LIFE STORAGE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. We make
statements in this section that are forward-looking statements within the
meaning of the federal securities laws. For a complete discussion of
forward-looking statements, see the section in this Form 10-K entitled "Forward
Looking Statements." Certain risk factors may cause actual results, performance
or achievements to differ materially from those expressed or implied by the
following discussion. For a discussion of such risk factors, see the section in
this Form 10-K entitled "Risk Factors." Dollar amounts in thousands, except
share and per share data, unless otherwise stated.
Business and Overview
We believe we are the fourth largest operator of self-storage properties in the
United States based on square feet owned and managed. All of our stores in the
United States conduct business under the customer-friendly name Life Storage ®.
Mining strategy
Our operating strategy is designed to generate growth and add value by:
a.
Increase operational performance and cash flow through aggressive management of our stores:
•
We seek to differentiate our self-storage facilities from our competitors through innovative marketing and value-added product offerings, including:
o
Strategic and effective web and mobile marketing that places
o
Regional marketing that creates effective brand awareness in the cities where we operate;
o OurCustomer Care Center answers sales inquiries and makes reservations for all of our Properties on a centralized basis. Further, our call center and customer contact software was developed in-house and is 100% supported by our in-house experts; o
Our fully digital “Rent Now” rental platform allows customers to “skip the meter” by selecting a specific storage unit, completing the rental agreement and making their rental payment online;
o Our truck move-in program, under which, at present, approximately 300 of our stores offerLife Storage trucks to assist our customers moving into their spaces, and also serve as a moving billboard further supporting our branding efforts; o
Our dehumidification system provides our customers with a better environment to store their goods and improves returns on our properties;
o
Our Warehouse Anywhere last-mile delivery solution provides enterprise customers with third-party logistics and related services through a decentralized, forward-deployed, unmanned model combining storage asset management with proprietary inventory tracking technology;
•
Our customized computer applications link each of our primary sales channels (customer care center, web, and store) allowing for real time access to space type and inventory, pricing, promotions, and other pertinent store information. This also provides us with raw data on historical and current pricing, move-in and move-out activity, specials and occupancies, etc. This data is then used within the advanced pricing analytics programs employed by our revenue management team;
•
All of our store employees receive a high level of training. New store associates are assigned a Certified Training Manager as a mentor during their initial training period. In addition, all employees have access to our online training and development portal for initial training as well as continuing education. Finally, we have a company intranet that acts as a communications portal for company policy and procedures, online ordering, incentive rankings, etc.
b.
Acquisition of additional stores:
•
Our objective is to acquire new stores in markets in which we currently operate. This is a proven strategy we have employed over the years as it facilitates our branding efforts, grows market share, and allows us to achieve improved economies of scale through shared advertising, payroll, and other services.
•
We also look to enter new markets that are in the top 50 Metropolitan Statistical Areas (MSA) by acquiring established multi-property portfolios. With this strategy we are then able to seek out additional acquisition or third-party management opportunities to continue to grow market share and branding and enhance economies of scale.
•
We primarily target stores with higher average rental rates per square foot than our overall portfolio to help improve operating margin.
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vs.
Development of our management activity:
•
We see our management business as a source of future acquisitions. We hold a noncontrolling interest in multiple joint ventures which hold a total of 116 properties that we manage. In addition, we manage 251 self-storage facilities for which we have no ownership. We may enter into additional management agreements and develop additional joint ventures in the future.
•
To broaden opportunities available, we have implemented a bridge lending program under which an unconsolidated joint venture of the Company provides financing to operating properties that we manage. We anticipate that this program will help us increase our management business, create additional future acquisition opportunities, and strengthen our relationship with partners, all while providing interest and fee income.
D.
Expansion and improvement of our existing stores:
•
Over the past five years we have undertaken a program of expanding and enhancing our Properties. In 2017, we added or converted to premium storage 504,000 square feet to existing Properties for a total cost of approximately$35.2 million ; in 2018, we added or converted to premium storage 390,000 square feet to existing Properties for a total cost of approximately$27.8 million ; in 2019, we added or converted to premium storage 694,000 square feet to existing Properties for a total cost of approximately$58.1 million ; in 2020, we added or converted to premium storage 522,000 square feet to existing Properties for a total cost of approximately$41.4 million ; and in 2021, we added or converted to premium storage 287,000 square feet to existing Properties for a total cost of approximately$23.5 million .
Supply and Demand / Operational Trends
We believe the supply and demand model in the self-storage industry is micro-market specific in that a majority of our business comes from within a five-mile radius of our stores. The out-performance of the sector compared to other real estate asset classes has drawn new capital to self-storage. The Company experienced significant new competition in recent years and expects moderate growth in new supply at least through 2022. Despite the inflow of additional properties, we have seen capitalization rates on quality stabilized acquisitions in the top 50 major metropolitan markets (expected annual return on investment) compress slightly at approximately 4.0% to 5.0%. We have experienced annual same store sales increases each year for the past 12 years, subsequent to the economic recession of 2009. We feel our recent performance further supports the notion that the self-storage industry holds up well regardless of the prevailing economic landscape. Our performance in 2021 and 2020 despite the ongoing effects of the COVID-19 global health crisis further supports this notion. We believe the decrease in same store move ins in 2021 when compared to 2020 was due to lack of available space at many of our stores as a result of extremely high occupancy rates throughout 2021. We believe the increase in same store move outs over the same period was a result of the COVID-19 global health crisis during 2020 as many jurisdictions implemented stay-at-home orders for a portion of that year. 2021 2020 Change Same store move ins 194,816 204,976 (10,160 ) Same store move outs 188,925 187,935 990 Difference 5,891 17,041 (11,150 ) Although property tax increases were kept at moderate levels through assessment challenges in 2021, elevated property tax increases are expected in the coming years. We expect same store expense growth resulting from increases in health costs, property insurance and property taxes in 2022, to be partially offset by operating efficiencies gained from leveraging technology. We believe the same store expense increases will be at manageable levels. 24 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, including those related to carrying values of storage facilities, bad debts, and contingencies and litigation. We base these estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following estimates are considered critical because they are particularly dependent on our judgment about matters that have a significant level of uncertainty at the tie the accounting estimates are made, and changes to those estimates could have a material impact on our financial condition or operating results. Assigning purchase price to assets acquired: Upon adoption of Accounting Standards Update 2017-01, most of our self-storage facility acquisitions, including all self-storage facility acquisitions in 2021 and 2020, do not meet the definition of business combinations and are therefore treated as asset acquisitions. As a result, the cost of acquired storage facilities is assigned primarily to land, land improvements, building, equipment, and in-place customer leases based on the relative fair values of these assets as of the date of acquisition. We use significant unobservable inputs in our determination of the fair values of these assets. The determination of these inputs involves judgments and estimates that can vary for each individual property based on various factors specific to the properties and the functional, economic and other factors affecting each property. The fair values of the acquired facilities are determined using financial projections and applicable capitalization rates. To determine the fair value of land, we use prices per acre derived from observed transactions involving comparable land in similar locations. To determine the fair value of buildings, equipment and improvements, we use current replacement cost estimates based on information derived from construction industry data by geographic region as adjusted for age, condition, and turnkey factor, economic profit and economic obsolescence considerations associated with these assets. The fair values of in-place customer leases are based on the rent that would be lost due to the amount of time required to replace existing customers which is based on our historical experience with market demand and turnover in our facilities. Qualification as a REIT: We operate, and intend to continue to operate, as a REIT under the Code, but no assurance can be given that we will at all times so qualify. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders. If we fail to qualify as a REIT, any requirement to pay federal income taxes could have a material adverse impact on our financial condition and results of operations. Recent Accounting Pronouncements
See Note 2 to the financial statements.
FINISHED EXERCISE
We recorded rental revenues of$690.8 million for the year endedDecember 31, 2021 , an increase of$151.2 million or 28.0% when compared to 2020 rental revenues of$539.6 million . Of the change in rental revenue,$72.2 million of the increase resulted from a 14.3% increase in rental revenues at the 531 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 531 core properties considered in same store sales are those included in the consolidated results of operations sinceDecember 31, 2019 , excluding stores not yet stabilized, four 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 290 basis point increase in average occupancy coupled with a 9.8% increase in rental income per square foot. Also contributing to the overall increase in rental revenues was an increase of$79.0 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2021 and 2020. We recorded tenant reinsurance revenues of$58.1 million for the year endedDecember 31, 2021 , an increase of$13.4 million or 29.9% when compared to 2020 tenant reinsurance revenues of$44.7 million . The increase in tenant reinsurance revenues is primarily due to the increase in stores owned or managed in 2021. Other operating income, which includes merchandise sales, truck rentals, management fees and acquisition fees, increased by$7.2 million for the year endedDecember 31, 2021 compared to 2020 primarily as the result of increased acquisition fees, increased management fees earned as a result of an increase in managed properties and increased revenues from the Company's Warehouse Anywhere third-party logistics and warehousing solution. Property operations and maintenance expenses increased$21.1 million or 17.2% in 2021 compared to 2020. The 531 core properties considered in the same store pool experienced a$3.7 million or 3.5% increase in such expenses primarily as the result of increased repairs and maintenance expenditures and office related expenses. The net activity of the stores not included in the same store pool also contributed$17.4 million to the overall increase in property operations and maintenance expenses. Tenant reinsurance expenses increased$7.2 million or 45.5% in 2021 compared to 2020 primarily as the result of the increase in stores owned or managed in 2021. Real estate tax expense increased$9.6 million or 13.6% in 2021 compared to 2020. The 531 core properties considered in the same store pool experienced a$2.2 million or 3.4% 25 -------------------------------------------------------------------------------- increase in real estate taxes which is reflective of a net increase in property tax levies on those properties. In addition to the same store real estate tax expense increase, real estate taxes increased$7.3 million from the stores not included in the same store pool. Our 2021 same store results consist of only those Properties that have been owned by the Company and included in our consolidated results sinceDecember 31, 2019 , excluding stores not yet stabilized, four stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017. The impact of tenant reinsurance related items is excluded from same store results. We believe that same store results are meaningful measures to investors in evaluating our operating performance because, given the acquisitive nature of the industry, same store results provide information about the overall business after removing the results from those properties that were not consistent from year-to-year. Additionally, same store results are widely used in the real estate industry and the self-storage industry to measure performance. Same store results should be considered in addition to, but not as a substitute for, consolidated results in accordance with generally accepted accounting principles ("GAAP"). The following table sets forth operating data for our 531 same store properties. These results provide information relating to property operating changes without the effects of acquisitions. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2021 2020 Change Same store rental income$ 578,658 $ 506,469 14.3 % Same store other operating income 6,893 6,519 5.7 % Total same store operating income 585,551 512,988 14.1 % Payroll and benefits 38,900 38,995 (0.2 )% Real estate taxes 67,142 64,918 3.4 % Utilities 14,654 14,273 2.7 % Repairs and maintenance 18,259 16,098 13.4 % Office and other operating expenses 16,680 15,397 8.3 % Insurance 6,374 6,151 3.6 % Advertising 212 241 (12.0 )% Internet marketing 13,871 14,069 (1.4 )% Total same store operating expenses 176,092 170,142 3.5 % Same store net operating income$ 409,459 $ 342,846 19.4 % Net operating income increased$134.0 million or 32.8% as a result of a 19.4% increase in our same store net operating income along with an increase of$67.4 million primarily related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool. Net operating income or "NOI" is a non-GAAP 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, any losses on sale of real estate, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, any gains 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. 26
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The following table reconciles our net income reported in the 2021 and 2020 consolidated financial statements with the NOI generated by our self-storage facilities during those years.
Year ended December 31, (dollars in thousands) 2021 2020 Net income$ 252,175 $ 152,360 General and administrative 62,617 52,055 Depreciation and amortization 147,119 122,925 Gain on sale of real estate - (302 ) Interest expense 86,786 86,015 Interest income (827 ) (19 ) Equity in income of joint ventures (5,696 ) (4,838 ) Net operating income$ 542,174 $ 408,196 Net operating income Same store 409,459 342,846
Other stores, tenant reinsurance income
and management fee income 132,715 65,350 Total net operating income$ 542,174 $ 408,196
General and administrative expenses increased
Depreciation and amortization expense increased to$147.1 million in 2021 from$122.9 million in 2020 as a result of depreciation and amortization related to self-storage facilities acquired in 2021 and 2020. Interest expense increased from$86.0 million in 2020 to$86.8 million in 2021 primarily as a result of increased outstanding debt balances in 2021 as compared to 2020, partially offset by a make whole payment of$4.0 million made in 2020 as part of the early repayment of$100 million of term notes.
The Company did not sell any properties in 2021 or 2020.
FINISHED EXERCISE
We recorded rental revenues of$539.6 million for the year endedDecember 31, 2020 , an increase of$28.8 million or 5.6% when compared to 2019 rental revenues of$510.8 million . Of the change in rental revenue,$8.3 million of the increase resulted from a 1.7% increase in rental revenues at the 515 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 515 core properties considered in same store sales are those included in the consolidated results of operations sinceDecember 31, 2018 , excluding stores not yet stabilized, the properties we sold in 2019, four 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 130 basis point increase in average occupancy, partially offset by a 0.6% decrease in rental income per square foot. Also contributing to the overall increase in rental revenues was an increase of$20.5 million in rental revenues contributed by stores not included in the same store pool, primarily those acquired in 2020 and 2019, partially offset by stores sold in 2019. We recorded tenant reinsurance revenues of$44.7 million for the year endedDecember 31, 2020 , an increase of$9.8 million or 28.2% when compared to 2019 tenant reinsurance revenues of$34.9 million . The increase in tenant reinsurance revenues is primarily due to the increase in stores in 2020 along with the change in the Company's tenant reinsurance program effectiveApril 1, 2019 . Other operating income, which includes merchandise sales, truck rentals, management fees and acquisition fees, increased by$3.4 million for the year endedDecember 31, 2020 compared to 2019 primarily as the result of increased management fees earned as a result of an increase in managed properties. Property operations and maintenance expenses increased$1.0 million or 0.9% in 2020 compared to 2019. The 515 core properties considered in the same store pool experienced a$1.4 million or 1.4% decrease in such expenses as a result of the impact of the Company's investments in technology such as our "Rent Now" online rental platform which has enabled the Company to operate more efficiently. Further, same store payroll, repairs and maintenance, utilities, and other operating expenses all decreased in 2020 as compared to 2019 due to the Company's focus on efficiencies. These same store decreases were offset by an increase in internet marketing costs used to drive move ins during the second and third quarters of 2020. The overall increase in property operations and maintenance expense is the result of the net activity of the stores not included in the same store pool along with expenses incurred during 2020 due to damages resulting from the impact of a hurricane on two of our self-storage facilities. Tenant reinsurance expenses increased$7.1 million or 82.8% in 2020 compared to 2019 primarily as the result of the change in the Company's tenant insurance program effectiveApril 1, 2019 , along with an increase in stores in 2020 and tenant reinsurance claims resulting from the impact of a hurricane on two of our self-storage facilities in 2020. Real estate tax expense increased$5.2 million or 8.1% in 2020 compared to 2019. The 515 core properties considered in the same store pool experienced a$1.9 million or 3.1% increase which is reflective of a net increase in property tax levies on those properties. In addition to the same store real estate expense increase, real estate taxes increased$3.3 million from the stores not included in the same store pool. 27 -------------------------------------------------------------------------------- Our 2020 same store results consist of only those Properties that have been owned by the Company and included in our consolidated results sinceDecember 31, 2018 , excluding stores not yet stabilized, the properties we sold in 2019, four stores significantly impacted by flooding, and two stores that the Company began to fully replace in 2017. The impact of tenant reinsurance related items is excluded from same store results. The following table sets forth operating data for our 515 same store properties. These results provide information relating to property operating changes without the effects of acquisitions. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2020 2019 Change Same store rental income$ 490,343 $ 482,006 1.7 % Same store other operating income 6,298 6,617 (4.8 )% Total same store operating income 496,641 488,623 1.6 % Payroll and benefits 37,761 38,864 (2.8 )% Real estate taxes 62,958 61,054 3.1 % Utilities 13,894 15,199 (8.6 )% Repairs and maintenance 15,579 16,582 (6.0 )% Office and other operating expenses 14,998 15,529 (3.4 )% Insurance 6,017 5,909 1.8 % Advertising 233 877 (73.4 )% Internet marketing 13,645 10,589 28.9 % Total same store operating expenses 165,085 164,603 0.3 % Same store net operating income$ 331,556 $ 324,020 2.3 % Net operating income increased$28.6 million or 7.5% as a result of a 2.3% increase in our same store net operating income along with an increase of$21.1 million related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool. The following table reconciles NOI generated by our self-storage facilities to our net income presented in the 2020 and 2019 consolidated financial statements. Year ended December 31, (dollars in thousands) 2020 2019 Net income$ 152,360 $ 260,077 General and administrative 52,055 46,622 Payments for rent - 358 Depreciation and amortization 122,925 107,130 Gain on sale of storage facilities - (104,353 ) Gain on sale of real estate (302 ) (1,781 ) Interest expense 86,015 76,430 Interest income (19 ) (342 ) Equity in income of joint ventures (4,838 ) (4,566 ) Net operating income$ 408,196 $ 379,575 Net operating income Same store 331,556 324,020
Other stores, tenant reinsurance income
and management fee income 76,640 55,555 Total net operating income$ 408,196 $ 379,575 General and administrative expenses increased$5.4 million or 11.7% from 2019 to 2020. This increase was primarily driven by increased personnel costs to support the growth in stores, a$1.7 million cost reduction in the second quarter of 2019 relating to the finalization of a legal settlement which did not recur in 2020, and$0.8 million of costs incurred related to a legal settlement in 2020. Depreciation and amortization expense increased to$122.9 million in 2020 from$107.1 million in 2019 as a result of depreciation and amortization related to self-storage facilities acquired in 2020 and 2019, paired with$5.8 million of additional depreciation expense in 2020 related to self-storage facilities that were identified for replacement. 28 -------------------------------------------------------------------------------- Interest expense increased from$76.4 million in 2019 to$86.0 million in 2020 primarily as a result of increased outstanding debt balances in 2020 as compared to 2019 and a make whole payment of$4.0 million made in 2020 as part of the early repayment of$100 million of term notes. The Company did not sell any properties in 2020. OnJuly 2, 2019 , the Company sold 32 non-strategic properties to an unrelated third-party and received net cash proceeds of$207.6 million , resulting in a gain of$100.2 million . The Company also recognized a gain of$4.1 million in 2019 related to a property that was sold during 2017 and subsequently leased by the Company throughNovember 2019 . These dispositions were not classified as discontinued operations since they did not meet the criteria for such classification under ASU 2014-08 guidance. 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 theNational Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income available to common shareholders computed in accordance with 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.
Reconciliation of net income to funds from operations
For Year Ended December 31,
(dollars in thousands) 2021 2020 2019 2018 2017
Net income attributable to common
shareholders $ 249,317 $ 151,571 $ 258,699 $ 206,590 $ 96,365
Net income attributable to
noncontrolling interests in the
Operating Partnership 1,364 789 1,378 968 444
Depreciation of real estate and
amortization of intangible assets
exclusive of debt issuance costs 144,978 120,512 105,107 100,528 125,580
Depreciation and amortization from
unconsolidated joint
ventures 6,227 5,814 6,195 5,107 4,296
(Gain) loss on sale of storage
facilities - - (104,353 ) (56,398 ) 3,503
Funds from operations allocable to
noncontrolling interest in
the Operating Partnership (2,177 ) (1,443 ) (1,417 ) (1,197 ) (1,045 )
Funds from operations available to
common shareholders $ 399,709 $ 277,243 $ 265,609 $ 255,598 $ 229,143
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LIQUIDITY AND CAPITAL RESOURCES
The COVID-19 global health crisis impacted the cost of debt and equity for a
period of time and may disrupt markets in the future. We expect to be able to
maintain adequate liquidity as we manage through the current environment. While
significant uncertainty exists as to the full impact of the COVID-19 global
health crisis on our liquidity and capital resources, as of the date of this
report we believe that the combination of our cash on hand, the cash generated
by our operations, and our line of credit will be adequate to fund our
operations. We will continue to actively monitor the potential impact of the
COVID-19 global health crisis on our 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 December 31, 2021 , 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 December 31,
2021 , 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. 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 $433.9 million , $299.0 million , and
$278.8 million for the years ended December 31, 2021 , 2020, and 2019,
respectively. The increases in operating cash flows from 2020 to 2021 and from
2019 to 2020 were primarily due to an increase in net income as adjusted for
non-cash depreciation and amortization expenses, gains on the sale of storage
facilities and other non-cash items during these periods.
Cash used in investing activities was $1,680.7 million , $576.0 million , and
$302.5 million for the years ended December 31, 2021 , 2020, and 2019,
respectively. The increase in cash used in investing activities from 2020 to
2021 was the result of an increase in self-storage facility acquisition
activity, increased capital spending, and an increase in the Company's
investment in unconsolidated joint ventures, partially offset by an increase in
return of investment in unconsolidated joint ventures. The increase in cash used
in investing activities from 2019 to 2020 was the result of an increase in
self-storage facility acquisition activity, partially offset by a $28.0 million
return of investment in unconsolidated joint ventures and decreases in both
capital spending and net proceeds from the sales of storage facilities in 2020.
Cash provided by financing activities was $1,364.5 million , $314.2 million , and
$31.2 million during the years ended December 31, 2021 , 2020, and 2019,
respectively. The increase in cash provided by financing activities from 2020 to
2021 was primarily the result of the Company's issuance of 2,875,000 shares of
common stock through a public equity offering in 2021 resulting in net proceeds
of $348.8 million , an increase in sales of shares of common stock under the
Company's continuous equity offering programs during 2021, and an increase in
proceeds from term notes resulting from $600 million of senior notes issued in
2021 as compared to $400 million of senior notes issued in 2020, partially
offset by an increase in dividends paid. Also contributing to this increase is a
reduction in the net repayment of the Company's line of credit in 2021 as
compared to 2020. The increase in cash provided by finance activities from 2019
to 2020 was primarily the result of $296.0 million of net proceeds from the
issuance of shares of common stock under the Company's continuous equity
offering program in 2020.
For the years 2019, 2020 and 2021, see Note 5 to the consolidated financial
statements for details of the Company's unsecured line of credit and term note
activity, Note 6 to the consolidated financial statements for the Company's
mortgage activity and related details, and Note 12 to the consolidated financial
statements for the Company's equity activity. Also, see Note 11 to the
consolidated financial statements for details of the activity in debt held by
unconsolidated joint ventures of the Company. The debt held by these
unconsolidated joint ventures is secured by the real estate owned by these
entities and is nonrecourse to us.
Our Line of Credit and Term Notes are investment grade rated by Standard and Poor’s (BBB) and Moody’s (Baa2).
We expect to fund operating expenses, future acquisitions, our expansion and
enhancement program, and share repurchases, if any, and any other cash
requirements with future cash flows from operations, draws on our line of
credit, issuance of common and/or 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/or any share
repurchases.
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PENDING OBLIGATIONS
The following table summarizes our current obligations:
Payments due by
period (in thousands)
2027 and Contractual obligations Total 2022 2023-2024 2025-2026 thereafter Term notes 2,775,000 - 175,000 600,000 2,000,000 Mortgages payable 37,030 515 30,316 6,199 - Interest payments 592,032 93,304 178,151 155,645 164,932 Land leases 10,036 741 1,484 1,488 6,323 Expansion and enhancement contracts 61,379 61,379 - - - Building leases 17,607 2,294 4,521 4,155 6,637 Retail space rent 5,254 5,254 - - - Self-storage facility acquisitions 246,300 246,300 - - - Total$ 3,744,638 $ 409,787 $ 389,472 $ 767,487 $ 2,177,892
Interest payments include actual interest on fixed rate debt.
ACQUISITION OF PROPERTIES In 2021, we acquired 112 self-storage facilities comprising 7.9 million square feet inAlabama (7),Arizona (4),California (1),Colorado (3),Connecticut (6),Florida (31),Georgia (16),Illinois (4),Kentucky (1),Maine (1),New Hampshire (4),New Jersey (5),New York (1),North Carolina (6),Ohio (1),Oklahoma (2),South Carolina (5),Tennessee (1),Texas (10),Virginia (1), andWashington (2) for a total purchase price of$ 1,696.3 million , which is net of the Company's equity in profit from the acquisitions of theNew York store and threeGeorgia stores purchased from unconsolidated joint ventures. Additionally, 27 of these facilities were managed by the Company for a third-party prior to acquisition. Based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate for these acquisitions was 3.6%. In 2020 we acquired 40 self-storage facilities comprising 3.1 million square feet inCalifornia (8),Florida , (6),Georgia (1),Missouri (1),New Jersey (7),New York (1),Ohio (6),Pennsylvania (4),South Carolina (1), andTexas (5) for a total purchase price of$532.6 million . One of these acquired properties resulted from the Company acquiring the remaining 15% of a joint venture. Additionally, two of these facilities were managed by the Company for a third-party prior to acquisition. Based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate for these acquisitions was 5.0%. In 2019, we acquired 30 self-storage facilities comprising 2.2 million square feet inFlorida (4),Georgia (1),Maryland (5),Nevada (1),New York (1),New Jersey (2),North Carolina (1),Ohio (3),South Carolina (2),Tennessee (1),Texas (1),Virginia (5), andWashington (3) for a total purchase price of$429.4 million . One of these acquired properties resulted from the Company acquiring the remaining 60% of a joint venture. Additionally, one of these self-storage facilities was previously leased by the Company prior to acquisition. Based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate for these acquisitions was 2.5%. 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 2022 and atDecember 31, 2021 we were under contract to acquire ten self-storage facilities for an aggregate purchase price of$246.3 million . DuringJanuary 2022 , the Company completed the acquisition of six of these self-storage facilities for an aggregate purchase price of$165.0 million . Also, subsequent toDecember 31, 2021 , the Company entered into a contracts to acquire 15 self-storage facilities for an aggregate purchase price of$236.2 million . The purchases of these 19 self-storage facilities under contract are subject to customary conditions to closing, and there is no assurance that these facilities will be acquired. In 2021, we added or converted to premium storage 287,000 square feet to existing Properties for a total cost of approximately$23.5 million . Although we do not expect to construct any new facilities in 2022, we do plan to complete$65 million to$75 million in expansions and enhancements to existing facilities of which$36.6 million was paid as ofDecember 31, 2021 . In 2021, the Company spent approximately$35.3 million for recurring capitalized expenditures including roofing, paving, and office renovations. We expect to spend$25 million to$30 million in 2022 on similar capital expenditures. 31 -------------------------------------------------------------------------------- DISPOSITION OF PROPERTIES The Company did not sell or otherwise dispose of any properties during 2021 or 2020. During 2019, the Company sold 32 non-strategic properties inLouisiana (9),Mississippi (8),North Carolina (4),South Carolina (5), andTexas (6) to an unrelated third-party for net proceeds of$207.6 million , resulting in a gain on sale of approximately$100.2 million . As part of our ongoing strategy to improve overall operating efficiencies and portfolio quality, we may seek to sell additional Properties to third-parties or joint venture partners in 2022. 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. In 2021, our percentage of revenue from such sources was approximately 97%, thereby passing the 95% test, and no special measures are expected to be required to enable us to maintain our REIT designation. 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. 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 do not carry any floating rate debt atDecember 31, 2021 . Therefore, 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 the 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.
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