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Home›Pooling of interests›LIFE STORAGE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

LIFE STORAGE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

By Pia
February 26, 2022
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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 Life storage in front of customers in search engines at the right time for conversion;

o

Regional marketing that creates effective brand awareness in the cities where we operate;

o
Our Customer 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 offer Life 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
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                   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 with U.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 DECEMBER 31, 2021 COMPARED TO THE FINANCIAL YEAR ENDED DECEMBER 31, 2020

We recorded rental revenues of $690.8 million for the year ended December 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 since December 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 ended December 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 ended December 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
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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 since December 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 $10.6 million or 20.3% from 2020 to 2021. This increase is primarily due to increased costs for home office staff to support store growth and increased investment in technology.

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 DECEMBER 31, 2020 COMPARED TO THE FINANCIAL YEAR ENDED DECEMBER 31, 2019

We recorded rental revenues of $539.6 million for the year ended December 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
since December 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
ended December 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 effective April 1,
2019. Other operating income, which includes merchandise sales, truck rentals,
management fees and acquisition fees, increased by $3.4 million for the year
ended December 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 effective April 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
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Our 2020 same store results consist of only those Properties that have been
owned by the Company and included in our consolidated results since December 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.

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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. On July 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 through
November 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 the National 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.

                                       30
--------------------------------------------------------------------------------
                              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 in Alabama (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), and Washington (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 the New York store and three Georgia
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 in California (8), Florida, (6), Georgia (1), Missouri (1), New Jersey (7),
New York (1), Ohio (6), Pennsylvania (4), South Carolina (1), and Texas (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 in Florida (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), and Washington (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 at December 31, 2021
we were under contract to acquire ten self-storage facilities for an aggregate
purchase price of $246.3 million. During January 2022, the Company completed the
acquisition of six of these self-storage facilities for an aggregate purchase
price of $165.0 million. Also, subsequent to December 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 of December 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 in Louisiana
(9), Mississippi (8), North Carolina (4), South Carolina (5), and Texas (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 at December 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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