psa-20180930 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

[X]  Yes  [   ]  No

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



 

 

 

 

Large accelerated
filer

Accelerated
filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

[X]

[   ]

[   ]

[   ]

[   ]

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

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

[   ]  Yes  [X]  No

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of October 29, 2018:

Common Shares of beneficial interest, $.10 par value per share – 174,364,490 shares

 

 


 

PUBLIC STORAGE



INDEX







 

 

PART I

FINANCIAL INFORMATION

Pages



 

 

Item 1.

Financial Statements (Unaudited)

 



 

 



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



 

 



Statements of Income for the Three and Nine Months Ended
September 30, 2018 and 2017



 

 



Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2018 and 2017



 

 



Statement of Equity for the Nine Months Ended September 30, 2018



 

 



Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

5-6 



 

 



Condensed Notes to Financial Statements

7-29 



 

 

Item 2.

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

30-56 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57 



 

 

Item 4.

Controls and Procedures

57 



 

 

PART II

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

 



 

 

Item 1.

Legal Proceedings

58 



 

 

Item 1A.

Risk Factors

58 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58 



 

 

Item 6.

Exhibits

59 



 

 



 



 

 

 


 

 

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)





 

 

 

 

 



September 30,

 

December 31,



2018

 

2017

ASSETS

 

(Unaudited)

 

 

 



 

 

 

 

 

Cash and equivalents

$

432,525 

 

$

433,376 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

4,027,764 

 

 

3,947,123 

Buildings

 

11,108,129 

 

 

10,718,866 



 

15,135,893 

 

 

14,665,989 

Accumulated depreciation

 

(6,041,262)

 

 

(5,700,331)



 

9,094,631 

 

 

8,965,658 

Construction in process

 

253,719 

 

 

264,441 



 

9,348,350 

 

 

9,230,099 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

619,405 

 

 

724,173 

Goodwill and other intangible assets, net

 

209,317 

 

 

214,957 

Other assets

 

138,343 

 

 

130,287 

Total assets

$

10,747,940 

 

$

10,732,892 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Notes payable

$

1,417,945 

 

$

1,431,322 

Accrued and other liabilities

 

409,973 

 

 

337,201 

    Total liabilities

 

1,827,918 

 

 

1,768,523 



 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

December 31, 2017), at liquidation preference

 

4,025,000 

 

 

4,025,000 

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

 

 

 

 

 

174,059,645 shares issued and outstanding  (173,853,370 shares at

 

 

 

 

 

December 31, 2017)

 

17,406 

 

 

17,385 

Paid-in capital

 

5,697,308 

 

 

5,648,399 

Accumulated deficit

 

(760,284)

 

 

(675,711)

Accumulated other comprehensive loss

 

(84,339)

 

 

(75,064)

Total Public Storage shareholders’ equity

 

8,895,091 

 

 

8,940,009 

Noncontrolling interests

 

24,931 

 

 

24,360 

  Total equity

 

8,920,022 

 

 

8,964,369 

Total liabilities and equity

$

10,747,940 

 

$

10,732,892 

 

 

See accompanying notes.

1

 


 

 

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

666,616 

 

$

646,238 

 

$

1,943,359 

 

$

1,878,215 

Ancillary operations

 

39,752 

 

 

40,123 

 

 

118,461 

 

 

118,005 



 

706,368 

 

 

686,361 

 

 

2,061,820 

 

 

1,996,220 



 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

183,637 

 

 

173,315 

 

 

545,700 

 

 

516,488 

Ancillary cost of operations

 

11,907 

 

 

17,304 

 

 

33,648 

 

 

39,611 

Depreciation and amortization

 

124,516 

 

 

113,320 

 

 

362,272 

 

 

334,426 

General and administrative

 

27,429 

 

 

22,311 

 

 

90,278 

 

 

62,331 



 

347,489 

 

 

326,250 

 

 

1,031,898 

 

 

952,856 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

358,879 

 

 

360,111 

 

 

1,029,922 

 

 

1,043,364 

Interest and other income

 

7,020 

 

 

4,569 

 

 

18,892 

 

 

12,722 

Interest expense

 

(8,094)

 

 

(2,389)

 

 

(24,589)

 

 

(4,553)

Equity in earnings of unconsolidated real estate entities

 

17,771 

 

 

17,218 

 

 

90,529 

 

 

57,235 

Foreign currency exchange gain (loss)

 

2,612 

 

 

(13,446)

 

 

12,738 

 

 

(44,452)

Casualty loss

 

 -

 

 

(7,789)

 

 

 -

 

 

(7,789)

Gain on sale of real estate

 

1,401 

 

 

 -

 

 

1,825 

 

 

975 

Net income

 

379,589 

 

 

358,274 

 

 

1,129,317 

 

 

1,057,502 

Allocation to noncontrolling interests

 

(1,562)

 

 

(1,600)

 

 

(4,491)

 

 

(4,684)

Net income allocable to Public Storage shareholders

 

378,027 

 

 

356,674 

 

 

1,124,826 

 

 

1,052,818 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders - distributions

 

(54,080)

 

 

(61,055)

 

 

(162,238)

 

 

(182,457)

Preferred shareholders - redemptions (Note 8)

 

 -

 

 

(14,692)

 

 

 -

 

 

(29,330)

Restricted share units 

 

(1,268)

 

 

(1,210)

 

 

(3,790)

 

 

(3,502)

Net income allocable to common shareholders

$

322,679 

 

$

279,717 

 

$

958,798 

 

$

837,529 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.85 

 

$

1.61 

 

$

5.51 

 

$

4.83 

Diluted

$

1.85 

 

$

1.61 

 

$

5.50 

 

$

4.81 



 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

173,975 

 

 

173,715 

 

 

173,933 

 

 

173,560 

Diluted weighted average common shares outstanding

 

174,348 

 

 

174,240 

 

 

174,240 

 

 

174,128 



 

 

 

 

 

 

 

 

 

 

 



 

 

See accompanying notes.

2

 


 

 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Net income

$

379,589 

 

$

358,274 

 

$

1,129,317 

 

$

1,057,502 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange gain (loss)

2,874 

 

 

(6,176)

 

 

3,463 

 

 

(24,219)

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

 

 

(gain) loss included in net income

 

(2,612)

 

 

13,446 

 

 

(12,738)

 

 

44,452 

Other comprehensive income (loss):

 

262 

 

 

7,270 

 

 

(9,275)

 

 

20,233 

Total comprehensive income

 

379,851 

 

 

365,544 

 

 

1,120,042 

 

 

1,077,735 

Allocation to noncontrolling interests

 

(1,562)

 

 

(1,600)

 

 

(4,491)

 

 

(4,684)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

378,289 

 

$

363,944 

 

$

1,115,551 

 

$

1,073,051 



 



 

 

See accompanying notes.

3

 


 

 

 PUBLIC STORAGE

STATEMENT OF EQUITY

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

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 



Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 



Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total



Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

Balances at December 31, 2017

$

4,025,000 

 

$

17,385 

 

$

5,648,399 

 

$

(675,711)

 

$

(75,064)

 

$

8,940,009 

 

$

24,360 

 

$

8,964,369 

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (206,275 shares) (Note 10)

 -

 

 

21 

 

 

7,922 

 

 

 -

 

 

 -

 

 

7,943 

 

 

 -

 

 

7,943 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 10)

 -

 

 

 -

 

 

40,987 

 

 

 -

 

 

 -

 

 

40,987 

 

 

 -

 

 

40,987 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,342 

 

 

1,342 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,129,317 

 

 

 -

 

 

1,129,317 

 

 

 -

 

 

1,129,317 

Net income allocated to noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

(4,491)

 

 

 -

 

 

(4,491)

 

 

4,491 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 8)

 

 -

 

 

 -

 

 

 -

 

 

(162,238)

 

 

 -

 

 

(162,238)

 

 

 -

 

 

(162,238)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(5,262)

 

 

(5,262)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($6.00 per share)

 

 -

 

 

 -

 

 

 -

 

 

(1,047,161)

 

 

 -

 

 

(1,047,161)

 

 

 -

 

 

(1,047,161)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(9,275)

 

 

(9,275)

 

 

 -

 

 

(9,275)

Balances at September 30, 2018

$

4,025,000 

 

$

17,406 

 

$

5,697,308 

 

$

(760,284)

 

$

(84,339)

 

$

8,895,091 

 

$

24,931 

 

$

8,920,022 



 



 

 

See accompanying notes.

4

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



 

 

 

 

 



Nine Months Ended September 30,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Net income

$

1,129,317 

 

$

1,057,502 

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

from operating activities:

 

 

 

 

 

Gain on real estate investment sales

 

(1,825)

 

 

(975)

Assets damaged due to hurricanes

 

 -

 

 

3,286 

Depreciation and amortization

 

362,272 

 

 

334,426 

Equity in earnings of unconsolidated real estate entities

 

(90,529)

 

 

(57,235)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

real estate entities

 

94,325 

 

 

39,887 

Foreign currency exchange (gain) loss

 

(12,738)

 

 

44,452 

Share-based compensation expense

 

51,836 

 

 

25,505 

Other

 

45,678 

 

 

55,671 

Total adjustments

 

449,019 

 

 

445,017 

Net cash flows from operating activities

 

1,578,336 

 

 

1,502,519 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(92,530)

 

 

(84,797)

Construction in process

 

(256,592)

 

 

(240,482)

Acquisition of real estate facilities and intangible assets

(107,775)

 

 

(81,676)

Distributions in excess of retained earnings from

 

 

 

 

 

unconsolidated real estate entities

 

91,927 

 

 

 -

Proceeds from sale of real estate investments

 

3,390 

 

 

5,596 

Net cash flows from investing activities

 

(361,580)

 

 

(401,359)

Cash flows from financing activities:

 

 

 

 

 

Repayments on notes payable

 

(1,329)

 

 

(1,267)

Issuance of notes payable

 

 -

 

 

992,129 

Issuance of preferred shares

 

 -

 

 

561,177 

Issuance of common shares

 

7,943 

 

 

34,754 

Redemption of preferred shares

 

 -

 

 

(922,500)

Cash paid upon vesting of restricted share units

 

(10,849)

 

 

(12,409)

Acquisition of noncontrolling interests

 

 -

 

 

(14,425)

Contributions by noncontrolling interests

 

1,342 

 

 

1,066 

Distributions paid to Public Storage shareholders

 

(1,209,399)

 

 

(1,227,597)

Distributions paid to noncontrolling interests

 

(5,262)

 

 

(5,540)

Net cash flows from financing activities

 

(1,217,554)

 

 

(594,612)

Net cash flows from operating, investing, and financing activities

 

(798)

 

 

506,548 

Net effect of foreign exchange translation

 

(143)

 

 

(165)

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

$

(941)

 

$

506,383 

 

 

 

 

 

 



See accompanying notes.

5

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30,



2018

 

2017



 

 

 

 

 

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

 

 

 

 

 

Cash and equivalents

$

433,376 

 

$

183,688 

Restricted cash included in other assets

 

22,677 

 

 

28,885 



$

456,053 

 

$

212,573 



 

 

 

 

 

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

 

 

 

 

 

Cash and equivalents

$

432,525 

 

$

694,233 

Restricted cash included in other assets

 

22,587 

 

 

24,723 



$

455,112 

 

$

718,956 



 

 

 

 

 

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 



 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

170 

 

$

(595)

Investments in unconsolidated real estate entities

 

9,045 

 

 

(19,613)

Notes payable

 

(12,821)

 

 

44,262 

Accumulated other comprehensive gain (loss)

 

3,463 

 

 

(24,219)



 

 

 

 

 

Accrued development costs and capital expenditures:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(877)

 

 

2,272 

Construction in process

 

(10,819)

 

 

(10,527)

Accrued and other liabilities

 

11,696 

 

 

8,255 



 



 

See accompanying notes.

6

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

1.Description of the Business

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

At September 30, 2018, we have direct and indirect equity interests in 2,418 self-storage facilities (with approximately 161 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Self Storage SA (“Shurgard Europe”), which owns 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 September 30, 2018, we have an approximate 42% common equity interest in PSB.

See Note 13 ‘Subsequent Events” for further information on an initial global offering of Shurgard Europe’s shares.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 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. 

 

7

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

We account for our investments in entities that we do not consolidate but have significant influence over using the equity method of accounting.  These entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”, eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary.  Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. 

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

Collectively, at September 30, 2018, the Company and the Subsidiaries own 2,418 self-storage facilities in the U.S., one self-storage facility in London, England and three commercial facilities in the U.S.  At September 30, 2018, the Unconsolidated Real 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 September 30, 2018, we had no tax benefits that were not recognized.

Real Estate Facilities

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

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

 

8

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Other Assets

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

Accrued and Other Liabilities

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

Cash Equivalents, Marketable Securities and Other Financial Instruments

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

Fair Value

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

We estimate the fair value of our cash and equivalents, marketable securities, other assets, debt, and other liabilities by discounting the related future cash flows at a rate based upon quoted interest rates for securities that have similar characteristics such as credit quality and time to maturity.  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 September 30, 2018, due primarily to our investment in Shurgard Europe (Note 4) and our notes payable denominated in Euros (Note 6), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

Goodwill and Other Intangible Assets

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

Goodwill totaled $174.6 million at September 30, 2018 and December 31, 2017.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of

 

9

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

$18.8 million at September 30, 2018 and December 31, 2017.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived assets and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At September 30, 2018, these intangibles had a net book value of $15.9 million ($21.5 million at December 31, 2017).  Accumulated amortization totaled $29.0 million at September 30, 2018 ($31.0 million at December 31, 2017), and amortization expense of $12.7 million and $11.9 million was recorded in the nine months ended September 30, 2018 and 2017, respectively.  The estimated future amortization expense for our finite-lived intangible assets at September 30, 2018 is approximately $3.3 million in the remainder of 2018, $6.3 million in 2019 and $6.3 million thereafter.  During the nine months ended September 30, 2018, intangibles increased $7.1 million in connection with the acquisition of self-storage facilities (Note 3). 

Evaluation of Asset Impairment

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

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

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

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

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

Casualty Loss

We record casualty losses for a) the book value of assets destroyed and b) incremental repair, clean-up, and other costs associated with the casualty.  Insurance proceeds are recorded as a reduction in casualty loss when all uncertainties of collection are satisfied.  During the three and nine months ended September 30, 2017, we incurred casualty losses totaling $7.8 million, comprised of $3.3 million in book value of assets damaged and $4.5 million in repairs and maintenance incurred in connection with Hurricanes Harvey and Irma. 

 

10

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Revenue and Expense Recognition

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

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities.  If these estimates are incorrect, the timing and amount of expense recognition could be incorrect.  Cost of operations (including advertising expenditures), general and administrative expense, and interest expense are expensed as incurred. 

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.160 U.S. Dollars per Euro at September 30, 2018 (1.198 at December 31, 2017), and average exchange rates of 1.162 and 1.175 for the three months ended September 30, 2018 and 2017, respectively, and average exchange rates of 1.194 and 1.113 for the nine months ended September 30, 2018 and 2017, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income

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

Recent Accounting Pronouncements and Guidance

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires revenue to be based upon the consideration expected from customers for promised goods or 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

 

11

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief effective January 1, 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-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 $4,162,000 for the nine months ended September 30, 2017 as compared to the current presentation on the statement of cash flows.

Net Income per Common Share

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

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



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,975 

 

 

173,715 

 

 

173,933 

 

 

173,560 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 



based on treasury stock method

 

373 

 

 

525 

 

 

307 

 

 

568 



Diluted weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

174,348 

 

 

174,240 

 

 

174,240 

 

 

174,128 





3.Real Estate Facilities



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

 

12

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 







 

 

 



 

 



 

Nine Months Ended



 

September 30, 2018



 

(Amounts in thousands)



Operating facilities, at cost:

 

 



Beginning balance

$

14,665,989 



Capital expenditures to maintain real estate facilities

93,407 



Acquisitions

 

100,632 



Dispositions

 

(1,686)



Developed or redeveloped facilities opened for operation

278,133 



Impact of foreign exchange rate changes

 

(582)



Ending balance

 

15,135,893 



Accumulated depreciation:

 

 



Beginning balance

 

(5,700,331)



Depreciation expense

 

(341,464)



Dispositions

 

121 



Impact of foreign exchange rate changes

 

412 



Ending balance

 

(6,041,262)



Construction in process:

 

 



Beginning balance

 

264,441 



Current development

 

267,411 



Developed or redeveloped facilities opened for operation

(278,133)



Ending balance

 

253,719 



Total real estate facilities at September 30, 2018

$

9,348,350 

During the nine months ended September 30, 2018, we acquired 16 self-storage facilities (1.0 million net rentable square feet), for a total cost of $107.8 million in cash, of which $7.1 million was allocated to intangible assets.  We completed development and redevelopment activities costing $278.1 million during the nine months ended September 30, 2018, adding 2.4 million net rentable square feet of self-storage space.  Construction in process at September 30, 2018 consists of projects to develop new self-storage facilities and redevelop existing self-storage facilities, which will build 5.4 million net rentable square feet of storage space at an aggregate estimated cost of approximately $596.4 million.  During the nine months ended September 30, 2018, we sold portions of real estate facilities in connection with eminent domain proceedings for $3.4 million in cash proceeds and recorded a related gain on sale of real estate of approximately $1.8 million.

4.Investments in Unconsolidated Real Estate Entities

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

 

13

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 





 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at



 

September 30, 2018

 

December 31, 2017



 



PSB

$

433,809 

 

$

400,133 



Shurgard Europe

 

185,596 

 

 

324,040 



Total

$

619,405 

 

$

724,173 









 

 

 

 

 

 

 

 

 

 

 

 



 

Equity in Earnings of Unconsolidated Real Estate Entities for the



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 



PSB

$

13,008 

 

$

9,261 

 

$

73,451 

 

$

35,694 



Shurgard Europe

 

4,763 

 

 

7,243 

 

 

17,078 

 

 

19,484 



Legacy Institutional

 

 

 

 

 

 

 

 

 

 

 



Partnership

 

 -

 

 

714 

 

 

 -

 

 

2,057 



Total

$

17,771 

 

$

17,218 

 

$

90,529 

 

$

57,235 



During the nine months ended September 30, 2018 and 2017, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $186.3 million and $39.9 million, respectively.  For the nine months ended September 30, 2018, $91.9 million of the distributions received exceeded the retained earnings of the Unconsolidated Real Estate Entities and are presented as an investing activity on our statement of cash flows.    At September 30, 2018, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $66.8 million ($67.3 million at December 31, 2017).  This differential is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $1.1 million and $1.0 million during the nine months ended September 30, 2018 and 2017, respectively.  

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 42% common equity interest in PSB as of September 30, 2018 and December 31, 2017, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB.  The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at September 30, 2018 ($127.09 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.8 billion.  At September 30, 2018, the adjusted tax basis of our investment in PSB approximates book value.    

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

 

14

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 







 

 

 

 

 

 



 

2018

 

2017



 

(Amounts in thousands)



For the nine months ended September 30,

 

 

 

 

 



Revenues

$

309,391 

 

$

300,342 



Costs of operations

 

(95,910)

 

 

(92,962)



Depreciation and amortization

 

(73,505)

 

 

(70,465)



General and administrative

 

(7,099)

 

 

(7,019)



Other items

 

1,575 

 

 

(1,131)



Gains on sale of real estate

 

85,283 

 

 

5,074 



Net income before allocation to preferred shareholders

 

 

 

 

 



and restricted share unitholders

 

219,735 

 

 

133,839 



Allocations to preferred shareholders and

 

 

 

 

 



restricted share unitholders

 

(40,513)

 

 

(45,954)



Net income allocated to common shareholders

 

 

 

 

 



and LP Unitholders

$

179,222 

 

$

87,885 



 

 

 

 

 

 



 

 

 

 

 

 



 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

(Amounts in thousands)



 

 

 

 

 

 



 

 

 

 

 

 



Total assets (primarily real estate)

$

2,063,377 

 

$

2,100,159 



Preferred stock called for redemption

 

 -

 

 

130,000 



Other liabilities

 

85,978 

 

 

80,223 



Equity:

 

 

 

 

 



Preferred stock

 

959,750 

 

 

959,750 



Common equity and LP units

 

1,017,649 

 

 

930,186 



Investment in Shurgard Europe

For all periods presented, we owned 31,268,459 shares of Shurgard Europe representing 49% of the shares outstanding and our joint venture partner owned the remaining sharesSee Note 13 “Subsequent Events” for further information on an initial global offering of Shurgard Europe’s common shares. Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income and 49% of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark.  The remaining 51% of the license fees are classified as interest and other income on our income statement. 

During the three months ended September 30, 2018, Shurgard Europe paid a cash dividend to its shareholders, of which our equity share was $145.4 million. 

Changes in foreign currency exchange rates decreased our investment in Shurgard Europe by approximately $9.0 million and increased it by $19.6 million in the nine months ended September 30, 2018 and 2017, respectively

 

15

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods, rather than our pro rata share.  Our equity earnings in Shurgard Europe are based upon our acquired book basis under GAAP, while Shurgard’s separate financial statements are presented in accordance with International Financial Reporting Standards (“IFRS”).  For Shurgard Europe, the primary difference between IFRS and GAAP is the use of fair value accounting for its real estate under IFRS, while GAAP presents real estate at historical cost.  Net income is affected by the corresponding periodic changes in the fair value of real estate under IFRS, as compared to the recognition of periodic depreciation expense under GAAP, combined with the related net impact upon deferred income tax expense. 





 

 

 

 

 

 

 



 

2018

 

2017

 



 

(Amounts in thousands)

 



For the nine months ended September 30,

 

 

 

 

 

 



Self-storage and ancillary revenues

$

213,746 

 

$

194,973 

 



Self-storage and ancillary cost of operations

 

(78,242)

 

 

(72,233)

 



Depreciation and amortization

 

(55,429)

 

 

(45,194)

 



General and administrative

 

(8,729)

 

 

(8,971)

 



Interest expense on third party debt 

 

(16,860)

 

 

(15,465)

 



Trademark license fee payable to Public Storage

 

(2,139)

 

 

(1,947)

 



Income tax expense

 

(18,618)

 

 

(12,622)

 



Gain on real estate investment sale

 

1,969 

 

 

 -

 



Other, net (a)

 

(2,984)

 

 

(725)

 



 

 

 

 

 

 

 



Net income

$

32,714 

 

$

37,816 

 



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

 

1.194 

 

 

1.113 

 



 

 

 

 

 

 

 



         (a) Amounts for the nine months ended September 30, 2018 include $2,971,000 in incremental

 



              costs incurred with respect to Shurgard Europe's initial global offering.  See Note 13.

 



 

 

 

 

 

 

 



 

September 30,

 

December 31,

 



 

2018

 

2017

 



 

 

(Amounts in thousands)

 



 

 

 

 

 

 

 



Total assets (primarily self-storage facilities)

$

1,406,216 

 

$

1,416,477 

 



Total debt to third parties

 

976,217 

 

 

726,617 

 



Other liabilities

 

169,089 

 

 

143,638 

 



Equity

 

260,910 

 

 

546,222 

 



 

 

 

 

 

 

 



Exchange rate of Euro to U.S. Dollar

 

1.160 

 

 

1.198 

 



See Note 13 “Subsequent Events” for further information on an initial global offering of Shurgard Europe’s common shares. 

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 September 30, 2018).  We are also required to

 

16

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

pay a quarterly facility fee ranging from 0.080% per annum to 0.250% per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value (0.080% per annum at September 30, 2018).  At September 30, 2018 and October 30,  2018, we had no outstanding borrowings under this Credit Facility.  We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling $16.1 million at September 30, 2018 and December 31, 2017.  The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at September 30, 2018.

6.Notes Payable

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Amounts at September 30, 2018

 

 



Coupon

 

Effective

 

 

 

 

Unamortized

 

 

Book

 

 

Fair 

 

 

Book Value at



Rate

 

Rate

 

 

Principal

 

Costs

 

 

Value

 

 

Value

 

 

December 31, 2017



 

 

 

 

($ amounts in thousands)

U.S. Dollar Denominated Unsecured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes due September 2022 

2.370%

 

2.483%

 

$

500,000 

 

$

(2,079)

 

$

497,921 

 

$

481,073 

 

$

497,525 

Notes due September 2027 

3.094%

 

3.218%

 

 

500,000 

 

 

(4,736)

 

 

495,264 

 

 

470,494 

 

 

494,868 



 

 

 

 

 

1,000,000 

 

 

(6,815)

 

 

993,185 

 

 

951,567 

 

 

992,393 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Denominated Unsecured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes due April 2024

1.540%

 

1.540%

 

 

116,046 

 

 

 -

 

 

116,046 

 

 

119,349 

 

 

119,795 

Notes due November 2025 

2.175%

 

2.175%

 

 

280,849 

 

 

 -

 

 

280,849 

 

 

294,039 

 

 

289,921 



 

 

 

 

 

396,895 

 

 

 -

 

 

396,895 

 

 

413,388 

 

 

409,716 

Mortgage Debt, secured by 30 real

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 estate facilities with a net book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 value of $113.9 million

4.020%

 

3.971%

 

 

27,865 

 

 

 -

 

 

27,865 

 

 

28,589 

 

 

29,213 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

$

1,424,760 

 

$

(6,815)

 

$

1,417,945 

 

$

1,393,544 

 

$

1,431,322 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar Denominated Unsecured Debt

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

The U.S. Dollar Notes have various financial covenants, all of which we were in compliance with at September 30, 2018.  Included in these covenants are a) a maximum Debt to Total Assets of 65%  (4.3% at September 30, 2018) and b) a minimum ratio of Adjusted EBITDA to Interest Expense of 1.5x  (66.8x for the twelve months ended September 30, 2018)  as well as covenants limiting the amount we can encumber our properties with mortgage debt. 

Euro Denominated Unsecured Debt

Our euro denominated unsecured notes (the “Euro Notes”) are payable to institutional investors.  The Euro Notes consist of two tranches, (i) €242.0 million issued on November 3, 2015 for $264.3 million in net

 

17

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

proceeds upon converting the Euros to U.S. Dollars and (ii) €100.0 million issued on April 12, 2016 for $113.6 million in net proceeds upon converting the Euros to U.S. Dollars.  Interest is payable semi-annually.  The Euro Notes have various customary financial covenants, all of which we were in compliance with at September 30, 2018. 

We reflect changes in the U.S. Dollar equivalent of the amount payable, as a result of changes in foreign exchange rates as “foreign currency exchange gain (loss)” on our income statement (gains of $2.6 million and $12.7 million for the three and nine months ended September 30, 2018, respectively, as compared to losses of $13.4 million and $44.5 million for the same periods in 2017, respectively).

Mortgage Debt

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

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

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



 

 

 

 

 

 

 

 



Unsecured

 

Mortgage

 

 



Debt

 

Debt

 

Total



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Remainder of 2018

$

 -

 

$

9,916 

 

$

9,916 

2019

 

 -

 

 

1,505 

 

 

1,505 

2020

 

 -

 

 

1,585 

 

 

1,585 

2021

 

 -

 

 

1,503 

 

 

1,503 

2022

 

500,000 

 

 

2,071 

 

 

502,071 

Thereafter

 

896,895 

 

 

11,285 

 

 

908,180 



$

1,396,895 

 

$

27,865 

 

$

1,424,760 

Weighted average effective rate

 

2.6% 

 

 

4.0% 

 

 

2.6% 

Cash paid for interest totaled $27.3 million and $7.6 million for the nine months ended September 30, 2018 and 2017, respectively.  Interest capitalized as real estate totaled $3.5 million and $3.1 million for the nine months ended September 30, 2018 and 2017, respectively.

7.Noncontrolling Interests

At September 30, 2018, the noncontrolling interests represent (i) third-party equity interests in subsidiaries owning 16 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 September 30, 2018, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary.  During the nine months ended September 30, 2018 and 2017, we allocated a total of $4.5 million and $4.7 million, respectively, of income to these interests; and we paid $5.3 million and $5.5 million, respectively, in distributions to these interests. 

During the nine months ended September 30, 2017, we acquired Noncontrolling Interests for $14.4 million  (none for the nine months ended September 30, 2018), in cash, of which $7.7 million was allocated

 

18

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

to Paid-in capital and $6.7 million as a reduction to Noncontrolling Interests.  During the nine months ended September 30, 2018 and 2017, Noncontrolling Interests contributed  $1.3 million and $1.1 million, respectively,  to our subsidiaries.    

8.Shareholders’ Equity



Preferred Shares

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

At September 30, 2018

 

At December 31, 2017



Series

 

Earliest Redemption Date

 

Dividend Rate

 

Shares Outstanding

 

Liquidation Preference

 

Shares Outstanding

 

Liquidation Preference



 

 

 

 

 

 

(Dollar amounts in thousands)



Series U

 

6/15/2017

 

5.625% 

 

11,500 

 

$

287,500 

 

11,500 

 

$

287,500 



Series V

 

9/20/2017

 

5.375% 

 

19,800 

 

 

495,000 

 

19,800 

 

 

495,000 



Series W

 

1/16/2018

 

5.200% 

 

20,000 

 

 

500,000 

 

20,000 

 

 

500,000 



Series X

 

3/13/2018

 

5.200% 

 

9,000 

 

 

225,000 

 

9,000 

 

 

225,000 



Series Y

 

3/17/2019

 

6.375% 

 

11,400 

 

 

285,000 

 

11,400 

 

 

285,000 



Series Z

 

6/4/2019

 

6.000% 

 

11,500 

 

 

287,500 

 

11,500 

 

 

287,500 



Series A

 

12/2/2019

 

5.875% 

 

7,600 

 

 

190,000 

 

7,600 

 

 

190,000 



Series B

 

1/20/2021

 

5.400% 

 

12,000 

 

 

300,000 

 

12,000 

 

 

300,000 



Series C

 

5/17/2021

 

5.125% 

 

8,000 

 

 

200,000 

 

8,000 

 

 

200,000 



Series D

 

7/20/2021

 

4.950% 

 

13,000 

 

 

325,000 

 

13,000 

 

 

325,000 



Series E

 

10/14/2021

 

4.900% 

 

14,000 

 

 

350,000 

 

14,000 

 

 

350,000 



Series F

 

6/2/2022

 

5.150% 

 

11,200 

 

 

280,000 

 

11,200 

 

 

280,000 



Series G

 

8/9/2022

 

5.050% 

 

12,000 

 

 

300,000 

 

12,000 

 

 

300,000 



Total Preferred Shares

 

 

 

161,000 

 

$

4,025,000 

 

161,000 

 

$

4,025,000 

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

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

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

 

19

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

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

On August 9, 2017, we issued 12.0 million depositary shares, each representing 1/1,000 of a share of our 5.050% Series G Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $300.0 million in gross proceeds, and we incurred $9.9 million in issuance costs. 

In June 2017, we called for redemption of, and on July 26, 2017, we redeemed our 5.900% Series S Preferred Shares, at par.  We recorded a $14.6 million allocation of income from our common shareholders to the holders of our Preferred Shares in the nine months ended September 30, 2017 in connection with this redemption.

In August 2017, we called for redemption of, and on September 28, 2017, we redeemed our 5.750% Series T Preferred Shares, at par.  We recorded a $14.7 million allocation of income from our common shareholders to the holders of our Preferred Shares in the three and nine months ended September 30, 2017 in connection with this redemption.

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $349.2 million ($2.00 per share) and $348.6 million ($2.00 per share) for the three months ended September 30, 2018 and 2017, respectively, and $1.0 billion ($6.00 per share) and $1.0 billion  ($6.00 per share) for the nine months ended September 30, 2018 and 2017, respectively.  Preferred share dividends totaled $54.1 million and $61.1 million for the three months ended September 30, 2018 and 2017, respectively, and $162.2 million and $182.5 million for the nine months ended September 30, 2018 and 2017, respectively.

9.Related Party Transactions

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

At September 30, 2018, B. Wayne Hughes and Tamara Hughes Gustavson together owned and 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.  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 $980,000 and $752,000 for the nine months ended September 30, 2018 and 2017, respectively.  Our right to continue receiving these premiums may be qualified.

10.Share-Based Compensation

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

 

20

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

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

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

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

In February 2018, we announced that our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company.  Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees.  For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire.  Accordingly, all remaining share-based compensation expense for these two executives will now be amortized by the end of 2018. 

See also “net 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 nine months ended September 30, 2018, we recorded $4.0 million and $10.9 million, respectively, in compensation expense related to stock options, as compared to $2.3 million and $5.1 million, for the same periods in 2017.  Amounts for the three and nine months ended September 30, 2018 include $1.8 million and $5.3 million, respectively, in connection with the acceleration of amortization of grants to our CEO and CFO noted above.  Amounts for the nine months ended September 30, 2017 reflect a reduction in compensation expense of $0.8 million related to stock options forfeited during the periods.

During the nine months ended September 30, 2018,  200,000 stock options were granted, 136,805 options were exercised and 8,000 options were forfeited.  A total of 2,464,112 stock options were outstanding at September 30, 2018  (2,408,917 at December 31, 2017) and have an average exercise price of $199.64.

 

21

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Restricted Share Units

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

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

During the nine months ended September 30, 2018,  63,395 RSUs were granted, 50,975 RSUs were forfeited and 121,191 RSUs vested.  This vesting resulted in the issuance of 69,470 common shares.  In addition, tax deposits totaling $10.9 million ($12.4 million for the same period in 2017) were made on behalf of employees in exchange for 51,721 common shares withheld upon vesting.  A total of 690,358 RSUs were outstanding at September 30, 2018  (799,129 at December 31, 2017)

A total of $14.7 million and $41.9 million in RSU expense was recorded for the three and nine months ended September 30, 2018,  respectively, which includes approximately $0.1 million and $1.0 million in employer taxes incurred upon vesting, as compared to $10.7 million and $21.1 million for the same periods in 2017, which includes approximately $0.1 million and $0.7 million, respectively, in employer taxes incurred upon vesting.    Amounts for the three and nine months ended September 30, 2018 include $5.3 million and $17.3 million, respectively, in connection with the acceleration of amortization on grants to our CEO and CFO as discussed above.  Amounts for the nine months ended September 30, 2017 reflect a reduction in compensation expense of $4.6 million related RSUs forfeited during the 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.

 

22

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Ancillary Operations

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

Investment in PSB

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

 

23

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

666,616 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

666,616 

Ancillary operations

 

 -

 

 

39,752 

 

 

 -

 

 

 -

 

 

 -

 

 

39,752 



 

666,616 

 

 

39,752 

 

 

 -

 

 

 -

 

 

 -

 

 

706,368 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

183,637 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

183,637 

Ancillary operations

 

 -

 

 

11,907 

 

 

 -

 

 

 -

 

 

 -

 

 

11,907 



 

183,637 

 

 

11,907 

 

 

 -

 

 

 -

 

 

 -

 

 

195,544 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

482,979 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

482,979 

Ancillary operations

 

 -

 

 

27,845 

 

 

 -

 

 

 -

 

 

 -

 

 

27,845 

  

 

482,979 

 

 

27,845 

 

 

 -

 

 

 -

 

 

 -

 

 

510,824 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(124,516)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(124,516)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(27,429)

 

 

(27,429)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7,020 

 

 

7,020 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(8,094)

 

 

(8,094)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 

 -

 

 

 -

 

 

13,008 

 

 

4,763 

 

 

 -

 

 

17,771 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,612 

 

 

2,612 

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,401 

 

 

1,401 

Net income (loss)

$

358,463 

 

$

27,845 

 

$

13,008 

 

$

4,763 

 

$

(24,490)

 

$

379,589 



 

24

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

646,238 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

646,238 

Ancillary operations

 

 -

 

 

40,123 

 

 

 -

 

 

 -

 

 

 -

 

 

40,123 



 

646,238 

 

 

40,123 

 

 

 -

 

 

 -

 

 

 -

 

 

686,361 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

173,315 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

173,315 

Ancillary operations

 

 -

 

 

17,304 

 

 

 -

 

 

 -

 

 

 -

 

 

17,304 



 

173,315 

 

 

17,304 

 

 

 -

 

 

 -

 

 

 -

 

 

190,619 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

472,923 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

472,923 

Ancillary operations

 

 -

 

 

22,819 

 

 

 -

 

 

 -

 

 

 -

 

 

22,819 

  

 

472,923 

 

 

22,819 

 

 

 -

 

 

 -

 

 

 -

 

 

495,742 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(113,320)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(113,320)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(22,311)

 

 

(22,311)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

4,569 

 

 

4,569 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,389)

 

 

(2,389)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

9,261 

 

 

7,243 

 

 

714 

 

 

17,218 

Foreign currency exchange loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,446)

 

 

(13,446)

Casualty loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,789)

 

 

(7,789)

Net income (loss)

$

359,603 

 

$

22,819 

 

$

9,261 

 

$

7,243 

 

$

(40,652)

 

$

358,274 



 

25

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

1,943,359 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

1,943,359 

Ancillary operations

 

 -

 

 

118,461 

 

 

 -

 

 

 -

 

 

 -

 

 

118,461 



 

1,943,359 

 

 

118,461 

 

 

 -

 

 

 -

 

 

 -

 

 

2,061,820 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

545,700 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

545,700 

Ancillary operations

 

 -

 

 

33,648 

 

 

 -

 

 

 -

 

 

 -

 

 

33,648 



 

545,700 

 

 

33,648 

 

 

 -

 

 

 -

 

 

 -

 

 

579,348 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

1,397,659 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,397,659 

Ancillary operations

 

 -

 

 

84,813 

 

 

 -

 

 

 -

 

 

 -

 

 

84,813 

  

 

1,397,659 

 

 

84,813 

 

 

 -

 

 

 -

 

 

 -

 

 

1,482,472 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(362,272)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(362,272)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(90,278)

 

 

(90,278)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,892 

 

 

18,892 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(24,589)

 

 

(24,589)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

73,451 

 

 

17,078 

 

 

 -

 

 

90,529 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,738 

 

 

12,738 

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,825 

 

 

1,825 

Net income (loss)

$

1,035,387 

 

$

84,813 

 

$

73,451 

 

$

17,078 

 

$

(81,412)

 

$

1,129,317 





 

26

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

1,878,215 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

1,878,215 

Ancillary operations

 

 -

 

 

118,005 

 

 

 -

 

 

 -

 

 

 -

 

 

118,005 



 

1,878,215 

 

 

118,005 

 

 

 -

 

 

 -

 

 

 -

 

 

1,996,220 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

516,488 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

516,488 

Ancillary operations

 

 -

 

 

39,611 

 

 

 -

 

 

 -

 

 

 -

 

 

39,611 



 

516,488 

 

 

39,611 

 

 

 -

 

 

 -

 

 

 -

 

 

556,099 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

1,361,727 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,361,727 

Ancillary operations

 

 -

 

 

78,394 

 

 

 -

 

 

 -

 

 

 -

 

 

78,394 

  

 

1,361,727 

 

 

78,394 

 

 

 -

 

 

 -

 

 

 -

 

 

1,440,121 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(334,426)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(334,426)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(62,331)

 

 

(62,331)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,722 

 

 

12,722 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(4,553)

 

 

(4,553)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

35,694 

 

 

19,484 

 

 

2,057 

 

 

57,235 

Foreign currency exchange loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(44,452)

 

 

(44,452)

Casualty loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,789)

 

 

(7,789)

Gain on sale of real estate

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

975 

 

 

975 

Net income (loss)

$

1,027,301 

 

$

78,394 

 

$

35,694 

 

$

19,484 

 

$

(103,371)

 

$

1,057,502 



 

27

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 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 carry property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles.  Our deductible for general liability is $2.0 million per occurrence.  Our annual deductibles for property losses are $25.0 million for first occurrence with an aggregate of $35.0 million for multiple occurrences and $5.0 million per occurrence thereafter.  Insurance carriers’ aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.

We reinsure a program that provides insurance to our customers from an independent third-party insurer.  This program covers customer claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit.  We reinsure all risks in this program, but purchase insurance to cover this exposure for a limit of $15.0 million for losses in excess of $5.0 million per occurrence. We are subject to licensing requirements and regulations in several states.  Customers participate in the program at their option.  At September 30, 2018, there were approximately 924,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.9 billion.

Construction Commitments

We have construction commitments representing future expected payments for construction under contract totaling $209.2  million at September 30, 2018.  We expect to pay approximately $36.6 million in the remainder of 2018, $146.7 million in 2019 and $25.9 million in 2020 for these construction commitments.



13.Subsequent Events

Subsequent to September 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) nine self-storage facilities, with 585,000 net rentable square feet, for $79.7 million. 



On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol.  In the Offering, Shurgard Europe issued 21.7 million of its shares to third parties at a price of €23 per share, for €500 million in gross proceeds.  There is a potential “green shoe” for an additional €75 million in gross proceeds at €23 per share.  Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 36.6% as a result of the Offering  (35.2% if the “green shoe” option is exercised).  While we did not sell any of our shares in the Offering, we will record a gain on disposition in the three months ending December 31, 2018, as if we had sold a proportionate share of our investment in Shurgard Europe. 

 

28

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

On October 18, 2018, we sold our property in West London to Shurgard Europe for $42.1 million.  We will record a gain on disposition  in the three months ending December 31, 2018. 

 

 

29

 


 

 

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;

 

30

 


 

 

·

delays in the development process;

·

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

·

economic uncertainty due to the impact of war or terrorism.

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

Critical Accounting Policies

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

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

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

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

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

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

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

 

31

 


 

 

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

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

Overview

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

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

We plan on growing organically as well as through the acquisition and development of new facilities and expanding our existing self-storage facilities.  Since the beginning of 2013 through September 30, 2018, we acquired a total of 287 facilities with 20.0 million net rentable square feet from third parties for approximately $2.6 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.2 billion, adding approximately 10.7 million net rentable square feet. 

Subsequent to September 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) nine self-storage facilities for $79.7 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of September 30, 2018, we had additional development and redevelopment projects to build approximately 5.4 million net rentable square feet at a total cost of approximately $596.4 million.  We expect to continue to seek additional development projects; however, the level of such activity may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities. 

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

On July 13, 2018, we received a cash distribution from Shurgard Self Storage SA (“Shurgard Europe”) totaling $145.4 million. 

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

 

32

 


 

 

On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol.  In the Offering, Shurgard Europe issued 21.7 million of its common shares to third parties at a price of €23 per share, for €500 million in gross proceeds.  There is a potential “green shoe” for an additional €75 million in gross proceeds at €23 per shareThe gross proceeds were used to repay short-term borrowings, invest in real estate assets, and for other corporate purposes.  Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 36.6% as a result of the Offering (35.2% assuming exercise of the “green shoe” option).  We  did not sell any shares in the Offering.  See “Investment in Shurgard Europe” below for more information

As of September 30, 2018, our capital resources over the next year are expected to be approximately $1.2 billion which exceeds our current planned capital needs over the next year of approximately $433.4 million.  Our capital resources include: (i) $432.5 million of cash as of September 30, 2018, (ii) $483.9 million of available borrowing capacity on our revolving line of credit, (iii) $42.1 million cash from the sale of our West London/Kensington self-storage facility to Shurgard Europe on October 18, 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) $342.7 million of remaining spend on our current development pipeline, (ii) $79.7 million in property acquisitions currently under contract, and (iii) $11.0 million in principal repayments on existing debt.  Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties.  In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

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

Results of Operations

Operating Results for the Three Months Ended September 30, 2018

For the three months ended September 30, 2018, net income allocable to our common shareholders was $322.7 million or $1.85 per diluted common share, compared to $279.7 million or $1.61 per diluted common share in 2017 representing an increase of $43.0 million or $0.24 per diluted common share.  The increase is due primarily to (i) a $10.1 million increase in self-storage net operating income (described below), (ii) a $16.1 million increase due to the impact of foreign currency exchange gains and losses associated with our euro denominated debt, (iii) a $14.7 million allocation to preferred shareholders associated with preferred share redemptions in the three months ended September 30, 2017, and (iv) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in the three months ended September 30, 2017.  These impacts were offset partially by a $7.1 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our CEO and CFO in 2018 as a result of their upcoming retirement.

The $10.1 million increase in self-storage net operating income is a result of a $2.5 million increase in our Same Store Facilities (as defined below) and a $7.6 million increase in our Non Same Store Facilities (as defined below).  Revenues for the Same Store Facilities increased 1.2% or $6.6 million in the three months ended September 30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by 2.8% or $4.1 million in the three months ended September 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 153 self-storage facilities acquired and developed since January 2016. 

Operating Results for the Nine Months Ended September 30, 2018

For the nine months ended September 30, 2018, net income allocable to our common shareholders was $958.8 million or $5.50 per diluted common share, compared to $837.5 million or $4.81 per diluted common share in

 

33

 


 

 

2017 representing an increase of $121.3 million or $0.69 per diluted common share.  The increase is due primarily to (i) a $35.9 million increase in self-storage net operating income (described below), (ii) our $34.9 million equity share of gains recorded by PS Business Parks in the nine months ended September 30, 2018, (iii) a $57.2 million increase due to the impact of foreign currency exchange gains and losses associated with our euro denominated debt, (iv) a $29.3 million allocation to preferred shareholders associated with preferred share redemptions in the nine months ended September 30, 2017, and (v) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in the nine months ended September 30, 2017.  These impacts were offset partially by a $28.0 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our CEO and CFO in 2018 as a result of their upcoming retirement and the reversal of share-based compensation accruals forfeited by retiring executives in 2017.

The $35.9 million increase in self-storage net operating income is a result of a $13.7 million increase in our Same Store Facilities and $22.2 million increase in our Non Same Store Facilities.  Revenues for the Same Store Facilities increased 1.6% or $26.6 million in the nine months ended September 30, 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by 2.9% or $12.9 million in the nine months ended September 30, 2018 as compared to 2017, due primarily to increased property taxes.  The increase in net operating income of $22.2 million for the Non Same Store Facilities is due primarily to the impact of 153 self-storage facilities acquired and developed since January 2016.

Funds from Operations and Core Funds from Operations

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

For the three months ended September 30, 2018, FFO was $2.66 per diluted common share, as compared to $2.35 for the same period in 2017, representing an increase of 13.2%, or $0.31 per diluted common share.

For the nine months ended September 30, 2018, FFO was $7.68 per diluted common share, as compared to $7.00 for the same period in 2017, representing an increase of 9.7%, or $0.68 per diluted common share.

 

34

 


 

 

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



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017



 

 

(Amounts in thousands, except per share data)

Reconciliation of Diluted Earnings per Share to

 

 

 

 

 

 

 

 

 

 

 

 

FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

$

1.85 

 

$

1.61 

 

$

5.50 

 

$

4.81 

Eliminate amounts per share excluded from FFO:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

0.82 

 

 

0.75 

 

 

2.40 

 

 

2.21 

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(0.01)

 

 

(0.01)

 

 

(0.22)

 

 

(0.02)

FFO per share

 

$

2.66 

 

$

2.35 

 

$

7.68 

 

$

7.00 



 

 

 

 

 

 

 

 

 

 

 

 

Computation of FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

 

$

322,679 

 

$

279,717 

 

$

958,798 

 

$

837,529 

Eliminate items excluded from FFO:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

124,516 

 

 

113,320 

 

 

362,272 

 

 

334,426 

Depreciation from unconsolidated

 

 

 

 

 

 

 

 

 

 

 

 

real estate investments

 

 

19,615 

 

 

18,054 

 

 

58,238 

 

 

52,635 

Depreciation allocated to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

(892)

 

 

(858)

 

 

(2,824)

 

 

(2,657)

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

 

(1,766)

 

 

 -

 

 

(37,530)

 

 

(3,077)

FFO allocable to common shares

 

$

464,152 

 

$

410,233 

 

$

1,338,954 

 

$

1,218,856 

Diluted weighted average common shares

 

 

174,348 

 

 

174,240 

 

 

174,240 

 

 

174,128 

FFO per share

 

$

2.66 

 

$

2.35 

 

$

7.68 

 

$

7.00 

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities,  (iii) acceleration of accruals due to the upcoming retirement of our CEO and CFO and reversals of accruals with respect to share-based awards forfeited by retiring senior executive officers, and (iv) certain other non-cash and/or nonrecurring income or expense items.  We review Core FFO per share to evaluate our ongoing operating performance and we believe it is used by investors and REIT analysts in a similar manner.  However, Core FFO per share is not a substitute for net income per share.  Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.

 

35

 


 

 

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

$

2.66 

 

$

2.35 

 

13.2% 

 

$

7.68 

 

$

7.00 

 

9.7% 

Eliminate the per share impact of items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluded from Core FFO, including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

our equity share from investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (gain) loss

(0.01)

 

 

0.08 

 

 

 

 

(0.07)

 

 

0.26 

 

 

Application of EITF D-42

 

 -

 

 

0.10 

 

 

 

 

 -

 

 

0.18 

 

 

Casualty losses and tenant claims

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

due to hurricanes

 

 -

 

 

0.07 

 

 

 

 

 -

 

 

0.07 

 

 

Acceleration (reversal) of share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation expense due to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

executive officer retirement

 

0.04 

 

 

 -

 

 

 

 

0.13 

 

 

(0.03)

 

 

Other items

 

0.01 

 

 

0.01 

 

 

 

 

0.01 

 

 

 -

 

 

Core FFO per share

$

2.70 

 

$

2.61 

 

3.4% 

 

$

7.75 

 

$

7.48 

 

3.6% 



Analysis of Net Income by Reportable Segment

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

Self-Storage Operations

Our self-storage operations are analyzed in two groups: (i) the 2,046 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 September 30, 2018 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.





 

36

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-Storage Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

 

 

 

Percentage

 

 

 

 

 

Percentage



2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Dollar amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

$

574,523 

 

$

567,969 

 

1.2% 

 

$

1,680,855 

 

$

1,654,263 

 

1.6% 

Non Same Store Facilities 

 

92,093 

 

 

78,269 

 

17.7% 

 

 

262,504 

 

 

223,952 

 

17.2% 



 

666,616 

 

 

646,238 

 

3.2% 

 

 

1,943,359 

 

 

1,878,215 

 

3.5% 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

152,206 

 

 

148,079 

 

2.8% 

 

 

456,426 

 

 

443,513 

 

2.9% 

Non Same Store Facilities

 

31,431 

 

 

25,236 

 

24.5% 

 

 

89,274 

 

 

72,975 

 

22.3% 



 

183,637 

 

 

173,315 

 

6.0% 

 

 

545,700 

 

 

516,488 

 

5.7% 

Net operating income (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

422,317 

 

 

419,890 

 

0.6% 

 

 

1,224,429 

 

 

1,210,750 

 

1.1% 

Non Same Store Facilities

 

60,662 

 

 

53,033 

 

14.4% 

 

 

173,230 

 

 

150,977 

 

14.7% 

Total net operating income

 

482,979 

 

 

472,923 

 

2.1% 

 

 

1,397,659 

 

 

1,361,727 

 

2.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense:

 

 

 

 

 

Same Store Facilities

 

(92,481)

 

 

(90,103)

 

2.6% 

 

 

(270,625)

 

 

(266,552)

 

1.5% 

Non Same Store Facilities

 

(32,035)

 

 

(23,217)

 

38.0% 

 

 

(91,647)

 

 

(67,874)

 

35.0% 

Total depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(124,516)

 

 

(113,320)

 

9.9% 

 

 

(362,272)

 

 

(334,426)

 

8.3% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

329,836 

 

 

329,787 

 

0.0% 

 

 

953,804 

 

 

944,198 

 

1.0% 

Non Same Store Facilities

 

28,627 

 

 

29,816 

 

(4.0)%

 

 

81,583 

 

 

83,103 

 

(1.8)%

Total net income

$

358,463 

 

$

359,603 

 

(0.3)%

 

$

1,035,387 

 

$

1,027,301 

 

0.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities at period end:

 

 

 

 

 

Same Store Facilities

 

 

 

 

 

 

 

 

 

2,046 

 

 

2,046 

 

 -

Non Same Store Facilities

 

 

 

 

 

 

 

 

 

373 

 

 

317 

 

17.7% 

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

 

 

Same Store Facilities

 

 

 

 

 

 

 

 

 

131,180 

 

 

131,180 

 

 -

Non Same Store Facilities

 

 

 

 

 

 

 

 

 

29,679 

 

 

25,164 

 

17.9% 

(a)

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

Net operating income from our self-storage operations has increased 2.1%  and 2.6%  in the three and nine months ended September 30, 2018, respectively, as compared to the same 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.

   

 

37

 


 

 

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 2,048 facilities at June 30, 2018 to 2,046 at September 30, 2018.  The following table summarizes the historical operating results of these 2,046 facilities (131.2 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 September 30, 2018.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data for the Same Store Facilities (2,046 facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



 

 

 

 

Percentage

 

 

 

 

 

Percentage



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change



(Dollar amounts in thousands, except weighted average amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

549,234 

 

$

542,535 

 

1.2% 

 

$

1,607,298 

 

$

1,580,888 

 

1.7% 

Late charges and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

administrative fees

 

25,289 

 

 

25,434 

 

(0.6)%

 

 

73,557 

 

 

73,375 

 

0.2% 

Total revenues (a)

 

574,523 

 

 

567,969 

 

1.2% 

 

 

1,680,855 

 

 

1,654,263 

 

1.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

59,004 

 

 

55,822 

 

5.7% 

 

 

176,501 

 

 

167,685 

 

5.3% 

On-site property manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payroll

 

28,608 

 

 

28,530 

 

0.3% 

 

 

85,066 

 

 

83,541 

 

1.8% 

Supervisory payroll

 

8,928 

 

 

9,611 

 

(7.1)%

 

 

27,802 

 

 

29,628 

 

(6.2)%

Repairs and maintenance

 

11,251 

 

 

11,407 

 

(1.4)%

 

 

34,367 

 

 

34,478 

 

(0.3)%

Utilities

 

10,871 

 

 

10,697 

 

1.6% 

 

 

31,238 

 

 

30,238 

 

3.3% 

Advertising and selling

7,814 

 

 

6,966 

 

12.2% 

 

 

22,027 

 

 

21,885 

 

0.6% 

Other direct property costs

 

14,814 

 

 

14,169 

 

4.6% 

 

 

44,350 

 

 

42,670 

 

3.9% 

Allocated overhead

 

10,916 

 

 

10,877 

 

0.4% 

 

 

35,075 

 

 

33,388 

 

5.1% 

Total cost of operations (a)

 

152,206 

 

 

148,079 

 

2.8% 

 

 

456,426 

 

 

443,513 

 

2.9% 

Net operating income

 

422,317 

 

 

419,890 

 

0.6% 

 

 

1,224,429 

 

 

1,210,750 

 

1.1% 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

(92,481)

 

 

(90,103)

 

2.6% 

 

 

(270,625)

 

 

(266,552)

 

1.5% 

Net income

$

329,836 

 

$

329,787 

 

0.0% 

 

$

953,804 

 

$

944,198 

 

1.0% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin (before depreciation

 

 

 

 

 

 

and amortization expense)

73.5% 

 

 

73.9% 

 

(0.5)%

 

 

72.8% 

 

 

73.2% 

 

(0.5)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average for the period:

 

 

 

 

 

Square foot occupancy

94.0% 

 

 

94.6% 

 

(0.6)%

 

 

93.4% 

 

 

94.1% 

 

(0.7)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rental income per (b):

 

 

 

 

 

Occupied square foot

$

17.83 

 

$

17.49 

 

1.9% 

 

$

17.49 

 

$

17.08 

 

2.4% 

Available square foot

$

16.75 

 

$

16.54 

 

1.3% 

 

$

16.34 

 

$

16.07 

 

1.7% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy

 

 

 

 

 

 

 

 

 

92.1% 

 

 

93.2% 

 

(1.2)%

Annual contract rent per

 

 

 

 

 

occupied square foot (c)

 

 

 

 

 

 

 

 

$

18.30 

 

$

18.04 

 

1.4% 

 

38

 


 

 

(a)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities.  See “Ancillary Operations” below for more information.

(b)

Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period.  Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period.  These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue.  Late charges are dependent upon the level of delinquency and administrative fees are dependent upon the level of move-ins.  In addition, the rates charged for late charges and administrative fees can vary independently from rental rates.  These measures take into consideration promotional discounts, which reduce rental income.

(c)

Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement.   Contract rates are initially set in the lease agreement upon move-in and we adjust them from time to time with notice.  Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.  

Analysis of Same Store Revenue

Revenues generated by our Same Store Facilities increased by 1.2%  and 1.6%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increases of 1.9%  and 2.4%  in the three and nine months ended September 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  2.4% for the three months ended September 30, 2017 as compared to the same period in 2016, to 1.2% for the three months ended September 30, 2018 as compared to the same period in 2017.  Growth trends decelerated from September 30, 2017 through September 30, 2018, with year over year revenue growth at 2.2% for the three months ended December 31, 2017, 2.1% for the three months ended March 31, 2018 and 1.6% for three months ended June 30, 2018.  We are experiencing softness in demand in substantially all of our major markets, which has led to lower move-in volumes combined with a lack of pricing power with respect to new tenants.  We attribute some of this softness to local economic conditions and, in some markets, most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York and Portland, increased supply of newly constructed self-storage facilities.

Same Store weighted average square foot occupancy was 94.0% and 93.4% during the three and nine months ended September 30, 2018,  respectively, as compared to 94.6%  and 94.1%  for the same periods in 2017, as move-in volume declined in the three and nine months ended September 30, 2018 as compared to the same periods in 2017, partially offset by lower move-out volume.    

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

Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth.  We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs.  Rental rate increases to existing tenants in the three and nine months ended September 30, 2018 have been similar to the same 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 1.4% from September 30, 2017 to September 30, 2018, as compared to a 3.1% increase from December 31, 2016 to December 31, 2017.  These year-over-year increases were primarily driven by annual rate increases given to existing tenants, partially offset by the net impact of replacing vacating tenants with new tenants with lower contract rates, or “rent roll down.”  The reduction in the year over year growth in annual contract rent per occupied foot from 3.1% at the beginning of the year to 1.4% at the end of the quarter is due primarily to increased rent roll down.    

 

39

 


 

 

During the three months ended September 30, 2018, the annual contract rent for tenants who moved in decreased 2.1% to $14.76 per foot as compared to $15.08 for the same period in 2017, and the annual contract rent for tenants who moved out increased 0.7% to $16.64 per foot as compared to $16.52 per foot for the same period in 2017.  During the nine months ended September 30, 2018, the annual contract rent for tenants who moved in decreased 2.9% to $14.37 per foot as compared to $14.80 for the same period in 2017, and the annual contract rent for tenants who moved out increased 1.7% to $16.35 per foot as compared to $16.08 per foot for the same period in 2017.    

In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer.  Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $18.5 million and $58.7 million for the three and nine months ended September 30, 2018, respectively, as compared to $21.7 million and $62.5 million for the same periods in 2017 and are recorded as a reduction to revenue.  The decrease in move-in discounts for the three and nine month periods is due primarily to lower average move-in contractual rates as well as a reduced volume of move-ins.

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

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

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

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

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 2.8%  and 2.9%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increased property tax expense

Property tax expense increased 5.7% and 5.3% in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to higher assessed values.  We expect property tax expense growth of approximately 5.7% in the remainder of 2018 due primarily to higher assessed values.

On-site property manager payroll expense increased 0.3%  and 1.8% in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to higher wage rates.  We expect on-site property manager payroll expense to increase on an inflationary basis in the remainder of 2018.

Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 7.1% and 6.2% in the three and nine months ended

 

40

 


 

 

September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to lower headcount.  We expect similar decreases in the remainder of 2018.

Repairs and maintenance expense decreased 1.4%  and 0.3%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017.  Repair and maintenance costs include snow removal expense totaling $2.8 million in the nine months ended September 30, 2018 as compared to $2.2 million for the same period in 2017 (none in each of the three month periods ended September 30, 2018 and 2017).  Excluding snow removal costs, repairs and maintenance decreased 2.1% in the nine months ended September 30, 2018 as compared to the same period in 2017.

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

Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels.  Changes in usage levels are driven primarily by weather and temperature.  Utility expense increased 1.6%  and 3.3% in the three and nine months ended September 30, 2018, respectively, as compared to the same 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 increased 12.2% and 0.6%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increased Internet marketing expenditures partially offset by, with respect to the nine month period, decreased television advertising spendingIn the remainder of 2018, we expect advertising and selling expense to increase over the same period in 2017, at a level similar to the increase experienced in the three months ended September 30, 2018.  

Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office.  These costs increased 4.6% and 3.9%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due to higher rates on data communication lines and increased credit card feesWe expect inflationary increases in other direct property costs in the remainder of 2018.

Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations.  Such functions include information technology, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer (CEO”) and Chief Financial Officer  (CFO”), which are included in general and administrative expense).  Allocated overhead increased 0.4%  and 5.1%  in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, due primarily to increased information technology expenses.  We expect greater than inflationary increases in allocated overhead in the remainder of 2018 due primarily to increased information technology expenses.

Analysis of Same Store Depreciation and Amortization

Depreciation and amortization for Same Store Facilities increased 2.6%  and 1.5% in the three and nine months ended September 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:

 

41

 


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Quarter Ended

 

 

 



March 31

 

June 30

 

September 30

 

December 31

 

Entire Year



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

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

548,116 

 

$

558,216 

 

$

574,523 

 

 

 

 

 

 

2017

$

536,618 

 

$

549,676 

 

$

567,969 

 

$

555,164 

 

$

2,209,427 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

153,532 

 

$

150,688 

 

$

152,206 

 

 

 

 

 

 

2017

$

148,577 

 

$

146,857 

 

$

148,079 

 

$

118,261 

 

$

561,774 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

58,359 

 

$

59,138 

 

$

59,004 

 

 

 

 

 

 

2017

$

55,831 

 

$

56,032 

 

$

55,822 

 

$

32,320 

 

$

200,005 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repairs and maintenance:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

11,523 

 

$

11,593 

 

$

11,251 

 

 

 

 

 

 

2017

$

11,684 

 

$

11,387 

 

$

11,407 

 

$

11,969 

 

$

46,447 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and selling expense:

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

6,516 

 

$

7,697 

 

$

7,814 

 

 

 

 

 

 

2017

$

6,792 

 

$

8,127 

 

$

6,966 

 

$

6,794 

 

$

28,679 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

$

15.97 

 

$

16.31 

 

$

16.75 

 

 

 

 

 

 

2017

$

15.63 

 

$

16.03 

 

$

16.54 

 

$

16.17 

 

$

16.09 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average realized annual rent per occupied square foot:

 

 

 

2018

$

17.30 

 

$

17.35 

 

$

17.83 

 

 

 

 

 

 

2017

$

16.79 

 

$

16.95 

 

$

17.49 

 

$

17.37 

 

$

17.15 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average occupancy levels for the period:

 

 

 

 

 

 

 

 

2018

 

92.3% 

 

 

94.0% 

 

 

94.0% 

 

 

 

 

 

 

2017

 

93.1% 

 

 

94.6% 

 

 

94.6% 

 

 

93.1% 

 

 

93.8% 

 

42

 


 

 

Analysis of Market Trends

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

 

2017

 

Change

 

 

2018

 

 

2017

 

Change



(Amounts in thousands, except for weighted average data)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles (197 facilities)

$

86,462 

 

$

84,141 

 

2.8% 

 

$

253,420 

 

$

244,445 

 

3.7% 

San Francisco (124 facilities)

 

49,390 

 

 

48,444 

 

2.0% 

 

 

144,406 

 

 

140,660 

 

2.7% 

New York (82 facilities)

 

36,002 

 

 

35,173 

 

2.4% 

 

 

105,047 

 

 

102,137 

 

2.8% 

Seattle-Tacoma (81 facilities)

 

27,029 

 

 

26,795 

 

0.9% 

 

 

78,520 

 

 

76,846 

 

2.2% 

Washington DC (82 facilities)

 

27,063 

 

 

27,182 

 

(0.4)%

 

 

78,773 

 

 

79,055 

 

(0.4)%

Miami (73 facilities)

 

24,689 

 

 

24,057 

 

2.6% 

 

 

72,838 

 

 

71,596 

 

1.7% 

Chicago (129 facilities)

 

30,081 

 

 

30,872 

 

(2.6)%

 

 

88,485 

 

 

90,734 

 

(2.5)%

Atlanta (98 facilities)

 

21,642 

 

 

21,118 

 

2.5% 

 

 

63,025 

 

 

61,657 

 

2.2% 

Houston (70 facilities)

 

16,461 

 

 

16,189 

 

1.7% 

 

 

49,149 

 

 

48,230 

 

1.9% 

Dallas-Ft. Worth (77 facilities)

 

16,040 

 

 

16,700 

 

(4.0)%

 

 

47,682 

 

 

48,940 

 

(2.6)%

Philadelphia (57 facilities)

 

14,818 

 

 

14,420 

 

2.8% 

 

 

42,870 

 

 

41,765 

 

2.6% 

Orlando-Daytona (64 facilities)

 

14,030 

 

 

13,461 

 

4.2% 

 

 

40,992 

 

 

39,239 

 

4.5% 

West Palm Beach (38 facilities)

 

11,888 

 

 

11,516 

 

3.2% 

 

 

34,940 

 

 

34,022 

 

2.7% 

Tampa (47 facilities)

 

11,228 

 

 

11,048 

 

1.6% 

 

 

33,053 

 

 

32,493 

 

1.7% 

Portland (41 facilities)

 

10,144 

 

 

10,327 

 

(1.8)%

 

 

29,788 

 

 

30,080 

 

(1.0)%

All other markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(786 facilities)

 

177,556 

 

 

176,526 

 

0.6% 

 

 

517,867 

 

 

512,364 

 

1.1% 

Total revenues

$

574,523 

 

$

567,969 

 

1.2% 

 

$

1,680,855 

 

$

1,654,263 

 

1.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

71,157 

 

$

69,770 

 

2.0% 

 

$

208,556 

 

$

201,742 

 

3.4% 

San Francisco

 

40,110 

 

 

39,558 

 

1.4% 

 

 

116,782 

 

 

114,045 

 

2.4% 

New York

 

25,494 

 

 

24,876 

 

2.5% 

 

 

72,998 

 

 

71,329 

 

2.3% 

Seattle-Tacoma

 

21,295 

 

 

21,253 

 

0.2% 

 

 

61,019 

 

 

60,161 

 

1.4% 

Washington DC

 

20,282 

 

 

20,572 

 

(1.4)%

 

 

57,974 

 

 

58,922 

 

(1.6)%

Miami

 

17,337 

 

 

16,803 

 

3.2% 

 

 

50,905 

 

 

50,304 

 

1.2% 

Chicago

 

16,094 

 

 

17,517 

 

(8.1)%

 

 

46,364 

 

 

50,281 

 

(7.8)%

Atlanta

 

16,028 

 

 

15,540 

 

3.1% 

 

 

45,894 

 

 

44,888 

 

2.2% 

Houston

 

10,771 

 

 

10,643 

 

1.2% 

 

 

32,389 

 

 

32,093 

 

0.9% 

Dallas-Ft. Worth

 

10,714 

 

 

11,370 

 

(5.8)%

 

 

31,736 

 

 

32,818 

 

(3.3)%

Philadelphia

 

10,527 

 

 

10,279 

 

2.4% 

 

 

29,903 

 

 

29,616 

 

1.0% 

Orlando-Daytona

 

10,118 

 

 

9,692 

 

4.4% 

 

 

29,381 

 

 

28,124 

 

4.5% 

West Palm Beach

 

8,865 

 

 

8,468 

 

4.7% 

 

 

25,820 

 

 

24,995 

 

3.3% 

Tampa

 

7,942 

 

 

7,792 

 

1.9% 

 

 

23,244 

 

 

22,847 

 

1.7% 

Portland

 

7,855 

 

 

8,121 

 

(3.3)%

 

 

22,903 

 

 

23,283 

 

(1.6)%

All other markets

 

127,728 

 

 

127,636 

 

0.1% 

 

 

368,561 

 

 

365,302 

 

0.9% 

Total net operating income

$

422,317 

 

$

419,890 

 

0.6% 

 

$

1,224,429 

 

$

1,210,750 

 

1.1% 







 

43

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 



 

 

 

 

 



 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

Weighted average square foot

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupancy:

 

 

 

 

 

 

 

 

 

Los Angeles

 

95.4% 

 

 

96.0% 

 

(0.6)%

 

 

95.3% 

 

 

95.8% 

 

(0.5)%

San Francisco

 

94.8% 

 

 

95.5% 

 

(0.7)%

 

 

94.8% 

 

 

95.5% 

 

(0.7)%

New York

 

95.1% 

 

 

95.2% 

 

(0.1)%

 

 

94.5% 

 

 

94.4% 

 

0.1% 

Seattle-Tacoma

 

94.5% 

 

 

95.8% 

 

(1.4)%

 

 

93.6% 

 

 

94.9% 

 

(1.4)%

Washington DC

 

93.6% 

 

 

93.9% 

 

(0.3)%

 

 

92.6% 

 

 

93.2% 

 

(0.6)%

Miami

 

93.0% 

 

 

93.5% 

 

(0.5)%

 

 

92.8% 

 

 

93.5% 

 

(0.7)%

Chicago

 

92.0% 

 

 

92.4% 

 

(0.4)%

 

 

90.3% 

 

 

91.7% 

 

(1.5)%

Atlanta

 

94.2% 

 

 

94.4% 

 

(0.2)%

 

 

93.3% 

 

 

93.7% 

 

(0.4)%

Houston

 

90.6% 

 

 

92.5% 

 

(2.1)%

 

 

91.2% 

 

 

91.0% 

 

0.2% 

Dallas-Ft. Worth

 

92.0% 

 

 

93.9% 

 

(2.0)%

 

 

91.8% 

 

 

93.8% 

 

(2.1)%

Philadelphia

 

95.4% 

 

 

95.2% 

 

0.2% 

 

 

94.8% 

 

 

94.9% 

 

(0.1)%

Orlando-Daytona

 

94.8% 

 

 

95.4% 

 

(0.6)%

 

 

94.8% 

 

 

95.2% 

 

(0.4)%

West Palm Beach

 

94.3% 

 

 

94.8% 

 

(0.5)%

 

 

94.3% 

 

 

94.8% 

 

(0.5)%

Tampa

 

93.7% 

 

 

94.7% 

 

(1.1)%

 

 

93.4% 

 

 

94.4% 

 

(1.1)%

Portland

 

94.3% 

 

 

95.5% 

 

(1.3)%

 

 

94.4% 

 

 

95.7% 

 

(1.4)%

All other markets

 

94.0% 

 

 

94.5% 

 

(0.5)%

 

 

93.3% 

 

 

93.9% 

 

(0.6)%

Total weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

square foot occupancy

 

94.0% 

 

 

94.6% 

 

(0.6)%

 

 

93.4% 

 

 

94.1% 

 

(0.7)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

26.18 

 

$

25.27 

 

3.6% 

 

$

25.60 

 

$

24.52 

 

4.4% 

San Francisco

 

26.74 

 

 

25.97 

 

3.0% 

 

 

26.06 

 

 

25.17 

 

3.5% 

New York

 

25.58 

 

 

24.96 

 

2.5% 

 

 

25.06 

 

 

24.40 

 

2.7% 

Seattle-Tacoma

 

20.40 

 

 

19.91 

 

2.5% 

 

 

19.95 

 

 

19.23 

 

3.7% 

Washington DC

 

21.75 

 

 

21.57 

 

0.8% 

 

 

21.33 

 

 

21.07 

 

1.2% 

Miami

 

20.05 

 

 

19.54 

 

2.6% 

 

 

19.78 

 

 

19.31 

 

2.4% 

Chicago

 

15.36 

 

 

15.70 

 

(2.2)%

 

 

15.36 

 

 

15.54 

 

(1.2)%

Atlanta

 

13.41 

 

 

13.07 

 

2.6% 

 

 

13.14 

 

 

12.81 

 

2.6% 

Houston

 

14.49 

 

 

14.09 

 

2.8% 

 

 

14.35 

 

 

14.13 

 

1.6% 

Dallas-Ft. Worth

 

13.45 

 

 

13.71 

 

(1.9)%

 

 

13.38 

 

 

13.44 

 

(0.4)%

Philadelphia

 

16.48 

 

 

16.06 

 

2.6% 

 

 

16.00 

 

 

15.59 

 

2.6% 

Orlando-Daytona

 

14.18 

 

 

13.58 

 

4.4% 

 

 

13.83 

 

 

13.20 

 

4.8% 

West Palm Beach

 

18.91 

 

 

18.31 

 

3.3% 

 

 

18.55 

 

 

18.00 

 

3.1% 

Tampa

 

14.44 

 

 

14.12 

 

2.3% 

 

 

14.22 

 

 

13.84 

 

2.7% 

Portland

 

19.08 

 

 

19.15 

 

(0.4)%

 

 

18.68 

 

 

18.58 

 

0.5% 

All other markets

 

14.53 

 

 

14.34 

 

1.3% 

 

 

14.24 

 

 

13.98 

 

1.9% 

Total realized rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot

$

17.83 

 

$

17.49 

 

1.9% 

 

$

17.49 

 

$

17.08 

 

2.4% 

 

44

 


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 



 

 

 

 

 



Three Months Ended September 30,

 

 

Nine Months Ended September 30,



 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

24.97 

 

$

24.25 

 

3.0% 

 

$

24.40 

 

$

23.50 

 

3.8% 

San Francisco

 

25.36 

 

 

24.80 

 

2.3% 

 

 

24.70 

 

 

24.03 

 

2.8% 

New York

 

24.32 

 

 

23.76 

 

2.4% 

 

 

23.69 

 

 

23.03 

 

2.9% 

Seattle-Tacoma

 

19.27 

 

 

19.07 

 

1.0% 

 

 

18.68 

 

 

18.24 

 

2.4% 

Washington DC

 

20.36 

 

 

20.26 

 

0.5% 

 

 

19.75 

 

 

19.64 

 

0.6% 

Miami

 

18.66 

 

 

18.27 

 

2.1% 

 

 

18.36 

 

 

18.07 

 

1.6% 

Chicago

 

14.13 

 

 

14.52 

 

(2.7)%

 

 

13.87 

 

 

14.24 

 

(2.6)%

Atlanta

 

12.63 

 

 

12.34 

 

2.4% 

 

 

12.26 

 

 

12.01 

 

2.1% 

Houston

 

13.12 

 

 

13.03 

 

0.7% 

 

 

13.08 

 

 

12.86 

 

1.7% 

Dallas-Ft. Worth

 

12.38 

 

 

12.87 

 

(3.8)%

 

 

12.28 

 

 

12.60 

 

(2.5)%

Philadelphia

 

15.73 

 

 

15.30 

 

2.8% 

 

 

15.17 

 

 

14.80 

 

2.5% 

Orlando-Daytona

 

13.44 

 

 

12.96 

 

3.7% 

 

 

13.11 

 

 

12.57 

 

4.3% 

West Palm Beach

 

17.84 

 

 

17.36 

 

2.8% 

 

 

17.49 

 

 

17.06 

 

2.5% 

Tampa

 

13.53 

 

 

13.37 

 

1.2% 

 

 

13.28 

 

 

13.07 

 

1.6% 

Portland

 

18.00 

 

 

18.28 

 

(1.5)%

 

 

17.64 

 

 

17.78 

 

(0.8)%

All other markets

 

13.66 

 

 

13.55 

 

0.8% 

 

 

13.28 

 

 

13.13 

 

1.1% 

Total REVPAF

$

16.75 

 

$

16.54 

 

1.3% 

 

$

16.34 

 

$

16.07 

 

1.7% 

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

Non Same Store Facilities

The Non Same Store Facilities at September 30, 2018 represent 373 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:

 

45

 


 

 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON SAME STORE

Three Months Ended September 30,

 

Nine Months Ended September 30,

FACILITIES

2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Dollar amounts in thousands, except square foot amounts)

Revenues (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

$

1,762 

 

$

 -

 

$

1,762 

 

$

2,288 

 

$

 -

 

$

2,288 

2017 acquisitions

 

7,409 

 

 

1,735 

 

 

5,674 

 

 

21,385 

 

 

2,873 

 

 

18,512 

2016 acquisitions

 

10,031 

 

 

9,297 

 

 

734 

 

 

29,221 

 

 

26,909 

 

 

2,312 

2016 - 2018 new developments

 

10,427 

 

 

5,124 

 

 

5,303 

 

 

26,165 

 

 

11,081 

 

 

15,084 

2013 - 2015 new developments

 

6,891 

 

 

6,491 

 

 

400 

 

 

19,883 

 

 

18,440 

 

 

1,443 

Other facilities (b)

 

55,573 

 

 

55,622 

 

 

(49)

 

 

163,562 

 

 

164,649 

 

 

(1,087)

    Total revenues

 

92,093 

 

 

78,269 

 

 

13,824 

 

 

262,504 

 

 

223,952 

 

 

38,552 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

678 

 

 

 -

 

 

678 

 

 

865 

 

 

 -

 

 

865 

2017 acquisitions

 

2,478 

 

 

633 

 

 

1,845 

 

 

7,444 

 

 

1,013 

 

 

6,431 

2016 acquisitions

 

3,479 

 

 

3,364 

 

 

115 

 

 

10,637 

 

 

10,348 

 

 

289 

2016 - 2018 new developments

 

6,391 

 

 

3,191 

 

 

3,200 

 

 

15,383 

 

 

8,405 

 

 

6,978 

2013 - 2015 new developments

 

2,120 

 

 

2,275 

 

 

(155)

 

 

6,317 

 

 

6,055 

 

 

262 

Other facilities (b)

 

16,285 

 

 

15,773 

 

 

512 

 

 

48,628 

 

 

47,154 

 

 

1,474 

    Total cost of operations

 

31,431 

 

 

25,236 

 

 

6,195 

 

 

89,274 

 

 

72,975 

 

 

16,299 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

1,084 

 

 

 -

 

 

1,084 

 

 

1,423 

 

 

 -

 

 

1,423 

2017 acquisitions

 

4,931 

 

 

1,102 

 

 

3,829 

 

 

13,941 

 

 

1,860 

 

 

12,081 

2016 acquisitions

 

6,552 

 

 

5,933 

 

 

619 

 

 

18,584 

 

 

16,561 

 

 

2,023 

2016 - 2018 new developments

 

4,036 

 

 

1,933 

 

 

2,103 

 

 

10,782 

 

 

2,676 

 

 

8,106 

2013 - 2015 new developments

 

4,771 

 

 

4,216 

 

 

555 

 

 

13,566 

 

 

12,385 

 

 

1,181 

Other facilities (b)

 

39,288 

 

 

39,849 

 

 

(561)

 

 

114,934 

 

 

117,495 

 

 

(2,561)

    Net operating income

 

60,662 

 

 

53,033 

 

 

7,629 

 

 

173,230 

 

 

150,977 

 

 

22,253 

Depreciation and

 

 

 

 

 

 

 

amortization expense

 

(32,035)

 

 

(23,217)

 

 

(8,818)

 

 

(91,647)

 

 

(67,874)

 

 

(23,773)

Net income

$

28,627 

 

$

29,816 

 

$

(1,189)

 

$

81,583 

 

$

83,103 

 

$

(1,520)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

83.2% 

 

 

 -

 

 

 -

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

91.9% 

 

 

89.5% 

 

 

2.7% 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

87.8% 

 

 

89.1% 

 

 

(1.5)%

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

61.4% 

 

 

51.3% 

 

 

19.7% 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

91.2% 

 

 

91.7% 

 

 

(0.5)%

Other facilities (b)

 

 

 

 

 

 

 

 

 

 

85.7% 

 

 

85.3% 

 

 

0.5% 



 

 

 

 

 

 

 

 

 

 

81.8% 

 

 

81.4% 

 

 

0.5% 

Annual contract rent per

 

 

 

 

 

 

occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

$

11.37 

 

$

 -

 

 

 -

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

14.77 

 

 

10.15 

 

 

45.5% 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

10.45 

 

 

10.10 

 

 

3.5% 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

11.80 

 

 

12.30 

 

 

(4.1)%

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

15.58 

 

 

14.72 

 

 

5.8% 

Other facilities (b)

 

 

 

 

 

 

 

 

 

 

17.13 

 

 

17.20 

 

 

(0.4)%



 

 

 

 

 

 

 

 

 

$

14.80 

 

$

15.01 

 

 

(1.4)%





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 


 

 

NON SAME STORE

 

 

Nine Months Ended September 30,

FACILITIES (Continued)

 

 

 

 

 

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

16 

 

 

 -

 

 

16 

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

34 

 

 

14 

 

 

20 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

55 

 

 

55 

 

 

 -

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

48 

 

 

28 

 

 

20 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

20 

 

 

20 

 

 

 -

Other facilities (b)

 

 

 

 

 

 

 

 

 

 

200 

 

 

200 

 

 

 -



 

 

 

 

 

 

 

 

 

 

373 

 

 

317 

 

 

56 

Net rentable square feet (in thousands):

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

 

1,015 

 

 

 -

 

 

1,015 

2017 acquisitions

 

 

 

 

 

 

 

 

 

 

2,114 

 

 

830 

 

 

1,284 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

4,247 

 

 

4,121 

 

 

126 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

6,006 

 

 

3,764 

 

 

2,242 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

1,877 

 

 

1,877 

 

 

 -

Other facilities (b)

 

 

 

 

 

 

 

 

 

 

14,420 

 

 

14,572 

 

 

(152)



 

 

 

 

 

 

 

 

 

 

29,679 

 

 

25,164 

 

 

4,515 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

As of
September 30, 2018

 

 

 

 

 

 

Costs to acquire or develop:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 acquisitions

 

 

 

 

 

 

 

 

 

$

107,775 

 

 

 

 

 

 

2017 acquisitions (c)

 

 

 

 

 

 

 

 

 

 

291,329 

 

 

 

 

 

 

2016 acquisitions

 

 

 

 

 

 

 

 

 

 

429,123 

 

 

 

 

 

 

2016 - 2018 new developments

 

 

 

 

 

 

 

 

 

 

719,483 

 

 

 

 

 

 

2013 - 2015 new developments

 

 

 

 

 

 

 

 

 

 

188,049 

 

 

 

 

 

 

Other facilities (b)

 

 

 

 

 

 

 

 

 

 

 -

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

$

1,735,759 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities.  See “Ancillary Operations” below for more information.

(b)

The “Other facilities” noted above include other self-storage facilities that are not stabilized in 2016, 2017, or the first nine months of 2018 due primarily to either completed or in-process redevelopment activities, as well as casualty events which significantly impacted the operating results.  It includes facilities where we recently expanded their square footage at a cost of $213.3 million, as well as facilities in the process of redevelopment where we demolished 731,000 net rentable square feet of storage space.  Such expansion costs are not included in “costs to acquire or develop” as it would not be meaningful or consistent with the amounts for the acquired and newly developed facilities.

(c)

Acquisition costs includes i) $149.8 million paid for 22 facilities acquired from third parties, ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and iii) the $6.3 million historical book value of our existing investment in the legacy institutional partnership.

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

 

47

 


 

 

For the nine months ended September 30, 2018, the weighted average annualized yield on cost, based upon net operating income, for i) the facilities acquired in 2016 was 5.8% and ii) the 22 facilities acquired in 2017 from third parties for $149.8 million was 5.1%.  The yield for the other facilities acquired are not meaningful due to our limited ownership period in the case of facilities acquired in 2018 and our preexisting ownership interest in and management of the 12 stabilized facilities owned by a legacy institutional partnership. 

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

Net operating income with respect to the “Other facilities” declined $0.6 million and $2.6 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017.  Such decreases are primarily due to the demolishment of 731,000 net rentable square feet of storage space due to expansion activities, offset partially by increased net operating income with respect to facilities where expansion activities are complete and the added space is filling up.  Our current pipeline of $345.8 million in redevelopment projects will result in the demolishment of an additional 84,000 net rentable square feet of space, and the build of an additional 3.8 million net rentable square feet of storage space.

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

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

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

At September 30, 2018, in addition to the $345.8 million in expansion projects noted above, we had various facilities in development (1.6 million net rentable square feet) estimated to cost $250.6 millionSome of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional development and expansion projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. 

Subsequent to September 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) nine self-storage facilities for $79.7 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefore the dollar value of acquisitions is unpredictable. 

Depreciation and amortization with respect to the Non Same Store Facilities totaled $32.0 million and $91.6 million in the three and nine months ended September 30, 2018, respectively, as compared to $23.2 million $67.9 million for the same periods in 2017.  These amounts include (i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and (ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate.  With respect to Non Same Store Facilities owned at September 30, 2018, depreciation of buildings and amortization of tenant intangibles is expected to total $28.0 million and $3.2 million, respectively, in the remainder of 2018.  The level of future depreciation and amortization will also depend upon the level of acquisitions of facilities and the level of newly developed storage space.

 

48

 


 

 

Ancillary Operations

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance premiums

$

31,734 

 

$

31,175 

 

$

559 

 

$

94,176 

 

$

92,094 

 

$

2,082 

Merchandise

 

8,018 

 

 

8,948 

 

 

(930)

 

 

24,285 

 

 

25,911 

 

 

(1,626)

Total revenues

 

39,752 

 

 

40,123 

 

 

(371)

 

 

118,461 

 

 

118,005 

 

 

456 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

7,176 

 

 

11,916 

 

 

(4,740)

 

 

19,317 

 

 

24,179 

 

 

(4,862)

Merchandise

 

4,731 

 

 

5,388 

 

 

(657)

 

 

14,331 

 

 

15,432 

 

 

(1,101)

Total cost of operations

 

11,907 

 

 

17,304 

 

 

(5,397)

 

 

33,648 

 

 

39,611 

 

 

(5,963)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

24,558 

 

 

19,259 

 

 

5,299 

 

 

74,859 

 

 

67,915 

 

 

6,944 

Merchandise

 

3,287 

 

 

3,560 

 

 

(273)

 

 

9,954 

 

 

10,479 

 

 

(525)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net income

$

27,845 

 

$

22,819 

 

$

5,026 

 

$

84,813 

 

$

78,394 

 

$

6,419 



Tenant reinsurance operations: Our 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 revenues increased from $31.2 million and $92.1 million in the three and nine months ended September 30, 2017, respectively, to $31.7 million and $94.2 million during the same periods in 2018, due primarily to an increase in our tenant base due to newly acquired and developed facilities.

Tenant insurance revenues include $26.1 million and $26.3 million for the three months ended September 30, 2018 and 2017, respectively, and $77.9 million and $78.2 million for the nine months ended September 30, 2018 and 2017, respectively, for the Same Store Facilities.

We expect future growth will come primarily from 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.  Tenant reinsurance cost of operations for the three and nine month periods ended September 30, 2017 include $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and IrmaExcluding these incremental hurricane related losses, tenant reinsurance cost of operations increased

 

49

 


 

 

from $6.7 million and $19.0 million in the three and nine months ended September 30, 2017, respectively, to $7.2 million and $19.3 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.

Equity in earnings of unconsolidated real estate entities

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Amounts in thousands)

Equity in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSB

$

13,008 

 

$

9,261 

 

$

3,747 

 

$

73,451 

 

$

35,694 

 

$

37,757 

Shurgard Europe 

 

4,763 

 

 

7,243 

 

 

(2,480)

 

 

17,078 

 

 

19,484 

 

 

(2,406)

Legacy Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership (a) 

 

 -

 

 

714 

 

 

(714)

 

 

 -

 

 

2,057 

 

 

(2,057)

Total equity in earnings

$

17,771 

 

$

17,218 

 

$

553 

 

$

90,529 

 

$

57,235 

 

$

33,294 

(a)

This represents our equity earnings in a legacy institutional partnership prior to our December 31, 2017 acquisition of the 74.25% interest that we did not own in this partnership for $135.5 million.  As a result, no further equity earnings will be recorded. 

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

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

Equity in earnings from PSB increased $3.7 million and $37.8 million in the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017.  These increases are due primarily to i) our $2.9 million equity share of PSB’s allocation of income to its preferred stockholders in connection with the redemption of preferred stock in September 2017, ii) our $34.9 million equity share of gains on sales of real estate in the nine months ended September 30,  2018 and iii) increases for the three and nine month periods in income from real estate operations.  See Note 4 to our September 30, 2018 financial statements for selected financial information on PSB, as well as PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com.

Investment in Shurgard Europe: At September 30, 2018, we had a 49% equity share in Shurgard Europe’s net income.  At September 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 September 30, 2018 financial statements for selected financial data on Shurgard Europe for the nine months ended September 30, 2018 and 2017.  As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe.  On June 30, 2018, Shurgard Europe acquired five self-storage facilities in Sweden for $45.7 million.  On October 15, 2018, Shurgard Europe became a publicly held entity, trading on Euronext Brussels under the symbol “SHUR”.    Its publicly reported information can be obtained on

 

50

 


 

 

its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu

Our equity in earnings from Shurgard Europe decreased $2.5 million and $2.4 million for the three and nine months ended September 30, 2018 as compared to the same periods in 2017, due primarily to our equity share of increased depreciation and income tax expense and our $1.5 million equity share of Shurgard Europe’s costs incurred during the three and nine months ended September 30, 2018 in connection with an initial global offering of its shares.  

Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the countries in which it does business and incurs tax expense.  Our equity share of such income tax expense was approximately $3.3 million and $9.1 million in the three and nine months ended September 30, 2018, respectively, as compared to $2.7 million and $6.2 million for the same periods in 2017.    

On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million.  The aggregate $296.8 million paid by Shurgard Europe was funded, in part, through the proceeds from a bank loan. 

On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol.  In the Offering, Shurgard Europe issued 21.7 million of its common shares to third parties at a price of €23 per share, for €500 million in gross proceeds.  There is a potential “green shoe” for an additional €75 million in gross proceeds at a price of €23 per shareThe gross proceeds were used to repay short-term debt, fund real estate investments and for other corporate purposes.  Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 36.6% as a result of the Offering (35.2% assuming exercise of the “green shoe” option).  While we did not sell any shares in the offering, and have no current plans to do so, we will record a gain on disposition in the three months ending December 31, 2018, as if we had sold a proportionate share of our investment in Shurgard Europe. 

On October 18, 2018, we sold our property in West London to Shurgard Europe for $42.1 million, and will record a related gain on disposition in the three months ending December 31, 2018.

We expect a reduction in ongoing equity earnings from Shurgard Europe due to (i) the extent to which offering proceeds are not immediately utilized to repay debt or invest in real estate assets and (ii) an increase in our equity share of depreciation due to an increased book basis of real estate associated with the aforementioned gain.  Shurgard Europe also expects to begin distributing a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate.  Our future earnings from Shurgard Europe will also be affected by (i) the operating results of its existing facilities, (ii) the level of development and acquisition activities,  (iii) income tax rates, and (iv) the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro).

For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated at exchange rates averaging 1.162 and 1.175 for the three months ended September 30, 2018 and 2017, respectively, and 1.194 and 1.113 for the nine months ended September 30, 2018 and 2017, respectively.

Analysis of items not allocated to segments

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

 

51

 


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,



2018

 

2017

 

Change

 

2018

 

2017

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Amounts in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

$

18,650 

 

$

12,991 

 

$

5,659 

 

$

52,838 

 

$

26,153 

 

$

26,685 

Costs of senior executives

 

419 

 

 

419 

 

 

 -

 

 

4,405 

 

 

5,455 

 

 

(1,050)

Development and acquisition costs

 

1,139 

 

 

1,655 

 

 

(516)

 

 

4,680 

 

 

6,844 

 

 

(2,164)

Tax compliance costs and taxes paid 

832 

 

 

1,063 

 

 

(231)

 

 

3,298 

 

 

3,510 

 

 

(212)

Legal costs

 

1,458 

 

 

1,500 

 

 

(42)

 

 

5,394 

 

 

5,181 

 

 

213 

Public company costs

 

1,090 

 

 

981 

 

 

109 

 

 

3,438 

 

 

3,129 

 

 

309 

Other costs

 

3,841 

 

 

3,702 

 

 

139 

 

 

16,225 

 

 

12,059 

 

 

4,166 

Total

$

27,429 

 

$

22,311 

 

$

5,118 

 

$

90,278 

 

$

62,331 

 

$

27,947 

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

In February 2018, we announced that our CEO and CFO are retiring from their executive roles at the end of 2018 and will then serve only as Trustees of the Company.  Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods as long as they remain Trustees.  For financial reporting, the service periods for previous stock option and RSU grants for these executives have changed from (i) the grants’ vesting periods to (ii) the end of 2018 when they will retire.  Accordingly, all remaining share-based compensation expense for these two executives will now be amortized by the end of 2018.  Included in share-based compensation expense for the three and nine months ended September 30, 2018 is approximately $7.1  million and $22.7 million, respectively, due to the accelerated amortization of grants to our CEO and CFO.  Similar increases in share-based compensation expense are expected in the remainder of 2018.  Share-based compensation costs in the nine months ended September 30, 2017 include a $5.4 million reversal of previously amortized costs, due to the forfeiture of share-based compensation resulting from the retirement of certain senior executives in the quarter ended September 30, 2017.  See Note 10 to our September 30, 2018 financial statements for further information on our share-based compensation. 

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

Development and acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities.  The amounts in the above table are net of $2.9 million and $9.2 million for the three and nine months ended September 30, 2018, respectively, and $2.4 million and $6.5 million for the same periods in 2017, in development costs that were capitalized to newly developed and redeveloped self-storage facilities.  Development and acquisition costs are expected to remain stable in the remainder of 2018. 

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

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

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

 

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Other costs represent certain professional and consulting fees, payroll, and overhead that are not attributable to our property operations.  Such costs vary depending upon the level of corporate activities, initiatives, and other factors and, as such, are not predictable.  Amounts for the nine months ended September 30, 2018 include approximately $2.4 million in costs incurred to demolish certain buildings that were damaged in flooding in 2017 and are being rebuilt.

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

Interest and other income: Interest and other income is comprised primarily of the net income from our commercial operations and property management operations and to a lesser extent interest earned on cash balances, trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts.  Amounts attributable to our commercial operations and property management operations totaled $3.0 million and $8.8 million in the three and nine months ended September 30, 2018, respectively, as compared to $2.5 million and $7.8 million for the same periods in 2017The increase in interest and other income is attributable to increased commercial operations and higher interest rates on uninvested cash balances.  We do not expect any significant changes in interest and other income in the remainder of 2018. 

Interest expense:  For the three and nine months ended September 30, 2018, we incurred $9.3 million and $28.1 million, respectively, of interest on our outstanding debt, as compared to $3.4 million and $7.7 million for the same periods in 2017.  In determining interest expense, these amounts were offset by capitalized interest of $1.2 million and $3.5 million during the three and nine months ended September 30, 2018, respectively, associated with our development activities, as compared to $1.0 million and $3.1 million for the same periods in 2017.  On September 18, 2017, we completed a public offering of $1.0 billion notes (the “U.S. Dollar Notes”) bearing an average annual interest rate of 2.732%.  For the three and nine months ended September 30, 2018, we incurred interest expense totaling $7.1 million and  $21.3 million, respectively, on the U.S. Dollar Notes.  At September 30, 2018, we had $1.4 billion of debt outstanding, with an average interest rate of 2.6%.  See Note 6 to our September 30, 2018 financial statements for further information on our debt balances.  Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs. 

Foreign Exchange Gain (Loss): For the three and nine months ended September 30, 2018, we recorded foreign currency exchange gains of  $2.6 million and $12.7 million, respectively, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates (losses of $13.4 million and $44.5 million for the same periods in 2017).  The Euro was translated at exchange rates of approximately 1.160 U.S. Dollars per Euro at September 30, 2018, 1.168 at June 30, 2018, 1.198 at December 31, 2017, 1.181 at September 30, 2017, 1.142 at June 30, 2017 and 1.052 at December 31, 2016.  Future gains and losses on foreign currency exchange will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding

Gain on Real Estate Investment Sales:  In the three and nine months ended September 30, 2018, we recorded gains totaling $1.4 million and $1.8 million,  respectively, and in the nine months ended September 30, 2017, we recorded gains totaling $1.0 million,  primarily in connection with the partial sale of real estate facilities pursuant to eminent domain proceedings.  We expect additional gains on disposition to be recorded in the three months ending December 31, 2018 in connection with the sale of our Kensington facility to Shurgard Europe and Shurgard Europe’s public offering of common shares (see “Investment in Shurgard Europe” above).

Casualty Loss:  The $7.8 million casualty loss on our income statements for the three and nine months ended September 30, 2017 represents $3.3 million resulting from physical damage to our facilities and $4.5 million incurred for repairs, cleanup, and disposal with respect to Hurricanes Harvey and Irma.

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

 

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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 three years, we have diversified our capital sources by issuing medium term debt. 

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

We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital.  As of September 30, 2018 and October 30, 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 September 30, 2018, our capital resources over the next year are expected to be approximately $1.2 billion which exceeds our current planned capital needs over the next year of approximately $433.4 million.  Our capital resources include: (i) $432.5 million of cash as of September 30, 2018, (ii) $483.9 million of available borrowing capacity on our revolving line of credit, (iii) $42.1 million cash from the sale of our West London/Kensington self-storage facility to Shurgard Europe on October 18, 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) $342.7 million of remaining spend on our current development pipeline, (ii) $79.7 million in property acquisitions currently under contract, and (iii) $11.0 million in principal repayments on existing debt.  Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties.  In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

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

Required Debt Repayments: As of September 30, 2018, our outstanding debt totaled approximately $1.4 billion, consisting of $27.9 million of secured debt, $396.9 million of Euro-denominated unsecured debt and $1.0 billion of U.S. Dollar denominated unsecured debt.  Approximate principal maturities are as follows (amounts in thousands):

 

54

 


 

 





 

 



 

 

Remainder of 2018

$

9,916 

2019

 

1,505 

2020

 

1,585 

2021

 

1,503 

2022

 

502,071 

Thereafter

 

908,180 



$

1,424,760 

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

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

Capital expenditures totaled $93.4 million in the first nine months of 2018, and are expected to be between $150 million and $170 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, as well as the timing thereof

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

On October 24, 2018, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of December 2018.  Our consistent, long-term dividend policy has been to distribute only our taxable income.  Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities. 

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

We estimate we will pay approximately $7.0 million per year in distributions to noncontrolling interests outstanding at September 30, 2018. 

Real Estate Investment Activities: Subsequent to September 30, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) nine self-storage facilities for $79.7 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of September 30, 2018 we had development and redevelopment projects at a total cost of approximately $596.4 million.  Costs incurred through September 30, 2018 were $253.7 million, with the remaining cost to complete of $342.7 million expected to be incurred primarily in the next 18 months.  Some of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. 

 

55

 


 

 

Shurgard Europe: On July 13, 2018, we received a cash distribution from Shurgard Europe totaling $145.4 million.  On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol.  We did not sell any of our shares in the Offering and have no current plans to do so.  Shurgard Europe expects to begin distributing a substantial portion of its earnings to its shareholders; heretofore we have not received regular ongoing distributions from Shurgard Europe.  On October 18, 2018, we sold our property in West London to Shurgard Europe for $42.1 million.

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

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

Contractual Obligations

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total

 

 

of 2018

 

 

2019 

 

 

2020 

 

 

2021 

 

 

2022 

 

 

Thereafter

Interest and principal payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on debt (1)

$

1,664,804 

 

$

18,982 

 

$

37,536 

 

$

37,536 

 

$

37,367 

 

$

534,408 

 

$

998,975 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases (2)

 

81,931 

 

 

1,060 

 

 

4,392 

 

 

4,586 

 

 

4,841 

 

 

3,966 

 

 

63,086 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction commitments (3)

 

209,193 

 

 

36,621 

 

 

146,662 

 

 

25,910 

 

 

 -

 

 

 -

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

1,955,928 

 

$

56,663 

 

$

188,590 

 

$

68,032 

 

$

42,208 

 

$

538,374 

 

$

1,062,061 



(1)

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

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

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

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

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

 

56

 


 

 

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 15.9% of the book value of our equity at September 30, 2018.  

We have foreign currency exposure at September 30, 2018 related to i) our investment in Shurgard Europe, with a fair market value of $912 million (based upon the 31.3 million shares we own at the October 29, 2018 closing price on Euronext of €25.605 and an October 29, 2018 exchange rate of 1.1389) and ii) €342.0 million ($396.9 million) of Euro-denominated unsecured notes payable. 

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

 

$

9,916 

 

$

1,505 

 

$

1,585 

 

$

1,503 

 

$

502,071 

 

$

908,180 

 

$

1,424,760 





ITEM 4.    Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required 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.

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

Internal Control Over Financial Reporting

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





 

 

57

 


 

 

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 October 30, 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 September 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 September 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.

 

 

58

 


 

 



 

 



 



PUBLIC STORAGE



INDEX TO EXHIBITS (1)



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



 



 

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.



 



 

 

 



 

 

59

 


 

 

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:  October 30, 2018

 

PUBLIC STORAGE



 



By:   /s/ John Reyes                 



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

 

 





 

60