UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
Commission file number:
(Exact name of Registrant as specified in its charter)
Maryland (Life Storage, Inc.) |
16-1194043 (Life Storage, Inc.) |
Delaware (Life Storage LP) |
16-1481551 (Life Storage LP) |
(State or other jurisdiction of |
(I.R.S. Employer |
(Address of principal executive offices) (Zip code)
(
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Life Storage, Inc. |
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No ☐ |
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Life Storage LP |
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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).
Life Storage, Inc. |
Yes ☒ |
No ☐ |
Life Storage LP |
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.
Life Storage, Inc.:
Large Accelerated Filer |
☒ |
Accelerated Filer |
☐ |
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Non-accelerated Filer |
☐ |
Smaller Reporting Company |
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Emerging Growth Company |
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Life Storage LP:
Large Accelerated Filer |
☒ |
Accelerated Filer |
☐ |
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Non-accelerated Filer |
☐ |
Smaller Reporting Company |
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Emerging Growth Company |
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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.
Life Storage, Inc. |
☐ |
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Life Storage LP |
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Life Storage, Inc. |
Yes ☐ |
No ☒ |
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Life Storage LP |
Yes ☐ |
No ☒ |
Securities registered pursuant to Section 12(b) of the Act:
Life Storage, Inc.:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, $.01 par value |
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New York Stock Exchange |
Life Storage LP:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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As of July 23, 2019,
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2019 of Life Storage, Inc. (the “Parent Company”) and Life Storage LP (the “Operating Partnership”). The Parent Company is a real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company.” In addition, terms such as “we,” “us,” or “our” used in this report may refer to the Company, the Parent Company and/or the Operating Partnership.
Life Storage Holdings, Inc., a wholly-owned subsidiary of the Parent Company (“Holdings”), is the sole general partner of the Operating Partnership; the Parent Company is a limited partner of the Operating Partnership, and through its ownership of Holdings and its limited partnership interest, controls the operations of the Operating Partnership, holding a 99.5% ownership interest therein as of June 30, 2019. The remaining ownership interests in the Operating Partnership are held by certain former owners of assets acquired by the Operating Partnership. As the owner of the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
Management operates the Parent Company and the Operating Partnership as one enterprise. The management teams of the Parent Company and the Operating Partnership are identical.
There are few differences between the Parent Company and the Operating Partnership, which are reflected in the note disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as a consolidated enterprise. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the owner of the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and, directly or indirectly, holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership.
The substantive difference between the Parent Company’s filings and the Operating Partnership’s filings is the fact that the Parent Company is a REIT with public equity, while the Operating Partnership is a partnership with no publicly traded equity. In the financial statements, this difference is primarily reflected in the equity (or capital for the Operating Partnership) section of the consolidated balance sheets and in the Shareholders’ Equity and Partners’ Capital notes to the financial statements. Apart from the different equity treatment, the consolidated financial statements of the Parent Company and the Operating Partnership are nearly identical.
The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will:
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facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business; |
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remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and |
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• |
create time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.
2
As the owner of the general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company’s operations on a consolidated basis and how management operates the Company.
This report also includes separate Item 4 - Controls and Procedures sections, signature pages and Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of the Parent Company and the Chief Executive Officer and the Chief Financial Officer of the Operating Partnership have made the requisite certifications and that the Parent Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended and 18 U.S.C. §1350.
3
Part I. Financial Information
Item 1. Financial Statements
LIFE STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data) |
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June 30, 2019 (unaudited) |
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December 31, 2018 |
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Assets |
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Investment in storage facilities: |
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Land |
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$ |
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$ |
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Building, equipment, and construction in progress |
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Less: accumulated depreciation |
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( |
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( |
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Investment in storage facilities, net |
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Cash and cash equivalents |
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Accounts receivable |
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Receivable from unconsolidated joint ventures |
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Investment in unconsolidated joint ventures |
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Prepaid expenses |
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Trade name |
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Other assets |
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Total Assets |
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$ |
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$ |
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Liabilities |
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Line of credit |
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$ |
— |
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$ |
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Term notes, net |
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Accounts payable and accrued liabilities |
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Deferred revenue |
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Mortgages payable |
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Total Liabilities |
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Noncontrolling redeemable Operating Partnership Units at redemption value |
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Shareholders’ Equity |
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Common stock $ shares outstanding at June 30, 2019 ( |
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Additional paid-in capital |
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Dividends in excess of net income |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total Shareholders’ Equity |
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Noncontrolling interest in consolidated subsidiary |
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Total Equity |
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Total Liabilities and Shareholders’ Equity |
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$ |
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$ |
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See notes to consolidated financial statements.
4
LIFE STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(dollars in thousands, except per share data) |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenues |
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Rental income |
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$ |
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$ |
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$ |
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$ |
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Other operating income |
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Total operating revenues |
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Expenses |
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Property operations and maintenance |
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Real estate taxes |
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General and administrative |
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Payments for rent |
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Depreciation and amortization |
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Total operating expenses |
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Gain on sale of real estate |
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— |
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— |
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— |
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Income from operations |
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Other income (expenses) |
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Interest expense |
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( |
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( |
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( |
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( |
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Interest income |
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Equity in income of joint ventures |
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Net income |
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Net income attributable to noncontrolling interest in the Operating Partnership |
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( |
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( |
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( |
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( |
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Net loss attributable to noncontrolling interest in consolidated subsidiary |
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Net income attributable to common shareholders |
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$ |
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$ |
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$ |
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$ |
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Earnings per common share attributable to common shareholders – basic |
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$ |
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$ |
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$ |
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$ |
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Earnings per common share attributable to common shareholders – diluted |
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$ |
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$ |
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$ |
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$ |
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Common shares used in basic earnings per share calculation |
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Common shares used in diluted earnings per share calculation |
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Dividends declared per common share |
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$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
5
LIFE STORAGE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(dollars in thousands) |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income: |
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Effective portion of gain on derivatives net of reclassification to interest expense |
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Total comprehensive income |
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Comprehensive income attributable to noncontrolling interest in the Operating Partnership |
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( |
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( |
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( |
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( |
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Comprehensive loss attributable to noncontrolling interest in consolidated subsidiary |
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Comprehensive income attributable to common shareholders |
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$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
6
LIFE STORAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands) |
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Six Months Ended June 30, 2019 |
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Six Months Ended June 30, 2018 |
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Operating Activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs and bond discount |
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Gain on sale of real estate |
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( |
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— |
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Equity in income of joint ventures |
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( |
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( |
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Distributions from unconsolidated joint ventures |
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Non-vested stock earned |
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Stock option expense |
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— |
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Deferred income taxes |
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Changes in assets and liabilities (excluding the effects of acquisitions): |
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Accounts receivable |
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( |
) |
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( |
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Prepaid expenses |
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( |
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( |
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(Advances to) receipts from joint ventures |
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( |
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Accounts payable and other liabilities |
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( |
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( |
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Deferred revenue |
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( |
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Net cash provided by operating activities |
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Investing Activities |
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Acquisition of storage facilities, net of cash acquired |
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( |
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— |
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Improvements, equipment additions, and construction in progress |
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( |
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( |
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Investment in unconsolidated joint ventures |
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( |
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( |
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Property deposits |
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( |
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Net cash used in investing activities |
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( |
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( |
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Financing Activities |
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Net proceeds from sale of common stock |
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— |
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Proceeds from line of credit |
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Repayments of line of credit |
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( |
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Proceeds from term notes, net of discount |
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— |
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Repayment of term notes |
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( |
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— |
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Debt issuance costs |
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( |
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— |
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Dividends paid - common stock |
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( |
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( |
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Distributions to noncontrolling interest holders |
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( |
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( |
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Redemption of operating partnership units |
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( |
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( |
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Mortgage principal payments |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Net increase (decrease) in cash and restricted cash |
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( |
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Cash and restricted cash at beginning of period |
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Cash and restricted cash at end of period |
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$ |
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$ |
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Supplemental cash flow information |
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Cash paid for interest, net of interest capitalized |
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$ |
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$ |
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Cash paid for income taxes, net of refunds |
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$ |
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$ |
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See notes to consolidated financial statements.
7
LIFE STORAGE LP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) |
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June 30, 2019 (unaudited) |
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December 31, 2018 |
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Assets |
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Investment in storage facilities: |
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Land |
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$ |
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$ |
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Building, equipment, and construction in progress |
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Less: accumulated depreciation |
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( |
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( |
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Investment in storage facilities, net |
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Cash and cash equivalents |
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Accounts receivable |
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Receivable from unconsolidated joint ventures |
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Investment in unconsolidated joint ventures |
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Prepaid expenses |
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Trade name |
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Other assets |
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Total Assets |
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$ |
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$ |
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Liabilities |
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Line of credit |
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$ |
- |
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$ |
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Term notes, net |
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Accounts payable and accrued liabilities |
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Deferred revenue |
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Mortgages payable |
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Total Liabilities |
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Limited partners’ redeemable capital interest at redemption value ( units outstanding at June 30, 2019 and December 31, 2018, respectively) |
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Partners’ Capital |
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General partner ( December 31, 2018, respectively) |
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Limited partners ( and December 31, 2018, respectively) |
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Accumulated other comprehensive loss |
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( |
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( |
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Total Controlling Partners’ Capital |
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Noncontrolling interest in consolidated subsidiary |
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|
|
Total Partners’ Capital |
|
|
|
|
|
|
|
|
Total Liabilities and Partners’ Capital |
|
$ |
|
|
|
$ |
|
|
See notes to consolidated financial statements.
8
LIFE STORAGE LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(dollars in thousands, except per unit data) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operations and maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for rent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest in the Operating Partnership |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to noncontrolling interest in consolidated subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Earnings per common unit attributable to common unitholders – basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Earnings per common unit attributable to common unitholders – diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common units used in basic earnings per unit calculation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units used in diluted earnings per unit calculation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per common unit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income attributable to general partner |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income attributable to limited partners |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See notes to consolidated financial statements.
9
LIFE STORAGE LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(dollars in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion of gain on derivatives net of reclassification to interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interest in the Operating Partnership |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Comprehensive loss attributable to noncontrolling interest in consolidated subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common unitholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See notes to consolidated financial statements.
10
LIFE STORAGE LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands) |
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and bond discount |
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
( |
) |
|
|
— |
|
Equity in income of joint ventures |
|
|
( |
) |
|
|
( |
) |
Distributions from unconsolidated joint ventures |
|
|
|
|
|
|
|
|
Non-vested stock earned |
|
|
|
|
|
|
|
|
Stock option expense |
|
|
— |
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
Changes in assets and liabilities (excluding the effects of acquisitions): |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses |
|
|
( |
) |
|
|
( |
) |
(Advances to) receipts from joint ventures |
|
|
( |
) |
|
|
|
|
Accounts payable and other liabilities |
|
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
|
( |
) |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Acquisition of storage facilities, net of cash acquired |
|
|
( |
) |
|
|
— |
|
Improvements, equipment additions, and construction in progress |
|
|
( |
) |
|
|
( |
) |
Investment in unconsolidated joint ventures |
|
|
( |
) |
|
|
( |
) |
Property deposits |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Financing Activities |
|
|
|
|
|
|
|
|
Net proceeds from sale of partnership units |
|
|
— |
|
|
|
|
|
Proceeds from line of credit |
|
|
|
|
|
|
|
|
Repayments of line of credit |
|
|
( |
) |
|
|
( |
) |
Proceeds from term notes, net of discount |
|
|
|
|
|
|
— |
|
Repayment of term notes |
|
|
( |
) |
|
|
— |
|
Debt issuance costs |
|
|
( |
) |
|
|
— |
|
Distributions to unitholders |
|
|
( |
) |
|
|
( |
) |
Distributions to noncontrolling interest holders |
|
|
( |
) |
|
|
( |
) |
Redemption of operating partnership units |
|
|
( |
) |
|
|
( |
) |
Mortgage principal payments |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
( |
) |
Net increase (decrease) in cash and restricted cash |
|
|
|
|
|
|
( |
) |
Cash and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
Cash and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest, net of interest capitalized |
|
$ |
|
|
|
$ |
|
|
Cash paid for income taxes, net of refunds |
|
$ |
|
|
|
$ |
|
|
See notes to consolidated financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Life Storage, Inc. (the “Parent Company”) and Life Storage LP (the “Operating Partnership”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
2. ORGANIZATION
The Parent Company operates as a self-administered and self-managed real estate investment trust (a “REIT”) that owns and operates self-storage properties. All of the Parent Company’s assets are owned by, and all its operations are conducted through, the Operating Partnership. Life Storage Holdings, Inc., a wholly-owned subsidiary of the Parent Company (“Holdings”), is the sole general partner of the Operating Partnership; the Parent Company is a limited partner of the Operating Partnership and, through its ownership of Holdings and its limited partnership interest, controls the operations of the Operating Partnership, holding a
At June 30, 2019, we had an ownership interest in and/or managed
We consolidate all wholly owned subsidiaries. Partially owned entities, including joint ventures, are consolidated when we control the entity. Our consolidated financial statements include the accounts of the Parent Company, the Operating Partnership, Life Storage Solutions, LLC (one of the Parent Company’s taxable REIT subsidiaries), Warehouse Anywhere LLC (an entity owned
Included in the Parent Company’s consolidated balance sheets are noncontrolling redeemable Operating Partnership Units and included in the Operating Partnership’s consolidated balance sheets are limited partners’ redeemable capital interest at redemption value. These interests are presented in the “mezzanine” section of the consolidated balance sheets because they do not meet the functional definition of a liability or equity under current accounting literature. These represent the outside ownership interests of the limited partners in the Operating Partnership. There were
12
The following is a reconciliation of the Parent Company’s noncontrolling redeemable Operating Partnership Units and the Operating Partnership’s limited partners’ redeemable capital interest for the period:
(dollars in thousands) |
|
Six Months Ended June 30, 2019 |
|
|
Beginning balance |
|
$ |
|
|
Net income attributable to noncontrolling interest in the Operating Partnership |
|
|
|
|
Redemption of units |
|
|
( |
) |
Distributions |
|
|
( |
) |
Adjustment to redemption value |
|
|
|
|
Ending balance |
|
$ |
|
|
The disaggregated revenues of the Company presented in accordance with ASC Topic 606 “Revenue from Contracts with Customers” are as follows:
(dollars in thousands) |
|
Three Months Ended June 30, 2019 |
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||||
Rental income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Management and acquisition fee income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues related to tenant reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Management and acquisition fee income and revenues related to tenant reinsurance are included in other operating income in the consolidated statements of operations.
During the six months ended June 30, 2019, approximately
Commencing April 1, 2019, the Company launched a tenant self-storage insurance program whereby a captive wholly owned subsidiary of the Company reinsures certain risks relating to property stored by its tenants. In connection with this new program, the Company’s prior arrangement with a third-party insurer was terminated. The change in tenant insurance programs is not expected to have a significant impact on the Company’s consolidated net income. However, as reflected in the Company’s results for the three months ended June 30, 2019, the Company does expect an increase to both tenant reinsurance revenues and related expenses as a result of the differences in the accounting for the two programs.
3. STOCK BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of ASC Topic 718, “Compensation - Stock Compensation.” The Company recognizes compensation cost in its financial statements for all share based payments granted, modified, or settled during the period.
For awards with graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.
The Company did
13
During the three months ended June 30, 2019 and 2018,
During the six months ended June 30, 2019, the Company issued
In September 2018, the Company announced that then current Chief Executive Officer, David Rogers, would be retiring effective March 1, 2019. In conjunction with this announcement, the vesting periods of certain restricted stock awards and performance-based awards previously granted to Mr. Rogers were accelerated to reflect his March 1, 2019 retirement date. As a result of this change, an additional $
4. CASH AND RESTRICTED CASH
Restricted cash represents those amounts required to be placed in escrow by banks with whom the Company has entered into mortgages and amounts required to be placed into escrow related to the Company’s tenant reinsurance program which became effective April 1, 2019 (see Note 2). Restricted cash is included in other assets in the consolidated balance sheets.
(Dollars in thousands) |
|
June 30, 2019 |
|
|
December 31, 2018 |
|
|
June 30, 2018 |
|
|||
Cash |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and restricted cash |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
5. INVESTMENT IN STORAGE FACILITIES AND INTANGIBLE ASSETS
The following summarizes our activity in storage facilities during the six months ended June 30, 2019:
(dollars in thousands) |
|
|
|
|
Cost: |
|
|
|
|
Beginning balance |
|
$ |
|
|
Acquisition of storage facilities |
|
|
|
|
Improvements and equipment additions |
|
|
|
|
Net decrease in construction in progress |
|
|
( |
) |
Dispositions |
|
|
( |
) |
Ending balance |
|
$ |
|
|
Accumulated Depreciation: |
|
|
|
|
Beginning balance |
|
$ |
|
|
Additions during the period |
|
|
|
|
Dispositions |
|
|
( |
) |
Ending balance |
|
$ |
|
|
The Company acquired
The purchase prices of the facilities acquired in 2019 have been assigned as follows:
(dollars in thousands) |
|
|
|
|
|
|
|
|
Consideration paid |
|
|
Acquisition Date Fair Value |
|
|
|
|
|
|||||||||||||||||||||||||
States |
|
Number of Properties |
|
|
Date of Acquisition |
|
Purchase Price |
|
|
Cash Paid |
|
|
Carrying Value of Noncontrolling Interest in Joint Venture |
|
|
Mortgage Assumed |
|
|
Net Other Liabilities (Assets) Assumed |
|
|
Land |
|
|
Building, Equipment, and Improvements |
|
|
In-Place Customers Leases |
|
|
Closing Costs Expensed |
|
||||||||||
NY |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
FL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
OH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
FL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Total acquired in 2019 |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
14
The facility purchased in New York was acquired as the result of the Company’s acquisition of the remaining
The $
The Company measures the fair value of in-place customer lease intangible assets based on the Company’s experience with customer turnover and the cost to replace the in-place leases. The Company amortizes in-place customer leases on a straight-line basis over
In-place customer leases are included in other assets on the Company’s consolidated balance sheets as follows:
(Dollars in thousands) |
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
In-place customer leases |
|
$ |
|
|
|
$ |
|
|
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Net carrying value at the end of period |
|
$ |
|
|
|
$ |
|
|
Amortization expense related to in-place customer leases was $
Change in Useful Life Estimates
As part of the Company’s capital improvement efforts during 2017, 2018 and 2019, buildings at certain self-storage facilities were identified for replacement. As a result of the decision to replace these buildings, the Company reassessed the estimated useful lives of the then existing buildings. This useful life reassessment resulted in an increase in depreciation expense of approximately $
The accelerated depreciation resulting from the events discussed above reduced both basic and diluted earnings per share/unit by less than $
15
6. UNSECURED LINE OF CREDIT AND TERM NOTES
Borrowings outstanding on our unsecured line of credit and term notes are as follows:
(Dollars in thousands) |
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
Revolving line of credit borrowings |
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Term note due June 4, 2020 |
|
|
— |
|
|
|
|
|
Term note due August 5, 2021 |
|
|
|
|
|
|
|
|
Term note due April 8, 2024 |
|
|
|
|
|
|
|
|
Senior term note due July 1, 2026 |
|
|
|
|
|
|
|
|
Senior term note due December 15, 2027 |
|
|
|
|
|
|
|
|
Term note due July 21, 2028 |
|
|
|
|
|
|
|
|
Senior term note due June 15, 2029 |
|
|
|
|
|
|
— |
|
Total term note principal balance outstanding |
|
$ |
|
|
|
$ |
|
|
Less: unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Less: unamortized senior term note discount |
|
|
( |
) |
|
|
( |
) |
Term notes payable |
|
$ |
|
|
|
$ |
|
|
The Company’s unsecured amended credit agreement includes a revolving credit facility with a limit of $
On June 3, 2019, the Operating Partnership issued $
On December 7, 2017, the Operating Partnership issued $
On June 20, 2016, the Operating Partnership issued $
The indenture under which the 2029 Senior Notes, the 2027 Senior Notes and the 2026 Senior Notes were issued restricts the ability of the Company and its subsidiaries to incur debt unless the Company and its consolidated subsidiaries comply with a leverage ratio not to exceed
On July 21, 2016, the Company entered into a $
16
On April 8, 2014, the Company entered into a $
In 2011, the Company entered into a $
The line of credit and term notes require the Company to meet certain financial covenants, measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness and limitations on dividend payouts. At June 30, 2019, the Company was in compliance with such covenants.
We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain consistent with amounts outstanding at June 30, 2019, the entire availability on the line of credit could be drawn without violating our debt covenants.
The Company’s fixed rate term notes contain a provision that allows for the noteholders to call the debt upon a change of control of the Company at an amount that includes a make whole premium based on rates in effect on the date of the change of control.
Deferred debt issuance costs and the discount on the outstanding term notes are both presented as reductions of term notes in the accompanying consolidated balance sheets at June 30, 2019 and December 31, 2018. Amortization expense related to these deferred debt issuance costs was $
7. MORTGAGES PAYABLE AND DEBT MATURITIES
Mortgages payable at June 30, 2019 and December 31, 2018 consist of the following:
(dollars in thousands) |
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
self-storage facility with an aggregate net book value of $ million, principal and interest paid monthly (effective interest rate |
|
$ |
|
|
|
$ |
|
|
storage facility with an aggregate net book value of $ million, principal and interest paid monthly (effective interest rate |
|
|
|
|
|
|
|
|
self-storage facility with an aggregate net book value of $ million, principal and interest paid monthly (effective interest rate |
|
|
|
|
|
|
|
|
storage facility with an aggregate net book value of $ million, principal and interest paid monthly (effective interest rate |
|
|
|
|
|
|
|
|
Total mortgages payable |
|
$ |
|
|
|
$ |
|
|
17
The table below summarizes the Company’s debt obligations at June 30, 2019. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The fair value of the fixed rate term notes and mortgage notes were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. These assumptions are considered Level 2 inputs within the fair value hierarchy as described in Note 9. The carrying values of our variable rate debt instruments approximate their fair values as these debt instruments bear interest at current market rates that approximate market participant rates. This is considered a Level 2 input within the fair value hierarchy. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts.
|
|
|
|
|
|
Expected Maturity Date Including Discount |
|
|
|
|
|
|||||||||||||||||||||
(dollars in thousands) |
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Thereafter |
|
|
Total |
|
|
Fair Value |
|
||||||||
Line of credit - variable rate LIBOR + June 30, 2019) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note - variable rate LIBOR + June 30, 2019) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Term note - fixed rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Mortgage note - fixed rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
Mortgage note - fixed rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
Mortgage note - fixed rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
|
|
Mortgage note - fixed rate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
8. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps have been used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps required the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts were not exchanged. Forward starting interest rate swaps have also been used by the Company to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters into interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.
The Company’s interest rate swaps qualified and were designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, interest rate swaps are recorded in the consolidated balance sheets at fair value and the related gains or losses are deferred in shareholders’ equity or partners’ capital as Accumulated Other Comprehensive Loss (“AOCL”). These deferred gains and losses are recognized in interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately.
In the third quarter of 2018, the Company’s last remaining interest rate swaps on $
In 2015 and 2016, the Company entered into forward starting interest rate swap agreements to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of fixed rate long-term debt. In conjunction with the issuance of the 2026 Senior Notes (see Note 6), the Company terminated these hedges and settled the forward starting swap agreements for approximately $
18
During each of the three and six months ended June 30, 2018, the net reclassification from AOCL to interest expense was ($
The changes in AOCL for the three and six months ended June 30, 2019 and 2018 are summarized as follows:
(dollars in thousands) |
|
Three Months Ended June 30, 2019 |
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||||
Accumulated other comprehensive loss beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Realized loss reclassified from accumulated other comprehensive loss to interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain from changes in the fair value of the effective portion of the interest rate swaps |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
Amount included in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
9. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC Topic 820 “Fair Value Measurements and Disclosures” in determining the fair value of its financial and nonfinancial assets and liabilities. ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Refer to Note 7 for presentation of the fair values of debt obligations which are disclosed at fair value on a recurring basis.
There are
19
10. INVESTMENT IN JOINT VENTURES
A summary of the Company’s unconsolidated joint ventures is as follows:
Venture |
|
Number of Properties at June 30, 2019 |
|
Company common ownership interest at June 30, 2019 |
|
|
Carrying value of investment at June 30, 2019 |
|
Carrying value of investment at December 31, 2018 |
|
Sovran HHF Storage Holdings LLC (“Sovran HHF”)1 |
|
|
|
|
|
|
$ |
|
$ |
|
Sovran HHF Storage Holdings II LLC (“Sovran HHF II”)2 |
|
|
|
|
|
|
$ |
|
$ |
|
191 III Life Storage Holdings LLC (“191 III”)3 |
|
|
|
|
|
|
$ |
|
$ |
|
Life Storage-SERS Storage LLC (“SERS”)4 |
|
|
|
|
|
|
$ |
|
$ |
|
Life Storage-HIERS Storage LLC (“HIERS”)5 |
|
|
|
|
|
|
$ |
|
$ |
|
Iskalo Office Holdings, LLC (“Iskalo”)6 |
|
N/A |
|
|
|
|
($ |
|
($ |
|
Urban Box Coralway Storage, LLC (“Urban Box”)7 |
|
|
|
|
|
|
$ |
|
$ |
|
SNL/Orix 1200 McDonald Ave., LLC (“McDonald”)8 |
|
|
|
|
|
|
$ |
|
$ |
|
SNL Orix Merrick, LLC (“Merrick”)9 |
|
|
|
|
|
|
$ |
|
$ |
|
N 32nd Street Self Storage, LLC (“N32”)10 |
|
|
|
|
|
|
$ |
|
$ |
|
NYX Don Mills Storage LP ("Don Mills")11 |
|
|
|
|
|
|
$ |
|
$ |
|
NYX Sheridan Storage LP ("Sheridan")12 |
|
|
|
|
|
|
$ |
|
$ |
|
NYX Appleby Storage LP ("Appleby")13 |
|
|
|
|
|
|
$ |
|
$ |
|
Bluebird Sanford Storage LP ("Sanford")14 |
|
|
|
|
|
|
$ |
|
N/A |
|
Bluebird Ingram Storage LP ("Ingram")15 |
|
|
|
|
|
|
$ |
|
N/A |
|
Other joint ventures |
|
N/A |
|
N/A |
|
|
$ |
|
N/A |
|
*Property in development stage |
|
|
|
|
|
|
|
|
|
|
1 |
Sovran HHF owns self-storage facilities in Arizona ( |
2 |
Sovran HHF II owns self-storage facilities in New Jersey ( |
3 |
191 III owns |
4 |
SERS owns |
5 |
HIERS owns self-storage facilities in Arizona ( |
6 |
Iskalo owns the building that houses the Company’s headquarters and other tenants. The Company paid rent to Iskalo of $ |
7 |
Urban Box owns a self-storage facility in Florida. Urban Box has entered into a non-recourse mortgage loan with $ |
8 |
McDonald owns a self-storage facility in New York. McDonald has entered into a non-recourse mortgage loan with $ |
9 |
Merrick owns a self-storage facility in New York. Merrick has entered into a non-recourse mortgage loan with $ |
20
10 |
N32 owns a self-storage property in Arizona and has entered into a non-recourse mortgage loan with $ |
11 |
Don Mills is developing a self-storage facility in Ontario, Canada which is expected to be completed in 2020. During the six months ended June 30, 2019, the Company contributed $ |
12 |
Sheridan is developing a self-storage facility in Ontario, Canada which is expected to be completed by 2021. |
13 |
Appleby is developing a self-storage facility in Ontario, Canada which is expected to be completed by 2021. |
14 |
Sanford owns a self-storage facility in Ontario, Canada and has entered into a non-recourse mortgage loan with $ |
15 |
Ingram owns a self-storage facility in Ontario, Canada and has entered into a non-recourse mortgage loan with $ |
Based on the facts and circumstances of each of the Company’s joint ventures, the Company has determined that only one of the joint ventures is a variable interest entity (“VIE”) in accordance with ASC 810, “Consolidation.” As a result, the Company used the voting model under ASC 810 for all joint ventures not considered a VIE to determine whether or not to consolidate the joint ventures. Based upon each member’s substantive participation rights over the activities as stipulated in the joint venture agreements, none of the joint ventures are consolidated by the Company. As the Company does not have the power to direct the activities of the joint venture that is considered a VIE, the VIE joint venture is not consolidated by the Company. Due to the Company’s significant influence over the operations of each of the joint ventures, all joint ventures are accounted for under the equity method of accounting.
In the first quarter of 2019, the Company acquired the remaining
21
The carrying values of the Company’s investments in joint ventures are assessed for other-than-temporary impairment on a periodic basis and no such impairments have been recorded on any of the Company’s investments in joint ventures.
The Company earns management and/or call center fees ranging from
The Company’s share of the unconsolidated joint ventures’ income (loss) is as follows:
(dollars in thousands) Venture |
|
Three Months Ended June 30, 2019 |
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||||
Sovran HHF |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Sovran HHF II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191 III |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
SERS |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
HIERS |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
RAP |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Merrick |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
McDonald |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Urban Box |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
N32 |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Iskalo |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanford |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Ingram |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
A summary of the combined unconsolidated joint ventures’ financial statements as of and for the six months ended June 30, 2019 is as follows:
(dollars in thousands) |
|
|
|
|
Balance Sheet Data: |
|
|
|
|
Investment in storage facilities, net |
|
$ |
|
|
Investment in office building, net |
|
|
|
|
Other assets |
|
|
|
|
Total Assets |
|
$ |
|
|
Due to the Company |
|
$ |
|
|
Mortgages payable |
|
|
|
|
Other liabilities |
|
|
|
|
Total Liabilities |
|
$ |
|
|
Unaffiliated partners’ equity |
|
|
|
|
Company equity |
|
|
|
|
Total Partners’ Equity |
|
|
|
|
Total Liabilities and Partners’ Equity |
|
$ |
|
|
Income Statement Data: |
|
|
|
|
Total revenues |
|
$ |
|
|
Property operating expenses |
|
|
( |
) |
Administrative, management and call center fees |
|
|
( |
) |
Depreciation and amortization of customer list |
|
|
( |
) |
Amortization of financing fees |
|
|
( |
) |
Income tax expense |
|
|
( |
) |
Interest expense |
|
|
( |
) |
Net income |
|
$ |
|
|
22
The Company does not guarantee the debt of any of its equity method investees.
We do not expect to have material future cash outlays relating to these joint ventures outside our share of capital for future acquisitions of properties and our share of the payoff of secured debt held by these joint ventures.
11. INCOME TAXES
The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and will generally not be subject to corporate income taxes to the extent it distributes its taxable income to its shareholders and complies with certain other requirements.
The Company has elected to treat three of its subsidiaries as taxable REIT subsidiaries. In general, the Company’s taxable REIT subsidiaries may perform additional services for tenants and generally may engage in certain real estate or non-real estate related business. A taxable REIT subsidiary is subject to corporate federal and state income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities.
The Company recorded federal and state income tax expense of $
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 20, 2017. The TCJA significantly changed the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders. Under the TCJA, the corporate income tax rate is reduced from a maximum rate of
12. EARNINGS PER SHARE AND EARNINGS PER UNIT
The Company reports earnings per share and earnings per unit data in accordance ASC Topic 260, “Earnings Per Share.” Under ASC Topic 260-10, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. The Parent Company and the Operating Partnership have calculated their basic and diluted earnings per share/unit using the two-class method.
23
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share utilizing the two-class method.
(in thousands except per share data) |
|
Three Months Ended June 30, 2019 |
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to common shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Diluted earnings per common share attributable to common shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Earnings Per Unit
The following table sets forth the computation of basic and diluted earnings per common unit utilizing the two-class method.
(in thousands except per unit data) |
|
Three Months Ended June 30, 2019 |
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2019 |
|
|
Six Months Ended June 30, 2018 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per unit – weighted average units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per unit – adjusted weighted average units and assumed conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common unit attributable to common unitholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Diluted earnings per common unit attributable to common unitholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Not included in the effect of dilutive securities above for both earnings per share and earnings per unit are
24
13. SHAREHOLDERS’ EQUITY
The following is a reconciliation of the changes in the Parent Company’s total shareholders’ equity for the six months ended June 30, 2019:
(dollars in thousands) |
|
Common Stock |
|
|
Additional Paid-in Capital |
|
|
Dividends in Excess of Net Income |
|
|
Accumulated Other Comprehensive Income (loss) |
|
|
Total Shareholders’ Equity |
|
|||||
Balance December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Earned portion of non-vested stock |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common shareholders |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Issuance of non-vested stock |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Earned portion of non-vested stock |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common shareholders |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
25
The following is a reconciliation of the changes in the Parent Company’s total shareholders’ equity for the six months ended June 30, 2018:
(dollars in thousands) |
|
Common Stock |
|
|
Additional Paid-in Capital |
|
|
Dividends in Excess of Net Income |
|
|
Accumulated Other Comprehensive Income (loss) |
|
|
Total Shareholders’ Equity |
|
|||||
Balance December 31, 2017 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Forfeiture of non-vested stock |
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Earned portion of non-vested stock |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock option expense |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Net income attributable to common shareholders |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of reclassifications |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Earned portion of non-vested stock |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock option expense |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Carrying value less than redemption value on redeemed noncontrolling interest |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment to redemption value on noncontrolling redeemable Operating Partnership Units |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common shareholders |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of reclassifications |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Dividends |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance June 30, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
On June 14, 2018, the Company entered into a continuous equity offering program with Wells Fargo Securities, LLC, Jeffries LLC, SunTrust Robinson Humphrey, Inc., HSBC Securities (USA) Inc., BB&T Capital Markets, a division of BB&T Securities, LLC and BTIG, LLC, pursuant to which the Company may sell up to $
On August 2, 2017, the Company’s Board of Directors authorized the repurchase of up to $
In 2013, the Company implemented a Dividend Reinvestment Plan which was suspended by the Company’s Board of Directors in 2017. As a result, the Company did not issue any shares under the Dividend Reinvestment Plan during the six months ended June 30, 2019 and 2018.
26
14. PARTNERS’ CAPITAL
The following is a reconciliation of the changes in total partners’ capital for the six months ended June 30, 2019:
(dollars in thousands) |
|
Life Storage Holdings, Inc. General Partner |
|
|
Life Storage, Inc. Limited Partner |
|
|
Accumulated Other Comprehensive Income (loss) |
|
|
Total Controlling Partners’ Capital |
|
||||
Balance December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Earned portion of non-vested stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Distributions |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Earned portion of non-vested stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Distributions |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The following is a reconciliation of the changes in total partners’ capital for the six months ended June 30, 2018:
(dollars in thousands) |
|
Life Storage Holdings, Inc. General Partner |
|
|
Life Storage, Inc. Limited Partner |
|
|
Accumulated Other Comprehensive Income (loss) |
|
|
Total Controlling Partners’ Capital |
|
||||
Balance December 31, 2017 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Forfeiture of non-vested stock |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Earned portion of non-vested stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Stock option expense |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Net income attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of reclassifications |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Distributions |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Earned portion of non-vested stock |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Stock option expense |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Carrying value less than redemption value on redeemed noncontrolling interest |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Adjustment to redemption value on noncontrolling redeemable Operating Partnership Units |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Amortization of terminated hedge included in AOCL |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Distributions |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance June 30, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
27
15. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted ASU 2014-09 effective as of January 1, 2018. The Company elected to adopt the standard using the modified retrospective transition method. Leases are specifically excluded from the scope of ASU 2014-09, therefore, upon analysis, the Company concluded that the adoption of the new standard did not have any impact on the timing or amounts of the Company’s rental revenue from customers which represents nearly
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (ASC 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840, “Leases” (ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability under this guidance is equal to the present value of lease payments and the right-of-use asset is based on the lease liability, subject to adjustments such as for initial direct costs and prepaid or accrued lease payments. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases result in straight-line expense (similar to previous accounting by lessees for operating leases under ASC 840) while finance leases result in a front-loaded expense pattern (similar to previous accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. The Company adopted ASU 2016-02 effective as of January 1, 2019. Management determined that the application of ASC 842 did not have a significant impact on the Company’s leases existing at the date of adoption where the Company is a lessor. The Company has inventoried all leases where the Company is a lessee as of January 1, 2019 and has examined certain other contracts to identify whether such contracts contain a lease as defined under the new guidance. The Company’s lease population is comprised of leases for land and/or buildings in which certain of the Company’s self-storage facilities operate, as well as leases of corporate office space. All leases where the Company is the lessee qualify as operating leases and the Company does not have any financing leases as of the date of adoption of ASU 2016-02. The aggregate right-of-use assets and related lease liabilities at the initial date of application related to all leases identified by the Company where the Company is a lessee both totaled approximately $
|
• |
The package of practical expedients in ASC 842-10-65-1(f) which, if elected, stipulates that for all leases existing at the date of application (1) an entity need not reassess whether any expired or existing contracts contain leases; (2) an entity need not reassess the lease classification for any expired or existing leases; and (3) an entity need not reassess initial direct costs for any existing leases. |
|
• |
The practical expedient in ASC 842-10-65-1(g) which, if elected, stipulates that an entity may use hindsight at the date of initial application in determining the lease term and in assessing impairment of the entity’s right to use assets. |
28
|
• |
The practical expedient in ASC 842-10-65-1(gg) which, if elected, stipulates that an entity need not assess whether existing or expired land easements that were not previously accounted for as leases under ASC 840 are or contain a lease under ASC 842. |
|
• |
The practical expedient in ASC 842-10-15-37 which, if elected, allows a lessee to choose not to separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component. |
|
• |
The practical expedient in ASC 842-10-15-42A which, if elected, allows a lessor to choose not to separate nonlease components from lease components and, instead, to account for each separate lease component and the nonlease components associated with that lease component as a single lease component if the nonlease components otherwise would be accounted for under ASC 606, “Revenue from Contracts with Customers,” and both (1) the timing and pattern of transfer for the lease component and nonlease component(s) associated with the lease component are the same, and (2) the lease component, if accounted for separately, would be classified as an operating lease in accordance with ASC 842-10-25 paragraphs 2 and 3. |
|
• |
The option in ASC 842-20-25-2 for a lessee to elect, as an accounting policy, not to apply the recognition requirements in ASC 842 to short-term leases and, instead, to recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Leases are considered short-term when they have a term of less than one year. |
|
• |
The Company has elected to define the term “major part,” as referenced in ASC 842-10-25-2 related to the remaining economic life of an asset, as being |
|
• |
The Company has elected to define the term “substantially all,” as referenced in ASC 842-10-25-2 related to the fair value of an asset, as being |
|
• |
The Company has elected to define the term “at or near the end,” as referenced in ASC 842-10-25-2 related to a lease commencement date, as being a date that falls within the last |
Expenses related to operating leases totaled $
At June 30, 2019, the Company has
(in thousands) |
|
|
|
|
2019 |
|
$ |
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
The difference between the amounts included in the table above and the aggregate lease liability recorded in the accompanying consolidated balance sheet at June 30, 2019 is the result of the impact of the discount rate on future minimum lease payments.
In August 2018, the FASB Issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which provides guidance to assist entities in accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) incurred by entities that are a customer in a hosting arrangement that is a service contract. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting ASU 2018-15 on its consolidated financial statements.
29
16. COMMITMENT AND CONTINGENCIES
At June 30, 2019, the Company was under contract to acquire
At June 30, 2019, the Company was under contract to sell
At June 30, 2019, the Company has signed contracts in place with third-party contractors for expansion and enhancements at its existing facilities. The Company expects to pay $
17. SUBSEQUENT EVENTS
On
On July 2, 2019, the Company sold
(in thousands) |
|
|
|
|
Land |
|
$ |
|
|
Building, equipment, and construction in progress |
|
$ |
|
|
Accumulated depreciation |
|
$ |
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
$ |
|
|
Other assets |
|
$ |
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
Deferred revenue |
|
$ |
|
|
Subsequent to June 30, 2019, the Company entered into contracts to acquire
30
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of the Company’s consolidated financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this document, the words “intends,” “believes,” “expects,” “anticipates,” and similar expressions are intended to identify “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; the Company’s ability to evaluate, finance and integrate acquired businesses into the Company’s existing business and operations; the Company’s ability to effectively compete in the industry in which it does business; the Company’s existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company’s outstanding floating rate debt; the Company’s ability to comply with debt covenants; any future ratings on the Company’s debt instruments; regional concentration of the Company’s business may subject it to economic downturns in the states of Florida and Texas; the Company’s reliance on its call center; and tax law changes that may change the taxability of future income.
RESULTS OF OPERATIONS
FOR THE PERIOD APRIL 1, 2019 THROUGH JUNE 30, 2019, COMPARED TO THE PERIOD APRIL 1, 2018 THROUGH JUNE 30, 2018
We recorded rental revenues of $128.9 million for the three months ended June 30, 2019, an increase of $3.0 million or 2.4% when compared to rental revenues of $125.9 million for the same period in 2018. Of the increase in rental revenue, $2.4 million resulted from a 2.1% increase in rental revenues at the 505 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore the 505 core properties considered in same store sales are those included in the consolidated results of operations since January 1, 2018, excluding stores not yet stabilized, the properties we sold in 2018 and on July 2, 2019, six stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017). The increase in same store rental revenues was a result of a 3.0% increase in rental income per square foot, partially offset by a 100 basis point decrease in average occupancy. The remainder of the overall increase is the result of an increase in rental revenue of $0.6 million related to the revenues from the stores not included in the same store pool. Other operating income, which includes merchandise sales, revenues related to tenant reinsurance, truck rentals, management fees and acquisition fees, increased by $4.0 million for the three months ended June 30, 2019 compared to the same period in 2018 primarily as a result of increased management fees earned as a result of an increase in managed properties and increased revenues related to tenant reinsurance due largely in part to the change in the Company’s tenant insurance program.
Property operations and maintenance expenses increased $3.6 million or 12.2% in the three months ended June 30, 2019 compared to the same period in 2018. Expenses related to the 505 core properties considered in the same store pool remained relatively consistent with a minor decrease from the same period in 2018. The overall increase is a result of the net activity of the stores not included in the same store pool and increased expenses related to tenant reinsurance due do the change in the Company’s tenant insurance program. Real estate tax expense increased $0.6 million as a result of a 4.1% increase in property taxes on the 505 core properties considered in the same store pool and the inclusion of taxes on the properties acquired in 2019 and 2018.
Net operating income increased $2.8 million or 3.0% resulting from a 2.4% increase in our same store net operating income along with the impact of the properties acquired since January 1, 2018 and stores not yet stabilized.
Net operating income, or “NOI,” is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, operating lease expense, depreciation and amortization expense, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, gain on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure to investors in evaluating our operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. Additionally, NOI is widely used in the real estate industry and the self-storage industry to measure the performance and value of real estate assets without regard to various items included in net income that do not relate to or are not indicative of operating performance, such as depreciation and amortization, which can vary depending on accounting methods and the book value of assets. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income. There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income.
31
The following table reconciles our net income presented in the consolidated financial statements to NOI generated by our self-storage facilities for the three months ended June 30, 2019 and 2018.
|
|
Three Months ended June 30, |
|
|||||
(dollars in thousands) |
|
2019 |
|
|
2018 |
|
||
Net income |
|
$ |
40,964 |
|
|
$ |
39,457 |
|
General and administrative |
|
|
10,510 |
|
|
|
11,728 |
|
Payments for rent |
|
|
141 |
|
|
|
141 |
|
Depreciation and amortization |
|
|
26,158 |
|
|
|
24,784 |
|
Interest expense |
|
|
18,759 |
|
|
|
17,518 |
|
Interest income |
|
|
(46 |
) |
|
|
(2 |
) |
Equity in income of joint ventures |
|
|
(1,110 |
) |
|
|
(1,048 |
) |
Net operating income |
|
$ |
95,376 |
|
|
$ |
92,578 |
|
Net operating income |
|
|
|
|
|
|
|
|
Same store |
|
$ |
80,252 |
|
|
$ |
78,334 |
|
Other stores, tenant reinsurance related income and management fee income |
|
|
15,124 |
|
|
|
14,244 |
|
Total net operating income |
|
$ |
95,376 |
|
|
$ |
92,578 |
|
Our 2019 same store results consist of only those properties that have been owned by the Company and included in our consolidated results since January 1, 2018, excluding stores not yet stabilized, the properties we sold in 2018 and on July 2, 2019, six stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017. The impact of tenant reinsurance related items is excluded from same store results. The following table sets forth operating data for our 505 same store properties. These results provide information relating to property operating changes without the effects of acquisitions.
Same Store Summary
|
|
Three Months ended June 30, |
|
|
Percentage |
|
||||||
(dollars in thousands) |
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
Same store rental income |
|
$ |
118,785 |
|
|
$ |
116,356 |
|
|
|
2.1 |
% |
Same store other operating income |
|
|
1,790 |
|
|
|
1,838 |
|
|
|
(2.6 |
)% |
Total same store operating income |
|
|
120,575 |
|
|
|
118,194 |
|
|
|
2.0 |
% |
Payroll and benefits |
|
|
9,664 |
|
|
|
9,807 |
|
|
|
(1.5 |
)% |
Real estate taxes |
|
|
14,890 |
|
|
|
14,301 |
|
|
|
4.1 |
% |
Utilities |
|
|
3,397 |
|
|
|
3,488 |
|
|
|
(2.6 |
)% |
Repairs and maintenance |
|
|
3,909 |
|
|
|
4,180 |
|
|
|
(6.5 |
)% |
Office and other operating expenses |
|
|
3,856 |
|
|
|
3,831 |
|
|
|
0.7 |
% |
Insurance |
|
|
1,444 |
|
|
|
1,444 |
|
|
|
— |
|
Advertising |
|
|
291 |
|
|
|
308 |
|
|
|
(5.5 |
)% |
Internet marketing |
|
|
2,872 |
|
|
|
2,501 |
|
|
|
14.8 |
% |
Total same store operating expenses |
|
|
40,323 |
|
|
|
39,860 |
|
|
|
1.2 |
% |
Same store net operating income |
|
$ |
80,252 |
|
|
$ |
78,334 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
Change |
|
|
Quarterly same store move ins |
|
|
52,576 |
|
|
|
53,552 |
|
|
|
(976 |
) |
Quarterly same store move outs |
|
|
46,760 |
|
|
|
48,143 |
|
|
|
(1,383 |
) |
We believe the decrease in same store move ins was due to increased competition and customer rate sensitivity in certain markets. We believe the decrease in same store move outs was a result of customers increasing their length of stay.
32
General and administrative expenses for the three months ended June 30, 2019 decreased $1.2 million or 10.4% when compared with the three months ended June 30, 2018. The decrease was primarily due to the finalization of a lawsuit settlement in the second quarter of 2019.
Depreciation and amortization expense increased to $26.2 million in the three months ended June 30, 2019 from $24.8 million in the same period in 2018 as a result of depreciation and amortization related to self-storage facilities acquired in 2018 and 2019.
Total interest expense increased $1.2 million in the three months ended June 30, 2019 as compared to the same period in 2018 primarily as a result of increased outstanding debt balances in 2019 as compared to 2018.
FOR THE PERIOD JANURY 1, 2019 THROUGH JUNE 30, 2019, COMPARED TO THE PERIOD JANUARY 1, 2018 THROUGH JUNE 30, 2018
We recorded rental revenues of $253.1 million for the six months ended June 30, 2019, an increase of $5.6 million or 2.3% when compared to rental revenues of $247.5 million for the same period in 2018. Of the increase in rental revenue, $5.3 million resulted from a 2.3% increase in rental revenues at the 505 core properties considered in same store sales (the Company will include stores in its same store pool in the second year after the stores achieve 80% sustained occupancy using market rates and incentives; therefore, the 505 core properties considered in same store sales are those included in the consolidated results of operations since January 1, 2018, excluding stores not yet stabilized, the properties we sold in 2018 and on July 2, 2019, six stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017). The increase in same store rental revenues was a result of a 3.3% increase in rental income per square foot, partially offset by a 110 basis point decrease in average occupancy. The remainder of the overall increase is the result of an increase in rental revenue of $0.3 million related to the revenues from the stores not included in the same store pool. Other operating income, which includes merchandise sales, revenues related to tenant reinsurance, truck rentals, management fees and acquisition fees, increased by $4.9 million for the six months ended June 30, 2019 compared to the same period in 2018 primarily as the result of increased management fees earned as a result of an increase in managed properties and increased revenues related to tenant reinsurance due largely in part to the change in the Company’s tenant insurance program.
Property operations and maintenance expenses increased $4.4 million or 7.2% in the six months ended June 30, 2019 compared to the same period in 2018. Expenses related to the 505 core properties considered in the same store pool remained relatively consistent with a minor decrease from the same period in 2018. The overall increase is a result of the net activity of the stores not included in the same store pool and increased expenses related to tenant reinsurance due do the change in the Company’s tenant insurance program. Real estate tax expense increased $1.3 million as a result of a 4.9% increase in property taxes on the 505 core properties considered in the same store pool and the inclusion of taxes on the properties acquired in 2019 and 2018.
Net operating income increased $4.8 million or 2.7% resulting from a 2.5% increase in our same store net operating income along with the impact of the properties acquired since January 1, 2018 and stores not yet stabilized.
The following table reconciles our net income presented in the consolidated financial statements to NOI generated by our self-storage facilities for the six months ended June 30, 2019 and 2018.
|
|
Six Months ended June 30, |
|
|||||
(dollars in thousands) |
|
2019 |
|
|
2018 |
|
||
Net income |
|
$ |
75,600 |
|
|
$ |
73,507 |
|
General and administrative |
|
|
22,847 |
|
|
|
23,771 |
|
Payments for rent |
|
|
283 |
|
|
|
283 |
|
Depreciation and amortization |
|
|
52,387 |
|
|
|
49,548 |
|
Interest expense |
|
|
36,578 |
|
|
|
34,722 |
|
Interest income |
|
|
(51 |
) |
|
|
(6 |
) |
Gain on sale of storage facilities |
|
|
(1,076 |
) |
|
|
— |
|
Equity in income of joint ventures |
|
|
(1,921 |
) |
|
|
(2,020 |
) |
Net operating income |
|
$ |
184,647 |
|
|
$ |
179,805 |
|
Net operating income |
|
|
|
|
|
|
|
|
Same store |
|
$ |
155,705 |
|
|
$ |
151,885 |
|
Other stores, tenant reinsurance related income and management fee income |
|
|
28,942 |
|
|
|
27,920 |
|
Total net operating income |
|
$ |
184,647 |
|
|
$ |
179,805 |
|
Our 2019 same store results consist of only those properties that have been owned by the Company and included in our consolidated results since January 1, 2018, excluding stores not yet stabilized, the properties we sold in 2018 and on July 2, 2019, six stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017. The impact of tenant reinsurance related items is excluded from same store results. The following table sets forth operating data for our 505 same store properties. These results provide information relating to property operating changes without the effects of acquisitions.
33
Same Store Summary
|
|
Six Months ended June 30, |
|
|
Percentage |
|
||||||
(dollars in thousands) |
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
Same store rental income |
|
$ |
233,941 |
|
|
$ |
228,655 |
|
|
|
2.3 |
% |
Same store other operating income |
|
|
3,343 |
|
|
|
3,447 |
|
|
|
(3.0 |
)% |
Total same store operating income |
|
|
237,284 |
|
|
|
232,102 |
|
|
|
2.2 |
% |
Payroll and benefits |
|
|
19,520 |
|
|
|
19,903 |
|
|
|
(1.9 |
)% |
Real estate taxes |
|
|
29,780 |
|
|
|
28,377 |
|
|
|
4.9 |
% |
Utilities |
|
|
7,211 |
|
|
|
7,471 |
|
|
|
(3.5 |
)% |
Repairs and maintenance |
|
|
8,950 |
|
|
|
8,788 |
|
|
|
1.8 |
% |
Office and other operating expenses |
|
|
7,726 |
|
|
|
7,881 |
|
|
|
(2.0 |
)% |
Insurance |
|
|
2,889 |
|
|
|
2,847 |
|
|
|
1.5 |
% |
Advertising |
|
|
582 |
|
|
|
621 |
|
|
|
(6.3 |
)% |
Internet marketing |
|
|
4,921 |
|
|
|
4,329 |
|
|
|
13.7 |
% |
Total same store operating expenses |
|
|
81,579 |
|
|
|
80,217 |
|
|
|
1.7 |
% |
Same store net operating income |
|
$ |
155,705 |
|
|
$ |
151,885 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
Change |
|
|
Year-to-date same store move ins |
|
|
97,115 |
|
|
|
99,972 |
|
|
|
(2,857 |
) |
Year-to-date same store move outs |
|
|
90,168 |
|
|
|
92,775 |
|
|
|
(2,607 |
) |
We believe the decrease in same store move ins was due to increased competition and customer rate sensitivity in certain markets. We believe the decrease in same store move outs was a result of customers increasing their length of stay.
General and administrative expenses for the six months ended June 30, 2019 decreased $0.9 million or 3.9% when compared to the six months ended June 30, 2018. The decrease was primarily due to the finalization of a lawsuit settlement in the second quarter of 2019, partially offset by the impact of the accelerated vesting of Mr. Rogers’ restricted stock awards and performance-based awards as discussed in Note 3, along with increases in technology related expenses. Also contributing to the decrease is approximately $1.1 million of costs incurred in 2018 associated with changes to the composition of the Company’s Board of Directors and other proxy matters that did not recur in 2019.
Depreciation and amortization expense increased to $52.4 million in the six months ended June 30, 2019 from $49.5 million in the same period in 2018 as a result of depreciation and amortization related to self-storage facilities acquired in 2018 and 2019.
Total interest expense increased $1.9 million in the six months ended June 30, 2019 as compared to the same period in 2018 primarily as a result of increased outstanding debt balances in 2019 as compared to 2018.
FUNDS FROM OPERATIONS
We believe that Funds from Operations (“FFO”) provides relevant and meaningful information about our operating performance that is necessary, along with net earnings and cash flows, for an understanding of our operating results. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful supplemental measure in evaluating our operating performance by disregarding (or adding back) historical cost depreciation.
FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) as net income available to common shareholders computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of properties, plus impairment of real estate assets, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance FFO should be compared with our reported net income and cash flows in accordance with GAAP, as presented in our consolidated financial statements.
Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, or as an indicator of our ability to make cash distributions.
34
Reconciliation of Net (Loss) Income to Funds From Operations (unaudited)
|
|
Three Months ended June 30, |
|
|
Six Months ended June 30, |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income attributable to common shareholders |
|
$ |
40,742 |
|
|
$ |
39,274 |
|
|
$ |
75,196 |
|
|
$ |
73,163 |
|
Net income attributable to noncontrolling interests in the Operating Partnership |
|
|
222 |
|
|
|
183 |
|
|
|
404 |
|
|
|
344 |
|
Depreciation of real estate and amortization of intangible assets exclusive of debt issuance costs |
|
|
25,722 |
|
|
|
24,270 |
|
|
|
51,528 |
|
|
|
48,526 |
|
Depreciation and amortization from unconsolidated joint ventures |
|
|
1,460 |
|
|
|
1,234 |
|
|
|
2,870 |
|
|
|
2,430 |
|
Funds from operations allocable to noncontrolling interest in the Operating Partnership |
|
|
(369 |
) |
|
|
(302 |
) |
|
|
(695 |
) |
|
|
(582 |
) |
Funds from operations available to common shareholders |
|
$ |
67,777 |
|
|
$ |
64,659 |
|
|
$ |
129,303 |
|
|
$ |
123,881 |
|
LIQUIDITY AND CAPITAL RESOURCES
Our line of credit and term notes require us to meet certain financial covenants measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness, and limitations on dividend payouts. At June 30, 2019, the Company was in compliance with all debt covenants. In the event that the Company violates its debt covenants in the future, the amounts due under the agreements could be callable by the lenders and could adversely affect our credit rating requiring us to pay higher interest and other debt-related costs. We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain consistent with amounts outstanding at June 30, 2019, the entire availability under our line of credit could be drawn without violating our debt covenants.
Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements.
Cash flows from operating activities were $118.9 million and $110.7 million for the six months ended June 30, 2019 and 2018, respectively. The increase in operating cash flows in the 2019 period compared to the 2018 period was primarily due to the increase in net income after adjusting for non-cash items.
Cash used in investing activities was $142.4 million and $29.9 million for the six months ended June 30, 2019 and 2018, respectively. The increase in cash used in investing activities in the 2019 period compared to the 2018 period was primarily due to the increased volume of acquisitions in 2019 as compared to the same period in 2018, along with increased expenditures on improvements and equipment additions, increased contributions made to unconsolidated joint ventures, and increased property deposits made.
Cash provided by financing activities was $60.1 million for the six months ended June 30, 2019, compared to cash used in financing activities of $82.4 million for the six months ended June 30, 2018. The change is primarily a result of the issuance of the $350 million 2029 Senior Notes in 2019, partially offset by the pay down of the Company’s $100 million term loan due 2020 and the net repayment of $91 million on the Company’s line of credit in 2019.
Note 6 and Note 7 to the consolidated financial statements include details related to the Company’s unsecured line of credit, term notes, mortgages, and other indebtedness. Note 13 to the consolidated financial statements includes details of our shareholders’ equity and activity related thereto.
Our line of credit facility and term notes have an investment grade rating from Standard and Poor’s (BBB) and Moody’s (Baa2).
Future acquisitions, our expansion and enhancement program, and share repurchases are expected to be funded with draws on our line of credit, issuance of common and preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program and share repurchases.
35
ACQUISITION AND DISPOSITION OF PROPERTIES
During the six months ended June 30, 2019, the Company acquired six self-storage facilities comprising 416,000 square feet in Florida (2), Ohio (3) and New York (1) for a total purchase price of $109.7 million. As three of these acquisitions were in the lease-up phase, based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate for these acquisitions was 1.9%. As discussed further in Note 5, the Company held a 40% ownership interest in one of the properties acquired prior to the acquisition of the remaining 60% ownership interest in the first quarter of 2019. The Company did not dispose of any properties during the six months ended June 30, 2019.
During 2018, the Company acquired eight self-storage facilities comprising 474,500 square feet in California (2), Florida (1), Georgia (1), Missouri (1), New Hampshire (1) and New York (2) for a total purchase price of $77.7 million. Based on the financial information of the entities from which the properties were acquired, the weighted average capitalization rate for these acquisitions was 2.8%.
As of June 30, 2019, the Company has entered into contracts to acquire an additional 16 self-storage facilities for an aggregate purchase price of $202.4 million. Twelve of these 16 self-storage facilities were acquired by the Company subsequent to June 30, 2019 for a purchase price of $134.8 million. The purchase of the remaining four facilities is subject to customary conditions to closing, and there are no assurances that these facilities will be acquired.
Subsequent to June 30, 2019, the Company entered into contracts to acquire six self-storage facilities for an aggregate purchase price of $76.1 million. One of these facilities was leased by the Company at June 30, 2019. The purchases of these facilities are subject to customary conditions to closing, and there is no assurance that these facilities will be acquired.
We may acquire additional stabilized or newly constructed properties in 2019.
During 2018, the Company sold 13 non-strategic self-storage facilities in Arizona (2), Florida (1), North Carolina (1), Texas (8) and Virginia (1) for net proceeds of approximately $100.5 million, which includes a $9.1 million investment retained in an unconsolidated joint venture, resulting in a $56.4 million gain on sale. Twelve of these properties were sold to an unconsolidated joint venture in which the Company has a 20% ownership interest.
We may also seek to sell additional properties to third-parties or joint venture partners in 2019.
FUTURE ACQUISITION AND DEVELOPMENT PLANS
Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations, or to expand into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2019, including potential acquisitions by unconsolidated joint ventures.
In the six months ended June 30, 2019, we added 329,000 square feet to existing properties for a total cost of approximately $25.2 million. We plan to complete an additional $20 million to $30 million of expansions and enhancements to our existing facilities in 2019, of which $18.6 million was paid as of June 30, 2019.
We also expect to continue investing in capital expenditures on our properties. This includes roofing, paving, and remodeling of store offices. For the six months ended June 30, 2019, we invested approximately $14.0 million in such improvements and we expect to invest approximately $6 million to $11 million for the remainder of 2019.
REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that we satisfy certain requirements, including distributing at least 90% of our REIT taxable income for a taxable year. These distributions must be made in the year to which they relate, or in the following year if declared before we file our federal income tax return, and if they are paid not later than the date of the first regular dividend of the following year. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends.
Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.
36
UMBRELLA PARTNERSHIP REIT
We are formed as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) and, as such, have the ability to issue Operating Partnership Units in exchange for properties sold by independent owners. By utilizing such Units as currency in facility acquisitions, we may obtain more favorable pricing or terms due to the seller’s ability to partially defer their income tax liability. As of June 30, 2019, 248,466 Units are outstanding. These Units had been issued in exchange for self-storage properties at the request of the sellers.
INTEREST RATE RISK
The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.
We did not carry any outstanding unsecured floating rate debt million at June 30, 2019. Therefore, based on our outstanding debt balances at June 30, 2019, a 100 basis point increase in interest rates would not have an effect on our annual interest expense. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment.
Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
INFLATION
We do not believe that inflation has had or will have a direct effect on our operations. Substantially all of the leases at our facilities are on a month-to-month basis which provides us with the opportunity to increase rental rates in a timely manner in response to any potential future inflationary pressures.
SEASONALITY
Our revenues typically have been higher in the third and fourth quarters, primarily because self-storage facilities tend to experience greater occupancy during the late spring, summer and early fall months due to the greater incidence of residential moves and college student activity during these periods. However, we believe that our customer mix, diverse geographic locations, rental structure and expense structure provide adequate protection against undue fluctuations in cash flows and net revenues during off-peak seasons. Thus, we do not expect seasonality to materially affect distributions to shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 15 to the financial statements.
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
The information required is incorporated by reference to the information appearing under the caption “Interest Rate Risk” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.
Item 4. |
Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Parent Company
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, has been conducted under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at June 30, 2019. There have not been changes in the Company’s internal controls or in other factors that could significantly affect these controls during the quarter ended June 30, 2019.
37
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Operating Partnership
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, has been conducted under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at June 30, 2019. There have not been changes in the Operating Partnership’s internal controls or in other factors that could significantly affect these controls during the quarter ended June 30, 2019.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Operating Partnership’s internal control over financial reporting (as defined in 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934) that occurred during the Operating Partnership’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
38
PART II. |
Other Information |
Item 1. |
Legal Proceedings |
None
Item 1A. |
Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
(c) The following table summarizes our purchases of our common stock from August 2, 2017 through June 30, 2019.
Issuer Purchases of Equity Securities
Period |
|
(a) Total number of shares purchased |
|
|
(b) Average price paid per share |
|
|
(c) Total number of shares purchased as part of publicly announced plans or programs (1) |
|
|
(d) Approx. dollar value of shares that may yet be purchased under the plans or programs (1) |
|
||||
August 2, 2017 - August 31, 2017 |
|
|
92,150 |
|
|
$ |
72.98 |
|
|
|
92,150 |
|
|
$ |
193,274,647 |
|
September 1, 2017 - September 30, 2017 |
|
|
20,404 |
|
|
|
73.94 |
|
|
|
20,404 |
|
|
|
191,765,955 |
|
October 1, 2017 - December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
January 1, 2018 - March 31, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
April 1, 2018 - June 30, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
July 1, 2018 - September 30, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
October 1, 2018 - December 31, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
January 1, 2019 - March 31, 2019 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
April 1, 2019 - June 30, 2019 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
112,554 |
|
|
|
73.16 |
|
|
|
112,554 |
|
|
$ |
191,765,955 |
|
(1) |
On August 2, 2017, the Company’s Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock. The program does not have an expiration date but may be suspended or discontinued at any time. |
Item 3. |
Defaults Upon Senior Securities |
None
Item 4. |
Mine Safety Disclosures |
Not Applicable
Item 5. |
Other Information |
None
39
Item 6. |
Exhibits |
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
31.3 |
|
|
|
|
|
31.4 |
|
|
|
|
|
32 |
|
|
|
|
|
32.1 |
|
|
|
|
|
101 |
|
The following financial statements from the Parent Company’s and the Operating Partnership’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in inline XBRL, as follows: |
|
|
|
|
|
(i) Consolidated Balance Sheets at June 30, 2019 and December 31, 2018; |
|
|
|
|
|
(ii) Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018; |
|
|
|
|
|
(iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018; |
|
|
|
|
|
(iv) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018; and |
|
|
|
|
|
(v) Notes to Consolidated Financial Statements. |
|
|
|
|
|
|
40
SIGNATURES
Pursuant to the requirements 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.
|
|
Life Storage, Inc. |
|||
|
|
|
|
|
|
|
|
By: |
|
/S/ Andrew J. Gregoire |
|
|
|
|
|
Andrew J. Gregoire |
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
(Principal Accounting Officer) |
August 1, 2019
Date
|
|
Life Storage LP |
||||
|
|
|
|
|
||
|
|
By: |
|
/S/ Andrew J. Gregoire |
||
|
|
|
|
Andrew J. Gregoire |
||
|
|
|
|
Chief Financial Officer |
||
|
|
|
|
(Principal Accounting Officer) |
August 1, 2019
Date
41