12. FAIR VALUE MEASUREMENTS
The Company sometimes limits its exposure to interest rate fluctuations by entering into interest rate swap agreements. The interest rate swap agreements moderate the Company's exposure to interest rate risk by effectively converting the interest on variable rate debt to a fixed rate. The Company measures its interest rate swap derivatives at fair value on a recurring basis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly into earnings.
Information regarding the Company's interest rate swaps measured at fair value, which are classified within Level 2 of the GAAP fair value hierarchy, is presented below (dollars in thousands):
The carrying values of cash and cash equivalents, restricted cash, trade receivables, and accounts payable and accrued liabilities reflected in the balance sheets at SeptemberJune 30, 20172020 and December 31, 2016,2019, approximate fair value due to the short term nature of these financial assets and liabilities. The carrying value of variable rate debt financing reflected in the balance sheets at SeptemberJune 30, 20172020 and December 31, 20162019 approximates fair value as the changes in
their associated interest rates reflect the current market and credit risk is similar to when the loans were originally obtained.
13. LEASES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may," or similar expressions, we intend to identify forward-looking statements.
The forward-looking statements contained in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. One of the most significant factors is the ongoing and potential impact of the current outbreak of COVID-19 on the economy, the self storage industry and the broader financial markets, which may have a significant negative impact on the Company's financial condition, results of operations and cash flows. The Company is unable to predict whether the continuing effects of the COVID-19 pandemic will trigger a further economic slowdown or a recession and to what extent the Company will experience disruptions related to the COVID-19 pandemic in the third quarter or thereafter. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below and the risks described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 26, 2020 (the "Annual Report"), the risk factor set forth in this quarterly report under Item 1A below, and the Company's subsequent filings under the Exchange Act.
Statements regarding the following subjects, among others, may be forward-looking:
•market trends in our industry, interest rates, the debt and lending markets or the general economy;
•our business and investment strategy;
•the acquisition of properties, including those under contract, and the ability of our acquisitions to achieve underwritten capitalization rates and our ability to execute on our acquisition pipeline;
•the timing of acquisitions;
•the internalization of retiring PROs into the Company;
•our relationships with, and our ability and timing to attract additional, PROs;
•our ability to effectively align the interests of our PROs with us and our shareholders;
•the integration of our PROs and their managed portfolios into the Company, including into our financial and operational reporting infrastructure and internal control framework;
•our operating performance and projected operating results, including our ability to achieve market rents and occupancy levels, reduce operating expenditures and increase the sale of ancillary products and services;
•our ability to access additional off-market acquisitions;
•actions and initiatives of the U.S. federal, state and local government and changes to U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
•the state of the U.S. economy generally or in specific geographic regions, states, territories or municipalities;
•economic trends and economic recoveries;
•our ability to obtain and maintain financing arrangements on favorable terms;
•general volatility of the securities markets in which we participate;
•the negative impacts from the continued spread of COVID-19 on the economy, the self storage industry, the broader financial markets, the Company's financial condition, results of operations and cash flows and the ability of the Company's tenants to pay rent;
•changes in the value of our assets;
•projected capital expenditures;
•the impact of technology on our products, operations, and business;
•the implementation of our technology and best practices programs (including our ability to effectively implement our integrated Internet marketing strategy);
•changes in interest rates and the degree to which our hedging strategies may or may not protect us from interest rate volatility;
•impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;
•our ability to continue to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes;
•availability of qualified personnel;
•the timing of conversions of subordinated performance units in our operating partnership and subsidiaries of our operating partnership into OP units in our operating partnership, the conversion ratio in effect at such time and the impact of such convertibility on our diluted earnings (loss) per share;
•the risks of investing through joint ventures, including whether the anticipated benefits from a joint venture are realized or may take longer to realize than expected;
•estimates relating to our ability to make distributions to our shareholders in the future; and
•our understanding of our competition.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. Readers should carefully review our financial statements and the notes thereto, as well as the sections entitled "Business," "Risk Factors," "Properties," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," described in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2017 (the "Annual Report"), and the other documents we file from time to time with the Securities and Exchange Commission.SEC. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
National Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment trust organized in the state of Maryland on May 16, 2013. We have elected and we believe that we have qualified to be taxed as a REIT commencing with our taxable year ended December 31, 2015. We serve as the sole general partner of our operating partnership, a Delaware limited partnership formed on February 13, 2013 to conduct our business, which is focused on the ownership, operation, and acquisition of self storage properties located within the top 100 metropolitan statistical areas throughout the United States.
Our executive chairman of the board of trustees and former chief executive officer, Arlen D. Nordhagen, co-founded SecurCare Self Storage, Inc. in 1988 to invest in and manage self storage properties. While growing SecurCare to over 150 self storage properties, Mr. Nordhagen recognized a market opportunity for a differentiated public self storage REIT that would leverage the benefits of national scale by integrating multiple experienced regional self storage operators with local operational focus and expertise. We believe that his vision, which is the foundation of the Company, aligns the interests of our participating regional operators ("PROs"), with those of our public shareholders by allowing our PROs to participate alongside our shareholders in our financial performance and the performance of our PROs' managed portfolios. This structure offers our PROs a unique opportunity to serve as regional property managers for their managed portfolios and directly participate in the potential upside of those properties while simultaneously diversifying their investment to include a broader portfolio of self storage properties.
COVID-19
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. The outbreak of COVID-19 in many countries, including the United States, has adversely impacted economic activity. The effect of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified, most states and municipalities have reacted by instituting quarantines, mandating business and school closures, requiring restrictions on travel, "shelter-in-place" and/or "stay-at-home" orders, and imposing restrictions on the types of businesses that may continue to operate. These containment measures generally do not apply to businesses, like ours, which are designated as "essential," but may apply to certain of our tenants, employees, vendors, lenders and joint venture partners.
As of the date of this report, our stores continue to operate and we are in compliance with federal, state and local COVID-19 guidelines and mandates. In response to the pandemic, we have increased the level and frequency of cleaning and sanitation of our self storage facilities and enacted recommended social distancing guidelines. Many of our stores feature online rental capabilities whereby a customer can complete the entire rental process online and receive an access code to the storage facility. For the remainder of our stores that do not yet benefit from the online rental feature, the combination of call center and email communication eliminates the need for any physical contact between customers and employees.
Due to the pandemic, we experienced a moderate slowdown in overall business activity during the three months ended June 30, 2020. Specifically, our same store portfolio (as defined below) operations were affected as follows:
•Same store move-in volume decreased approximately 14% during the three months ended June 30, 2020, compared to the three months ended June 30, 2019;
•Same store move-out volume decreased approximately 18% during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.
•Same store period-end occupancy was 89.8% as of June 30, 2020, a decrease of approximately 100 basis points compared to June 30, 2019.
•Same store average occupancy was 88.1% for the three months ended June 30, 2020, a decrease of approximately 140 basis points compared to the three months ended June 30, 2019.
Our July 2020 same store portfolio (as defined below) operations were affected as follows:
•Same store move-in volume increased approximately 8% in July 2020, compared to the same period in 2019.
•Same store move-out volume decreased approximately 20% in July 2020, compared to the same period in 2019.
•Same store period-end occupancy was 91.1% as of July 31, 2020, which was a 130 basis point increase compared to June 30, 2020 and a increase of approximately 80 basis points compared to July 31, 2019.
We continue to take proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:
•We have resumed rental rate increases for in-place tenants at the vast majority of our stores during the third quarter of 2020;
•We have closely monitored our liquidity position. As of July 31, 2020, we had the capacity to borrow remaining Revolver commitments of approximately $257 million with less than $5 million of debt maturing through 2022;
•We have entered into an agreement to issue $150.0 million of 2.99% senior unsecured notes due August 5, 2030 and $100.0 million of 3.09% senior unsecured notes due August 5, 2032 in a private placement, as discussed further in Note 14 to Item 1;
•We are continuing to diligently manage operating expenses, including store-level personnel costs, marketing and repairs and maintenance expenses. We have also continued to incur lower corporate travel costs compared to expectations at the beginning of the year.
•We remain committed to acquiring properties at appropriate risk-adjusted returns. We expect in the near-term there may be a lower volume of acquisition transactions in the self storage sector generally due to uncertainty from the pandemic. We believe our acquisition opportunities through our captive pipeline and relationship-
based third-party deals sourced by our PROs will continue to be a differentiating factor for us to prudently deploy capital, including through the issuance of OP equity.
The above discussion is intended to provide shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management’s efforts to respond to those impacts. We are unable to predict the impact of the COVID-19 pandemic on our business for the balance of the third quarter of 2020 and thereafter. We will continue to monitor its effects and will adjust our operations as necessary. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows for the third quarter of 2020 and future periods. See "Risk Factors" under Item 1A.
Our Structure
Our structure promotes operator accountability as subordinated performance units issued to our PROs in exchange for the contribution of their properties are entitled to distributions only after those properties satisfy minimum performance thresholds. In the event of a material reduction in operating cash flow, distributions on our subordinated performance units will be reduced before or disproportionately to distributions on our common shares held by our common shareholders. In addition, we expect our PROs will generally co-invest subordinated equity in the form of subordinated performance units in each acquisition that they source, and the value of these subordinated performance units will fluctuate with the performance of their managed portfolios. Therefore, our PROs are incentivized to select acquisitions that are expected to exceed minimum performance thresholds, thereby increasing the value of their subordinated equity stake. We expect that our shareholders will benefit from the higher levels of property performance that our PROs are incentivized to deliver.
Our PROs
The Company had eightnine PROs as of SeptemberJune 30, 2017: SecurCare,2020: Northwest, Optivest, Guardian, Move It, Storage Solutions, Hide Away, Personal Mini, Southern and Personal Mini. Moove In. As discussed in Note 1 in Item 1, on March 31, 2020, we closed on the merger and internalization of the management platform of SecurCare, which prior to the merger and internalization was our largest PRO. As part of the internalization, we offered and provided employment to most of SecurCare's employees, including its key persons, to continue managing SecurCare's managed portfolio under the brand SecurCare as members of our existing property management platform. As a result of the merger, we no longer pay any fees or reimbursements to SecurCare and distributions on the series of subordinated performance units related to SecurCare's managed portfolio were discontinued.
We seek to further expand our platform by continuing to recruit
additional established self storage operators, while integrating our operations through the implementation of centralized initiatives, including management information systems, revenue enhancement, and cost optimization programs. Our national platform allows us to capture cost savings by eliminating redundancies and utilizing economies of scale across the property management platforms of our PROs while also providing greater access to lower-cost capital.
On July 1, 2017, SecurCare and Move It terminated SecurCare's sub-management relationship with Move It. In connection with this transaction, the Company, SecurCare and Move It completed a series of transactions modifying Move It's relationship with the Company to permit Move It to hold OP units and a new series of subordinated performance units directly.
Our Consolidated Properties
We seek to own properties that are well located in high quality sub-markets with highly accessible street access and attractive supply and demand characteristics, providing our properties with strong and stable cash flows that are less sensitive to the fluctuations of the general economy. Many of these markets have multiple barriers to entry against increased supply, including zoning restrictions against new construction and new construction costs that we believe are higher than our properties' fair market value. We have an attractive, high quality potential acquisition pipeline that we expect will continue to drive our future growth.
As of SeptemberJune 30, 2017,2020, we owned a geographically diversified portfolio of 413607 self storage properties, located in 2529 states and Puerto Rico, comprising approximately 25.236.6 million rentable square feet, configured in approximately 200,000291,000 storage units. Of these properties, 242268 were acquired by us from our PROs, and 171338 were acquired by us from third-party sellers.sellers and one was acquired from the 2016 Joint Venture.
During the ninesix months ended SeptemberJune 30, 2017,2020, we acquired 3440 self storage properties with an aggregate fair value of $225.8for $259.0 million, comprising approximately 2.32.0 million rentable square feet, configured in approximately 17,30016,000 storage units. Of these acquisitions, seventhree were acquired by us from our PROs and 2737 were acquired by us from third-party sellers.
During the nine months ended September 30, 2017, the Company sold three self storage properties to unrelated third parties for $15.6 million. These self storage properties comprised approximately 0.2 million rentable square feet configured in approximately 1,200 storage units.
Subsequent to September 30, 2017, we acquired 28 self storage properties with an aggregate fair value of approximately $174.5 million comprising approximately 1.8 million rentable square feet, configured in approximately 13,700 storage units.33
Our Unconsolidated Real Estate VentureVentures
We seek to opportunistically partner with institutional funds and other institutional investors to acquire attractive portfolios utilizing a promoted return structure. We believe there is significant opportunity for continued external growth by partnering with institutional investors seeking to deploy capital in the self storage industry. In addition, we consider the 75% third-party interest in the Company's unconsolidated real estate ventures, which currently own 177 properties, to present a potential acquisition opportunity. Were we to pursue an acquisition of these interests, it could potentially drive our future growth.
2018 Joint Venture
As of SeptemberJune 30, 2017,2020, our unconsolidated real estate venture,2018 Joint Venture, in which we have a 25% interest, owned and operated a portfolio of 103 properties containing approximately 7.7 million rentable square feet, configured in approximately 64,000 storage units and located across 17 states.
2016 Joint Venture
As of June 30, 2020, our 2016 Joint Venture, in which we have a 25% ownership interest, owned and operated a portfolio of 7074 properties containing approximately 4.9 million rentable square feet, configured in approximately 39,00040,000 storage units and located across 13 states.
During the ninesix months ended SeptemberJune 30, 2017,2020, our unconsolidated real estate venture2016 Joint Venture acquired fourtwo self storage properties with an aggregate fair value of $49.8 million, comprising approximately 0.3 million rentable square feet, configured in approximately 3,100 storage units.
Since September 30, 2017, our unconsolidated real estate venture acquired one self storage property with an estimated fair value of $9.3 million, comprising approximatelycontaining less than 0.1 million rentable square feet, configured in approximately 430500 storage units.units and located in one state.
Our Property Management Platform
Through our property management platform, we direct, manage and control the day-to-day operations and affairs of thecertain consolidated properties and our unconsolidated real estate ventures. As of June 30, 2020, our property management platform managed and controlled 266 of our consolidated properties and 177 of our unconsolidated real estate venture andproperties.
We earn certain customary fees for managing and operating the properties. In addition, we provide tenant warranty protection to tenants atproperties in the unconsolidated real estate ventureventures and we facilitate tenant insurance and/or tenant warranty protection programs for tenants at these properties in exchange for half of all proceeds from the tenant warranty protection program at each unconsolidated real estate venture property.such programs.
Results of Operations
When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired 3440 self storage properties during the ninesix months ended SeptemberJune 30, 20172020 and 10769 self storage properties during the year ended December 31, 2016.2019. As a result of these and other factors, we do not believe that our historical results of operations discussed and analyzed below are comparable or necessarily indicative of our future results of operations or cash flows.
To help analyze the operating performance of our self storage properties, we also discuss and analyze operating results relating to our same store portfolio. Our same store portfolio is defined as those properties owned and operated forsince the entiretyfirst day of the applicable periodsearliest year presented, excluding any properties sold, or expected to be sold or where we completed a storage space expansionsubject to significant changes such as expansions or casualty events which causedcause the property'sportfolio's year-over-year operating results to no longer be comparable. As of SeptemberJune 30, 2017,2020, our same store portfolio consisted of 277500 consolidated self storage properties which consists of only those properties that were included in our condensed consolidated financial statements since January 1, 2016.properties.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements in Item 1. Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Three Months Ended SeptemberJune 30, 20172020 compared to the Three Months Ended SeptemberJune 30, 20162019
Net income was $11.2 $17.8 million for the three months ended June 30, 2020, compared to $17.7 million for the three months ended SeptemberJune 30, 2017, compared to $7.9 million for the three months ended September 30, 2016, 2019, an increase of $3.3 million.$0.1 million. The increase was primarily due to an increase in net operating income ("NOI") resulting from an additional 6553 self storage properties acquired between OctoberJuly 1, 20162019 and SeptemberJune 30, 2017 and same store NOI growth,2020 partially offset by increases in depreciation and amortization interest expense and general and administrative expenses.a decrease in gains from the sale of self storage properties. For a description of NOI, see "Non-GAAP Financial measuresMeasures – NOI".
The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Rental revenue | | | | | |
Same store portfolio | $ | 80,141 | | | $ | 81,038 | | | $ | (897) | |
Non-same store portfolio | 15,161 | | | 6,137 | | | 9,024 | |
Total rental revenue | 95,302 | | | 87,175 | | | 8,127 | |
Other property-related revenue | | | | | |
Same store portfolio | 2,860 | | | 2,921 | | | (61) | |
Non-same store portfolio | 558 | | | 207 | | | 351 | |
Total other property-related revenue | 3,418 | | | 3,128 | | | 290 | |
Property operating expenses | | | | | |
Same store portfolio | 24,780 | | | 25,052 | | | (272) | |
Non-same store portfolio | 5,477 | | | 2,138 | | | 3,339 | |
Total property operating expenses | 30,257 | | | 27,190 | | | 3,067 | |
Net operating income | | | | | |
Same store portfolio | 58,221 | | | 58,907 | | | (686) | |
Non-same store portfolio | 10,242 | | | 4,206 | | | 6,036 | |
Total net operating income | 68,463 | | | 63,113 | | | 5,350 | |
Management fees and other revenue | 5,697 | | | 5,116 | | | 581 | |
General and administrative expenses | (10,329) | | | (10,813) | | | 484 | |
Depreciation and amortization | (29,309) | | | (25,829) | | | (3,480) | |
Other | (462) | | | (357) | | | (105) | |
Other (expense) income | | | | | |
Interest expense | (15,513) | | | (13,947) | | | (1,566) | |
| | | | | |
Equity in earnings (losses) of unconsolidated real estate ventures | 52 | | | (1,646) | | | 1,698 | |
Acquisition costs | (252) | | | (305) | | | 53 | |
Non-operating expense | (317) | | | (169) | | | (148) | |
Gain on sale of self storage properties | — | | | 2,814 | | | (2,814) | |
Other expense | (16,030) | | | (13,253) | | | (2,777) | |
Income before income taxes | 18,030 | | | 17,977 | | | 53 | |
Income tax expense | (243) | | | (244) | | | 1 | |
Net income | 17,787 | | | 17,733 | | | 54 | |
Net income attributable to noncontrolling interests | (7,365) | | | (25,389) | | | 18,024 | |
Net income (loss) attributable to National Storage Affiliates Trust | 10,422 | | | (7,656) | | | 18,078 | |
Distributions to preferred shareholders | (3,274) | | | (3,257) | | | (17) | |
Net income (loss) attributable to common shareholders | $ | 7,148 | | | $ | (10,913) | | | $ | 18,061 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | Change |
Rental revenue | | | | | |
Same store portfolio | $ | 42,700 |
| | $ | 40,540 |
| | $ | 2,160 |
|
Non-same store portfolio | 22,015 |
| | 10,723 |
| | 11,292 |
|
Total rental revenue | 64,715 |
| | 51,263 |
| | 13,452 |
|
Other property-related revenue | | | | | |
Same store portfolio | 1,417 |
| | 1,335 |
| | 82 |
|
Non-same store portfolio | 728 |
| | 351 |
| | 377 |
|
Total other property-related revenue | 2,145 |
| | 1,686 |
| | 459 |
|
Property operating expenses | | | | | |
Same store portfolio | 13,595 |
| | 13,275 |
| | 320 |
|
Non-same store portfolio | 8,023 |
| | 4,055 |
| | 3,968 |
|
Total property operating expenses | 21,618 |
| | 17,330 |
| | 4,288 |
|
Net operating income | | | | | |
Same store portfolio | 30,522 |
| | 28,600 |
| | 1,922 |
|
Non-same store portfolio | 14,720 |
| | 7,019 |
| | 7,701 |
|
Total net operating income | 45,242 |
| | 35,619 |
| | 9,623 |
|
Management fees and other revenue | 1,998 |
| | — |
| | 1,998 |
|
General and administrative expenses | (7,480 | ) | | (5,259 | ) | | (2,221 | ) |
35
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | Change |
Depreciation and amortization | (18,463 | ) | | (14,319 | ) | | (4,144 | ) |
Income from operations | 21,297 |
| | 16,041 |
| | 5,256 |
|
Other (expense) income | | | | | |
Interest expense | (9,157 | ) | | (6,265 | ) | | (2,892 | ) |
Equity in losses of unconsolidated real estate venture | (710 | ) | | — |
| | (710 | ) |
Acquisition costs | (139 | ) | | (1,737 | ) | | 1,598 |
|
Non-operating expense | (9 | ) | | (15 | ) | | 6 |
|
Gain on sale of self storage properties | 106 |
| | — |
| | 106 |
|
Other expense | (9,909 | ) | | (8,017 | ) | | (1,892 | ) |
Income before income taxes | 11,388 |
| | 8,024 |
| | 3,364 |
|
Income tax expense | (162 | ) | | (80 | ) | | (82 | ) |
Net income | 11,226 |
| | 7,944 |
| | 3,282 |
|
Net income attributable to noncontrolling interests | (9,955 | ) | | (7,955 | ) | | (2,000 | ) |
Net income (loss) attributable to National Storage Affiliates Trust | $ | 1,271 |
| | $ | (11 | ) | | $ | 1,282 |
|
Total Revenue
Our total revenue increased by $15.9$9.0 million, or 30.0%9.4%, for the three months ended SeptemberJune 30, 2017,2020, as compared to the three months ended SeptemberJune 30, 2016.2019. This increase was primarily attributable to incremental revenue from 6553 self storage properties we acquired between OctoberJuly 1, 20162019 and SeptemberJune 30, 2017,2020, regular rental increases for in-place tenants, and management fees and other revenue earned from our unconsolidated real estate venture, partially offset by a decrease in total portfolio average occupancy from 91.0%89.1% for the three months ended June 30, 2019 to 90.4%.87.5% for the three months ended June 30, 2020. Average occupancy is calculated based on the average of the month-end occupancy immediately preceding the period presented and the month-end occupancies included in the respective period presented.
Rental Revenue
Rental revenue increased by $13.5$8.1 million, or 26.2%9.3%, for the three months ended SeptemberJune 30, 2017,2020, as compared to the three months ended SeptemberJune 30, 2016.2019. The increase in rental revenue was due to a $11.3$9.0 million increase in non-same store rental revenue which was primarily attributable to incremental rental revenue of $7.8$5.9 million from 4649 self storage properties acquired between OctoberJuly 1, 20162019 and June 30, 2017,March 31, 2020, and $1.6$0.3 million from 19four self storage properties acquired during the three months ended SeptemberJune 30, 2017.2020. Same store portfolio rental revenues increased $2.2decreased $0.9 million, or 5.3%1.1%, due to a 5.7%decrease in average occupancy from 89.5% for the three months ended June 30, 2019 to 88.1% for the three months ended June 30, 2020 partially offset by a 0.4% increase, from $11.19$11.94 to $11.83,$11.99, in annualized same store rental revenue (including fees and net of any discounts and uncollectible customer amounts) divided by average occupied square feet ("average annualized rental revenue per occupied square foot"), driven primarily by increased contractual lease rates and fees.for in-place tenants.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and commissions and sales of storage supplies. Other property-related revenue increased by $0.5$0.3 million, or 27.2%9.3%, for the three months ended SeptemberJune 30, 2017,2020, as compared to the three months ended SeptemberJune 30, 2016.2019. This increase primarily resulted from a $0.4 million increase in non-same store other property-related revenue which was primarily attributable to $0.2 million incremental other property-related revenue of $0.3 million from 4649 self storage properties acquired between OctoberJuly 1, 20162019 and June 30, 2017, and less than $0.1 million from 19 self storage properties acquired during the three months ended September 30, 2017.March 31, 2020.
Management Fees and Other Revenue
During the three months ended September 30, 2017, we earned $2.0 million of managementManagement fees and other fees forrevenue, which are primarily related to managing and operating the unconsolidated real estate venture. The unconsolidated real estate venture pays certain customary fees to us for managing and operating the unconsolidated real estate venture properties, including property management fees, call center fees, platform fees and acquisition fees.
Total Operating Expenses
Total operating expenses for the three months ended September 30, 2017ventures, were $47.6 million compared to $36.9$5.7 million for the three months ended SeptemberJune 30, 2016,2020, compared to $5.1 million for the three months ended June 30, 2019, an increase of $10.7 million, or 28.9%. As discussed below, this change$0.6 million. This increase was primarily dueattributable to incremental tenant insurance fees and dividends from an increase of $4.3 millioninvestment in property operating expenses (which included less than $0.1 million of clean-up costs from hurricanes Harvey and Irma), $2.2 million in general and administrative expenses, and $4.1 million in depreciation and amortization.a tenant reinsurance company made during the three months ended June 30, 2019.
Property Operating Expenses
Property operating expenses were $21.6$30.3 million for the three months ended SeptemberJune 30, 20172020 compared to $17.3$27.2 million for the three months ended SeptemberJune 30, 2016,2019, an increase of $4.3$3.1 million, or 24.7%11.3%. ThisThe increase in property operating expenses primarily resulted from a $4.0$3.3 million increase in non-same store property operating expenses that was primarily attributable to incremental property operating expenses of $2.8$2.5 million from 4649 self storage properties acquired between OctoberJuly 1, 20162019 and June 30, 2017March 31, 2020, and $0.5$0.1 million from 19four self storage properties acquired during the three months ended SeptemberJune 30, 2017. In addition, same store portfolio property operating expenses increased $0.3 million, or 2.4%, primarily due to increases in property taxes.2020.
General and Administrative Expenses
General and administrative expenses increased $2.2decreased $0.5 million, or 42.2%4.5%, for the three months ended SeptemberJune 30, 2017,2020, compared to the three months ended SeptemberJune 30, 2016.2019. This increasedecrease was attributable to increasesdecreases in supervisory and administrative fees charged by our PROs of $0.7 million primarily as a result of incremental fees related to the 65 properties we acquired from October 1, 2016 to September 30, 2017, costs related to our propertymerger and internalization of the management platform of $0.9 million, salaries and benefits of $0.2 million and equity-based compensation expense of $0.2 million.SecurCare on March 31, 2020, as discussed in Note 1 in Item 1.
Depreciation and Amortization
Depreciation and amortization increased $4.1$3.5 million, or 28.9%13.5%, for the three months ended SeptemberJune 30, 2017,2020, compared to the three months ended SeptemberJune 30, 2016.2019. This increase was primarily attributable to incremental depreciation expense of $2.5 million from 46related to the 53 self storage properties we acquired between OctoberJuly 1, 20162019 and June 30, 2017,2020 and $0.5 million from 19 self storage properties acquired during the three months ended September 30, 2017. In addition,partially offset by a decrease in amortization of customer in-place leases decreased $0.2 million from $3.2$2.8 million for the three months ended SeptemberJune 30, 20162019 to $3.0$2.4 million for the three months ended SeptemberJune 30, 2017. Customer in-place leases are amortized over the 12-month period following the respective acquisition dates of our self storage properties. As of September 30, 2017, the unamortized balance of customer in-place leases totaled $4.6 million.2020.
Interest Expense
Interest expense increased $2.9$1.6 million, or 46.2%11.2%, for the three months ended SeptemberJune 30, 2017,2020, compared to the three months ended SeptemberJune 30, 2016.2019. The increase in interest expense was primarily attributable to increasesadditional borrowings consisting of $155.0 million of additional term loan borrowings under the Company's credit facility in July 2019, $100.0 million of borrowings under the 2029 Term Loan Facility in April 2019 and the issuance of the $150.0 million Senior Unsecured Notes in a private placement in August 2019. The increase in interest expense from these additional borrowings was partially offset by lower outstanding borrowings under our credit facility and higher interest rates on the Revolver, a new $84.9 million secured debt financing we entered into during August 2017 and a $0.1 million decrease in amortization of debt premiums.Revolver.
Equity In LossesEarnings (Losses) Of Unconsolidated Real Estate VentureVentures
During the three months ended September 30, 2017, we recorded $0.7 million of equity in losses from our unconsolidated real estate venture. Equity in lossesearnings (losses) of unconsolidated real estate ventureventures represents our share of earnings and losses earnedincurred through our 25% ownership interestinterests in the 2018 Joint Venture and the 2016 Joint Venture. During the three months ended June 30, 2020, we recorded $0.1 million of equity in earnings from our unconsolidated real estate venture. The unconsolidated real estate venture recorded a net lossventures compared to $1.6 million of $2.8 millionlosses for the three months ended June 30, 2019. This was primarily the result of incremental losses from our 2018 Joint Venture during the three months ended SeptemberJune 30, 2017, primarily due to NOI of $9.5 million, offset2019 driven by $8.2 million ofreal estate depreciation and amortization $2.9 million of interest expense, and $1.3 million of supervisory, administrative,customer in-place leases following the acquisition and other expenses.
Acquisition Costs
Acquisition costs decreased $1.6 million, or 92.0%, for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. This decrease was due to a reduction in the number of properties acquired and the adoption of ASU 2017-01 during the nine months ended September 30, 2017. As a result of the adoption of ASU 2017-01, the self storage properties acquired during the three months endedInitial 2018 Joint Venture portfolio in September 30, 2017 were accounted for as asset acquisitions, and accordingly, $1.7 million of acquisition costs related to the self storage property acquisitions during the three months ended September 30, 2017 were capitalized as part of the basis of the acquired properties.
2018.
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties increased $0.1was $2.8 million for the three months ended SeptemberJune 30, 2017, compared to2019. During the three months ended SeptemberJune 30, 2016. This increase resulted from the sale of improved land adjacent to2019, we sold one self storage propertiesproperty to an unrelated third party for gross proceeds of $1.1 million during the three months ended September 30, 2017.
Income Tax Expense
Income tax expense increased $0.1 million, or 102.5%, for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The increase in income tax expense was primarily related to growth in the Company's portfolio contributing to increases in certain state and local taxes that are considered income-based taxes and increases in the Company's tax provision for its taxable REIT subsidiary, through which the Company provides management and other services to the unconsolidated real estate venture as well as other activities.
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 in Item 1, we allocate GAAP income (loss) utilizing the hypothetical liquidation at book value ("HLBV") method, in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating partnership at period end after adjusting for any distributions or contributions made during such period.
Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests. Net income attributable to noncontrolling interests was $10.0 million for the three months ended September 30, 2017, compared to $8.0 million for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016
Net income was $34.0 million for the nine months ended September 30, 2017, compared to $18.8 million for the nine months ended September 30, 2016, an increase of $15.2$6.5 million. The increase was primarily due to an increase in NOI resulting from an additional 65 self storage properties we acquired between October 1, 2016 and September 30, 2017, gains from the sale of two self storage properties and same store NOI growth, partially offset by increases in depreciation and amortization, interest expense and general and administrative expenses.
The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | Change |
Rental revenue | | | | | |
Same store portfolio | $ | 123,866 |
| | $ | 117,078 |
| | $ | 6,788 |
|
Non-Same store portfolio | 58,847 |
| | 18,470 |
| | 40,377 |
|
Total rental revenue | 182,713 |
| | 135,548 |
| | 47,165 |
|
Other property-related revenue | | | | | |
Same store portfolio | 4,121 |
| | 3,762 |
| | 359 |
|
Non-Same store portfolio | 1,950 |
| | 572 |
| | 1,378 |
|
Total other property-related revenue | 6,071 |
| | 4,334 |
| | 1,737 |
|
Property operating expenses | | | | | |
Same store portfolio | 39,713 |
| | 39,134 |
| | 579 |
|
Non-Same store portfolio | 21,457 |
| | 6,930 |
| | 14,527 |
|
Total property operating expenses | 61,170 |
| | 46,064 |
| | 15,106 |
|
Net operating income | | | | | |
Same store portfolio | 88,274 |
| | 81,706 |
| | 6,568 |
|
Non-same store portfolio | 39,340 |
| | 12,112 |
| | 27,228 |
|
Total net operating income | 127,614 |
| | 93,818 |
| | 33,796 |
|
Management fees and other revenue | 5,978 |
| | — |
| | 5,978 |
|
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | Change |
General and administrative expenses | (22,066 | ) | | (14,431 | ) | | (7,635 | ) |
Depreciation and amortization | (54,946 | ) | | (38,299 | ) | | (16,647 | ) |
Income from operations | 56,580 |
| | 41,088 |
| | 15,492 |
|
Other (expense) income | | | | | |
Interest expense | (24,788 | ) | | (17,050 | ) | | (7,738 | ) |
Loss on early extinguishment of debt | — |
| | (136 | ) | | 136 |
|
Equity in losses of unconsolidated real estate venture | (2,260 | ) | | — |
| | (2,260 | ) |
Acquisition costs | (450 | ) | | (4,733 | ) | | 4,283 |
|
Non-operating expense | (75 | ) | | (77 | ) | | 2 |
|
Gain on sale of self storage properties | 5,743 |
| | — |
| | 5,743 |
|
Other expense | (21,830 | ) | | (21,996 | ) | | 166 |
|
Income before income taxes | 34,750 |
| | 19,092 |
| | 15,658 |
|
Income tax expense | (767 | ) | | (301 | ) | | (466 | ) |
Net income | 33,983 |
| | 18,791 |
| | 15,192 |
|
Net income attributable to noncontrolling interests | (29,790 | ) | | (9,222 | ) | | (20,568 | ) |
Net income attributable to National Storage Affiliates Trust | $ | 4,193 |
| | $ | 9,569 |
| | $ | (5,376 | ) |
| | | | | |
Total Revenue
Our total revenue increased by $54.9 million, or 39.2%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase was primarily attributable to incremental rental revenue from 65 self storage properties we acquired between October 1, 2016 and September 30, 2017, regular rental increases for in-place tenants, and management fees and other revenue earned from our unconsolidated real estate venture, partially offset by a decrease in average total portfolio occupancy from 90.0% to 89.3%.
Rental Revenue
Rental revenue increased by $47.2 million, or 34.8%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The increase in rental revenue was primarily due to a $40.4 million increase in non-same store rental revenue which was attributable to incremental rental revenue of $19.0 million from 76 self storage properties acquired during the nine months ended September 30, 2016, $15.5 million from 31 self storage properties acquired between October 1, 2016 and December 31, 2016, and $5.9 million from 34 self storage properties acquired during the nine months ended September 30, 2017. Same store portfolio rental revenues increased $6.8 million, or 5.8%, due to a 6.0% increase, from $10.92 to $11.58, in same store rental revenue per occupied square foot, driven primarily by a combination of increased contractual lease rates and fees.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and commissions and sales of storage supplies. Other property-related revenue increased by $1.7 million, or 40.1%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase primarily resulted from a $1.4 million increase in non-same store other property-related revenue which was attributable to incremental other property-related revenue of $0.8 million from 76 self storage properties acquired during the nine months ended September 30, 2016, $0.4 million from 31 self storage properties acquired between October 1, 2016 and December 31, 2016, and $0.1 million from 34 self storage properties acquired during the nine months ended September 30, 2017.
Management Fees and Other Revenue
During the nine months ended September 30, 2017, we earned $6.0 million of management and other fees for managing and operating the unconsolidated real estate venture properties. The unconsolidated real estate venture pays certain customary fees to us for managing and operating the unconsolidated real estate venture properties, including property management fees, call center fees, platform fees and acquisition fees.
Total Operating Expenses
Total operating expenses increased $39.4 million, or 39.9%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. As discussed below, this change was primarily due to an increase of $15.1 million in property operating expenses (which included less than $0.1 million of clean-up costs from hurricanes Harvey and Irma), $7.6 million in general and administrative expenses, and $16.6 million in depreciation and amortization.
Property Operating Expenses
Property operating expenses increased $15.1 million, or 32.8%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase resulted from a $14.5 million increase in non-same store property operating expenses attributable to incremental property operating expenses of $6.8 million from 76 self storage properties acquired during the nine months ended September 30, 2016, $5.6 million from 31 self storage properties acquired between October 1, 2016 and December 31, 2016, and $2.1 million from 34 self storage properties acquired during the nine months ended September 30, 2017. In addition, same store portfolio property operating expenses increased $0.6 million, or 1.5%, due to increases in property taxes, administrative expenses, repairs and maintenance and bad debt expense, partially offset by decreases in insurance and advertising costs.
General and Administrative Expenses
General and administrative expenses increased $7.6 million, or 52.9%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. This increase was attributable to increases in supervisory and administrative fees charged by our PROs of $2.7 million primarily as a result of incremental fees related to the self storage properties we acquired in 2016 and 2017, costs related to our property management platform of $2.6 million, salaries and benefits of $1.1 million and equity-based compensation expense of $0.9 million.
Depreciation and Amortization
Depreciation and amortization increased $16.6 million, or 43.5%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. This increase was attributable to incremental depreciation expense related to the self storage properties we acquired in 2016 and 2017. In addition, amortization of customer in-place leases increased $2.2 million from $8.3 million for the nine months ended September 30, 2016 to $10.5 million for the nine months ended September 30, 2017.
Interest Expense
Interest expense increased $7.7 million, or 45.4%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase in interest expense was primarily due to increases in outstanding borrowings under our credit facility and higher interest rates on the Revolver, a new term loan facility borrowing during 2016, a new $84.9 million secured debt financing we entered into during August 2017, the assumption of fixed rate mortgages in connection with self storage property acquisitions and a $0.4 million decrease in amortization of debt premiums.
Loss On Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $0.1 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. During the nine months ended September 30, 2016, in connection with an amendment to our credit facility, one of the lenders that was included in the syndicated group of lenders prior to the amendment is no longer a participating lender following the amendment, which constitutes an extinguishment of debt for accounting purposes. As a result, we wrote off $0.1 million of unamortized debt issuance costs, which is the amount attributed to the lender no longer included in the lending syndicate.
Equity In Losses Of Unconsolidated Real Estate Venture
During the nine months ended September 30, 2017, we recorded $2.3 million of equity in losses from our unconsolidated real estate venture. Equity in losses of unconsolidated real estate venture represents our share of earnings and losses earned through our 25% ownership interest in the unconsolidated real estate venture. The unconsolidated real estate venture recorded net losses of $9.0 million during the nine months ended September 30, 2017, primarily due to NOI of $26.6 million, offset by $23.3 million of depreciation and amortization, $8.5 million of interest expense and $3.8 million of supervisory, administrative, acquisition and other expenses.
Acquisition Costs
Acquisition costs decreased $4.3 million, or 90.5%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. This decrease was due to a reduction in the number of properties acquired and the adoption of ASU 2017-01 during the nine months ended September 30, 2017. As a result of the adoption of ASU 2017-01, the self storage properties acquired during the nine months ended September 30, 2017 were accounted for as asset acquisitions, and accordingly, $2.5 million of acquisition costs related to the self storage property acquisitions during the nine months ended September 30, 2017 were capitalized as part of the basis of the acquired properties.
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties increased $5.7 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. This increase resulted from the sale of two self storage properties and improved land adjacent to self storage properties during the nine months ended September 30, 2017 for gross proceeds of $11.4 million.
Income Tax Expense
Income tax expense increased $0.5 million, or 154.8%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase in income tax expense was primarily related to growth in the Company's portfolio contributing to increases in certain state and local taxes that are considered income-based taxes and increases in the Company's tax provision for its taxable REIT subsidiary, through which the Company provides management and other services to the unconsolidated real estate venture as well as other activities.
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 in Item 1, we allocate GAAP income (loss) utilizing the HLBV method, in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating partnership at period end after adjusting for any distributions or contributions made during such period.
Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests. Net income attributable to noncontrolling interests was $29.8$7.4 million for the ninethree months ended SeptemberJune 30, 2017,2020, compared to $9.2$25.4 million for the ninethree months ended SeptemberJune 30, 2016.2019.
Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2019
Net income was $33.6 million for the six months ended June 30, 2020, compared to $30.7 million for the six months ended June 30, 2019, an increase of $2.9 million. The increase was primarily due to an increase in NOI resulting from an additional 53 self storage properties acquired between July 1, 2019 and June 30, 2020 and same store NOI growth partially offset by increases in depreciation and amortization and interest expense.
The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Rental revenue | | | | | |
Same store portfolio | $ | 161,750 | | | $ | 160,376 | | | $ | 1,374 | |
Non-same store portfolio | 28,954 | | | 9,654 | | | 19,300 | |
Total rental revenue | 190,704 | | | 170,030 | | | 20,674 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Other property-related revenue | | | | | |
Same store portfolio | 5,767 | | | 5,601 | | | 166 | |
Non-same store portfolio | 1,022 | | | 351 | | | 671 | |
Total other property-related revenue | 6,789 | | | 5,952 | | | 837 | |
Property operating expenses | | | | | |
Same store portfolio | 50,518 | | | 50,271 | | | 247 | |
Non-same store portfolio | 10,331 | | | 3,376 | | | 6,955 | |
Total property operating expenses | 60,849 | | | 53,647 | | | 7,202 | |
Net operating income | | | | | |
Same store portfolio | 116,999 | | | 115,706 | | | 1,293 | |
Non-same store portfolio | 19,645 | | | 6,629 | | | 13,016 | |
Total net operating income | 136,644 | | | 122,335 | | | 14,309 | |
Management fees and other revenue | 11,146 | | | 10,009 | | | 1,137 | |
General and administrative expenses | (21,423) | | | (21,193) | | | (230) | |
Depreciation and amortization | (58,414) | | | (50,178) | | | (8,236) | |
Other | (851) | | | (743) | | | (108) | |
Other (expense) income | | | | | |
Interest expense | (31,141) | | | (27,158) | | | (3,983) | |
| | | | | |
Equity in losses of unconsolidated real estate ventures | (288) | | | (3,748) | | | 3,460 | |
Acquisition costs | (1,085) | | | (462) | | | (623) | |
Non-operating expense | (509) | | | (267) | | | (242) | |
Gain (loss) on sale of self storage properties | — | | | 2,814 | | | (2,814) | |
Other expense | (33,023) | | | (28,821) | | | (4,202) | |
Income before income taxes | 34,079 | | | 31,409 | | | 2,670 | |
Income tax expense | (529) | | | (736) | | | 207 | |
Net income | 33,550 | | | 30,673 | | | 2,877 | |
Net income attributable to noncontrolling interests | (16,480) | | | (30,918) | | | 14,438 | |
Net income (loss) attributable to National Storage Affiliates Trust | 17,070 | | | (245) | | | 17,315 | |
Distributions to preferred shareholders | (6,547) | | | (5,845) | | | (702) | |
Net income (loss) attributable to common shareholders | $ | 10,523 | | | $ | (6,090) | | | $ | 16,613 | |
Total Revenue
Our total revenue increased by $22.6 million, or 12.2%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was primarily attributable to incremental revenue from 53 self storage properties acquired between July 1, 2019 and June 30, 2020, regular rental increases for in-place tenants, partially offset by a decrease in total portfolio average occupancy from 88.2% for the six months ended June 30, 2019 to 87.2% for the six months ended June 30, 2020.
Rental Revenue
Rental revenue increased by $20.7 million, or 12.2%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase in rental revenue was due to a $19.3 million increase in non-same store rental revenue which was primarily attributable to incremental rental revenue of $3.2 million from 13 self storage properties acquired between July 1, 2019 and December 31, 2019, and $7.8 million from 40 self storage properties acquired during the six months ended June 30, 2020. Same store portfolio rental revenues increased $1.4 million, or 0.9%, due to a 1.6% increase, from 11.96 to 12.15, in average annualized rental revenue per occupied square foot, driven primarily by increased contractual lease rates for in-place tenants partially offset by a decrease in average occupancy from 88.5% for the six months ended June 30, 2019 to 87.7% for the six months ended June 30, 2020.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and sales of storage supplies. Other property-related revenue increased by $0.8 million, or 14.1%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase primarily resulted from a $0.7 million increase in non-same store other property-related revenue which was primarily attributable to incremental other property-related revenue of $0.1 million from 13 self storage properties acquired between July 1, 2019 and December 31, 2019, and $0.3 million from 40 self storage properties acquired during the six months ended June 30, 2020.
Management Fees and Other Revenue
Management fees and other revenue, which are primarily related to managing and operating the unconsolidated real estate ventures, were $11.1 million for the six months ended June 30, 2020, compared to $10.0 million for the six months ended June 30, 2019, an increase of $1.1 million. This increase was primarily attributable to incremental tenant insurance fees and dividends from an investment in a tenant reinsurance company made during the three months ended June 30, 2019.
Property Operating Expenses
Property operating expenses were $60.8 million for the six months ended June 30, 2020 compared to $53.6 million for the six months ended June 30, 2019, an increase of $7.2 million, or 13.4%. The increase in property operating expenses primarily resulted from a $7.0 million increase in non-same store property operating expenses that was primarily attributable to incremental property operating expenses of $1.2 million from 13 self storage properties acquired between July 1, 2019 and December 31, 2019, and $3.2 million from 40 self storage properties acquired during the six months ended June 30, 2020.
General and Administrative Expenses
General and administrative expenses increased $0.2 million, or 1.1%, for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. This increase was primarily attributable to increases in payroll and related costs partially offset by decreases in supervisory and administrative fees charged by our PROs primarily as a result of the merger and internalization of the management platform of SecurCare on March 31, 2020, as discussed in Note 1 in Item 1.
Depreciation and Amortization
Depreciation and amortization increased $8.2 million, or 16.4%, for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. This increase was primarily attributable to incremental depreciation expense related to the 53 self storage properties we acquired between July 1, 2019 and June 30, 2020.
Interest Expense
Interest expense increased $4.0 million, or 14.7%, for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. The increase in interest expense was primarily attributable to additional borrowings consisting of $155.0 million of additional term loan borrowings under the Company's credit facility in July 2019, $100.0 million of borrowings under the 2029 Term Loan Facility in April 2019 and the issuance of the $150.0 million Senior Unsecured Notes in a private placement in August 2019. The increase in interest expense from these additional borrowings was partially offset by lower outstanding borrowings under the Revolver.
Equity In Earnings (Losses) Of Unconsolidated Real Estate Ventures
Equity in earnings (losses) of unconsolidated real estate ventures represents our share of earnings and losses incurred through our 25% ownership interests in the 2018 Joint Venture and the 2016 Joint Venture. During the six months ended June 30, 2020, we recorded $0.3 million of equity in losses from our unconsolidated real estate ventures compared to $3.7 million of losses for the six months ended June 30, 2019. This was primarily the result of incremental losses from our 2018 Joint Venture during the six months ended June 30, 2019 driven by real estate depreciation and amortization of customer in-place leases following the acquisition of the Initial 2018 Joint Venture portfolio in September 2018.
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties was $2.8 million for the six months ended June 30, 2019. During the six months ended June 30, 2019, we sold one self storage property to an unrelated third party for gross proceeds of $6.5 million.
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 in Item 1, we allocate GAAP income (loss) utilizing the HLBV method, in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating partnership at period end after adjusting for any distributions or contributions made during such period.
Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests. Net income attributable to noncontrolling interests was $16.5 million for the six months ended June 30, 2020, compared to $30.9 million for the six months ended June 30, 2019.
Non-GAAP Financial Measures
FFO and Core FFO
Funds from operations, or FFO, is a widely used performance measure for real estate companies and is provided here as a supplemental measure of our operating performance. The April 2002 National Policy Bulletin of NAREIT,December 2018 Nareit Funds From Operations White Paper - 2018 Restatement, which we refer to as the White Paper, as amended, defines FFO as net income (loss) (as determined under GAAP), excluding gains (or losses) from sales of real estate and related impairment charges, plusexcluding: real estate depreciation and amortization, gains and losses from the sale of certain real estate assets, gains and losses from change in control, mark-to-market changes in value recognized on equity securities, impairment write-downs of certain real estate assets and impairment of investments in entities when it is directly attributable to decreases in the value of depreciable real estate held by the entity and after adjustments foritems to record unconsolidated partnerships and joint ventures. We include amortization of customer in-place leases in real estate depreciation and amortization inventures on the calculation of FFO because we believe the amortization of customer in-place leases is analogous to real estate depreciation, as the value of such intangibles is inextricably connected to the real estate acquired.same basis. Distributions declared on subordinated performance units and DownREIT subordinated performance units represent our allocation of FFO to noncontrolling interests held by subordinated performance unitholders and DownREIT subordinated performance unitholders for the purposeunitholders. For purposes of calculating FFO attributable to common shareholders, OP unitholders, and LTIP unitholders.unitholders, we exclude distributions declared on subordinated performance units, DownREIT subordinated performance units, preferred shares and preferred units. We define Core FFO as FFO, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. These further adjustments consist of acquisition costs, organizational and offering costs, gains on debt forgiveness, gains (losses) on early extinguishment of debt, and after adjustments for unconsolidated partnerships and joint ventures.
Management uses FFO and Core FFO as key performance indicators in evaluating the operations of our properties. Given the nature of our business as a real estate owner and operator, we consider FFO and Core FFO as key supplemental measures of our operating performance that are not specifically defined by GAAP. We believe that FFO and Core FFO are useful to management and investors as a starting point in measuring our operational performance because FFO and Core FFO exclude various items included in net income (loss) that do not relate to or are not indicative of our operating performance such as gains (or losses) from sales of self storage properties and depreciation, which can make periodic and peer analyses of operating performance more difficult. Our computation of FFO and Core FFO may not be comparable to FFO reported by other REITs or real estate companies.
FFO and Core FFO 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 (loss). FFO and Core FFO do not represent cash generated from operating activities determined in accordance with GAAP and are not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further
understand our performance, FFO and Core FFO should be compared with our reported net income (loss) and considered in addition to cash flows computed in accordance with GAAP, as presented in our condensed consolidated financial statements.
The following table presents a reconciliation of net income (loss) to FFO and Core FFO for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except per share and unit amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 17,787 | | | $ | 17,733 | | | $ | 33,550 | | | $ | 30,673 | |
Add (subtract): | | | | | | | |
Real estate depreciation and amortization | 28,955 | | | 25,510 | | | 57,719 | | | 49,537 | |
Company's share of unconsolidated real estate venture real estate depreciation and amortization | 3,811 | | | 5,472 | | | 7,598 | | | 10,929 | |
Gain on sale of self storage properties | — | | | (2,814) | | | — | | | (2,814) | |
Mark-to-market changes in value on equity securities | — | | | — | | | 142 | | | — | |
Company's share of unconsolidated real estate venture loss on sale of properties | — | | | — | | | — | | | 202 | |
Distributions to preferred shareholders and unitholders | (3,514) | | | (3,461) | | | (7,028) | | | (6,214) | |
FFO attributable to subordinated performance unitholders(1) | (6,030) | | | (8,462) | | | (14,694) | | | (15,755) | |
FFO attributable to common shareholders, OP unitholders, and LTIP unitholders | 41,009 | | | 33,978 | | | 77,287 | | | 66,558 | |
Add: | | | | | | | |
Acquisition costs | 252 | | | 305 | | | 1,085 | | | 462 | |
| | | | | | | |
| | | | | | | |
Core FFO attributable to common shareholders, OP unitholders, and LTIP unitholders | $ | 41,261 | | | $ | 34,283 | | | $ | 78,372 | | | $ | 67,020 | |
| | | | | | | |
Weighted average shares and units outstanding - FFO and Core FFO:(2) | | | | | | | |
Weighted average shares outstanding - basic | 68,210 | | | 57,543 | | | 64,004 | | | 57,101 | |
Weighted average restricted common shares outstanding | 34 | | | 29 | | | 29 | | | 29 | |
Weighted average OP units outstanding | 29,720 | | | 30,213 | | | 30,215 | | | 30,081 | |
Weighted average DownREIT OP unit equivalents outstanding | 1,925 | | | 1,848 | | | 1,887 | | | 1,848 | |
Weighted average LTIP units outstanding | 534 | | | 537 | | | 576 | | | 641 | |
Total weighted average shares and units outstanding - FFO and Core FFO | 100,423 | | | 90,170 | | | 96,711 | | | 89,700 | |
| | | | | | | |
FFO per share and unit | $ | 0.41 | | | $ | 0.38 | | | $ | 0.80 | | | $ | 0.74 | |
Core FFO per share and unit | $ | 0.41 | | | $ | 0.38 | | | $ | 0.81 | | | $ | 0.75 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 11,226 |
| | $ | 7,944 |
| | $ | 33,983 |
| | $ | 18,791 |
|
Add (subtract): | | | | | | | |
Real estate depreciation and amortization | 18,187 |
| | 14,117 |
| | 53,773 |
| | 37,831 |
|
Company's share of unconsolidated real estate venture real estate depreciation and amortization | 2,042 |
| | — |
| | 5,832 |
| | — |
|
Gain on sale of self storage properties | (106 | ) | | — |
| | (5,743 | ) | | — |
|
FFO attributable to subordinated performance unitholders(1) | (7,699 | ) | | (5,551 | ) | | (20,743 | ) | | (16,044 | ) |
FFO attributable to common shareholders, OP unitholders, and LTIP unitholders | 23,650 |
| | 16,510 |
| | 67,102 |
| | 40,578 |
|
Add: | | | | | | | |
Acquisition costs | 139 |
| | 1,737 |
| | 450 |
| | 4,733 |
|
Company's share of unconsolidated real estate venture acquisition costs | 1 |
| | — |
| | 22 |
| | — |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | 136 |
|
Core FFO attributable to common shareholders, OP unitholders, and LTIP unitholders | $ | 23,790 |
| | $ | 18,247 |
| | $ | 67,574 |
| | $ | 45,447 |
|
| | | | | | | |
Weighted average shares and units outstanding - FFO and Core FFO:(2) |
Weighted average shares outstanding - basic | 44,269 |
| | 35,080 |
| | 43,967 |
| | 27,084 |
|
Weighted average restricted common shares outstanding | 27 |
| | 19 |
| | 24 |
| | 18 |
|
Weighted average OP units outstanding | 26,361 |
| | 24,310 |
| | 25,984 |
| | 23,761 |
|
Weighted average DownREIT OP unit equivalents outstanding | 1,835 |
| | 1,835 |
| | 1,835 |
| | 1,835 |
|
Weighted average LTIP units outstanding | 603 |
| | 2,556 |
| | 1,095 |
| | 2,523 |
|
Total weighted average shares and units outstanding - FFO and Core FFO | 73,095 |
| | 63,800 |
| | 72,905 |
| | 55,221 |
|
| | | | | | | |
FFO per share and unit | $ | 0.32 |
| | $ | 0.26 |
| | $ | 0.92 |
| | $ | 0.73 |
|
Core FFO per share and unit | $ | 0.33 |
| | $ | 0.29 |
| | $ | 0.93 |
| | $ | 0.82 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
(1) Amounts represent distributions declared for subordinated performance unitholders and DownREIT subordinated performance unitholders for the periods presented. | | | | | | | |
(2) NSA combines OP units and DownREIT OP units with common shares because, after the applicable lock-out periods, OP units in the Company's operating partnership are redeemable for cash or, at NSA's option, exchangeable for common shares on a one-for-one basis and DownREIT OP units are also redeemable for cash or, at NSA's option, exchangeable for OP units in our operating partnership on a one-for-one basis, subject to certain adjustments in each case. Subordinated performance units, DownREIT subordinated performance units, and LTIP units may also, under certain circumstances, be convertible into or exchangeable for common shares (or other units that are convertible into or exchangeable for common shares). See footnote(1) in the following table for additional discussion of subordinated performance units, DownREIT subordinated performance units, and LTIP units in the calculation of FFO and Core FFO per share and unit. | | | | | | | |
The following table presents a reconciliation of earnings (loss) per share - diluted to FFO and Core FFO per share and unit for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Earnings (loss) per share - diluted | $ | 0.10 | | | $ | (0.19) | | | $ | 0.16 | | | $ | (0.11) | |
Impact of the difference in weighted average number of shares(1) | (0.03) | | | 0.07 | | | (0.06) | | | 0.04 | |
Impact of GAAP accounting for noncontrolling interests, two-class method and treasury stock method(2) | 0.07 | | | 0.28 | | | 0.17 | | | 0.35 | |
Add real estate depreciation and amortization | 0.29 | | | 0.28 | | | 0.60 | | | 0.55 | |
Add Company's share of unconsolidated venture real estate depreciation and amortization | 0.04 | | | 0.06 | | | 0.08 | | | 0.12 | |
Subtract gain on sale of self storage properties | — | | | (0.03) | | | — | | | (0.03) | |
FFO attributable to subordinated performance unitholders | (0.06) | | | (0.09) | | | (0.15) | | | (0.18) | |
FFO per share and unit | 0.41 | | | 0.38 | | | 0.80 | | | 0.74 | |
Add acquisition costs | — | | | — | | | 0.01 | | | 0.01 | |
Core FFO per share and unit | $ | 0.41 | | | $ | 0.38 | | | $ | 0.81 | | | $ | 0.75 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Earnings (loss) per share - diluted | $ | 0.03 |
| | $ | — |
| | $ | 0.09 |
| | $ | 0.25 |
|
Impact of the difference in weighted average number of shares(1) | (0.02 | ) | | — |
| | (0.04 | ) | | 0.09 |
|
Impact of GAAP accounting for noncontrolling interests, two-class method and treasury stock method(2) | 0.14 |
| | 0.13 |
| | 0.41 |
| | — |
|
Add real estate depreciation and amortization | 0.25 |
| | 0.22 |
| | 0.74 |
| | 0.68 |
|
Add Company's share of unconsolidated venture real estate depreciation and amortization | 0.03 |
| | — |
| | 0.08 |
| | — |
|
Subtract gain on sale of self storage properties | — |
| | — |
| | (0.08 | ) | | — |
|
FFO attributable to subordinated performance unitholders | (0.11 | ) | | (0.09 | ) | | (0.28 | ) | | (0.29 | ) |
FFO per share and unit | 0.32 |
| | 0.26 |
| | 0.92 |
| | 0.73 |
|
Add acquisition costs, Company's share of unconsolidated real estate venture acquisition costs, and loss on early extinguishment of debt | 0.01 |
| | 0.03 |
| | 0.01 |
| | 0.09 |
|
Core FFO per share and unit | $ | 0.33 |
| | $ | 0.29 |
| | $ | 0.93 |
| | $ | 0.82 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
(1) Adjustment accounts for the difference between the weighted average number of shares used to calculate diluted earnings per share and the weighted average number of shares used to calculate FFO and Core FFO per share and unit. Diluted earnings per share is calculated using the two-class method for the company's restricted common shares and the treasury stock method for certain unvested LTIP units, and includesassumes the assumptionconversion of vested LTIP units into OP units on a one-for-one basis and the hypothetical conversion of subordinated performance units, and DownREIT subordinated performance units into OP units, even though such units may only be convertible into OP units (i) after a lock-out period and (ii) upon certain events or conditions. For additional information about the conversion of subordinated performance units, DownREIT subordinated performance units and LTIP units into OP units, see Note 9 in Item 1. The computation of weighted average shares and units for FFO and Core FFO per share and unit includes all restricted common shares and LTIP units that participate in distributions and excludes all subordinated performance units and DownREIT subordinated performance units because their effect has been accounted for through the allocation of FFO to the related unitholders based on distributions declared. | | | | | | | |
(2) Represents the effect of adjusting the numerator to consolidated net income (loss) prior to GAAP allocations for noncontrolling interests, after deducting preferred share and unit distributions, and before the application of the two-class method and treasury stock method, as described in footnote(1). | | | | | | | |
NOI
We defineNet operating income, or NOI, as net income (loss), as determined under GAAP,represents rental revenue plus general and administrative expenses, depreciation and amortization, interest expense, loss on early extinguishment of debt, equity in earnings (losses) of unconsolidated real estate ventures, acquisition costs, organizational and offering expenses, income tax expense, impairment of long-lived assets, losses on the sale of properties and non-operating expense and by subtracting management fees and other property-related revenue gains on sale of properties, debt forgiveness, and non-operating income.less property operating expenses. NOI is not a measure of performance calculated in accordance with GAAP.
We believe NOI is useful to investors in evaluating our operating performance because:
•NOI is one of the primary measures used by our management and our PROs to evaluate the economic productivity of our properties, including our ability to lease our properties, increase pricing and occupancy and control our property operating expenses;
•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 upon accounting methods, the book value of assets, and the impact of our capital structure; and
•We believe NOI helps our investors to meaningfully compare the results of our operating performance from period to period by removing the impact of our capital structure (primarily interest expense on our outstanding indebtedness) and depreciation of the cost basis of our assets from our operating results.
There are material limitations to using a non-GAAP 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 (loss). 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 (loss). 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 income from operations and net loss.income (loss).
The following table presents a reconciliation of net income (loss) to NOI for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (dollars in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 11,226 |
| | $ | 7,944 |
| | $ | 33,983 |
| | $ | 18,791 |
| Net income | $ | 17,787 | | | $ | 17,733 | | | $ | 33,550 | | | $ | 30,673 | |
(Subtract) Add: | | | | | | | | (Subtract) Add: | |
Management fees and other revenue | (1,998 | ) | | — |
| | (5,978 | ) | | — |
| Management fees and other revenue | (5,697) | | | (5,116) | | | (11,146) | | | (10,009) | |
General and administrative expenses | 7,480 |
| | 5,259 |
| | 22,066 |
| | 14,431 |
| General and administrative expenses | 10,329 | | | 10,813 | | | 21,423 | | | 21,193 | |
Other | | Other | 462 | | | 357 | | | 851 | | | 743 | |
Depreciation and amortization | 18,463 |
| | 14,319 |
| | 54,946 |
| | 38,299 |
| Depreciation and amortization | 29,309 | | | 25,829 | | | 58,414 | | | 50,178 | |
Interest expense | 9,157 |
| | 6,265 |
| | 24,788 |
| | 17,050 |
| Interest expense | 15,513 | | | 13,947 | | | 31,141 | | | 27,158 | |
Equity in losses of unconsolidated real estate venture | 710 |
| | — |
| | 2,260 |
| | — |
| |
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | 136 |
| |
Equity in (earnings) losses of unconsolidated real estate ventures | | Equity in (earnings) losses of unconsolidated real estate ventures | (52) | | | 1,646 | | | 288 | | | 3,748 | |
| Acquisition costs | 139 |
| | 1,737 |
| | 450 |
| | 4,733 |
| Acquisition costs | 252 | | | 305 | | | 1,085 | | | 462 | |
Income tax expense | 162 |
| | 80 |
| | 767 |
| | 301 |
| Income tax expense | 243 | | | 244 | | | 529 | | | 736 | |
Gain on sale of self storage properties | (106 | ) | | — |
| | (5,743 | ) | | — |
| Gain on sale of self storage properties | — | | | (2,814) | | | — | | | (2,814) | |
| Non-operating expense | 9 |
| | 15 |
| | 75 |
| | 77 |
| Non-operating expense | 317 | | | 169 | | | 509 | | | 267 | |
Net Operating Income | $ | 45,242 |
| | $ | 35,619 |
| | $ | 127,614 |
| | $ | 93,818 |
| Net Operating Income | $ | 68,463 | | | $ | 63,113 | | | $ | 136,644 | | | $ | 122,335 | |
Our consolidated NOI shown in the table above does not include our proportionate share of theNOI for our unconsolidated real estate venture's net operating income.ventures. For additional information about our unconsolidated real estate venture2018 Joint Venture and 2016 Joint Venture see Note 5 to the condensed consolidated financial statements in Item 1.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss), as determined under GAAP, plus interest expense, loss on early extinguishment of debt, income taxes, depreciation and amortization expense and the Company's share of unconsolidated real estate venture depreciation and amortization. We define Adjusted EBITDA as EBITDA plus acquisition costs, the Company's share of unconsolidated real estate venture acquisition costs, organizational and offering expenses, equity-based compensation expense, losses on sale of properties and impairment of long-lived assets; and by subtractingassets, minus gains on sale of properties and debt forgiveness.forgiveness, and after adjustments for unconsolidated partnerships and joint ventures. These further adjustments eliminate the impact of items that we do not consider indicative of our core operating performance. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
We present EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. EBITDA and Adjusted EBITDA have limitations as an analytical tool. Some of these limitations are:
•EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures, contractual commitments or working capital needs;
•EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•Adjusted EBITDA excludes equity-based compensation expense, which is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;
•EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting itstheir usefulness as a comparative measure.measures.
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 (loss). EBITDA and Adjusted EBITDA 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 income from operations, and net income (loss).
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 17,787 | | | $ | 17,733 | | | $ | 33,550 | | | $ | 30,673 | |
Add: | | | | | | | |
Depreciation and amortization | 29,309 | | | 25,829 | | | 58,414 | | | 50,178 | |
Company's share of unconsolidated real estate venture depreciation and amortization | 3,811 | | | 5,472 | | | 7,598 | | | 10,929 | |
Interest expense | 15,513 | | | 13,947 | | | 31,141 | | | 27,158 | |
Income tax expense | 243 | | | 244 | | | 529 | | | 736 | |
| | | | | | | |
EBITDA | 66,663 | | | 63,225 | | | 131,232 | | | 119,674 | |
Add: | | | | | | | |
Acquisition costs | 252 | | | 305 | | | 1,085 | | | 462 | |
| | | | | | | |
Gain on sale of self storage properties | — | | | (2,814) | | | — | | | (2,814) | |
| | | | | | | |
Company's share of unconsolidated real estate venture loss on sale of properties | — | | | — | | | — | | | 202 | |
Equity-based compensation expense | 1,151 | | | 1,108 | | | 1,925 | | | 2,220 | |
Adjusted EBITDA | $ | 68,066 | | | $ | 61,824 | | | $ | 134,242 | | | $ | 119,744 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 11,226 |
| | $ | 7,944 |
| | $ | 33,983 |
| | $ | 18,791 |
|
Add: | | | | | | | |
Depreciation and amortization | 18,463 |
| | 14,319 |
| | 54,946 |
| | 38,299 |
|
Company's share of unconsolidated real estate venture depreciation and amortization | 2,042 |
| | — |
| | 5,832 |
| | — |
|
Interest expense | 9,157 |
| | 6,265 |
| | 24,788 |
| | 17,050 |
|
Income tax expense | 162 |
| | 80 |
| | 767 |
| | 301 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | 136 |
|
EBITDA | 41,050 |
| | 28,608 |
| | 120,316 |
| | 74,577 |
|
Add: | | | | | | | |
Acquisition costs | 139 |
| | 1,737 |
| | 450 |
| | 4,733 |
|
Company's share of unconsolidated real estate venture acquisition costs | 1 |
| | — |
| | 22 |
| | — |
|
Gain on sale of self storage properties | (106 | ) | | — |
| | (5,743 | ) | | — |
|
Equity-based compensation expense(1) | 921 |
| | 685 |
| | 2,844 |
| | 1,913 |
|
Adjusted EBITDA | $ | 42,005 |
| | $ | 31,030 |
| | $ | 117,889 |
| | $ | 81,223 |
|
| | | | | | | |
(1) Equity-based compensation expense is a non-cash item that is included in general and administrative expenses in our consolidated statements of operations. |
Liquidity and Capital Resources
Liquidity Overview
Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flow from our operations. Additional sources are proceeds from equity and debt offerings, and debt financings including borrowings under ourthe credit facility, and2023 Term Loan Facility, (as defined below).2028 Term Loan Facility and 2029 Term Loan Facility.
Our short-term liquidity requirements consist primarily of property operating expenses, property acquisitions, capital expenditures, general and administrative expenses acquisition pursuit costs and principal and interest on our outstanding indebtedness. A further short-term liquidity requirement relates to distributions to our common and preferred shareholders and holders of preferred units, OP units, LTIP units, subordinated performance units, DownREIT OP units and DownREIT subordinated performance units. We expect to fund short-term liquidity requirements from our operating cash flow, cash on hand and borrowings under our credit facility.
As discussed in Note 8 in Item 1, on February 8, 2017, we entered into an Increase Agreement with a syndicated group of lenders to increase the total borrowing capacity under the credit facility by $170.0 million for a total credit facility of $895.0 million, which included entry into a new $105.0 million Term Loan C. We continue to have an expansion option under the credit facility, which, if exercised in full, would provide for a total credit facility of $1.0 billion.
As of September 30, 2017, $235.0 million was outstanding under the Term Loan A with an effective interest rate of 2.63%, $155.0 million was outstanding under the Term Loan B with an effective interest rate of 3.24%, $105.0 million was outstanding under the Term Loan C with an effective interest rate of 3.71% and $201.0 million was outstanding under the Revolver with an effective interest rate of 2.63%. As of September 30, 2017, we would have had the capacity to borrow remaining Revolver commitments of $194.3 million while remaining in compliance with the credit facility's financial covenants.
For a summary of our financial covenants and additional detail regarding our credit facility, Term Loan Facility (as defined below), and fixed rate mortgage payables, please see Note 8 to the Company's most recent Annual Report on Form10-K filed with the Securities and Exchange Commission.
Our long-term liquidity needs consist primarily of the repayment of debt, property acquisitions, and capital expenditures. We acquire properties through the use of cash, preferred units, OP units and subordinated performance units in our operating partnership or DownREIT partnerships. We expect to meet our long-term liquidity requirements with operating cash flow, cash on hand, secured and unsecured indebtedness, and the issuance of equity and debt securities.
We have aThe availability of credit agreement with a syndicated groupand its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, all of lenders for a term loan facility (the "Term Loan Facility") in an aggregate amountwhich are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of $100.0 million, which amount is outstanding, with an effective interest rate of 3.08% as of September 30, 2017. We have an expansion option under the Term Loan Facility, which, if exercised in full, would provide for a total Term Loan Facility in an aggregate amount of $200.0 million.
COVID-19 pandemic. We believe that, as a publicly-traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of debt and additional equity securities. However, we cannot assure you that this will be the case.
Cash Flows
At SeptemberJune 30, 2017,2020, we had $13.7$17.3 million in cash and cash equivalents and $4.7$5.6 million of restricted cash, an increasea decrease in cash and cash equivalents of $1.1$3.3 million and an increase in restricted cash of $1.9 million from December 31, 2016.2019. Restricted cash primarily consists of escrowed funds deposited with financial institutions for real estate taxes, insurance, and other reserves for capital improvements in accordance with our loan agreements. The following discussion relates to changes in cash due to operating, investing, and financing activities, which are presented in our condensed consolidated statements of cash flows included in Item 1 of this report.
Cash Flows From Operating Activities
Cash provided by our operating activities was $94.9$105.7 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $68.3$93.5 million for the ninesix months ended SeptemberJune 30, 2016,2019, an increase of $26.6$12.2 million. Our operating cash flow increased primarily due to the 3113 self storage properties that were acquired between OctoberJuly 1, 20162019 and December 31, 20162019 that generated cash flow for the entire ninesix months ended SeptemberJune 30, 2017,2020, and an additional 3440 self storage properties acquired during the ninesix months ended SeptemberJune 30, 2017.2020. Because these 6553 self storage properties were acquired after SeptemberJune 30, 2016,2019, our operating results for the ninesix months ended SeptemberJune 30, 20162019 were not impacted by them. In addition, we received $3.8 million of operating distributions from our unconsolidated real estate venture during the nine months ended September 30, 2017. The increase in our operating cash flows from these activities was partially offset by higher cash payments for general and administrative expenses and interest expense.
Cash Flows From Investing Activities
Cash used in investing activities was $217.1$243.9 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $342.6$318.1 million for the ninesix months ended SeptemberJune 30, 2016.2019. The primary uses of cash for the ninesix months ended SeptemberJune 30, 20172020 were for our acquisition of 3440 self storage properties for cash consideration of $209.7$239.1 million, capital expenditures of $10.0$8.6 million, investments in our unconsolidated real estate venture2016 Joint Venture of $12.6$3.1 million, expenditures for corporate furniture, equipment and other of $0.3 million and deposits for potential acquisitions of $2.3$0.3 million partially offset by $17.5$7.6 million of proceeds from the sale of three self storage properties and land parcels.equity securities. The primary uses of cash for the ninesix months ended SeptemberJune 30, 20162019 were for our acquisition of 7656 self storage properties for cash consideration of $323.8$307.8 million, capital expenditures of $8.0$10.4 million, acquisition of the interest in a reinsurance company and related cash flows of $6.6 million, capital expenditures of corporate furniture and equipment of $0.4 million and deposits for potential acquisitions of $5.4$0.2 million, partially offset by $6.3 million of net proceeds from the sale of a self storage property and distributions received from our 2016 Joint Venture of $1.0 million.
Capital expenditures totaled $10.0$8.6 million and $8.0$10.4 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. We generally fund post-acquisition capital additions from cash provided by operating activities.
We categorize our capital expenditures broadly into three primary categories:
•recurring capital expenditures, which represent the portion of capital expenditures that are deemed to replace the consumed portion of acquired capital assets and extend their useful life;
revenue•value enhancing capital expenditures, which represent the portion of capital expenditures that are made to enhance the revenue and value of an asset from its original purchase condition; and
•acquisitions capital expenditures, which represent the portion of capital expenditures capitalized during the current period that were identified and underwritten prior to a property's acquisition.
A summary of the capital expenditures for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, are presented below (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Recurring capital expenditures | $ | 3,438 | | | $ | 4,757 | |
Value enhancing capital expenditures | 2,037 | | | 2,152 | |
Acquisitions capital expenditures | 3,600 | | | 4,328 | |
Total capital expenditures | 9,075 | | | 11,237 | |
Change in accrued capital spending | (492) | | | (794) | |
Capital expenditures per statement of cash flows | $ | 8,583 | | | $ | 10,443 | |
| | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Recurring capital expenditures | $ | 2,589 |
| | $ | 2,442 |
|
Revenue enhancing capital expenditures | 1,271 |
| | 2,315 |
|
Acquisitions capital expenditures | 6,149 |
| | 3,982 |
|
Total capital expenditures | 10,009 |
| | 8,739 |
|
Change in accrued capital spending | 2 |
| | (759 | ) |
Capital expenditures per statement of cash flows | $ | 10,011 |
| | $ | 7,980 |
|
| | | |
Cash Flows From Financing Activities
Cash provided by our financing activities was $125.3$136.8 million for the ninesix months ended SeptemberJune 30, 20172020 compared to cash provided by our financing activities of $281.0$228.0 million for the ninesix months ended SeptemberJune 30, 2016.2019. Our sources of financing cash flows for the ninesix months ended SeptemberJune 30, 20172020 primarily consisted of $455.5$311.0 million of borrowings under our credit facility, an $84.9 million secured debt financingRevolver and $7.0$16.2 million of proceeds from the issuance of 300,043 subordinated performance units to an affiliate of Personal Mini.common shares. Our primary uses of financing cash flows for the ninesix months ended SeptemberJune 30, 20172020 were for principal payments on existing debt of $344.9$103.9 million (which included $331.0$100.0 million of principal repayments under the Revolver $10.4and $3.9 million of fixed rate mortgage principal payoffspayments), distributions to noncontrolling interests of $36.4 million, payments of dividends to common shareholders of $42.4 million and $3.5distributions to preferred shareholders of $6.5 million. Our sources of financing cash flows for the six months ended June 30, 2019 primarily consisted of $399.0 million of borrowings under our credit facility, $100.0 million of borrowings under our 2029 Term Loan Facility, $70.6 million of proceeds from the issuance of common shares and $43.6 million of proceeds from the issuance of Series A preferred shares. Our primary uses of financing cash flows for the six months ended June 30, 2019 were for principal payments on existing debt of $306.5 million (which included $304.0 million of principal repayments under the Revolver and $2.5 million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of $41.8$36.1 million, and distributions to common shareholders of $33.6$36.0 million and distributions to preferred shareholders of $5.8 million. Our sources
Credit Facility and Term Loan Facilities
As of financing cash flowsJune 30, 2020, our credit facility provided for total borrowings of $1.275 billion, consisting of five components: (i) a Revolver which provides for a total borrowing commitment up to $500.0 million, whereby we may borrow, repay and re-borrow amounts under the nine months ended SeptemberRevolver, (ii) a $125.0 million Term Loan A, (iii) a $250.0 million Term Loan B, (iv) a $225.0 million Term Loan C and (v) a $175.0 million Term Loan D. The Revolver matures in January 2024; provided that we may elect to extend the maturity to July 2024 by paying an extension fee of 0.075% of the total borrowing commitment thereunder at the time of extension and meeting other customary conditions with respect to compliance. The Term Loan A matures in January 2023, the Term Loan B matures in July 2024, the Term Loan C matures in January 2025 and the Term Loan D matures in July 2026. The Revolver, Term Loan A, Term Loan B, Term Loan C and Term Loan D are not subject to any scheduled reduction or amortization payments prior to maturity. As of June 30, 2016 primarily consisted2020, we have an expansion option under the credit facility, which, if exercised in full, would provide for a total credit facility of $237.5$1.750 billion. As of June 30, 2020, we would have had the capacity to borrow remaining Revolver commitments of $283.3 million while remaining in compliance with the credit facility's financial covenants.
We have a 2023 Term Loan Facility that matures in June 2023 and is separate from the credit facility in an aggregate amount of $175.0 million. As of June 30, 2020 the entire amount was outstanding under the 2023 Term Loan Facility with an effective interest rate of 2.83%. We have an expansion option under the 2023 Term Loan Facility, which, if exercised in full, would provide for total borrowings in an aggregate amount of $400.0 million.
We have a 2028 Term Loan Facility that matures in December 2028 and is separate from the credit facility and 2023 Term Loan Facility in an aggregate amount of $75.0 million. As of June 30, 2020 the entire amount was outstanding under the 2028 Term Loan Facility with an effective interest rate of 4.62%. We have an expansion option under the 2028 Term Loan Facility, which, if exercised in full, would provide for total borrowings in an aggregate amount up to $125.0 million.
We have a 2029 Term Loan Facility that matures in April 2029 and is separate from the credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility in an aggregate amount of $100.0 million. As of June 30, 2020 the entire amount was outstanding under the 2029 Term Loan Facility with an effective interest rate of 4.27%.
2029 And 2031 Senior Unsecured Notes
On August 30, 2019, our operating partnership issued $100.0 million of proceeds from the completion of our follow-on common share offering, $398.53.98% senior unsecured notes due August 30, 2029 and $50.0 million of borrowings under4.08% senior unsecured notes due August 30, 2031 in a private placement to certain institutional accredited investors.
2030 And 2032 Senior Unsecured Notes
As discussed in Note 14 in Item 1, on August 4, 2020, our credit facilityoperating partnership entered into an agreement to issue $150.0 million of 2.99% senior unsecured notes due August 5, 2030 and $100.0 million of borrowings under our Term loan facility. Our primary uses3.09% senior unsecured notes due August 5, 2032 in a private placement to certain institutional accredited investors.
Equity Transactions
Issuance of financing cash flows forCommon Shares and Series A Preferred Shares
As discussed in Note 3 in Item 1, on March 31, 2020, we closed on the ninemergers of SecurCare and DLAN with and into wholly-owned subsidiaries of the Company. In connection with the mergers, we issued 8,105,192 common shares to the former owners of SecurCare and DLAN.
During the six months ended SeptemberJune 30, 20162020, we sold 512,000 of our common shares through at the market offerings. The common shares were sold at an average offering price of $32.41 per share, resulting in net proceeds to us of approximately $16.2 million after deducting compensation payable by us to the agents and offering expenses.
During the six months ended June 30, 2020, after receiving notices of redemption from certain OP unitholders, we elected to issue 411,252 common shares to such holders in exchange for principal payments on existing debt411,252 OP units in satisfaction of $401.2 million (which included $376.0 millionthe operating partnership's redemption obligations.
During the six months ended June 30, 2020, after receiving notices of principal repayments underredemption from certain Series A-1 preferred unitholders, we elected to issue 5,600 Series A preferred shares to such holders in exchange for 5,600 Series A-1 preferred units in satisfaction of the Revolver, $22.0 millionoperating partnership's redemption obligations.
Issuance of fixed rate mortgage principal payoffs and $3.2 million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of $33.4 million, and distributions to common shareholders of $17.6 million.OP Equity
In connection with the 3440 properties acquired during the ninesix months ended SeptemberJune 30, 2017,2020, we issued $13.1 million of OP equity of $14.2 million (consisting of 473,533356,392 OP units, 96,39428,892 LTIP units and 35,735 subordinated performance units). In addition, we issued 28,894 LTIP units to consultants that will vest upon the completion of expansion projects.
As discussed in Note 3 in Item 1, during the six months ended June 30, 2020, the Company issued 445,701 OP units issued upon the conversion of 332,738 subordinated performance units and 214,512 OP units upon the vestingconversion of 36,400an equivalent number of LTIP units previously issued)units.
Dividends and paid cash of $209.7 million.Distributions
On August 24, 2017,May 21, 2020 our board of trustees declared a cash dividend and distribution, respectively, of $0.26$0.33 per common share and OP unit. Such distributions were paid on September 29, 2017unit to shareholders and OP unitholders of record as of SeptemberJune 15, 2017.2020. On September 13, 2017,May 21, 2020, our board of trustees also declared cash distributions of $0.375 per Series A Preferred Share and Series A-1 Preferred Unit to shareholders and unitholders of record as of June 15, 2020. On June 10, 2020, our board of trustees declared cash distributions of $7.7$6.0 million, in the aggregate, to subordinated performance unitholders of record as of SeptemberJune 15, 2017.2020. Such dividends and distributions were paid on September 29, 2017.
During the nine months ended SeptemberJune 30, 2017, after receiving notices of redemption from certain holders of OP units, we elected to issue 1,189,801 common shares to such holders in exchange for 1,189,801 OP units in satisfaction of the operating partnership's redemption obligations.
As discussed in Note 13 in Item 1, on October 11, 2017, we completed an underwritten public offering of 6,900,000 of our Preferred Shares, which included 900,000 Preferred Shares sold upon the exercise in full by the underwriters of their option to purchase additional Preferred Shares, resulting in net proceeds to us of approximately $166.6 million, after deducting the underwriting discount and our other offering expenses. We used the net proceeds from the offering to repay amounts outstanding under our Revolver, and subsequently redrew under our Revolver to fund self storage property acquisitions.2020.
Cash Distributions from our Operating Partnership
Under the LP Agreement of our operating partnership, to the extent that we, as the general partner of our operating partnership, determine to make distributions to the partners of our operating partnership out of the operating cash flow or capital transaction proceeds generated by a real property portfolio managed by one of our PROs, the holders of the series of subordinated performance units that relate to such portfolio are entitled to share in such distributions. Under the LP Agreement of our operating partnership, operating cash flow with respect to a portfolio of properties managed by one of our PROs is generally an amount determined by us, as general partner of our operating partnership, equal to the excess of property revenues over property related expenses from that portfolio. In general, property revenue from the portfolio includes:
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(i) | all receipts, including rents and other operating revenues; |
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(ii) | any incentive, financing, break-up and other fees paid to us by third parties; |
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(iii) | amounts released from previously set aside reserves; and |
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(iv) | any other amounts received by us, which we allocate to the particular portfolio of properties. |
(i)all receipts, including rents and other operating revenues;
(ii)any incentive, financing, break-up and other fees paid to us by third parties;
(iii)amounts released from previously set aside reserves; and
(iv)any other amounts received by us, which we allocate to the particular portfolio of properties.
In general, property-related expenses include all direct expenses related to the operation of the properties in that portfolio, including real property taxes, insurance, property-level general and administrative expenses, employee costs, utilities, property marketing expense, property maintenance and property reserves and other expenses incurred at the
property level. In addition, other expenses incurred by our operating partnership maywill also be allocated by us, as general partner, to the property portfolio and will be included in the property-related expenses of that portfolio. Examples of such other expenses include:
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(i) | corporate-level general and administrative expenses; |
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(ii) | out-of-pocket costs, expenses and fees of our operating partnership, whether or not capitalized; |
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(iii) | the costs and expenses of organizing and operating our operating partnership; |
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(iv) | amounts paid or due in respect of any loan or other indebtedness of our operating partnership during such period; |
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(v) | extraordinary expenses of our operating partnership not previously or otherwise deducted under item (ii) above; |
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(vi) | any third-party costs and expenses associated with identifying, analyzing, and presenting a proposed property to us and/or our operating partnership; and |
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(vii) | reserves to meet anticipated operating expenditures, debt service or other liabilities, as determined by us. |
(i)corporate-level general and administrative expenses;
(ii)out-of-pocket costs, expenses and fees of our operating partnership, whether or not capitalized;
(iii)the costs and expenses of organizing and operating our operating partnership;
(iv)amounts paid or due in respect of any loan or other indebtedness of our operating partnership during such period;
(v)extraordinary expenses of our operating partnership not previously or otherwise deducted under item (ii) above;
(vi)any third-party costs and expenses associated with identifying, analyzing, and presenting a proposed property to us and/or our operating partnership; and
(vii)reserves to meet anticipated operating expenditures, debt service or other liabilities, as determined by us.
To the extent that we, as the general partner of our operating partnership, determine to make distributions to the partners of our operating partnership out of the operating cash flow of a real property portfolio managed by one of our PROs, operating cash flow from a property portfolio is required to be allocated to holders of OP unitsunitholders and to the holders of series of subordinated performance units that relate to such property portfolio as follows:
First, an amount is allocated to holders of OP unitsunitholders in order to provide holders of OP unitsunitholders (together with any prior allocations of capital transaction proceeds) with a cumulative preferred allocation on the unreturned capital contributions attributed to the OP units in respect of such property portfolio. The preferred allocation for all of our existing portfolios is 6%. As of SeptemberJune 30, 2017,2020, our operating partnership had an aggregate of $1,081.0$1,730.4 million of such unreturned capital contributions with respect to common shareholders and OP unitholders, andwith respect to the various property portfolios.
Second, an amount is allocated to the holders of the series of subordinated performance units relating to such property portfolio in order to provide such holders with an allocation (together with prior distributions of capital transaction proceeds) on their unreturned capital contributions. Although the subordinated allocation for the subordinated performance units is non-cumulative from period to period, if the operating cash flow from a property portfolio related to a series of subordinated performance units is sufficient, in the judgment of the general partner (with the approval of a majority of our independent trustees), to fund distributions to the holders of such series of subordinated performance units, but we, as the general partner of our operating partnership, decline to make distributions to such holders, the amount available but not paid as distributions will be added to the capital contributionssubordinated allocation corresponding to such series of subordinated performance units. The subordinated allocation for the outstanding subordinated performance units is 6%. As of SeptemberJune 30, 2017,2020, an aggregate of $188.3$117.8 million of unreturned capital contributions has been allocated to the various series of subordinated performance units.
Thereafter, any additional operating cash flow is allocated to holders of OP unitsunitholders and the applicable series of subordinated performance units equally.
Following the allocation described above, we as the general partner of our operating partnership, will generally cause our operating partnership to distribute the amounts allocated to the relevant series of subordinated performance units to the holders of such series of subordinated performance units. We, as the general partner, may cause our operating partnership to distribute the amounts allocated to holders of the OP unitsunitholders or may cause our operating partnership to retain such amounts to be used by our operating partnership for any purpose. Any operating cash flow that is attributable to amounts retained by our operating partnership pursuant to the preceding sentence will generally be available to be allocated as an additional capital contribution to the various property portfolios.
The foregoing description of the allocation of operating cash flow between the OP unit holdersunitholders and subordinated performance unit holdersunitholders is used for purposes of determining distributions to holders of subordinated performance units but does not necessarily represent the operating cash flow that will be distributed to holders of OP unitsunitholders (or paid as dividends to holders of our common shares). Any distribution of operating cash flow allocated to the holders of OP unitsunitholders will be made at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of trustees).
Under the LP Agreement of our operating partnership, capital transactions are transactions that are outside the ordinary course of our operating partnership's business, involve the sale, exchange, other disposition, or refinancing
of any property, and are designated as capital transactions by us, as the general partner. To the extent the general partner determines to distribute capital transaction proceeds, the proceeds from capital transactions involving a particular property portfolio are required to be allocated to holders of OP unitsunitholders and to the series of subordinated performance units that relate to such property portfolio as follows:
First, an amount determined by us, as the general partner, of such capital transaction proceeds is allocated to holders of OP unitsunitholders in order to provide holders of OP unitsunitholders (together with any prior allocations of operating cash flow) with a cumulative preferred allocation on the unreturned capital contributions attributed to the holders of OP unitsunitholders in respect of such property portfolio that relate to such capital transaction plus an additional amount equal to such unreturned capital contributions.
Second, an amount determined by us, as the general partner, is allocated to the holders of the series of subordinated performance units relating to such property portfolio in order to provide such holders with a non-cumulative subordinated allocation on the unreturned capital contributions made by such holders in respect of such property portfolio that relatesrelate to such capital transaction plus an additional amount equal to such unreturned capital contributions.
The preferred allocation and subordinated allocation with respect to capital transaction proceeds for each portfolio is equal to the preferred allocation and subordinated allocation for distributions of operating cash flow with respect to that portfolio.
Thereafter, any additional capital transaction proceeds are equally allocated to holders of OP unitsunitholders and the applicable series of subordinated performance units.units equally.
Following the allocation described above, we, as the general partner of our operating partnership, will generally cause our operating partnership to distribute the amounts allocated to the relevant series of subordinated performance units to the holders of such series of subordinated performance units. We, as general partner of our operating partnership, may cause our operating partnership to distribute the amounts allocated to holders of the OP units unitholders
or may cause our operating partnership to retain such amounts to be used by our operating partnership for any purpose, including additional acquisitions through the use of 1031 exchanges.purpose. Any capital transaction proceeds that are attributable to amounts retained by our operating partnership pursuant to the preceding sentence will generally be available to be allocated as an additional capital contribution to the various property portfolios.
The foregoing allocation of capital transaction proceeds between the OP unit holdersunitholders and subordinated performance unit holdersunitholders is used for purposes of determining distributions to holders of subordinated performance units but does not necessarily represent the capital transaction proceeds that will be distributed to holders of OP unitsunitholders (or paid as dividends to holders of our common shares). Any distribution of capital transaction proceeds allocated to the holders of OP unitsunitholders will be made at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of trustees).
Allocation of Capital Contributions
We, as the general partner of our operating partnership, in our discretion, have the right to increase or decrease, as appropriate, the amount of capital contributions allocated to our operating partnership in general and to each series of subordinated performance units to reflect capital expenditures made by our operating partnership in respect of each portfolio, the sale or refinancing of all or a portion of the properties comprising the portfolio, the distribution of capital transaction proceeds by our operating partnership, the retention by our operating partnership of cash for working capital purposes and other events impacting the amount of capital contributions allocated to the holders. In addition, to avoid conflicts of interests, any decision by us to increase or decrease allocations of capital contributions must also be approved by a majority of our independent trustees.
Off-Balance Sheet Arrangements
Except as disclosed in the notes to our financial statements, as of SeptemberJune 30, 2017,2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our financial statements, as of SeptemberJune 30, 2017,2020, we have not guaranteed any obligations of unconsolidated entities, nor do we havemade any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposedentities, that creates any material exposure to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
risk.
Seasonality
The self storage business is subject to minor seasonal fluctuations. A greater portion of revenues and profits are realized from May through September. Historically, our highest level of occupancy has typically been in July, while our lowest level of occupancy has typically been in February. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows, and fair values of financial instruments are dependent upon prevailing market interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We use interest rate swaps to moderate our exposure to interest rate risk by effectively converting the interest on variable rate debt to a fixed rate. We make limited use of other derivative financial instruments and we do not use them for trading or other speculative purposes.
As of SeptemberJune 30, 2017,2020, we had $201.0$211.0 million of debt subject to variable interest rates (excluding variable-rate debt subject to interest rate swaps). If one-month LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt (excluding variable-rate debt subject to interest rate swaps) would increasedecrease or decreaseincrease future earnings and cash flows by approximately $2.0$2.1 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take 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, these analyses assume no changes in our financial structure.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this report, are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended SeptemberJune 30, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are not currently subject to any legal proceedings that we consider to be material.
ITEM 1A. Risk Factors
For a discussion of ourthe Company's potential risks and uncertainties, see the information below and in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017 under the heading Item 1A. "Risk Factors" beginning on page 14,15, which is accessible on the SEC's website at www.sec.gov. During
The current outbreak of COVID-19 or the nine months ended September 30, 2017, therefuture outbreak of any other highly infectious or contagious diseases, could adversely impact or cause significant disruption to our financial condition, results of operations and cash flows. The spread of the COVID-19 outbreak has disrupted, and is likely to further cause severe disruptions in, the economy and financial markets and create widespread business continuity and viability issues.
The potential impact and duration of COVID-19 or another pandemic could have significant repercussions across the economy and financial markets, and could trigger a period of economic slowdown or recessions. The outbreak of COVID-19 in many countries continues to adversely impact economic activity and has contributed to significant volatility and negative pressure in financial markets. The impact of the outbreak has been no material changesrapidly evolving and, as cases of the virus have continued to increase around the world, many countries, including the United States, have reacted by instituting, among other things, quarantines and restrictions on travel.
Most states and municipalities, including where we have our headquarters (Colorado) and in regions of the United States where our properties and tenants are located, have also reacted by instituting quarantines, mandating business and school closures, requiring restrictions on travel, "shelter in place" or "stay-at-home" orders, and imposing restrictions on the types of business that may continue to operate. Although many of these jurisdictions, including Colorado, are gradually relaxing a number of these restrictions, many of these restrictions are being re-instituted or are still in place in regions where our properties and tenants are located.
As a result, the COVID-19 pandemic, or a future pandemic, could adversely impact our financial condition, results of operations and cash flows due to, among other factors:
•reduced economic activity that may severely impact the Company's tenants and may cause a portion of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such riskobligations, which could increase uncollectible receivables and cause subsequent reductions in revenue;
•reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending, which could reduce move-in volumes at our stores or limit our ability to minimize exposure to uncollectible receivables;
•governmental or health and safety requirements or recommendations could compel a complete or partial closure of, or other operational issues at, one or more of our properties or prohibit us from charging late fees, conducting auctions and increasing prices;
•any of the above factors, disclosedor a combination thereof, could cause the Company to recognize impairment in value of its tangible or intangible assets;
•a general decline in business activity and demand for property acquisitions, expansions, and the addition of new PROs and/or joint venture partners could adversely affect our ability or desire to grow our portfolio of properties;
•interrupted availability of personnel, including our executive officers, other employees and the employees of our PROs, and an inability of us or our PROs to recruit, attract and retain additional skilled personnel to manage our business and/or properties;
•the potential negative impact on the health of our or our PROs' personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption;
•the inability of other third-party vendors we rely on to conduct our business to operate effectively and continue to support our business and operations, including vendors that provide IT services, legal and accounting services, or other operational support services;
•difficulty accessing debt and equity capital on attractive terms, or at all, and severe disruption or instability in the financial markets or a deterioration in credit and financing conditions may affect our access to capital necessary to fund business operations, potential acquisitions, or other growth opportunities or address maturing liabilities on a timely basis; and
•the financial impact of the COVID-19 pandemic, including potential decreases in cash from operations resulting therefrom, could negatively impact our future compliance with the financial covenants in our credit facility and other debt agreements and result in a default and potential acceleration of indebtedness, which could negatively impact our ability to make additional borrowings under our revolving credit facility and pay dividends.
The rapid development and fluidity of the circumstances resulting from this pandemic preclude any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows and our tenants' ability to pay rent.
The factors described above, as well as additional factors that the Company may not currently be aware of, could materially negatively impact the Company’s ability to collect rent and could lead to termination of leases by tenants, tenant defaults, tenant bankruptcies, decreases in demand for storage space at the Company’s properties, difficulties in accessing capital, impairment of the Company’s tangible or intangible assets and other impacts that could materially and adversely affect the Company’s financial condition, results of operations and cash flows.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the Risk Factors section in the Annual Report, such as those relating to economic or other conditions in the markets in which we do business, changes in interest rates, demand for self storage space generally, illiquidity of real estate investments, our ability to obtain debt financing, our dependence on Form 10-K filed with the SEC on February 28, 2017.external sources of capital and our ability to pay dividends.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the three months ended SeptemberJune 30, 2017,2020, the Company, in its capacity as general partner of its operating partnership, caused the operating partnership to issue 36,283292,291 common shares to satisfy redemption requests from certain limited partners.
On October 3, 2017,June 30, 2020, the operating partnership issued 26,049120,300 OP Units and 22,630 subordinated performance units to Nordhagen LLLP, an entity for which Arlen D. Nordhagen, the Company's chairmanthird parties and chief executive officer, holds voting and/or investment power, 115,918 OP units each to JM Trust and Lamb Family Trust, each an affiliateaffiliates of Guardian,Investment Real Estate Management, LLC d/b/a Moove In, one of the Company's existing PROs and 2,605 OP("Moove In"), as partial consideration for the acquisition of a self storage property.
On July 1, 2020, the operating partnership issued 1,289 subordinated performance units to an unrelated third partyaffiliates of Moove In, as partial consideration for the acquisition of a self storage property.
On October 16, 2017,July 14, 2020, the operating partnership issued 22,2147,837 subordinated performance units to SecurCare Self Storage Inc., an affiliateaffiliates of SecurCare, oneMoove In, as partial consideration for the acquisition of the Company's existing PROs and an affiliate of Arlen D. Nordhagen, the Company's chairman and chief executive officer and 23,121 subordinated performance units to Move It B Units, LLC, an affiliate of Move It, one of the Company's existing PROs.a self storage property.
Following a specified lock up period after the respective datesdate of issuance set forth above, the OP units issued by the operating partnership may be redeemed from time to time by holders for a cash amount per OP unit equal to the market value of an equivalent number of common shares of the Company.shares. The Company has the right, but not the obligation, to assume and satisfy the redemption obligation of itsthe operating partnership described above by issuing one common share in exchange for each OP unit tendered for redemption.
The Company has elected to report early the private placement of its common shares that may occur if the Company elects to assume the redemption obligation of itsthe operating partnership as described above in the event that OP units are in the future tendered for redemption.
Following a two-year lock-up period, holders of subordinated performance units may elect, only upon the achievement of certain performance thresholds relating to the properties to which such subordinated performance units relate, to convert all or a portion of such subordinated performance units into OP units one time each year by submitting a completed conversion notice prior to December 1 of such year. All duly submitted conversion notices will become effective on the immediately following January 1. For additional information about the conversion or exchange of subordinated performance units into OP units, see Note 9 in Item 1 of this report.
As of NovemberAugust 6, 2017,2020, other than those OP units held by the Company, after reflecting the transactions described herein, 29,111,15332,318,889 OP units of its operating partnership were outstanding (including 771,396765,840 outstanding LTIP units in the operating partnership and 1,834,7861,924,918 outstanding OP units ("DownREIT OP units") in certain consolidated subsidiaries of the operating partnership, which are convertible into, or exchangeable for, OP units on a one-for-basis, subject to certain conditions) and 13,061,988 subordinated performance units (including 4,337,111 subordinated performance units in certain subsidiaries of the operating partnership ("DownREIT subordinated performance units").
These issuances were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Use of Proceeds
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
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ITEM 6. Exhibits | |
The following exhibits are filed with this report: |
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Exhibit Number | Exhibit Description |
Exhibit Number | Exhibit Description |
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101*101.INS* | XBRL (Extensible Business Reporting Language). The following materials from NSA's Quarterly Report on Form 10-Q forInstance Document - the quarterly period ended September 30, 2017, taggedinstance document does not appear in XBRL: ((i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of comprehensive income (loss); (iv) condensed consolidated statement of changes in equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements. |
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* | Filed herewith.the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* | Inline XBRL Taxonomy Extension Schema |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase |
104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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* | Filed herewith. |
** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| National Storage Affiliates Trust |
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By: | /s/ TAMARA D. FISCHER |
| Tamara D. Fischer |
| president and chief executive officer |
| (principal executive officer) |
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By: | National Storage Affiliates Trust/s/ BRANDON S. TOGASHI |
| Brandon S. Togashi |
By: | /s/ ARLEN D. NORDHAGEN |
| Arlen D. Nordhagen |
| chairman of the board of trustees |
| and chief executive officer |
| (principal executive officer) |
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By: | /s/ TAMARA D. FISCHER |
| Tamara D. Fischer |
| chief financial officer |
| (principal accounting and financial officer) |
Date: NovemberAugust 7, 2017
2020