 

(34,407)

Proceeds from sale of real estate investments

 

1,947 

 

 

5,596 

Net cash flows from investing activities

 

(254,665)

 

 

(245,450)

Cash flows from financing activities:

 

 

 

 

 

Repayments on notes payable

 

(882)

 

 

(841)

Issuance of preferred shares

 

 -

 

 

271,057 

Issuance of common shares

 

1,699 

 

 

31,902 

Cash paid upon vesting of restricted share units

 

(10,242)

 

 

(11,764)

Acquisition of noncontrolling interests

 

 -

 

 

(14,425)

Contributions by noncontrolling interests

 

752 

 

 

584 

Distributions paid to Public Storage shareholders

 

(806,153)

 

 

(817,987)

Distributions paid to noncontrolling interests

 

(3,055)

 

 

(3,749)

Net cash flows from financing activities

 

(817,881)

 

 

(545,223)

Net cash flows from operating, investing, and financing activities

 

(94,636)

 

 

174,654 

Net effect of foreign exchange translation

 

13 

 

 

(104)

(Decrease) increase in cash, equivalents, and restricted cash

$

(94,623)

 

$

174,550 

 

 

 

 

 

 

Cash, equivalents, and restricted cash at beginning of the period:

 

 

 

 

 

Cash and equivalents

$

433,376 

 

$

183,688 

Restricted cash included in other assets

 

22,677 

 

 

28,885 



$

456,053 

 

$

212,573 



 

 

 

 

 

Cash, equivalents, and restricted cash at end of the period:

 

 

 

 

 

Cash and equivalents

$

338,419 

 

$

358,266 

Restricted cash included in other assets

 

23,011 

 

 

28,857 



$

361,430 

 

$

387,123 



 

 

 

 

 

See accompanying notes.

5

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Six Months Ended June 30,



2018

 

2017

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 



 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

149 

 

$

(374)

Investments in unconsolidated real estate entities

 

9,396 

 

 

(12,569)

Notes payable

 

(10,121)

 

 

30,882 

Accumulated other comprehensive loss

 

589 

 

 

(18,043)



 

 

 

 

 

Preferred shares called for redemption and reclassified to liabilities

 

 -

 

 

460,000 

Preferred shares called for redemption and reclassified from equity

 

 -

 

 

(460,000)



 

 

 

 

 

Accrued development costs and capital expenditures:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

3,415 

 

 

(1,445)

Construction in process

 

1,694 

 

 

(2,336)

Accrued and other liabilities

 

(5,109)

 

 

3,781 



 



 

See accompanying notes.

6

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

1.Description of the Business

Public Storage (referred to herein as “the Company,” “we,” “us,” or “our”), a Maryland real estate investment trust (“REIT”), was organized in 1980.  Our principal business activities include the ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, ancillary activities such as merchandise sales and tenant reinsurance to the tenants at our self-storage facilities, as well as the acquisition and development of additional self-storage space. 

At June 30, 2018, we have direct and indirect equity interests in 2,402 self-storage facilities (with approximately 160 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 227 self-storage facilities (with approximately 12 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 29 million net rentable square feet of commercial space located in seven states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At June 30, 2018, we have an approximate 42% common equity interest in PSB.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 12) are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.).

2.Summary of Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying interim financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Accounting Standards Codification of the Financial Accounting Standards Board (“FASB”), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In our opinion, the interim financial statements presented herein reflect all adjustments, of a normal recurring nature, that are necessary to fairly present the interim financial statements.  Because they do not include all of the disclosures required by GAAP for complete annual financial statements, these interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest.  We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE.  We have no involvement with any material VIEs.  We consolidate all other entities when we control them through voting shares or contractual rights.  The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries,” and we eliminate intercompany transactions and balances. 

We account for our investments in entities that we do not consolidate but have significant influence over using the equity method of accounting.  These entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”, eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against

 

7

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary.  Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. 

When we begin consolidating an entity, we reflect our preexisting equity interest at book value.  All changes in consolidation status are reflected prospectively.

Collectively, at June 30, 2018, the Company and the Subsidiaries own 2,402 self-storage facilities in the U.S., one self-storage facility in London, England and three commercial facilities in the U.S.  At June 30, 2018, the Unconsolidated Real Estate Entities are comprised of PSB and Shurgard Europe.

Use of Estimates

The financial statements and accompanying notes reflect our estimates and assumptions.  Actual results could differ from those estimates and assumptions.

Income Taxes

We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense. 

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of June 30, 2018, we had no tax benefits that were not recognized.

Real Estate Facilities

Real estate facilities are recorded at cost.  We capitalize all costs incurred to acquire, develop, construct, renovate and improve facilities, including interest and property taxes incurred during the construction period.  We allocate the net acquisition cost of acquired real estate facilities to the underlying land, buildings, and identified intangible assets based upon their respective individual estimated fair values. 

Costs associated with dispositions of real estate, as well as repairs and maintenance costs, are expensed as incurred.  We depreciate buildings and improvements on a straight-line basis over estimated useful lives ranging generally between 5 to 25 years.

Other Assets

Other assets primarily consist of rents receivable from our tenants, prepaid expenses and restricted cash.



 

8

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll, accrued tenant reinsurance losses, and contingent loss accruals when probable and estimable.  We believe the fair value of our accrued and other liabilities approximates book value, due to the short period until repayment.  We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Cash Equivalents, Marketable Securities and Other Financial Instruments

Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition.  Cash and equivalents which are restricted from general corporate use are included in other assets.  We believe that the book value of all such financial instruments for all periods presented approximates fair value, due to the short period to maturity.

Fair Value

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Our estimates of fair value involve considerable judgment and are not necessarily indicative of the amounts that could be realized in current market exchanges.

We estimate the fair value of our cash and equivalents, marketable securities, other assets, debt, and other liabilities by discounting the related future cash flows at a rate based upon quoted interest rates for securities that have similar characteristics such as credit quality and time to maturity.  Such quoted interest rates are referred to generally as “Level 2” inputs.

Currency and Credit Risk

Financial instruments that are exposed to credit risk consist primarily of cash and equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash.  Cash equivalents we invest in are either money market funds with a rating of at least AAA by Standard & Poor’s, commercial paper that is rated A1 by Standard & Poor’s or deposits with highly rated commercial banks.

At June 30, 2018, due primarily to our investment in Shurgard Europe (Note 4) and our notes payable denominated in Euros (Note 6), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

Goodwill and Other Intangible Assets

Intangible assets are comprised of goodwill, the “Shurgard” trade name, acquired customers in place, and leasehold interests in land.

Goodwill totaled $174.6 million at June 30, 2018 and December 31, 2017.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at June 30, 2018 and December 31, 2017.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived assets and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At June 30, 

 

9

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

2018, these intangibles had a net book value of $14.0 million ($21.5 million at December 31, 2017).  Accumulated amortization totaled $33.1 million at June 30, 2018 ($31.0 million at December 31, 2017), and amortization expense of $8.8 million and $8.0 million was recorded in the six months ended June 30, 2018 and 2017, respectively.  The estimated future amortization expense for our finite-lived intangible assets at June 30, 2018 is approximately $4.8 million in the remainder of 2018, $3.7 million in 2019 and $5.5 million thereafter.  During the six months ended June 30, 2018, intangibles increased $1.3  million in connection with the acquisition of self-storage facilities (Note 3). 

Evaluation of Asset Impairment

We evaluate our real estate and finite-lived intangible assets for impairment each quarter.  If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal. 

We evaluate our investments in unconsolidated real estate entities for impairment on a quarterly basis.  We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.  

We evaluate goodwill for impairment annually and whenever relevant events, circumstances and other related factors indicate that fair value of the related reporting unit may be less than the carrying amount.  If we determine that the fair value of the reporting unit exceeds the aggregate carrying amount, no impairment charge is recorded.  Otherwise, we record an impairment charge to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.  

We evaluate other indefinite-lived intangible assets, such as the “Shurgard” trade name for impairment at least annually and whenever relevant events, circumstances and other related factors indicate that the fair value is less than the carrying amount.  When we conclude that it is likely that the asset is not impaired, we do not record an impairment charge and no further analysis is performed.  Otherwise, we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value. 

No impairments were recorded in any of our evaluations for any period presented herein.

Casualty Loss

We record casualty losses for a) the book value of assets destroyed and b) incremental repair, clean-up, and other costs associated with the casualty.  Insurance proceeds are recorded as a reduction in casualty loss when all uncertainties of collection are satisfied. 

Revenue and Expense Recognition

Revenues from self-storage facilities, which are primarily composed of rental income earned pursuant to month-to-month leases, as well as associated late charges and administrative fees, are recognized as earned.  Promotional discounts reduce rental income over the promotional period, which is generally one month.  Ancillary revenues and interest and other income are recognized when earned.  

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities.  If these estimates are

 

10

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

incorrect, the timing and amount of expense recognition could be incorrect.  Cost of operations (including advertising expenditures), general and administrative expense, and interest expense are expensed as incurred. 

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.168 U.S. Dollars per Euro at June 30, 2018 (1.198 at December 31, 2017), and average exchange rates of 1.192 and 1.099 for the three months ended June 30, 2018 and 2017, respectively, and average exchange rates of 1.210 and 1.082 for the six months ended June 30, 2018 and 2017, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income

Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period.  The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in Shurgard Europe and our unsecured notes denominated in Euros.

Recent Accounting Pronouncements and Guidance

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires revenue to be based upon the consideration expected from customers for promised goods or servicesIn February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance with respect to the sale of real estate facilities.  The new standards permit either the retrospective or cumulative effects transition method.  We adopted the new standards effective January 1, 2018 utilizing the modified retrospective transition method applied to open contracts.  The new standards did not have a material impact on our results of operations or financial condition, primarily because most of our revenue is from rental revenue from self-storage facilities, and included in self-storage facilities revenue on our statements of income, which the new standards do not address, and because we do not provide any material products and services to our customers or sell material amounts of our real estate facilities.  The remainder of our revenues are composed of elements that are either covered by the new standards but not impacted, or are not covered by the new standards.

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting.  The new standard, effective on January 1, 2019, requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief effective January 1, 2019 with a cumulative effect through December 31, 2018 recorded through retained earnings.  The Company is currently assessing the impact of the guidance on our financial statements.  However, we do not believe this standard will have a material impact on our results of operations or financial condition, because substantially all of our lease revenues are derived from month-to-month self-storage leases, and we do not have material amounts of lease expense.    

In May 2017, the FASB issued ASU 2017-09, Stock Compensation: Scope of Modification Accounting, to increase clarity and consistency of practice and reduce cost and complexity when modifying the terms of share-

 

11

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

based awardsWe prospectively adopted this guidance effective January 1, 2018, with no material impact on our financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which primarily requires the statement of cash flows to explain not only the change in cash and equivalents, but also the change in restricted cash.  The standard is effective on January 1, 2018, with early adoption permitted and requires the use of the retrospective transition method. The Company early adopted the new guidance during the fourth quarter of 2017 and, accordingly, net cash flows from investing activities decreased by $28,000 for the six months ended June 30, 2017 as compared to the current presentation on the statement of cash flows.

Net Income per Common Share

Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation”), and (iii) the remaining net income is allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings. 

Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders presented on the face of our income statement, divided by (i) in the case of basic net income per common share, weighted average common shares, and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock options outstanding (Note 10).  The following table reconciles from basic to diluted common shares outstanding (amounts in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,932 

 

 

173,602 

 

 

173,912 

 

 

173,483 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 



based on treasury stock method

 

292 

 

 

473 

 

 

274 

 

 

589 



Diluted weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

174,224 

 

 

174,075 

 

 

174,186 

 

 

174,072 







3.Real Estate Facilities



Activity in real estate facilities during the six months ended June 30, 2018 is as follows:

 

12

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 







 

 

 



 

 



 

Six Months Ended



 

June 30, 2018



 

(Amounts in thousands)



Operating facilities, at cost:

 

 



Beginning balance

$

14,665,989 



Capital expenditures to maintain real estate facilities

53,227 



Acquisitions

 

32,679 



Dispositions

 

(1,603)



Developed or redeveloped facilities opened for operation

194,743 



Impact of foreign exchange rate changes

 

(403)



Ending balance

 

14,944,632 



Accumulated depreciation:

 

 



Beginning balance

 

(5,700,331)



Depreciation expense

 

(223,690)



Dispositions

 

80 



Impact of foreign exchange rate changes

 

254 



Ending balance

 

(5,923,687)



Construction in process:

 

 



Beginning balance

 

264,441 



Current development

 

164,346 



Developed or redeveloped facilities opened for operation

(194,743)



Ending balance

 

234,044 



Total real estate facilities at June 30, 2018

$

9,254,989 

During the six months ended June 30, 2018, we acquired five self-storage facilities (356,000 net rentable square feet), for a total cost of $33.9 million in cash, of which $1.3 million was allocated to intangible assets.  We completed development and redevelopment activities costing $194.7 million during the six months ended June 30, 2018, adding 1.7 million net rentable square feet of self-storage space.  Construction in process at June 30, 2018 consists of projects to develop new self-storage facilities and redevelop existing self-storage facilities, which will build 6.1 million net rentable square feet of storage space at an aggregate estimated cost of approximately $679.2 million.  During the six months ended June 30, 2018, we sold portions of real estate facilities in connection with eminent domain proceedings for $2.0 million in cash proceeds and recorded a related gain on sale of real estate of approximately $0.4 million.

4.Investments in Unconsolidated Real Estate Entities

The following table sets forth our investments in, and equity in earnings of, the Unconsolidated Real Estate Entities (amounts in thousands):

 

13

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 





 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at



 

June 30, 2018

 

December 31, 2017



 



PSB

$

435,987 

 

$

400,133 



Shurgard Europe

 

326,260 

 

 

324,040 



Total

$

762,247 

 

$

724,173 









 

 

 

 

 

 

 

 

 

 

 

 



 

Equity in Earnings of Unconsolidated Real Estate Entities for the



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 



PSB

$

36,612 

 

$

12,733 

 

$

60,443 

 

$

26,433 



Shurgard Europe

 

5,351 

 

 

6,650 

 

 

12,315 

 

 

12,241 



Other Investments

 

 -

 

 

685 

 

 

 -

 

 

1,343 



Total

$

41,963 

 

$

20,068 

 

$

72,758 

 

$

40,017 



During the six months ended June 30, 2018 and 2017, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $25.3 million and $26.5 million, respectively.  At June 30, 2018, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $66.3 million ($67.3 million at December 31, 2017).  This differential is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $0.9 million and $0.7 million during the six months ended June 30, 2018 and 2017, respectively.  

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 42% common equity interest in PSB as of June 30, 2018 and December 31, 2017, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB.  The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at June 30, 2018 ($128.50 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.9 billion.  At June 30, 2018, the adjusted tax basis of our investment in PSB approximates book value.

The following table sets forth selected financial information of PSB.  The amounts represent all of PSB’s balances and not our pro-rata share.

 

14

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 





 

 

 

 

 



2018

 

2017



(Amounts in thousands)

For the six months ended June 30,

 

 

 

 

 

Revenues

$

205,583 

 

$

199,861 

Costs of operations

 

(64,256)

 

 

(61,283)

Depreciation and amortization

 

(48,298)

 

 

(46,706)

General and administrative

 

(4,674)

 

 

(5,274)

Other items

 

1,065 

 

 

(464)

Gains on sale of real estate

 

85,283 

 

 

5,074 

Net income before allocation to preferred shareholders

 

174,703 

 

 

91,208 

and restricted share unitholders

 

 

 

 

 

Allocations to preferred shareholders and

 

 

 

 

 

restricted share unitholders

 

(27,315)

 

 

(26,327)

Net income allocated to common shareholders

 

 

 

 

 

and LP Unitholders

$

147,388 

 

$

64,881 



 

 

 

 

 













 

 

 

 

 



June 30,

 

December 31,



2018

 

2017



(Amounts in thousands)



 

 

 

 

 



 

 

 

 

 

Total assets (primarily real estate)

$

2,072,315 

 

$

2,100,159 

Debt

 

10,000 

 

 

 -

Preferred stock called for redemption

 

 -

 

 

130,000 

Other liabilities

 

81,296 

 

 

80,223 

Equity:

 

 

 

 

 

Preferred stock

 

959,750 

 

 

959,750 

Common equity and LP units

 

1,021,269 

 

 

930,186 



Investment in Shurgard Europe

For all periods presented, we had a 49% equity investment in Shurgard Europe and our joint venture partner owns the remaining 51% interest.  Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income and 49% of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark.  The remaining 51% of the license fees are classified as interest and other income on our income statement. 

Changes in foreign currency exchange rates decreased our investment in Shurgard Europe by approximately $9.4 million and increased it by $12.6 million in the six months ended June 30, 2018 and 2017, respectively. 

The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods, rather than our pro rata share.  Such amounts are based upon our historical acquired book basis.

 

15

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 









 

 

 

 

 



2018

 

2017



(Amounts in thousands)

For the six months ended June 30,

 

 

 

 

 

Self-storage and ancillary revenues

$

142,665 

 

$

124,886 

Self-storage and ancillary cost of operations

 

(53,186)

 

 

(46,539)

Depreciation and amortization

 

(37,114)

 

 

(29,578)

General and administrative

 

(5,488)

 

 

(6,376)

Interest expense on third party debt 

 

(11,209)

 

 

(10,099)

Trademark license fee payable to Public Storage

 

(1,427)

 

 

(1,249)

Income tax expense

 

(11,873)

 

 

(7,092)

Gain on real estate investment sale

 

1,225 

 

 

 -

Foreign exchange gain (loss)

 

113 

 

 

(220)



 

 

 

 

 

Net income

$

23,706 

 

$

23,733 

Average exchange rates of Euro to the U.S. Dollar

 

1.210 

 

 

1.082 



 

 

 

 

 







 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2018

 

2017



 

(Amounts in thousands)



 

 

 

 

 

Total assets (primarily self-storage facilities)

$

1,412,300 

 

$

1,416,477 

Total debt to third parties

 

708,411 

 

 

726,617 

Other liabilities

 

153,854 

 

 

143,638 

Equity

 

550,035 

 

 

546,222 



 

 

 

 

 

Exchange rate of Euro to U.S. Dollar

 

1.168 

 

 

1.198 

 



5.Credit Facility

We have a revolving credit agreement (the “Credit Facility”) with a $500 million borrowing limit, which expires on March 31, 2020.  Amounts drawn on the Credit Facility bear annual interest at rates ranging from LIBOR plus 0.850% to LIBOR plus 1.450% depending upon the ratio of our Total Indebtedness to Gross Asset Value (as defined in the Credit Facility) (LIBOR plus 0.850% at June 30, 2018).  We are also required to pay a quarterly facility fee ranging from 0.080% per annum to 0.250% per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value (0.080% per annum at June 30, 2018).  At June 30, 2018 and August 1,  2018, we had no outstanding borrowings under this Credit Facility.  We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling $16.1 million at June 30, 2018 and December 31, 2017.  The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at June 30, 2018.

6.Notes Payable

Our notes payable at June 30, 2018 and December 31, 2017 are set forth in the table below:

 

16

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Amounts at June 30, 2018

 

 



Coupon

Effective

 

 

 

 

Unamortized

 

 

Book

 

 

Fair 

 

 

Book Value at



Rate

Rate

 

 

Principal

 

Costs

 

 

Value

 

 

Value

 

 

December 31, 2017



 

 

 

($ amounts in thousands)

U.S. Dollar Denominated Unsecured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes due September 2022 

2.370%

2.483%

 

$

500,000 

 

$

(2,211)

 

$

497,789 

 

$

479,952 

 

$

497,525 

Notes due September 2027 

3.094%

3.218%

 

 

500,000 

 

 

(4,868)

 

 

495,132 

 

 

470,908 

 

 

494,868 



 

 

 

 

1,000,000 

 

 

(7,079)

 

 

992,921 

 

 

950,860 

 

 

992,393 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Denominated Unsecured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes due April 2024

1.540%

1.540%

 

 

116,836 

 

 

 -

 

 

116,836 

 

 

120,040 

 

 

119,795 

Notes due November 2025 

2.175%

2.175%

 

 

282,759 

 

 

 -

 

 

282,759 

 

 

297,490 

 

 

289,921 



 

 

 

 

399,595 

 

 

 -

 

 

399,595 

 

 

417,530 

 

 

409,716 

Mortgage Debt, secured by 30 real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 facilities with a net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 of $115.5 million

4.031%

3.980%

 

 

28,318 

 

 

 -

 

 

28,318 

 

 

29,144 

 

 

29,213 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

$

1,427,913 

 

$

(7,079)

 

$

1,420,834 

 

$

1,397,534 

 

$

1,431,322 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar Denominated Unsecured Debt

On September 18, 2017, we issued, in a public offering, two tranches each totaling $500.0 million of U.S. Dollar denominated unsecured notes (the “U.S. Dollar Notes”).  In connection with the offering, we incurred a total of $7.9 million in costs, which is reflected as a reduction in the principal amount and amortized, using the effective interest method, over the term of each respective note.  Interest on the U.S. Dollar Notes is payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2018. 

The U.S. Dollar Notes have various financial covenants, all of which we were in compliance with at June 30, 2018.  Included in these covenants are a) a maximum Debt to Total Assets of 65%  (4.4% at June 30, 2018) and b) a minimum ratio of Adjusted EBITDA to Interest Expense of 1.5x  (74.7x for the twelve months ended June 30, 2018)  as well as covenants limiting the amount we can encumber our properties with mortgage debt. 

Euro Denominated Unsecured Debt

Our euro denominated unsecured notes (the “Euro Notes”) are payable to institutional investors.  The Euro Notes consist of two tranches, (i) €242.0 million issued on November 3, 2015 for $264.3 million in net proceeds upon converting the Euros to U.S. Dollars and (ii) €100.0 million issued on April 12, 2016 for $113.6 million in net proceeds upon converting the Euros to U.S. Dollars.  Interest is payable semi-annually.  The Euro Notes have various customary financial covenants, all of which we were in compliance with at June 30, 2018. 

We reflect changes in the U.S. Dollar equivalent of the amount payable, as a result of changes in foreign exchange rates as “foreign currency exchange gain (loss)” on our income statement (gains of $21.9 million and $10.1 million for the three and six months ended June 30, 2018, respectively, as compared to losses of $25.4 million and $31.0 million for the same periods in 2017, respectively).

 

17

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

Mortgage Debt

Our non-recourse mortgage debt was assumed in connection with property acquisitions, and recorded at fair value with any premium or discount to the stated note balance amortized using the effective interest method. 

At June 30, 2018, the related contractual interest rates are fixed, ranging between 2.9% and 7.1%, and mature between November 2018 and September 2028.

At June 30, 2018, approximate principal maturities of our Notes Payable are as follows (amounts in thousands):



 

 

 

 

 

 

 

 



Unsecured

 

Mortgage

 

 



Debt

 

Debt

 

Total



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Remainder of 2018

$

 -

 

$

10,361 

 

$

10,361 

2019

 

 -

 

 

1,505 

 

 

1,505 

2020

 

 -

 

 

1,585 

 

 

1,585 

2021

 

 -

 

 

1,503 

 

 

1,503 

2022

 

500,000 

 

 

2,071 

 

 

502,071 

Thereafter

 

899,595 

 

 

11,293 

 

 

910,888 



$

1,399,595 

 

$

28,318 

 

$

1,427,913 

Weighted average effective rate

 

2.6% 

 

 

4.0% 

 

 

2.6% 

Cash paid for interest totaled $18.3 million and $4.3 million for the six months ended June 30, 2018 and 2017, respectively.  Interest capitalized as real estate totaled $2.3 million and $2.1 million for the six months ended June 30, 2018 and 2017, respectively.

7.Noncontrolling Interests

At June 30, 2018, the noncontrolling interests represent (i) third-party equity interests in subsidiaries owning 14 operating self-storage facilities and six self-storage facilities that are under construction and (ii) 231,978 partnership units held by third-parties in a subsidiary that are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder (collectively, the “Noncontrolling Interests”).  At June 30, 2018, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary.  During the six months ended June 30, 2018 and 2017, we allocated a total of $2.9 million and $3.1 million, respectively, of income to these interests; and we paid $3.1 million and $3.7 million, respectively, in distributions to these interests. 

During the six months ended June 30, 2017, we acquired Noncontrolling Interests for $14.4 million  (none for the six months ended June 30, 2018), in cash, of which $7.7 million was allocated to Paid-in capital and $6.7 million as a reduction to Noncontrolling Interests.  During the six months ended June 30, 2018 and 2017, Noncontrolling Interests contributed  $0.8 million and $0.6 million, respectively,  to our subsidiaries.    

8.Shareholders’ Equity



Preferred Shares

At June 30, 2018 and December 31, 2017, we had the following series of Cumulative Preferred Shares (“Preferred Shares”) outstanding:

 

18

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

At June 30, 2018

 

At December 31, 2017



Series

 

Earliest Redemption Date

 

Dividend Rate

 

Shares Outstanding

 

Liquidation Preference

 

Shares Outstanding

 

Liquidation Preference



 

 

 

 

 

 

(Dollar amounts in thousands)



Series U

 

6/15/2017

 

5.625% 

 

11,500 

 

$

287,500 

 

11,500 

 

$

287,500 



Series V

 

9/20/2017

 

5.375% 

 

19,800 

 

 

495,000 

 

19,800 

 

 

495,000 



Series W

 

1/16/2018

 

5.200% 

 

20,000 

 

 

500,000 

 

20,000 

 

 

500,000 



Series X

 

3/13/2018

 

5.200% 

 

9,000 

 

 

225,000 

 

9,000 

 

 

225,000 



Series Y

 

3/17/2019

 

6.375% 

 

11,400 

 

 

285,000 

 

11,400 

 

 

285,000 



Series Z

 

6/4/2019

 

6.000% 

 

11,500 

 

 

287,500 

 

11,500 

 

 

287,500 



Series A

 

12/2/2019

 

5.875% 

 

7,600 

 

 

190,000 

 

7,600 

 

 

190,000 



Series B

 

1/20/2021

 

5.400% 

 

12,000 

 

 

300,000 

 

12,000 

 

 

300,000 



Series C

 

5/17/2021

 

5.125% 

 

8,000 

 

 

200,000 

 

8,000 

 

 

200,000 



Series D

 

7/20/2021

 

4.950% 

 

13,000 

 

 

325,000 

 

13,000 

 

 

325,000 



Series E

 

10/14/2021

 

4.900% 

 

14,000 

 

 

350,000 

 

14,000 

 

 

350,000 



Series F

 

6/2/2022

 

5.150% 

 

11,200 

 

 

280,000 

 

11,200 

 

 

280,000 



Series G

 

8/9/2022

 

5.050% 

 

12,000 

 

 

300,000 

 

12,000 

 

 

300,000 



Total Preferred Shares

 

 

 

161,000 

 

$

4,025,000 

 

161,000 

 

$

4,025,000 

The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions.  Except under certain conditions and as noted below, holders of the Preferred Shares will not be entitled to vote on most matters.  In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our board of trustees (our “Board”) until the arrearage has been cured.  At June 30, 2018, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the Preferred Shares are not redeemable prior to the dates indicated on the table above.  On or after the respective dates, each of the series of Preferred Shares is redeemable at our option, in whole or in part, at $25.00 per depositary share, plus accrued and unpaid dividends.  Holders of the Preferred Shares cannot require us to redeem such shares.

Upon issuance of our Preferred Shares, we classify the liquidation value as preferred equity on our balance sheet with any issuance costs recorded as a reduction to Paid-in capital.

On June 2, 2017, we issued 11.2 million depositary shares, each representing 1/1,000 of a share of our 5.150% Series F Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $280.0 million in gross proceeds, and we incurred $8.9 million in issuance costs. 

In June 2017, we called for redemption of, and on July 26, 2017, we redeemed our 5.900% Series S Preferred Shares, at par.  The liquidation value (at par) of $460.0 million was reclassified as a liability at June 30, 2017.  We recorded a $14.6 million allocation of income from our common shareholders to the holders of our Preferred Shares in the three and six months ended June 30, 2017 in connection with this redemption.

 

19

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $349.0 million ($2.00 per share) and $348.4 million ($2.00 per share) for the three months ended June 30, 2018 and 2017, respectively, and $698.0 million ($4.00 per share) and $696.6 million ($4.00 per share) for the six months ended June 30, 2018 and 2017, respectively.  Preferred share dividends totaled $54.1 million and $61.3 million for the three months ended June 30, 2018 and 2017, respectively, and $108.2 million and $121.4 million for the six months ended June 30, 2018 and 2017, respectively.

9.Related Party Transactions

B. Wayne Hughes, our former Chairman and his family, including his daughter Tamara Hughes Gustavson and his son B. Wayne Hughes, Jr., who are both members of our Board, collectively own approximately 14.3% of our common shares outstanding at June 30, 2018.

At June 30, 2018, B. Wayne Hughes and Tamara Hughes Gustavson together owned and controlled 58 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 with the facilities’ owners.  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 $625,000 and $481,000 for the six months ended June 30, 2018 and 2017, respectively.  Our right to continue receiving these premiums may be qualified.

10.Share-Based Compensation

Under various share-based compensation plans and under terms established by our Board or a committee thereof, we grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, and key employees.  

Stock options and RSUs are considered “granted” and “outstanding” as the terms are used herein, when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock, and (iv) it is probable that any performance conditions will be met.  

We amortize the grant-date fair value of awards as compensation expense over the service period, which begins on the grant date and ends on the vesting date.  For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period.  For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).

In amortizing share-based compensation expense, we do not estimate future forfeitures in advance.  Instead, we reverse previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment. 

In February 2018, we announced that our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company.  Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the

 

20

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

original vesting periods as long as they remain Trustees.  For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire.  Accordingly, all remaining share-based compensation expense for these two executives will now be amortized by the end of 2018. 

See also “net income per common share” in Note 2 for further discussion regarding the impact of RSUs and stock options on our net income per common share and income allocated to common shareholders.

Stock Options

Stock options vest ratably over a three to five-year period, expire ten years after the grant date, and the exercise price is equal to the closing trading price of our common shares on the grant date.  Employees cannot require the Company to settle their award in cash.  We use the Black-Scholes option valuation model to estimate the fair value of our stock options. 

Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation.

For the three and six months ended June 30, 2018, we recorded $3.5 million and $7.0 million, respectively, in compensation expense related to stock options, as compared to $1.0 million and $2.8 million, for the same periods in 2017.  Amounts for the three and six months ended June 30, 2018 include $1.8 million and $3.6 million, respectively, in connection with the acceleration of amortization of grants to our CEO and CFO noted above.  Amounts for the three and six months ended June 30, 2017 reflect a reduction in compensation expense of $0.8 million related to stock options forfeited during the periods.

During the six months ended June 30, 2018,  200,000 stock options were granted, 18,778 options were exercised and 8,000 options were forfeited.  A total of 2,582,139 stock options were outstanding at June 30, 2018  (2,408,917 at December 31, 2017) and have an average exercise price of $192.93.

Restricted Share Units

RSUs generally vest ratably over a five to eight-year period from the grant date.  The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders.  We expense any dividends previously paid upon forfeiture of the related RSU.  Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. 

The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares.

During the six months ended June 30, 2018,  71,595 RSUs were granted, 35,242 RSUs were forfeited and 113,885 RSUs vested.  This vesting resulted in the issuance of 64,887 common shares.  In addition, tax deposits totaling $10.3 million ($11.8 million for the same period in 2017) were made on behalf of employees in exchange for 48,998 common shares withheld upon vesting.  A total of 721,597 RSUs were outstanding at June 30, 2018  (799,129 at December 31, 2017)

A total of $13.8 million and $27.2 million in RSU expense was recorded for the three and six months ended June 30, 2018,  respectively, which includes approximately $0.1 million and $1.0 million in employer taxes incurred upon vesting, as compared to $3.3 million and $10.4 million for the same periods in 2017, which includes

 

21

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

approximately $0.1 million and $0.6 million, respectively, in employer taxes incurred upon vesting.    Amounts for the three and six months ended June 30, 2018 include $6.0 million and $12.1 million, respectively, in connection with the acceleration of amortization on grants to our CEO and CFO as discussed above.  Amounts for the three and six months ended June 30, 2017 reflect a reduction in compensation expense of $4.6 million related RSUs forfeited during the period.

11.Segment Information

Our reportable segments reflect the significant components of our operations where discrete financial information is evaluated separately by our chief operating decision maker (“CODM”).  We organize our segments based primarily upon the nature of the underlying products and services, as well as the drivers of profitability growth.  The net income for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2.  The amounts not attributable to reportable segments are aggregated under “other items not allocated to segments.” 

Following is a description of and basis for presentation for each of our reportable segments.

Self-Storage Operations

The Self-Storage Operations segment reflects the rental operations from all self-storage facilities we own.  Our CODM reviews the net operating income (“NOI”) of this segment, which represents the related revenues less cost of operations (prior to depreciation expense), in assessing performance and making resource allocation decisions.  The presentation in the tables below sets forth the NOI of this segment, as well as the depreciation expense for this segment, which while reviewed by our CODM and included in net income, is not considered by the CODM in assessing performance and decision making.  For all periods presented, substantially all of our real estate facilities, goodwill and other intangible assets, other assets, and accrued and other liabilities are associated with the Self-Storage Operations segment.

Ancillary Operations

The Ancillary Operations segment reflects the sale of merchandise and reinsurance of policies against losses to goods stored by our self-storage tenants, activities which are incidental to our primary self-storage rental activities.  Our CODM reviews the NOI of these operations in assessing performance and making resource allocation decisions. 

Investment in PSB

This segment represents our 42% equity interest in PSB, a publicly-traded REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial space.  PSB has a separate management team that makes its financing, capital allocation, and other significant decisions.  In making resource allocation decisions with respect to our investment in PSB, the CODM reviews PSB’s net income, which is detailed in PSB’s periodic filings with the SEC, and is included in Note 4.  The segment presentation in the tables below includes our equity earnings from PSB. 

Investment in Shurgard Europe

This segment represents our 49% equity interest in Shurgard Europe, which owns and operates self-storage facilities located in seven countries in Western Europe.  Shurgard Europe has a separate management team reporting to our CODM and our joint venture partner.  In making resource allocation decisions with respect to our investment in Shurgard Europe, the CODM reviews Shurgard Europe’s net income, which is detailed in

 

22

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 

Note 4.  The segment presentation below includes our equity earnings from Shurgard Europe.

Presentation of Segment Information

The following tables reconcile NOI (as applicable) and net income of each segment to our consolidated net income (amounts in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

645,206 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

645,206 

Ancillary operations

 

 -

 

 

40,322 

 

 

 -

 

 

 -

 

 

 -

 

 

40,322 



 

645,206 

 

 

40,322 

 

 

 -

 

 

 -

 

 

 -

 

 

685,528 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

179,876 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

179,876 

Ancillary operations

 

 -

 

 

11,101 

 

 

 -

 

 

 -

 

 

 -

 

 

11,101 



 

179,876 

 

 

11,101 

 

 

 -

 

 

 -

 

 

 -

 

 

190,977 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

465,330 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

465,330 

Ancillary operations

 

 -

 

 

29,221 

 

 

 -

 

 

 -

 

 

 -

 

 

29,221 

  

 

465,330 

 

 

29,221 

 

 

 -

 

 

 -

 

 

 -

 

 

494,551 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(119,777)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(119,777)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(31,329)

 

 

(31,329)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

6,328 

 

 

6,328 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(8,388)

 

 

(8,388)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 

 -

 

 

 -

 

 

36,612 

 

 

5,351 

 

 

 -

 

 

41,963 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

21,944 

 

 

21,944 

Net income (loss)

$

345,553 

 

$

29,221 

 

$

36,612 

 

$

5,351 

 

$

(11,445)

 

$

405,292 



 

23

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

624,199 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

624,199 

Ancillary operations

 

 -

 

 

40,113 

 

 

 -

 

 

 -

 

 

 -

 

 

40,113 



 

624,199 

 

 

40,113 

 

 

 -

 

 

 -

 

 

 -

 

 

664,312 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

171,195 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

171,195 

Ancillary operations

 

 -

 

 

11,383 

 

 

 -

 

 

 -

 

 

 -

 

 

11,383 



 

171,195 

 

 

11,383 

 

 

 -

 

 

 -

 

 

 -

 

 

182,578 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

453,004 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

453,004 

Ancillary operations

 

 -

 

 

28,730 

 

 

 -

 

 

 -

 

 

 -

 

 

28,730 

  

 

453,004 

 

 

28,730 

 

 

 -

 

 

 -

 

 

 -

 

 

481,734 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(110,177)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(110,177)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(14,992)

 

 

(14,992)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

4,155 

 

 

4,155 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,116)

 

 

(1,116)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

12,733 

 

 

6,650 

 

 

685 

 

 

20,068 

Foreign currency exchange loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(25,440)

 

 

(25,440)

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

975 

 

 

975 

Net income (loss)

$

342,827 

 

$

28,730 

 

$

12,733 

 

$

6,650 

 

$

(35,733)

 

$

355,207 



 

24

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

1,276,743 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

1,276,743 

Ancillary operations

 

 -

 

 

78,709 

 

 

 -

 

 

 -

 

 

 -

 

 

78,709 



 

1,276,743 

 

 

78,709 

 

 

 -

 

 

 -

 

 

 -

 

 

1,355,452 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

362,063 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

362,063 

Ancillary operations

 

 -

 

 

21,741 

 

 

 -

 

 

 -

 

 

 -

 

 

21,741 



 

362,063 

 

 

21,741 

 

 

 -

 

 

 -

 

 

 -

 

 

383,804 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

914,680 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

914,680 

Ancillary operations

 

 -

 

 

56,968 

 

 

 -

 

 

 -

 

 

 -

 

 

56,968 

  

 

914,680 

 

 

56,968 

 

 

 -

 

 

 -

 

 

 -

 

 

971,648 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(237,756)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(237,756)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(62,849)

 

 

(62,849)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11,872 

 

 

11,872 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(16,495)

 

 

(16,495)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

60,443 

 

 

12,315 

 

 

 -

 

 

72,758 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

10,126 

 

 

10,126 

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

424 

 

 

424 

Net income (loss)

$

676,924 

 

$

56,968 

 

$

60,443 

 

$

12,315 

 

$

(56,922)

 

$

749,728 





 

25

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

1,231,977 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

1,231,977 

Ancillary operations

 

 -

 

 

77,882 

 

 

 -

 

 

 -

 

 

 -

 

 

77,882 



 

1,231,977 

 

 

77,882 

 

 

 -

 

 

 -

 

 

 -

 

 

1,309,859 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

343,173 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

343,173 

Ancillary operations

 

 -

 

 

22,307 

 

 

 -

 

 

 -

 

 

 -

 

 

22,307 



 

343,173 

 

 

22,307 

 

 

 -

 

 

 -

 

 

 -

 

 

365,480 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

888,804 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

888,804 

Ancillary operations

 

 -

 

 

55,575 

 

 

 -

 

 

 -

 

 

 -

 

 

55,575 

  

 

888,804 

 

 

55,575 

 

 

 -

 

 

 -

 

 

 -

 

 

944,379 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(221,106)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(221,106)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(40,020)

 

 

(40,020)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,153 

 

 

8,153 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,164)

 

 

(2,164)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

26,433 

 

 

12,241 

 

 

1,343 

 

 

40,017 

Foreign currency exchange loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(31,006)

 

 

(31,006)

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

975 

 

 

975 

Net income (loss)

$

667,698 

 

$

55,575 

 

$

26,433 

 

$

12,241 

 

$

(62,719)

 

$

699,228 



 

26

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

 







12.Commitments and Contingencies

Contingent Losses

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

Insurance and Loss Exposure

We have historically carried 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 deductibles for property losses are $25.0 million for first occurrence with an aggregate of $35.0 million for multiple occurrences and $5.0 million per occurrence thereafter.  Insurance carriers’ aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.

We reinsure a program that provides insurance to our customers from an independent third-party insurer.  This program covers customer claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit.  We reinsure all risks in this program, but purchase insurance to cover this exposure for a limit of $15.0 million for losses in excess of $5.0 million per occurrence. We are subject to licensing requirements and regulations in several states.  Customers participate in the program at their option.  At June 30, 2018, there were approximately 942,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.9 billion.

Construction Commitments

We have construction commitments representing future expected payments for construction under contract totaling $162.4 million at June 30, 2018.  We expect to pay approximately $134.6 million in the remainder of 2018 and $27.8 million in 2019 for these construction commitments.



13.Subsequent Events

Subsequent to June 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities, with 842,000 net rentable square feet, for $95.2 million.  On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million.

 



 

 

27

 


 

 

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words “expects,”  “believes,”  “anticipates,” “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” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2018 and in our other filings with the SEC including:

·

general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;

·

risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;

·

the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;

·

difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;

·

risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, changes in tax laws, and local and global economic uncertainty that could adversely affect our earnings and cash flows;

·

risks related to our participation in joint ventures;

·

the impact of the regulatory environment as well as national, state and local laws and regulations including, without limitation, those governing environmental, taxes, our tenant reinsurance business and labor, and risks related to the impact of new laws and regulations;

·

risks of increased tax expense associated either with a possible failure by us to qualify as a real estate investment trust (“REIT”), or with challenges to the determination of taxable income for our taxable REIT subsidiaries;

·

changes in United States (“U.S.”) federal or state tax laws related to the taxation of REITs and other corporations;

·

security breaches or a failure of our networks, systems or technology could adversely impact our business, customer and employee relationships;

·

risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;

·

difficulties in raising capital at a reasonable cost;

 

28

 


 

 

·

delays in the development process;

·

ongoing litigation and other legal and regulatory actions which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business; and

·

economic uncertainty due to the impact of war or terrorism.

These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements.  All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement.  We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law.  Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.

Critical Accounting Policies

Our MD&A discusses our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates.  The notes to our June 30, 2018 financial statements, primarily Note 2, summarize our significant accounting policies.

We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense:  We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years.  For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements. 

In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions.  If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments.  Such a penalty tax could have a material adverse impact on our net income.

Impairment of Long-Lived Assets:  The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity.  Others could come to materially different conclusions.  In addition, we may not have identified all current facts and circumstances that may affect impairment.  Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities:  We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties.  We estimate such liabilities based upon many factors such as assumptions of past and future trends and

 

29

 


 

 

our evaluation of likely outcomes.  However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated. 

Accounting for Acquired Real Estate Facilities:    We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price.  Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, and (iv) future cash flows from the real estate and the existing tenant base.  Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.

Overview

Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio.  Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities. 

Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends.  We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.

We plan on growing organically as well as through the acquisition and development of new facilities and expanding our existing self-storage facilities.  Since the beginning of 2013 through June 30, 2018, we acquired a total of 276 facilities with 19.4 million net rentable square feet from third parties for approximately $2.5 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.1 billion, adding approximately 10.0 million net rentable square feet. 

Subsequent to June 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $95.2 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of June 30, 2018, we had additional development and redevelopment projects to build approximately 6.1 million net rentable square feet at a total cost of approximately $679.2 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 are beneficial to our business over the long run.  However, in the short run, such activities dilute our earnings due to the three to four year period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the cost, combined with related overhead expenses flowing through general and administrative expense.  We believe this dilution will increase in the remainder of 2018 and beyond, because of an increased level of net rentable square feet being added to our portfolio due to continued development and redevelopment efforts.

On September 18, 2017, we completed a public offering of $1.0 billion in aggregate principal amount of unsecured notes in two equal tranches (collectively, the “U.S. Dollar Notes”), one maturing in September 2022 bearing interest at 2.370%, and another maturing in September 2027 bearing interest at 3.094%.  This was our first public offering of debt, which should also serve to facilitate future offerings.  

As of June 30, 2018, our capital resources over the next year are expected to be approximately $1.2 billion which exceeds our current planned capital needs over the next year of approximately $551.5 million.  Our capital resources include: (i) $338.4 million of cash as of June 30, 2018, (ii) $483.9 million of available borrowing capacity on our revolving line of credit, (iii) a  $145.4 million cash distribution received from Shurgard Europe on July 13,

 

30

 


 

 

2018, and (iv) approximately $200 million to $250 million of expected retained operating cash flow for the next twelve months.  Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities. 

Our planned capital needs over the next year consist of (i) $445.2 million of remaining spend on our current development pipeline, (ii) $95.2 million in property acquisitions currently under contract, and (iii) $11.1 million in principal repayments on existing debt.  Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties.  In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements. 

Results of Operations

Operating Results for the Three Months Ended June 30, 2018

For the three months ended June 30, 2018, net income allocable to our common shareholders was $348.3 million or $2.00 per diluted common share, compared to $276.7 million or $1.59 per diluted common share in 2017 representing an increase of $71.6 million or $0.41 per diluted common share.  The increase is due primarily to i) a $12.3 million increase in self-storage net operating income (described below), ii) our $24.0 million equity share of a gain on sale of assets recorded by PS Business Parks in the three months ended June 30, 2018, iii) a $47.4 million increase due to the impact of foreign exchange gains and losses associated with our euro denominated debt and iv) a $14.6 million allocation to preferred shareholders associated with preferred share redemptions in the three months ended June 30, 2017.  These increases were offset partially by a $13.0 million increase in general and administrative expense due to the acceleration of share-based compensation accruals for our CEO and CFO in 2018 as a result of their upcoming retirement and the reversal of share-based compensation accruals forfeited by retiring executives in 2017.

The $12.3 million increase in self-storage net operating income is a result of a $4.7 million increase in our Same Store Facilities (as defined below) and a $7.6 million increase in our Non Same Store Facilities (as defined below).  Revenues for the Same Store Facilities increased 1.5% or $8.5 million in the three months ended June 30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by 2.6% or $3.8 million in the three months ended June 30, 2018 as compared to 2017, due primarily to increased property taxes.  The increase in net operating income of $7.6 million for the Non Same Store Facilities is due primarily to the impact of 137 self-storage facilities acquired and developed since January 2016. 

Operating Results for the Six Months Ended June 30, 2018

For the six months ended June 30, 2018, net income allocable to our common shareholders was $636.1 million or $3.65 per diluted common share, compared to $557.8 million or $3.20 in 2017 representing an increase of $78.3 million or $0.45 per diluted common share.  The increase is due primarily to i) a $25.9 million increase in self-storage net operating income, ii) our $34.9 million equity share of gains recorded by PS Business Parks in the six months ended June 30, 2018, iii) a $41.1 million increase due to the impact of foreign exchange gains and losses associated with our euro denominated debt and iv) a $14.6 million allocation to preferred shareholders associated with preferred share redemptions in the six months ended June 30, 2017.  These increases were offset partially by a $21.0 million increase in general and administrative expense due to the acceleration of share-based compensation accruals for our CEO and CFO in 2018 as a result of their upcoming retirement and the reversal of share-based compensation accruals forfeited by retiring executives in 2017.

The $25.9 million increase in self-storage net operating income is a result of an $11.2 million increase in our Same Store Facilities and $14.7 million increase in our Non Same Store Facilities.  Revenues for the Same Store Facilities increased 1.8% or $20.0 million in the six months ended June 30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by

 

31

 


 

 

3.0% or $8.8 million in the six months ended June 30, 2018 as compared to 2017, due primarily to increased property taxes, property manager payroll, and allocated overhead.  The increase in net operating income of $14.7 million for the Non Same Store Facilities is due primarily to the impact of 137 self-storage facilities acquired and developed since January 2016.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts.  FFO represents net income before real estate depreciation, which is excluded because it is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions.  FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical real estate costs and are impacted by historical depreciation.  FFO and FFO per share are not a substitute for net income or earnings per share.  FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows.  In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the three months ended June 30, 2018, FFO was $2.65 per diluted common share, as compared to $2.31 for the same period in 2017, representing an increase of 14.7%, or $0.34 per diluted common share.

For the six months ended June 30, 2018, FFO was $5.02 per diluted common share, as compared to $4.65 for the same period in 2017, representing an increase of 8.0%, or $0.37 per diluted common share.

 

32

 


 

 

The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2018

 

2017

 

2018

 

2017



 

 

(Amounts in thousands, except per share data)

Reconciliation of Diluted Earnings per Share to

 

 

 

 

 

 

 

 

 

 

 

 

FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

$

2.00 

 

$

1.59 

 

$

3.65 

 

$

3.20 

Eliminate amounts per share excluded from FFO:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

0.79 

 

 

0.73 

 

 

1.58 

 

 

1.46 

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(0.14)

 

 

(0.01)

 

 

(0.21)

 

 

(0.01)

FFO per share

 

$

2.65 

 

$

2.31 

 

$

5.02 

 

$

4.65 



 

 

 

 

 

 

 

 

 

 

 

 

Computation of FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

 

$

348,300 

 

$

276,681 

 

$

636,119 

 

$

557,812 

Eliminate items excluded from FFO:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

119,777 

 

 

110,177 

 

 

237,756 

 

 

221,106 

Depreciation from unconsolidated

 

 

 

 

 

 

 

 

 

 

 

 

real estate investments

 

 

19,308 

 

 

17,368 

 

 

38,623 

 

 

34,581 

Depreciation allocated to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

(1,014)

 

 

(837)

 

 

(1,932)

 

 

(1,799)

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(23,873)

 

 

(1,466)

 

 

(35,764)

 

 

(3,077)

FFO allocable to common shares

 

$

462,498 

 

$

401,923 

 

$

874,802 

 

$

808,623 

Diluted weighted average common shares

 

 

174,224 

 

 

174,075 

 

 

174,186 

 

 

174,072 

FFO per share

 

$

2.65 

 

$

2.31 

 

$

5.02 

 

$

4.65 



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 and (iii) acceleration of accruals due to the upcoming retirement of our CEO and CFO and reversals of accruals with respect to share-based awards forfeited by retiring senior executive officers.  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.

 

33

 


 

 

The following table reconciles FFO per share to Core FFO per share:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

$

2.65 

 

$

2.31 

 

14.7% 

 

$

5.02 

 

$

4.65 

 

8.0% 

Eliminate the per share impact of items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluded from Core FFO, including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

our equity share from investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (gain) loss

(0.13)

 

 

0.15 

 

 

 

 

(0.06)

 

 

0.18 

 

 

Application of EITF D-42

 

 -

 

 

0.08 

 

 

 

 

 -

 

 

0.08 

 

 

Acceleration (reversal) of share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation expense due to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

executive officer retirement

 

0.04 

 

 

(0.03)

 

 

 

 

0.09 

 

 

(0.03)

 

 

Other items

 

0.01 

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

Core FFO per share

$

2.57 

 

$

2.51 

 

2.4% 

 

$

5.05 

 

$

4.88 

 

3.5% 



Analysis of Net Income by Reportable Segment

The following discussion and analysis is presented and organized in accordance with Note 11 to our June 30, 2018 financial statements, “Segment Information.”  Accordingly, refer to the tables presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments.

Self-Storage Operations

Our self-storage operations are analyzed in two groups: (i) the 2,048 facilities that we have owned and operated on a stabilized basis since January 1, 2016 (the “Same Store Facilities”), and (ii) all other facilities, which are newly acquired, newly developed, recently redeveloped, or are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2016 (the “Non Same Store Facilities”).  See Note 11 to our June 30, 2018 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.





 

34

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-Storage Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

Three Months Ended June 30,

 

Six Months Ended June 30,



 

 

 

 

Percentage

 

 

 

 

 

Percentage



2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Dollar amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

$

558,651 

 

$

550,136 

 

1.5% 

 

$

1,107,194 

 

$

1,087,208 

 

1.8% 

Non Same Store Facilities 

 

86,555 

 

 

74,063 

 

16.9% 

 

 

169,549 

 

 

144,769 

 

17.1% 



 

645,206 

 

 

624,199 

 

3.4% 

 

 

1,276,743 

 

 

1,231,977 

 

3.6% 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

150,802 

 

 

146,971 

 

2.6% 

 

 

304,454 

 

 

295,655 

 

3.0% 

Non Same Store Facilities

 

29,074 

 

 

24,224 

 

20.0% 

 

 

57,609 

 

 

47,518 

 

21.2% 



 

179,876 

 

 

171,195 

 

5.1% 

 

 

362,063 

 

 

343,173 

 

5.5% 

Net operating income (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

407,849 

 

 

403,165 

 

1.2% 

 

 

802,740 

 

 

791,553 

 

1.4% 

Non Same Store Facilities

 

57,481 

 

 

49,839 

 

15.3% 

 

 

111,940 

 

 

97,251 

 

15.1% 

Total net operating income

 

465,330 

 

 

453,004 

 

2.7% 

 

 

914,680 

 

 

888,804 

 

2.9% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense:

 

 

 

 

 

Same Store Facilities

 

(87,881)

 

 

(88,602)

 

(0.8)%

 

 

(176,411)

 

 

(176,537)

 

(0.1)%

Non Same Store Facilities

 

(31,896)

 

 

(21,575)

 

47.8% 

 

 

(61,345)

 

 

(44,569)

 

37.6% 

Total depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(119,777)

 

 

(110,177)

 

8.7% 

 

 

(237,756)

 

 

(221,106)

 

7.5% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

319,968 

 

 

314,563 

 

1.7% 

 

 

626,329 

 

 

615,016 

 

1.8% 

Non Same Store Facilities

 

25,585 

 

 

28,264 

 

(9.5)%

 

 

50,595 

 

 

52,682 

 

(4.0)%

Total net income

$

345,553 

 

$

342,827 

 

0.8% 

 

$

676,924 

 

$

667,698 

 

1.4% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities at period end:

 

 

 

 

 

Same Store Facilities

 

 

 

 

 

 

 

 

 

2,048 

 

 

2,048 

 

 -

Non Same Store Facilities

 

 

 

 

 

 

 

 

 

355 

 

 

299 

 

18.7% 

Net rentable square footage at period end (in thousands):

 

 

Same Store Facilities

 

 

 

 

 

 

 

 

 

131,307 

 

 

131,307 

 

 -

Non Same Store Facilities

 

 

 

 

 

 

 

 

 

28,274 

 

 

23,254 

 

21.6% 

(a)

Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions.  We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends.  We believe that investors and analysts utilize NOI in a similar manner.  NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results.  See Note 11 to our June 30, 2018 financial statements for a reconciliation of NOI to our total net income for all periods presented.

Net operating income from our self-storage operations has increased 2.7%  and 2.9%  in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017.  These increases are due to higher revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities.

   

 

35

 


 

 

Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated at a stabilized level of occupancy, revenues and cost of operations since January 1, 2016.  We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 2016, 2017, and 2018We believe the Same Store information is used by investors and REIT analysts in a similar manner.  The Same Store pool decreased from 2,052 facilities at March 31, 2018  to  2,048 facilities at June 30, 2018.  The following table summarizes the historical operating results of these 2,048 facilities (131.3 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 June 30, 2018.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data for the Same Store Facilities (2,048 facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



 

 

 

 

Percentage

 

 

 

 

 

Percentage



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change



(Dollar amounts in thousands, except weighted average amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

534,997 

 

$

526,249 

 

1.7% 

 

$

1,058,876 

 

$

1,039,210 

 

1.9% 

Late charges and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

administrative fees

 

23,654 

 

 

23,887 

 

(1.0)%

 

 

48,318 

 

 

47,998 

 

0.7% 

Total revenues (a)

 

558,651 

 

 

550,136 

 

1.5% 

 

 

1,107,194 

 

 

1,087,208 

 

1.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

59,174 

 

 

56,066 

 

5.5% 

 

 

117,566 

 

 

111,928 

 

5.0% 

On-site property manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payroll

 

27,847 

 

 

27,554 

 

1.1% 

 

 

56,511 

 

 

55,061 

 

2.6% 

Supervisory payroll

 

9,296 

 

 

9,895 

 

(6.1)%

 

 

18,891 

 

 

20,035 

 

(5.7)%

Repairs and maintenance

 

11,602 

 

 

11,397 

 

1.8% 

 

 

23,139 

 

 

23,089 

 

0.2% 

Utilities

 

9,556 

 

 

9,339 

 

2.3% 

 

 

20,379 

 

 

19,552 

 

4.2% 

Advertising and selling

7,706 

 

 

8,138 

 

(5.3)%

 

 

14,229 

 

 

14,937 

 

(4.7)%

Other direct property costs

 

14,521 

 

 

14,247 

 

1.9% 

 

 

29,557 

 

 

28,520 

 

3.6% 

Allocated overhead

 

11,100 

 

 

10,335 

 

7.4% 

 

 

24,182 

 

 

22,533 

 

7.3% 

Total cost of operations (a)

 

150,802 

 

 

146,971 

 

2.6% 

 

 

304,454 

 

 

295,655 

 

3.0% 

Net operating income

 

407,849 

 

 

403,165 

 

1.2% 

 

 

802,740 

 

 

791,553 

 

1.4% 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

(87,881)

 

 

(88,602)

 

(0.8)%

 

 

(176,411)

 

 

(176,537)

 

(0.1)%

Net income

$

319,968 

 

$

314,563 

 

1.7% 

 

$

626,329 

 

$

615,016 

 

1.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin (before depreciation

 

 

 

 

 

 

and amortization expense)

73.0% 

 

 

73.3% 

 

(0.4)%

 

 

72.5% 

 

 

72.8% 

 

(0.4)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average for the period:

 

 

 

 

 

Square foot occupancy

94.0% 

 

 

94.6% 

 

(0.6)%

 

 

93.1% 

 

 

93.8% 

 

(0.7)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rental income per (b):

 

 

 

 

 

Occupied square foot

$

17.35 

 

$

16.95 

 

2.4% 

 

$

17.32 

 

$

16.87 

 

2.7% 

Available square foot

$

16.30 

 

$

16.03 

 

1.7% 

 

$

16.13 

 

$

15.83 

 

1.9% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy

 

 

 

 

 

 

 

 

 

93.7% 

 

 

94.7% 

 

(1.1)%

Annual contract rent per

 

 

 

 

 

occupied square foot (c)

 

 

 

 

 

 

 

 

$

17.93 

 

$

17.63 

 

1.7% 

 

36

 


 

 

(a)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities.

(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 1.5%  and 1.8%  in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increases of 2.4%  and 2.7%  in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017 in realized annual rental income per occupied square foot. 

Year-over-year growth in our Same Store revenues has declined from 3.4% for the three months ended June 30, 2017 as compared to the same period in 2016, to 1.5% for the three months ended June 30, 2018 as compared to the same period in 2017.  Growth trends decelerated throughout 2017 and the first six months of 2018, with year over year revenue growth at 2.4% for the three months ended September 30, 2017, 2.2% for the three months ended December 31, 2017 and 2.1% for the three months ended March 31, 2018.  We are experiencing softness in demand in substantially all of our major markets, which has led to lower move-in volumes combined with a lack of pricing power with respect to new tenants.  We attribute some of this softness to local economic conditions and, in some markets, most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, and New York, increased supply of newly constructed self-storage facilities.

Same Store weighted average square foot occupancy was 94.0% and 93.1% during the three and six months ended June 30, 2018, respectively, as compared to 94.6%  and 93.8% for the same periods in 2017, as move-out volume declined in the three and six months ended June 30, 2018 as compared to the same periods in 2017, partially offset by lower move-in volume.    

We believe that high occupancies help maximize our rental income.  We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts in order to generate sufficient move-in volume to replace tenants that vacate.

Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth.  We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs.  Rental rate increases to existing tenants in the three and six months ended June 30, 2018 have been similar to the same periods in 2017, and we expect rate increases to existing tenants in the remainder of 2018 to be similar to the same period in 2017. 

Annual contract rent per occupied foot increased 1.7% from June 30, 2017 to June 30, 2018, as compared to a 3.1% increase from December 31, 2016 to December 31, 2017.  These year-over-year increases were primarily driven by annual rate increases given to existing tenants, partially offset by the net impact of replacing vacating tenants with new tenants with lower contract rates, or “rent roll down.”  The reduction in the year over year growth in annual contract rent per occupied foot from 3.1% at the beginning of the year to 1.7% at the end of the quarter is due primarily to continued rent roll down.    

 

37

 


 

 

During the three months ended June 30, 2018, the annual contract rent for tenants who moved in decreased 4.2% to $14.48 per foot as compared to $15.11  for the same period in 2017, and the annual contract rent for tenants who moved out increased 1.6% to $16.17 per foot as compared to $15.92 per foot for the same period in 2017.  During the six months ended June 30, 2018, the annual contract rent for tenants who moved in decreased 3.4% to $14.17 per foot as compared to $14.67 for the same period in 2017, and the annual contract rent for tenants who moved out increased 2.3% to $16.17 per foot as compared to $15.81 per foot for the same period in 2017.    

In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer.  Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $18.5 million and $37.1 million for the three and six months ended June 30, 2018, respectively, as compared to $21.5 million and $41.7 million for the same periods in 2017 and are recorded as a reduction to revenue. 

Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months.  Demand fluctuates due to various local and regional factors, including the overall economy.  Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage. 

We believe rental growth in the remainder of 2018 will come primarily from continued annual rent increases to existing tenants.  Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants. 

We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in the remainder of 2018.  However, there can be no assurance of continued revenue growth, because current trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors.  Such factors include initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, the level of consumer demand, competition from newly developed facilities and the degree and timing of rate increases previously passed to existing tenants.

We are taking a number of actions to improve demand into our system, including (i) increasing marketing spend on the Internet, and (ii) reducing rental rates and continuing to offer promotional discounts to new tenants.  Even if these actions are successful in improving demand into our system, in at least the near term, we believe these actions may have a negative impact on our revenue trends due to lower initial rental rates.

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 2.6%  and 3.0% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increased property tax expense, on-site property manager payroll, and allocated overhead

Property tax expense increased 5.5% and 5.0% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to higher assessed values.  We expect property tax expense growth of approximately 5.0% in the remainder of 2018 due primarily to higher assessed values.

On-site property manager payroll expense increased 1.1%  and 2.6% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to higher wage rates.  We expect on-site property manager payroll expense to increase on an inflationary basis in the remainder of 2018.

Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 6.1% and 5.7% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to lower headcount.  We expect inflationary increases in wage rates and stable headcount in the remainder of 2018.

 

38

 


 

 

Repairs and maintenance expense increased 1.8%  and 0.2% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017.  Repair and maintenance costs include snow removal expense totaling $0.7 million and $2.8 million in the three and six months ended June 30, 2018, respectively, as compared to $0.2 million and $2.2 million for the same periods in 2017.  Excluding snow removal costs, repairs and maintenance decreased 2.3% and 2.5% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017.

Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events.  We expect inflationary increases in repairs and maintenance expense in the remainder of 2018, excluding snow removal expense, which is primarily weather dependent and not predictable. 

Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels.  Changes in usage levels are driven primarily by weather and temperature.  Utility expense increased 2.3%  and 4.2% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017.  It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable. 

Advertising and selling expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center.  Advertising and selling expense varies based upon demand, occupancy levels, and other factors.  Television and Internet advertising, in particular, can increase or decrease significantly in the short term.  Advertising and selling expenses decreased 5.3% and 4.7%  in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to decreased television advertising spending partially offset by increased Internet marketing expenditures.  We expect moderate increases in advertising and selling expense in the remainder of 2018.

Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office.  These costs increased 1.9% and 3.6%  in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017We expect inflationary increases in other direct property costs in the remainder of 2018.

Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations.  Such functions include information technology, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer (CEO”) and Chief Financial Officer  (CFO”), which are included in general and administrative expense).  Allocated overhead increased 7.4%  and 7.3% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increased information technology expenses.  We expect greater than inflationary increases in allocated overhead in the remainder of 2018 due primarily to increased information technology expenses.

Analysis of Same Store Depreciation and Amortization

Depreciation and amortization for Same Store Facilities decreased 0.8%  and 0.1% in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017.  We expect depreciation to be flat in the remainder of 2018 as compared to the same period in 2017.

The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:

 

39

 


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Quarter Ended

 

 

 



March 31

 

June 30

 

September 30

 

December 31

 

Entire Year



(Amounts in thousands, except for per square foot amounts)

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

548,543 

 

$

558,651 

 

 

 

 

 

 

 

 

 

2017

$

537,072 

 

$

550,136 

 

$

568,429 

 

$

555,588 

 

$

2,211,225 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

153,652 

 

$

150,802 

 

 

 

 

 

 

 

 

 

2017

$

148,684 

 

$

146,971 

 

$

148,198 

 

$

118,351 

 

$

562,204 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

58,392 

 

$

59,174 

 

 

 

 

 

 

 

 

 

2017

$

55,862 

 

$

56,066 

 

$

55,855 

 

$

32,332 

 

$

200,115 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repairs and maintenance:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

11,537 

 

$

11,602 

 

 

 

 

 

 

 

 

 

2017

$

11,692 

 

$

11,397 

 

$

11,421 

 

$

11,983 

 

$

46,493 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and selling expense:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

6,523 

 

$

7,706 

 

 

 

 

 

 

 

 

 

2017

$

6,799 

 

$

8,138 

 

$

6,972 

 

$

6,802 

 

$

28,711 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

15.96 

 

$

16.30 

 

 

 

 

 

 

 

 

 

2017

$

15.63 

 

$

16.03 

 

$

16.54 

 

$

16.17 

 

$

16.09 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average realized annual rent per occupied square foot:

 

 

 

2018

$

17.30 

 

$

17.35 

 

 

 

 

 

 

 

 

 

2017

$

16.79 

 

$

16.95 

 

$

17.49 

 

$

17.37 

 

$

17.15 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average occupancy levels for the period:

 

 

 

 

 

 

 

 

2018

 

92.3% 

 

 

94.0% 

 

 

 

 

 

 

 

 

 

2017

 

93.1% 

 

 

94.6% 

 

 

94.6% 

 

 

93.1% 

 

 

93.8% 

 

40

 


 

 

Analysis of Market Trends

The following table sets forth selected market trends in our Same Store Facilities:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

 

2017

 

Change

 

 

2018

 

 

2017

 

Change



(Amounts in thousands, except for weighted average data)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles (198 facilities)

$

84,446 

 

$

81,400 

 

3.7% 

 

$

167,509 

 

$

160,884 

 

4.1% 

San Francisco (124 facilities)

 

47,957 

 

 

46,707 

 

2.7% 

 

 

95,016 

 

 

92,216 

 

3.0% 

New York (82 facilities)

 

34,883 

 

 

33,786 

 

3.2% 

 

 

69,046 

 

 

66,964 

 

3.1% 

Seattle-Tacoma (81 facilities)

 

26,062 

 

 

25,439 

 

2.4% 

 

 

51,491 

 

 

50,050 

 

2.9% 

Washington DC (82 facilities)

 

26,145 

 

 

26,291 

 

(0.6)%

 

 

51,710 

 

 

51,873 

 

(0.3)%

Miami (73 facilities)

 

24,225 

 

 

23,889 

 

1.4% 

 

 

48,149 

 

 

47,539 

 

1.3% 

Chicago (129 facilities)

 

29,414 

 

 

30,200 

 

(2.6)%

 

 

58,403 

 

 

59,863 

 

(2.4)%

Atlanta (98 facilities)

 

20,922 

 

 

20,489 

 

2.1% 

 

 

41,383 

 

 

40,540 

 

2.1% 

Houston (70 facilities)

 

16,345 

 

 

15,992 

 

2.2% 

 

 

32,688 

 

 

32,041 

 

2.0% 

Dallas-Ft. Worth (78 facilities)

 

15,990 

 

 

16,411 

 

(2.6)%

 

 

31,953 

 

 

32,573 

 

(1.9)%

Philadelphia (57 facilities)

 

14,224 

 

 

13,883 

 

2.5% 

 

 

28,051 

 

 

27,345 

 

2.6% 

Orlando-Daytona (64 facilities)

 

13,635 

 

 

13,099 

 

4.1% 

 

 

26,962 

 

 

25,778 

 

4.6% 

West Palm Beach (38 facilities)

 

11,583 

 

 

11,308 

 

2.4% 

 

 

23,051 

 

 

22,506 

 

2.4% 

Tampa (47 facilities)

 

10,974 

 

 

10,851 

 

1.1% 

 

 

21,825 

 

 

21,445 

 

1.8% 

Portland (41 facilities)

 

9,918 

 

 

10,052 

 

(1.3)%

 

 

19,644 

 

 

19,753 

 

(0.6)%

All other markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(786 facilities)

 

171,928 

 

 

170,339 

 

0.9% 

 

 

340,313 

 

 

335,838 

 

1.3% 

Total revenues

$

558,651 

 

$

550,136 

 

1.5% 

 

$

1,107,194 

 

$

1,087,208 

 

1.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

69,749 

 

$

67,291 

 

3.7% 

 

$

137,841 

 

$

132,450 

 

4.1% 

San Francisco

 

38,949 

 

 

37,858 

 

2.9% 

 

 

76,672 

 

 

74,487 

 

2.9% 

New York

 

24,802 

 

 

24,138 

 

2.8% 

 

 

47,506 

 

 

46,453 

 

2.3% 

Seattle-Tacoma

 

20,241 

 

 

19,876 

 

1.8% 

 

 

39,725 

 

 

38,907 

 

2.1% 

Washington DC

 

19,210 

 

 

19,581 

 

(1.9)%

 

 

37,692 

 

 

38,350 

 

(1.7)%

Miami

 

16,938 

 

 

16,838 

 

0.6% 

 

 

33,569 

 

 

33,501 

 

0.2% 

Chicago

 

16,112 

 

 

17,427 

 

(7.5)%

 

 

30,269 

 

 

32,765 

 

(7.6)%

Atlanta

 

14,873 

 

 

14,844 

 

0.2% 

 

 

29,866 

 

 

29,349 

 

1.8% 

Houston

 

10,767 

 

 

10,633 

 

1.3% 

 

 

21,617 

 

 

21,450 

 

0.8% 

Dallas-Ft. Worth

 

10,536 

 

 

10,905 

 

(3.4)%

 

 

21,208 

 

 

21,664 

 

(2.1)%

Philadelphia

 

9,875 

 

 

10,006 

 

(1.3)%

 

 

19,375 

 

 

19,338 

 

0.2% 

Orlando-Daytona

 

9,766 

 

 

9,324 

 

4.7% 

 

 

19,263 

 

 

18,432 

 

4.5% 

West Palm Beach

 

8,549 

 

 

8,259 

 

3.5% 

 

 

16,953 

 

 

16,526 

 

2.6% 

Tampa

 

7,669 

 

 

7,605 

 

0.8% 

 

 

15,302 

 

 

15,055 

 

1.6% 

Portland

 

7,641 

 

 

7,787 

 

(1.9)%

 

 

15,048 

 

 

15,162 

 

(0.8)%

All other markets

 

122,172 

 

 

120,793 

 

1.1% 

 

 

240,834 

 

 

237,664 

 

1.3% 

Total net operating income

$

407,849 

 

$

403,165 

 

1.2% 

 

$

802,740 

 

$

791,553 

 

1.4% 







 

41

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 



 

 

 

 

 



 

Three Months Ended June 30,

 

 

Six Months Ended June 30,



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

Weighted average square foot

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupancy:

 

 

 

 

 

 

 

 

 

Los Angeles

 

95.6% 

 

 

96.0% 

 

(0.4)%

 

 

95.3% 

 

 

95.8% 

 

(0.5)%

San Francisco

 

95.2% 

 

 

95.9% 

 

(0.7)%

 

 

94.7% 

 

 

95.4% 

 

(0.7)%

New York

 

95.0% 

 

 

94.7% 

 

0.3% 

 

 

94.2% 

 

 

94.0% 

 

0.2% 

Seattle-Tacoma

 

94.3% 

 

 

95.4% 

 

(1.2)%

 

 

93.2% 

 

 

94.4% 

 

(1.3)%

Washington DC

 

93.8% 

 

 

94.2% 

 

(0.4)%

 

 

92.0% 

 

 

92.9% 

 

(1.0)%

Miami

 

93.1% 

 

 

93.7% 

 

(0.6)%

 

 

92.7% 

 

 

93.5% 

 

(0.9)%

Chicago

 

90.8% 

 

 

92.4% 

 

(1.7)%

 

 

89.5% 

 

 

91.3% 

 

(2.0)%

Atlanta

 

93.7% 

 

 

94.2% 

 

(0.5)%

 

 

92.8% 

 

 

93.4% 

 

(0.6)%

Houston

 

91.2% 

 

 

90.2% 

 

1.1% 

 

 

91.5% 

 

 

90.3% 

 

1.3% 

Dallas-Ft. Worth

 

92.3% 

 

 

94.2% 

 

(2.0)%

 

 

91.6% 

 

 

93.7% 

 

(2.2)%

Philadelphia

 

95.6% 

 

 

95.6% 

 

0.0% 

 

 

94.5% 

 

 

94.7% 

 

(0.2)%

Orlando-Daytona

 

95.4% 

 

 

95.6% 

 

(0.2)%

 

 

94.8% 

 

 

95.1% 

 

(0.3)%

West Palm Beach

 

94.6% 

 

 

94.8% 

 

(0.2)%

 

 

94.3% 

 

 

94.8% 

 

(0.5)%

Tampa

 

93.8% 

 

 

94.8% 

 

(1.1)%

 

 

93.2% 

 

 

94.3% 

 

(1.2)%

Portland

 

95.2% 

 

 

96.5% 

 

(1.3)%

 

 

94.4% 

 

 

95.8% 

 

(1.5)%

All other markets

 

94.0% 

 

 

94.7% 

 

(0.7)%

 

 

92.9% 

 

 

93.7% 

 

(0.9)%

Total weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

square foot occupancy

 

94.0% 

 

 

94.6% 

 

(0.6)%

 

 

93.1% 

 

 

93.8% 

 

(0.7)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

25.45 

 

$

24.35 

 

4.5% 

 

$

25.28 

 

$

24.12 

 

4.8% 

San Francisco

 

25.85 

 

 

24.99 

 

3.4% 

 

 

25.72 

 

 

24.77 

 

3.8% 

New York

 

24.90 

 

 

24.17 

 

3.0% 

 

 

24.81 

 

 

24.12 

 

2.9% 

Seattle-Tacoma

 

19.74 

 

 

19.01 

 

3.8% 

 

 

19.71 

 

 

18.88 

 

4.4% 

Washington DC

 

21.00 

 

 

20.82 

 

0.9% 

 

 

21.12 

 

 

20.82 

 

1.4% 

Miami

 

19.71 

 

 

19.29 

 

2.2% 

 

 

19.65 

 

 

19.20 

 

2.3% 

Chicago

 

15.24 

 

 

15.40 

 

(1.0)%

 

 

15.36 

 

 

15.46 

 

(0.6)%

Atlanta

 

13.06 

 

 

12.73 

 

2.6% 

 

 

13.01 

 

 

12.68 

 

2.6% 

Houston

 

14.34 

 

 

14.17 

 

1.2% 

 

 

14.28 

 

 

14.15 

 

0.9% 

Dallas-Ft. Worth

 

13.24 

 

 

13.31 

 

(0.5)%

 

 

13.30 

 

 

13.26 

 

0.3% 

Philadelphia

 

15.83 

 

 

15.48 

 

2.3% 

 

 

15.76 

 

 

15.36 

 

2.6% 

Orlando-Daytona

 

13.74 

 

 

13.17 

 

4.3% 

 

 

13.65 

 

 

13.01 

 

4.9% 

West Palm Beach

 

18.41 

 

 

17.94 

 

2.6% 

 

 

18.36 

 

 

17.85 

 

2.9% 

Tampa

 

14.14 

 

 

13.81 

 

2.4% 

 

 

14.11 

 

 

13.70 

 

3.0% 

Portland

 

18.54 

 

 

18.51 

 

0.2% 

 

 

18.49 

 

 

18.29 

 

1.1% 

All other markets

 

14.09 

 

 

13.85 

 

1.7% 

 

 

14.09 

 

 

13.79 

 

2.2% 

Total realized rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot

$

17.35 

 

$

16.95 

 

2.4% 

 

$

17.32 

 

$

16.87 

 

2.7% 

 

42

 


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 



 

 

 

 

 



Three Months Ended June 30,

 

 

Six Months Ended June 30,



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

24.32 

 

$

23.38 

 

4.0% 

 

$

24.08 

 

$

23.10 

 

4.2% 

San Francisco

 

24.62 

 

 

23.95 

 

2.8% 

 

 

24.37 

 

 

23.64 

 

3.1% 

New York

 

23.64 

 

 

22.89 

 

3.3% 

 

 

23.37 

 

 

22.66 

 

3.1% 

Seattle-Tacoma

 

18.62 

 

 

18.14 

 

2.6% 

 

 

18.38 

 

 

17.82 

 

3.1% 

Washington DC

 

19.69 

 

 

19.61 

 

0.4% 

 

 

19.44 

 

 

19.33 

 

0.6% 

Miami

 

18.35 

 

 

18.07 

 

1.5% 

 

 

18.21 

 

 

17.96 

 

1.4% 

Chicago

 

13.85 

 

 

14.22 

 

(2.6)%

 

 

13.75 

 

 

14.10 

 

(2.5)%

Atlanta

 

12.24 

 

 

11.99 

 

2.1% 

 

 

12.08 

 

 

11.84 

 

2.0% 

Houston

 

13.07 

 

 

12.78 

 

2.3% 

 

 

13.06 

 

 

12.78 

 

2.2% 

Dallas-Ft. Worth

 

12.21 

 

 

12.54 

 

(2.6)%

 

 

12.19 

 

 

12.43 

 

(1.9)%

Philadelphia

 

15.14 

 

 

14.80 

 

2.3% 

 

 

14.89 

 

 

14.55 

 

2.3% 

Orlando-Daytona

 

13.11 

 

 

12.59 

 

4.1% 

 

 

12.94 

 

 

12.37 

 

4.6% 

West Palm Beach

 

17.42 

 

 

17.01 

 

2.4% 

 

 

17.31 

 

 

16.92 

 

2.3% 

Tampa

 

13.26 

 

 

13.09 

 

1.3% 

 

 

13.16 

 

 

12.92 

 

1.9% 

Portland

 

17.65 

 

 

17.85 

 

(1.1)%

 

 

17.46 

 

 

17.53 

 

(0.4)%

All other markets

 

13.25 

 

 

13.11 

 

1.1% 

 

 

13.09 

 

 

12.92 

 

1.3% 

Total REVPAF

$

16.30 

 

$

16.03 

 

1.7% 

 

$

16.13 

 

$

15.83 

 

1.9% 

We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows.  It is difficult to predict localized trends in short-term self-storage demand and operating results.  Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics. 

Non Same Store Facilities

The Non Same Store Facilities at June 30, 2018 represent 355 facilities that were not stabilized with respect to occupancies or rental rates since January 1, 2016, or that we did not own as of January 1, 2016.  As a result of the stabilization process and timing of when facilities were acquired, developed, or redeveloped, year-over-year changes can be significant. 

The following table summarizes operating data with respect to the Non Same Store Facilities:

 

43

 


 

 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON SAME STORE

Three Months Ended June 30,

 

Six Months Ended June 30,

FACILITIES

2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Dollar amounts in thousands, except square foot amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

$

459 

 

$

 -

 

$

459 

 

$

526 

 

$

 -

 

$

526 

2017 acquisitions

 

7,116 

 

 

799 

 

 

6,317 

 

 

13,976 

 

 

1,138 

 

 

12,838 

2016 acquisitions

 

9,761 

 

 

9,031 

 

 

730 

 

 

19,190 

 

 

17,612 

 

 

1,578 

2016 - 2018 new developments

 

8,618 

 

 

3,630 

 

 

4,988 

 

 

15,738 

 

 

5,957 

 

 

9,781 

2013 - 2015 new developments

 

6,591 

 

 

6,151 

 

 

440 

 

 

12,992 

 

 

11,949 

 

 

1,043 

Other facilities

 

54,010 

 

 

54,452 

 

 

(442)

 

 

107,127 

 

 

108,113 

 

 

(986)

    Total revenues

 

86,555 

 

 

74,063 

 

 

12,492 

 

 

169,549 

 

 

144,769 

 

 

24,780 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

165 

 

 

 -

 

 

165 

 

 

187 

 

 

 -

 

 

187 

2017 acquisitions

 

2,459 

 

 

229 

 

 

2,230 

 

 

4,966 

 

 

380 

 

 

4,586 

2016 acquisitions

 

3,521 

 

 

3,502 

 

 

19 

 

 

7,158 

 

 

6,984 

 

 

174 

2016 - 2018 new developments

 

4,937 

 

 

2,918 

 

 

2,019 

 

 

8,992 

 

 

5,214 

 

 

3,778 

2013 - 2015 new developments

 

2,098 

 

 

1,913 

 

 

185 

 

 

4,197 

 

 

3,780 

 

 

417 

Other facilities

 

15,894 

 

 

15,662 

 

 

232 

 

 

32,109 

 

 

31,160 

 

 

949 

    Total cost of operations

 

29,074 

 

 

24,224 

 

 

4,850 

 

 

57,609 

 

 

47,518 

 

 

10,091 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

294 

 

 

 -

 

 

294 

 

 

339 

 

 

 -

 

 

339 

2017 acquisitions

 

4,657 

 

 

570 

 

 

4,087 

 

 

9,010 

 

 

758 

 

 

8,252 

2016 acquisitions

 

6,240 

 

 

5,529 

 

 

711 

 

 

12,032 

 

 

10,628 

 

 

1,404 

2016 - 2018 new developments

 

3,681 

 

 

712 

 

 

2,969 

 

 

6,746 

 

 

743 

 

 

6,003 

2013 - 2015 new developments

 

4,493 

 

 

4,238 

 

 

255 

 

 

8,795 

 

 

8,169 

 

 

626 

Other facilities

 

38,116 

 

 

38,790 

 

 

(674)

 

 

75,018 

 

 

76,953 

 

 

(1,935)

    Net operating income

 

57,481 

 

 

49,839 

 

 

7,642 

 

 

111,940 

 

 

97,251 

 

 

14,689 

Depreciation and

 

 

 

 

 

 

 

amortization expense

 

(31,896)

 

 

(21,575)

 

 

(10,321)

 

 

(61,345)

 

 

(44,569)

 

 

(16,776)

Net income

$

25,585 

 

$

28,264 

 

$

(2,679)

 

$

50,595 

 

$

52,682 

 

$

(2,087)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

72.0% 

 

 

 -

 

 

 -

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

90.8% 

 

 

93.0% 

 

 

(2.4)%

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

89.1% 

 

 

90.3% 

 

 

(1.3)%

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

61.4% 

 

 

57.5% 

 

 

6.8% 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

92.9% 

 

 

93.3% 

 

 

(0.4)%

Other facilities

 

 

 

 

 

 

 

 

 

 

87.4% 

 

 

88.7% 

 

 

(1.5)%



 

 

 

 

 

 

 

 

 

 

83.0% 

 

 

85.9% 

 

 

(3.4)%

Annual contract rent per

 

 

 

 

 

 

occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

$

9.55 

 

$

 -

 

 

 -

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

14.57 

 

 

9.89 

 

 

47.3% 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

10.27 

 

 

9.92 

 

 

3.5% 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

11.49 

 

 

12.92 

 

 

(11.1)%

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

14.98 

 

 

14.24 

 

 

5.2% 

Other facilities

 

 

 

 

 

 

 

 

 

 

16.92 

 

 

16.87 

 

 

0.3% 



 

 

 

 

 

 

 

 

 

$

14.66 

 

$

14.93 

 

 

(1.8)%





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44

 


 

 

NON SAME STORE

 

 

Six Months Ended June 30,

FACILITIES (Continued)

 

 

 

 

 

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

34 

 

 

 

 

27 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

55 

 

 

55 

 

 

 -

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

43 

 

 

19 

 

 

24 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

20 

 

 

20 

 

 

 -

Other facilities

 

 

 

 

 

 

 

 

 

 

198 

 

 

198 

 

 

 -



 

 

 

 

 

 

 

 

 

 

355 

 

 

299 

 

 

56 

Net rentable square feet (in thousands):

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

356 

 

 

 -

 

 

356 

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

2,114 

 

 

398 

 

 

1,716 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

4,247 

 

 

4,121 

 

 

126 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

5,479 

 

 

2,595 

 

 

2,884 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

1,877 

 

 

1,877 

 

 

 -

Other facilities (a)

 

 

 

 

 

 

 

 

 

 

14,201 

 

 

14,263 

 

 

(62)



 

 

 

 

 

 

 

 

 

 

28,274 

 

 

23,254 

 

 

5,020 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

As of
June 30, 2018

 

 

 

 

 

 

Costs to acquire or develop:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

$

33,930 

 

 

 

 

 

 

2017 acquisitions (b)

 

 

 

 

 

 

 

 

 

 

291,329 

 

 

 

 

 

 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

429,123 

 

 

 

 

 

 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

660,629 

 

 

 

 

 

 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

188,049 

 

 

 

 

 

 

Other facilities (c)

 

 

 

 

 

 

 

 

 

 

 -

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

$

1,603,060 

 

 

 

 

 

 



(a)

Square footage at June 30, 2018 for the “other facilities” excludes 665,000 net rentable square feet of storage space that was demolished with respect to redevelopments that are in process.  Our current pipeline of $363.9 million in redevelopment projects will result in the demolishment of an additional 153,000 net rentable square feet of space, and build 3.9 million net rentable square feet of storage space.

(b)

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.

(c)

Other facilities include existing facilities for which we recently expanded their square footage at  a cost of $188.8 million.  We have not included these costs or the historical costs incurred to initially acquire or develop these 198 facilities in the table, as they would not be meaningful or consistent with the amounts for the acquired and newly developed facilities.

The facilities included above under “2017 acquisitions” include 22 facilities acquired from third parties and 12 stabilized facilities previously owned by a legacy institutional partnership that we began consolidating effective December 31, 2017.

 

45

 


 

 

For the six months ended June 30, 2018, the weighted average annualized yield on cost, based upon net operating income, for i) the facilities acquired in 2016 was 5.6% and ii) the 22 facilities acquired in 2017 from third parties for $149.8 million was 4.9%.  The yield for the other facilities acquired are not meaningful due to our limited ownership period in the case of facilities acquired in 2018 and our preexisting ownership interest in and management of the 12 stabilized facilities owned by a legacy institutional partnership. 

We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners.  However, it can take 24 or more months for us to fully achieve the higher net operating income, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions.  As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities. 

We believe that our real estate development activities are beneficial to our business over the long run.  However, in the short run, development activities dilute our earnings due to the three to four year period to reach a stabilized level of cash flows and the cost of capital to fund development, combined with general and administrative expenses associated with development.  We believe this dilution will increase in the remainder of 2018 because of an increased level of net rentable square feet being added to our portfolio.

We expect the Non Same Store Facilities to continue to provide increased net operating income in the remainder of 2018 as these facilities approach stabilized occupancy levels and the earnings of the 2017 acquisitions are reflected in our operations for a longer period in 2018 as compared to 2017. 

We also expect to increase the number and net rentable square feet of Non Same Store Facilities through development of new self-storage facilities, redevelopment of existing facilities and acquisitions of facilities. 

At June 30, 2018, we had various facilities in development (2.2 million net rentable square feet) estimated to cost $315.3 million and various expansion projects (3.9 million net rentable square feet) estimated to cost $363.9 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 and challenges in obtaining building permits for self-storage activities in certain municipalities. 

Subsequent to June 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $95.2 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefore the dollar value of acquisitions is unpredictable. 

Depreciation and amortization with respect to the Non Same Store Facilities totaled $31.9 million and $61.3 million in the three and six months ended June 30, 2018, respectively, as compared to $21.6 million $44.6 million for the same periods in 2017.  These amounts include i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate.  With respect to Non Same Store Facilities owned at June 30, 2018, depreciation of buildings and amortization of tenant intangibles is expected to total $58.0 million and $4.6 million, respectively, in the remainder of 2018.  The level of future depreciation and amortization will also depend upon the level of acquisitions of facilities and the level of newly developed storage space.

Ancillary Operations

Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities.  The following table sets forth our ancillary operations:

 

46

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance premiums

$

31,605 

 

$

30,979 

 

$

626 

 

$

62,442 

 

$

60,919 

 

$

1,523 

Merchandise

 

8,717 

 

 

9,134 

 

 

(417)

 

 

16,267 

 

 

16,963 

 

 

(696)

Total revenues

 

40,322 

 

 

40,113 

 

 

209 

 

 

78,709 

 

 

77,882 

 

 

827 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

5,941 

 

 

5,986 

 

 

(45)

 

 

12,141 

 

 

12,263 

 

 

(122)

Merchandise

 

5,160 

 

 

5,397 

 

 

(237)

 

 

9,600 

 

 

10,044 

 

 

(444)

Total cost of operations

 

11,101 

 

 

11,383 

 

 

(282)

 

 

21,741 

 

 

22,307 

 

 

(566)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

25,664 

 

 

24,993 

 

 

671 

 

 

50,301 

 

 

48,656 

 

 

1,645 

Merchandise

 

3,557 

 

 

3,737 

 

 

(180)

 

 

6,667 

 

 

6,919 

 

 

(252)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net income

$

29,221 

 

$

28,730 

 

$

491 

 

$

56,968 

 

$

55,575 

 

$

1,393 



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 from $31.0 million and $60.9 million in the three and six months ended June 30, 2017, respectively, to $31.6 million and $62.4 million during the same periods in 2018, due primarily to an increase in our tenant base due to newly acquired and developed facilities.

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 decreased from $6.0 million and $12.3 million in the three and six months ended June 30, 2017, respectively, to $5.9 million and $12.1 million during the same periods in 2018.  

Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities.  We do not expect any significant changes in revenues or profitability from our merchandise sales in the remainder of 2018.

 

47

 


 

 

Equity in earnings of unconsolidated real estate entities

At June 30, 2018, we have equity investments in PSB and Shurgard Europe, which we account for on the equity method and record our pro-rata share of the net income of these entities for each period.  The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Amounts in thousands)

Equity in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSB

$

36,612 

 

$

12,733 

 

$

23,879 

 

$

60,443 

 

$

26,433 

 

$

34,010 

Shurgard Europe 

 

5,351 

 

 

6,650 

 

 

(1,299)

 

 

12,315 

 

 

12,241 

 

 

74 

Disposed Investment (a) 

 

 -

 

 

685 

 

 

(685)

 

 

 -

 

 

1,343 

 

 

(1,343)

Total equity in earnings

$

41,963 

 

$

20,068 

 

$

21,895 

 

$

72,758 

 

$

40,017 

 

$

32,741 

(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: At June 30, 2018 and December 31, 2017, we had approximately a 42% common equity interest in PS Business Parks, Inc. (“PSB”), comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB.  The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. 

At June 30, 2018, PSB wholly-owned approximately 28 million rentable square feet of commercial space and had a 95% interest in a 395-unit apartment complex.  PSB also manages commercial space that we own pursuant to property management agreements.

Equity in earnings from PSB increased $23.9 million and $34.0 million in the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increases of $23.5 million and $32.8 million in our equity share of gains on sales of real estate in three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017 and from improved real estate facility operating results.  See Note 4 to our June 30, 2018 financial statements for selected financial information on PSB, as well as PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com.

Investment in Shurgard Europe: We have a 49% equity share in Shurgard Europe’s net income.  At June 30, 2018, Shurgard Europe’s operations are comprised of 227 wholly-owned facilities with 12 million net rentable square feet.  See Note 4 to our June 30, 2018 financial statements for selected financial data on Shurgard Europe for the six months ended June 30, 2018 and 2017.  As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe.  On June 30, 2018, Shurgard Europe acquired five self-storage facilities in Sweden for $45.7 million. 

Our equity in earnings from Shurgard Europe decreased $1.3 million for the three months ended June 30, 2018 as compared to the same period in 2017, due primarily to our equity share of increased depreciation and income tax expense, offset partially by improved property operations.  For the six months ended June 30, 2018, our equity in earnings from Shurgard Europe were flat as compared to the same period in 2017, with our equity share of improved property operations offset by increased income tax and depreciation expense.

Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the countries in which it does business and incurs tax expense.  Our equity share of such income tax expense was approximately $3.1 million and $5.8 million in the three and six months ended June 30, 2018, respectively, as compared to $2.0 million and $3.5 million for the same periods in 2017.    

 

48

 


 

 

As previously reported, Shurgard Europe is considering an initial public offering.  There can be no assurance as to whether Shurgard Europe will actually complete an initial public offering.  We do not expect to liquidate any of our investment in Shurgard Europe in connection with any such initial public offering; accordingly, we do not expect any such initial public offering to have a material impact upon our earnings.

On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million, representing our 49% share of an aggregate dividend totaling $296.8 million.  The dividend was funded by Shurgard Europe in part through proceeds from a bank loan.

For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated at exchange rates of approximately 1.168 U.S. Dollars per Euro at June 30, 2018 (1.198 at December 31, 2017), and average exchange rates of 1.192 and 1.099 for the three months ended June 30, 2018 and 2017, respectively, and average exchange rates of 1.210 and 1.082 for the six months ended June 30, 2018 and 2017, respectively.

Our future earnings from Shurgard Europe will be affected primarily by the operating results of its existing facilities, the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro), the impact of income taxes, and the degree to which Shurgard Europe reinvests the cash it generates from operations into real estate investments or distributes the amounts to its shareholders.

Analysis of items not allocated to segments

General and administrative expense: The following table sets forth our general and administrative expense:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Amounts in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

$

17,278 

 

$

4,265 

 

$

13,013 

 

$

34,188 

 

$

13,162 

 

$

21,026 

Costs of senior executives

 

416 

 

 

416 

 

 

 -

 

 

3,986 

 

 

5,036 

 

 

(1,050)

Development and acquisition costs

 

1,208 

 

 

1,912 

 

 

(704)

 

 

3,541 

 

 

5,189 

 

 

(1,648)

Tax compliance costs and taxes paid 

1,118 

 

 

1,098 

 

 

20 

 

 

2,466 

 

 

2,447 

 

 

19 

Legal costs

 

2,192 

 

 

1,735 

 

 

457 

 

 

3,936 

 

 

3,681 

 

 

255 

Public company costs

 

1,129 

 

 

1,023 

 

 

106 

 

 

2,348 

 

 

2,148 

 

 

200 

Other costs

 

7,988 

 

 

4,543 

 

 

3,445 

 

 

12,384 

 

 

8,357 

 

 

4,027 

Total

$

31,329 

 

$

14,992 

 

$

16,337 

 

$

62,849 

 

$

40,020 

 

$

22,829 

Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes.  Share-based compensation expense varies based upon the level of grants and their related vesting and amortization periods, forfeitures, as well as the Company’s common share price on the date of grant. 

In February 2018, we announced that our CEO and CFO are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company.  Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees.  For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire.  Accordingly, all remaining share-based compensation expense for these two executives will now be amortized by the end of 2018.  Included in share-based compensation expense for the three and six months ended June 30, 2018 is approximately $7.8 million and $15.6 million, respectively, due to the accelerated amortization of grants to our CEO and CFO.  Similar increases in share-based compensation expense are expected in the remainder of 2018.  Share-based compensation costs in the three and six months ended June 30, 2017 include a $5.4 million reversal of previously amortized costs, due to the forfeiture of share-based compensation resulting from the retirement of certain senior executives in the quarter ended

 

49

 


 

 

June 30, 2017.  See Note 10 to our June 30, 2018 financial statements for further information on our share-based compensation. 

Costs of senior executives represent the cash compensation paid to our chief executive officer and chief financial officer. 

Development and acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities.  The amounts in the above table are net of $3.2 million and $6.3 million for the three and six months ended June 30, 2018, respectively, and $2.0 million and $4.1 million for the same periods in 2017, in development costs that were capitalized to newly developed and redeveloped self-storage facilities.  Development and acquisition costs are expected to remain stable in the remainder of 2018. 

Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules.  Such costs vary primarily based upon the tax rates of the various states in which we do business. 

Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of legal activity.  The future level of legal costs is not determinable.

Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ (our “Board”) costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Sarbanes-Oxley Act of 2002. 

Other costs represent certain professional and consulting fees, payroll, and overhead that are not attributable to our property operations.  Such costs vary depending upon the level of corporate activities, initiatives, and other factors and, as such, are not predictable.  Amounts for the three and six months ended June 30, 2018 include approximately $2.0 million in costs incurred to demolish certain buildings that were damaged in flooding in 2017 and are being rebuilt.

Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.

Interest and other income: Interest and other income is comprised primarily of the net income from our commercial operations and property management operations and to a lesser extent interest earned on cash balances, trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts.  Amounts attributable to our commercial operations and property management operations totaled $3.0 million and $5.8 million in the three and six months ended June 30, 2018, respectively, as compared to $2.6 million and $5.2 million for the same periods in 2017.  We do not expect any significant changes in interest and other income in the remainder of 2018. 

Interest expense:  For the three and six months ended June 30, 2018, we incurred $9.4 million and $18.8 million, respectively, of interest on our outstanding debt, as compared to $2.2 million and $4.3 million for the same periods in 2017.  In determining interest expense, these amounts were offset by capitalized interest of $1.0 million and $2.3 million during the three and six months ended June 30, 2018, respectively, associated with our development activities, as compared to $1.1 million and $2.1 million for the same periods in 2017.  On September 18, 2017, we completed a public offering of $1.0 billion notes (the “U.S. Dollar Notes”) bearing an average annual interest rate of 2.732%.  For the three and six months ended June 30, 2018, we incurred interest expense totaling $7.1 million and  $14.2 million, respectively, on the U.S. Dollar Notes.  At June 30, 2018, we had $1.4 billion of debt outstanding, with an average interest rate of 2.6%.  See Note 6 to our June 30, 2018 financial statements for further information on our debt balances.  Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs. 

 

50

 


 

 

Foreign Exchange Gain (Loss): For the three and six months ended June 30, 2018, we recorded foreign currency exchange gains of  $21.9 million and $10.1 million, respectively, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates (losses of $25.4 million and $31.0 million for the same periods in 2017).  The Euro was translated at exchange rates of approximately 1.168 U.S. Dollars per Euro at June 30, 2018, 1.232 at March 31, 2018, 1.198 at December 31, 2017, 1.142 at June 30, 2017, 1.068 at March 31, 2017 and 1.052 at December 31, 2016.  Future gains and losses on foreign currency exchange will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding

Gain on Real Estate Investment Sales:  In the six months ended June 30, 2018, we recorded gains totaling $424,000,  and in the three and six months ended June 30, 2017, we recorded gains totaling $975,000, primarily in connection with the partial sale of real estate facilities pursuant to eminent domain proceedings.

Net Income Allocable to Preferred Shareholders:  Net income allocable to preferred shareholders based upon distributions decreased in the three and six months ended June 30, 2018 as compared to the same periods in 2017, due to lower average rates and lower weighted average preferred shares outstanding.  Based upon our preferred shares outstanding at June 30, 2018, our quarterly distribution to our preferred shareholders is expected to be approximately $54.1 million.

Liquidity and Capital Resources



Financing Strategy:  As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments.  As a result, in order to grow our asset base, access to capital is important.  Historically we have primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferred securities.  Over the past two years, we have diversified our capital sources by issuing medium term debt. 

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows.  We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s.  Our unsecured debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s.  Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s.  Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital.  As of June 30, 2018 and August 1, 2018, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $16.1 million of outstanding letters of credit which limits our borrowing capacity to $483.9 million

Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of additional medium or long term debt, and proceeds from the issuance of common and preferred securities.  We will select among these sources of capital based upon availability, relative cost, the desire for leverage, refinancing risk, and considering potential constraints caused by certain features of capital sources, such as debt covenants. 

Liquidity and Capital Resource Analysis:  We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures and distributions to our shareholders for the foreseeable future. 

As of June 30, 2018, our capital resources over the next year are expected to be approximately $1.2 billion which exceeds our current planned capital needs over the next year of approximately $551.5 million.  Our capital resources include: (i) $338.4 million of cash as of June 30, 2018, (ii) $483.9 million of available borrowing capacity on our revolving line of credit, (iii) $145.4 million in cash distributions received from Shurgard Europe on July 13, 2018, and (iv) approximately $200 million to $250 million of expected retained operating cash flow for the next twelve

 

51

 


 

 

months.  Retained operating cash flow represents our expected cash flows from our operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities. 

Our planned capital needs over the next year consist of (i) $445.2 million of remaining spend on our current development pipeline, (ii) $95.2 million in property acquisitions currently under contract, and (iii) $11.1 million in principal repayments on existing debt.  Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties.  In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.

Required Debt Repayments: As of June 30, 2018, our outstanding debt totaled approximately $1.4 billion, consisting of $28.3 million of secured debt, $399.6 million of Euro-denominated unsecured debt and $1.0 billion of U.S. Dollar denominated unsecured debt.  Approximate principal maturities are as follows (amounts in thousands):





 

 



 

 

Remainder of 2018

$

10,361 

2019

 

1,505 

2020

 

1,585 

2021

 

1,503 

2022

 

502,071 

Thereafter

 

910,888 



$

1,427,913 

The remaining maturities on our debt over at least the next three years are nominal compared to our expected annual retained operating cash flow.

Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal.  Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.

Capital expenditures totaled $53.2 million in the first six months of 2018, and are expected to be between $140 million and $180 million in 2018.  The level of our capital expenditures are dependent upon the results of our evaluation of the potential upgrade of existing HVAC equipment, offices, lighting, and elevator units in certain facilities.  For the last four years, maintenance capital expenditures have ranged between approximately $0.45 and $0.75 per net rentable square foot per year.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code.  As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. 

On July 25, 2018, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of September 2018.  Our consistent, long-term dividend policy has been to distribute only our taxable income.  Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities. 

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at June 30, 2018, to be approximately $216.3 million per year. 

 

52

 


 

 

We estimate we will pay approximately $6.0 million per year in distributions to noncontrolling interests outstanding at June 30, 2018. 

Real Estate Investment Activities: Subsequent to June 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $95.2 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of June 30, 2018 we had development and redevelopment projects at a total cost of approximately $679.2 million.  Costs incurred through June 30, 2018 were $234.0 million, with the remaining cost to complete of $445.2 million expected to be incurred primarily in the next 18 months.  Some of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. 

Shurgard Europe: As previously reported, Shurgard Europe is considering an initial public offering.  On July 13, 2018, we received a cash distribution from Shurgard Europe of $145.4 million, representing our 49% share of an aggregate dividend totaling $296.8 million.  The dividend was funded by Shurgard Europe in part through proceeds from a bank loan.  There can be no assurance as to whether Shurgard Europe will actually complete an initial public offering.  We do not expect to liquidate any of our investment in Shurgard Europe in connection with any such initial public offering. 

Redemption of Preferred Securities: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities.  In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt.  As of August 1, 2018, we have four series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.625% Series U Preferred Shares with $287.5 million outstanding, our 5.375% Series V Preferred Shares with $495.0 million outstanding, our 5.200% Series W Preferred Shares with $500.0 million outstanding and our 5.200% Series X Preferred Shares with $225.0 million outstanding.  Redemption of such preferred shares will depend upon many factors.  None of our preferred securities are redeemable at the option of the holders. 

Repurchases of Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  During the three months ended June 30, 2018, we did not repurchase any of our common shares.  From the inception of the repurchase program through August 1, 2018, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million.  Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares. 

Contractual Obligations

Our significant contractual obligations at June 30, 2018 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total

 

 

of 2018

 

 

2019 

 

 

2020 

 

 

2021 

 

 

2022 

 

 

Thereafter

Interest and principal payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on debt (1)

$

1,677,437 

 

$

28,556 

 

$

37,592 

 

$

37,592 

 

$

37,423 

 

$

534,464 

 

$

1,001,810 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases (2)

 

83,431 

 

 

2,033 

 

 

4,311 

 

 

4,554 

 

 

4,832 

 

 

3,939 

 

 

63,762 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction commitments (3)

 

162,438 

 

 

134,594 

 

 

27,844 

 

 

 -

 

 

 -

 

 

 -

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

1,923,306 

 

$

165,183 

 

$

69,747 

 

$

42,146 

 

$

42,255 

 

$

538,403 

 

$

1,065,572 



 

53

 


 

 

(1)

Represents contractual principal and interest payments.  Amounts with respect to certain Euro-denominated debt are based upon exchange rates at June 30, 2018.  See Note 6 to our June 30, 2018 financial statements for further information. 

(2)Represents future contractual payments on land, equipment and office space under various operating leases. 

(3)Represents future expected development spending that was under contract at June 30, 2018.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at June 30, 2018 to be approximately $216.3 million per year.  Dividends are paid when and if declared by our Board and accumulate if not paid. 

Off-Balance Sheet Arrangements: At June 30, 2018, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk

To limit our exposure to market risk, we are capitalized primarily with preferred and common equity.  Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption option.  Our debt is our only market-risk sensitive portion of our capital structure, which totals approximately $1.4 billion and represents 16.0% of the book value of our equity at June 30, 2018.  

We have foreign currency exposure at June 30, 2018 related to i) our investment in Shurgard Europe, with a book value of $326.3 million and ii) €342.0  million ($399.6 million) of Euro-denominated unsecured notes payable. 

The fair value of our fixed rate debt at June 30, 2018 is approximately $1.4 billion.  The table below summarizes the annual maturities of our fixed rate debt, which had a weighted average effective rate of 2.6% at June 30, 2018.  See Note 6 to our June 30, 2018 financial statements for further information regarding our fixed rate debt (amounts in thousands).





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

 

$

10,361 

 

$

1,505 

 

$

1,585 

 

$

1,503 

 

$

502,071 

 

$

910,888 

 

$

1,427,913 





ITEM 4.    Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance.  We also have investments in certain unconsolidated real estate entities and because we do not control these entities, our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

 

54

 


 

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level. 

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

55

 


 

 





 

Part II.

OTHER INFORMATION







 

 

ITEM 1.

Legal Proceedings



We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.





 

ITEM 1A.

Risk Factors



In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K filed for the year ended December 31, 2017, in Part I, Item 1A, Risk Factors, and in our other filings with the SEC.  These factors may materially affect our business, financial condition and operating results and could cause our actual results to differ materially from expectations.  In addition, in considering the forward-looking statements contained in this Form 10-Q and elsewhere, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Part I, Item 2 of this Form 10-Q.





 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Common Share Repurchases



Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  From the inception of the repurchase program through August 1, 2018, 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 June 30, 2018.  We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares. 

Preferred Share Redemptions



We had no preferred redemptions during the three months ended June 30, 2018





 

ITEM 6.

Exhibits

Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index which is incorporated herein by reference.

 

 

56

 


 

 



 

 



 



PUBLIC STORAGE



INDEX TO EXHIBITS (1)



(Items 15(a)(3) and 15(c))



 



 

3.1

Articles of Amendment and Restatement of Declaration of Trust of Public Storage, filed with the Maryland State Department of Assessments and Taxation on May 4, 2018. Filed with the Registrant’s Current Report on Form 8-K dated May 4, 2018 and incorporated by reference herein.



 

3.2

Amended and Restated Bylaws of Public Storage, dated May 4, 2018. Filed with the Registrant’s Current Report on Form 8-K dated May 4, 2018 and incorporated by reference herein.



 

12

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Share Income Allocations.  Filed herewith.



 

31.1

Rule 13a – 14(a) Certification.  Filed herewith.



 

31.2

Rule 13a – 14(a) Certification.  Filed herewith.



 

32

Section 1350 Certifications.  Filed herewith. 



 

101 .INS

XBRL Instance Document.  Filed herewith.



 

101 .SCH

XBRL Taxonomy Extension Schema.  Filed herewith.



 

101 .CAL

XBRL Taxonomy Extension Calculation Linkbase.  Filed herewith.



 

101 .DEF

XBRL Taxonomy Extension Definition Linkbase.  Filed herewith.



 

101 .LAB

XBRL Taxonomy Extension Label Linkbase.  Filed herewith.



 

101 .PRE

XBRL Taxonomy Extension Presentation Link.  Filed herewith.



 

_ (1)  SEC

File No. 001-33519 unless otherwise indicated.



 



 

 

 



 

 

57

 


 

 

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

4

 



DATED:  August 1, 2018

 

PUBLIC STORAGE



 



By:   /s/ John Reyes                 



John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized officer)

 

 





 

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