NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Sovran Self Storage, Inc. and Sovran Acquisition Limited Partnership have been prepared in
accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Reclassification:
Certain amounts from the 2015 financial statements have been reclassified to conform with the current year presentation as
described in Note 5.
2. ORGANIZATION
Sovran Self
Storage, Inc. (the Parent Company) operates as a self-administered and self-managed real estate investment trust (a REIT) that owns and operates self-storage facilities throughout the United States. All of the Parent
Companys assets are owned by, and all its operations are conducted through, Sovran Acquisition Limited Partnership (the Operating Partnership). Sovran Holdings, Inc., a wholly-owned subsidiary of the Parent Company
(Holdings), is the sole general partner of the Operating Partnership; the Parent Company is a limited partner of the Operating Partnership, and through its ownership of Holdings and its limited partnership interest controls the
operations of the Operating Partnership, holding a 99.6% ownership interest therein as of June 30, 2016. The remaining ownership interests in the Operating Partnership (the Units) are held by certain former owners of assets acquired
by the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the Company. In addition, terms such as we, us, or
our used in this report may refer to the Company, the Parent Company and/or the Operating Partnership.
At June 30, 2016, we had an
ownership interest in, and/or managed 563 self-storage properties in 26 states under the name Uncle Bobs Self Storage
®
. Among our 563 self-storage properties are 39 properties that we
manage for an unconsolidated joint venture (Sovran HHF Storage Holdings LLC) of which we are a 20% owner, 30 properties that we manage for an unconsolidated joint venture (Sovran HHF Storage Holdings II LLC) of which we are a 15% owner, and 16
properties that we manage and have no ownership interest. Approximately 40.5% of the Companys revenue is derived from stores in the states of Texas and Florida. In addition, approximately 9.6% of the Companys revenue is derived from the
Houston, Texas market.
12
We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are consolidated
when we control the entity. Our consolidated financial statements include the accounts of the Parent Company, the Operating Partnership, Uncle Bobs Management, LLC (the Parent Companys taxable REIT subsidiary), Warehouse Anywhere
LLC (an entity owned 60% by Uncle Bobs Management, LLC), Locke Sovran I, LLC (a wholly-owned subsidiary), and Locke Sovran II, LLC (a wholly-owned subsidiary). All intercompany transactions and balances have been eliminated. Investments in
joint ventures that we do not control but for which we have significant influence over are accounted for using the equity method.
Included in the Parent
Companys consolidated balance sheets are noncontrolling redeemable operating partnership units and included in the Operating Partnerships consolidated balance sheets are limited partners redeemable capital interest at redemption
value. These interests are presented in the mezzanine section of the consolidated balance sheet because they do not meet the functional definition of a liability or equity under current accounting literature. These represent the outside
ownership interests of the limited partners in the Operating Partnership. At June 30, 2016, there were 196,008 noncontrolling redeemable operating partnership Units outstanding (168,866 at December 31, 2015). These unitholders are entitled
to receive distributions per unit equivalent to the dividends declared per share on the Parent Companys common stock. The Operating Partnership is obligated to redeem each of these limited partnership Units in the Operating Partnership at the
request of the holder thereof for cash equal to the fair market value of a share of the Parent Companys common stock, at the time of such redemption, provided that the Company at its option may elect to acquire any such Unit presented for
redemption for one common share or cash. The Company accounts for these noncontrolling redeemable Operating Partnership Units under the provisions of EITF D-98,
Classification and Measurement of Redeemable Securities
which was
codified in FASB ASC Topic 480-10-S99. The application of the FASB ASC Topic 480-10-S99 accounting model requires the noncontrolling interest to follow normal noncontrolling interest accounting and then be marked to redemption value at the end of
each reporting period if higher (but never adjusted below that normal noncontrolling interest accounting amount). The offset to the adjustment to the carrying amount of the noncontrolling interests is reflected in the Companys dividends in
excess of net income and in the Operating Partnerships general partner and limited partners capital balances. Accordingly, in the accompanying consolidated balance sheets, noncontrolling interests are reflected at redemption value at
June 30, 2016 and December 31, 2015, equal to the number of noncontrolling interest units outstanding multiplied by the fair market value of the Parent Companys common stock at that date. Redemption value exceeded the value
determined under the Companys historical basis of accounting at those dates.
The following is a reconciliation of the Parent Companys
noncontrolling interests for the period:
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
Jun. 30, 2016
|
|
Beginning balance noncontrolling redeemable Operating Partnership Units
|
|
$
|
18,171
|
|
Issuance of Operating Partnership Units
|
|
|
7,767
|
|
Redemption of Operating Partnership Units
|
|
|
(4,795
|
)
|
Net income attributable to noncontrolling interest in the Operating Partnership
|
|
|
338
|
|
Distributions
|
|
|
(370
|
)
|
Adjustment to redemption value
|
|
|
(920
|
)
|
|
|
|
|
|
Ending balance noncontrolling redeemable Operating Partnership Units
|
|
$
|
20,191
|
|
|
|
|
|
|
13
The following is a reconciliation of the Operating Partnerships noncontrolling interests for the period:
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
Jun. 30, 2016
|
|
Beginning balance Limited Partners Redeemable Capital Interest
|
|
$
|
18,171
|
|
Issuance of Limited Partners Redeemable Capital Interest Units
|
|
|
7,767
|
|
Redemption of Limited Partners Redeemable Capital Interest Units
|
|
|
(4,795
|
)
|
Net income attributable to Limited Partners Redeemable Capital Interest
|
|
|
338
|
|
Distributions
|
|
|
(370
|
)
|
Adjustment to redemption value
|
|
|
(920
|
)
|
|
|
|
|
|
Ending balance Limited Partners Redeemable Capital Interest
|
|
$
|
20,191
|
|
|
|
|
|
|
In 2016 the Operating Partnership issued 69,005 Units with a fair market value of $7.8 million to acquire self-storage
properties. The fair value of the Units on the date of issuance was determined based upon the fair market value of the Parent Companys common stock on that date.
3. STOCK BASED COMPENSATION
The Company accounts for
stock-based compensation under the provisions of ASC Topic 718,
CompensationStock Compensation
. The Company recognizes compensation cost in its financial statements for all share based payments granted, modified, or settled
during the period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.
For the
three months ended June 30, 2016 and 2015, the Company recorded compensation expense (included in general and administrative expense) of $35,000 and $81,000, respectively, related to stock options and $1,891,000 and $1,579,000, respectively,
related to amortization of non-vested stock grants and performance-based awards. For the six months ended June 30, 2016 and 2015, the Company recorded compensation expense of $81,000 and $117,000, respectively, related to stock options and
$3,757,000 and $3,191,000, respectively, related to amortization of non-vested stock grants and performance-based awards.
During the three months ended
June 30, 2016 and 2015, employees and directors exercised 0 and 5,500 stock options respectively, and 3,696 and 5,995 shares of non-vested stock, respectively, vested. During the six months ended June 30, 2016 and 2015, employees and
directors exercised 0 and 15,000 stock options respectively, and 10,881 and 11,229 shares of non-vested stock, respectively, vested.
14
4. INVESTMENT IN STORAGE FACILITIES
The following summarizes our activity in storage facilities during the six months ended June 30, 2016.
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Cost:
|
|
|
|
|
Beginning balance
|
|
$
|
2,491,702
|
|
Acquisition of storage facilities
|
|
|
431,460
|
|
Improvements and equipment additions
|
|
|
13,624
|
|
Additions to consolidated subsidiary
|
|
|
2,117
|
|
Net increase in construction in progress
|
|
|
12,724
|
|
Dispositions
|
|
|
(29,333
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
2,922,294
|
|
|
|
|
|
|
Accumulated Depreciation:
|
|
|
|
|
Beginning balance
|
|
$
|
465,195
|
|
Additions during the period
|
|
|
31,674
|
|
Dispositions
|
|
|
(10,348
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
486,521
|
|
|
|
|
|
|
The Company acquired 34 facilities during the six months ended June 30, 2016. The acquisition of one store that
was acquired at certificate of occupancy was accounted for as an asset acquisition. The cost of this store, including closing costs, was assigned to its land, building, equipment and improvements components based upon their relative fair values. The
assets and liabilities of the other 33 storage facilities acquired in 2016, which primarily consist of tangible and intangible assets, are measured at fair value on the date of acquisition in accordance with the principles of FASB ASC Topic 820,
Fair Value Measurements and Disclosures
and were accounted for as business combinations in accordance with the principles of FASB ASC Topic 805 Business Combinations. The purchase price of the 34 facilities acquired in
2016 has been preliminarily assigned as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Consideration paid
|
|
|
Acquisition Date Fair Value
|
|
State
|
|
Number
of
Properties
|
|
|
Date of
Acquisition
|
|
|
Purchase
Price
|
|
|
Cash
Paid
|
|
|
Value of
Operating
Partnership
Units
Issued
|
|
|
Mortgage
Assumed
|
|
|
Net Other
Liabilities
(Assets)
Assumed
|
|
|
Land
|
|
|
Building,
Equipment,
and
Improvements
|
|
|
In-Place
Customers
Leases
|
|
|
Closing
Costs
Expensed
|
|
Florida
|
|
|
4
|
|
|
|
1/6/2016
|
|
|
$
|
20,350
|
|
|
$
|
20,246
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104
|
|
|
$
|
6,646
|
|
|
$
|
13,339
|
|
|
$
|
365
|
|
|
$
|
372
|
|
California
|
|
|
4
|
|
|
|
1/21/2016
|
|
|
|
78,750
|
|
|
|
78,562
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
27,876
|
|
|
|
49,860
|
|
|
|
1,014
|
|
|
|
332
|
|
New Hampshire
|
|
|
5
|
|
|
|
1/21/2016
|
|
|
|
54,225
|
|
|
|
53,941
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
12,902
|
|
|
|
40,428
|
|
|
|
895
|
|
|
|
576
|
|
Massachusetts
|
|
|
1
|
|
|
|
1/21/2016
|
|
|
|
11,375
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
4,874
|
|
|
|
6,335
|
|
|
|
166
|
|
|
|
65
|
|
Texas
|
|
|
3
|
|
|
|
1/21/2016
|
|
|
|
42,050
|
|
|
|
41,894
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
23,487
|
|
|
|
18,000
|
|
|
|
563
|
|
|
|
251
|
|
Arizona
|
|
|
1
|
|
|
|
2/1/2016
|
|
|
|
9,275
|
|
|
|
9,261
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
988
|
|
|
|
8,224
|
|
|
|
63
|
|
|
|
120
|
|
Florida
|
|
|
1
|
|
|
|
2/12/2016
|
|
|
|
11,274
|
|
|
|
11,270
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
2,294
|
|
|
|
8,980
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
1
|
|
|
|
2/17/2016
|
|
|
|
5,750
|
|
|
|
5,732
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
1,768
|
|
|
|
3,879
|
|
|
|
103
|
|
|
|
148
|
|
Colorado
|
|
|
1
|
|
|
|
2/29/2016
|
|
|
|
12,600
|
|
|
|
12,549
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
4,528
|
|
|
|
7,915
|
|
|
|
157
|
|
|
|
172
|
|
California
|
|
|
3
|
|
|
|
3/16/2016
|
|
|
|
68,832
|
|
|
|
63,965
|
|
|
|
4,472
|
|
|
|
|
|
|
|
395
|
|
|
|
22,647
|
|
|
|
45,371
|
|
|
|
814
|
|
|
|
265
|
|
California
|
|
|
1
|
|
|
|
3/17/2016
|
|
|
|
17,320
|
|
|
|
17,278
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
6,728
|
|
|
|
10,339
|
|
|
|
253
|
|
|
|
116
|
|
California
|
|
|
1
|
|
|
|
4/11/2016
|
|
|
|
36,750
|
|
|
|
33,346
|
|
|
|
3,295
|
|
|
|
|
|
|
|
109
|
|
|
|
17,445
|
|
|
|
18,840
|
|
|
|
465
|
|
|
|
125
|
|
Connecticut
|
|
|
2
|
|
|
|
4/14/2016
|
|
|
|
17,313
|
|
|
|
17,152
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
6,142
|
|
|
|
10,904
|
|
|
|
267
|
|
|
|
172
|
|
New York
|
|
|
2
|
|
|
|
4/26/2016
|
|
|
|
24,312
|
|
|
|
20,143
|
|
|
|
|
|
|
|
4,249
|
|
|
|
(80
|
)
|
|
|
5,710
|
|
|
|
18,201
|
|
|
|
401
|
|
|
|
340
|
|
Florida
|
|
|
1
|
|
|
|
5/2/2016
|
|
|
|
8,100
|
|
|
|
4,006
|
|
|
|
|
|
|
|
4,036
|
|
|
|
58
|
|
|
|
3,018
|
|
|
|
4,922
|
|
|
|
160
|
|
|
|
144
|
|
Texas
|
|
|
1
|
|
|
|
5/5/2016
|
|
|
|
10,800
|
|
|
|
10,708
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
2,333
|
|
|
|
8,302
|
|
|
|
165
|
|
|
|
117
|
|
New York
|
|
|
2
|
|
|
|
5/19/2016
|
|
|
|
8,400
|
|
|
|
8,366
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
714
|
|
|
|
7,521
|
|
|
|
165
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired
|
|
|
34
|
|
|
|
|
|
|
$
|
437,476
|
|
|
$
|
419,769
|
|
|
$
|
7,767
|
|
|
$
|
8,285
|
|
|
$
|
1,655
|
|
|
$
|
150,100
|
|
|
$
|
281,360
|
|
|
$
|
6,016
|
|
|
$
|
3,495
|
|
15
All of the properties acquired were purchased from unrelated third parties. The operating results of the
facilities acquired have been included in the Companys operations since the respective acquisition dates. Of the $419.8 million paid at closing for the properties acquired during 2016, $4.0 million represented deposits that were paid in 2015
when certain of these properties originally went under contract. In addition to the closing costs expensed on 2016 acquisitions, the Company also incurred $0.6 million of acquisition costs during the six months ended June 30, 2016 related to
facilities acquired in July of 2016, including the acquisition of LifeStorage, LP (See Note 16).
Non-cash investing activities during 2016 include the
issuance of $7.8 million in Operating Partnership Units, the assumption of two mortgages with outstanding balances of $8.3 million, and the assumption of net other liabilities of $1.7 million.
The Company measures the fair value of in-place customer lease intangible assets based on the Companys experience with customer turnover. The Company
amortizes in-place customer leases on a straight-line basis over 12 months (the estimated future benefit period). In-place customer leases are included in other assets on the Companys consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Jun. 30,
2016
|
|
|
Dec. 31,
2015
|
|
In-place customer leases
|
|
$
|
28,237
|
|
|
$
|
22,320
|
|
Accumulated amortization
|
|
|
(23,912
|
)
|
|
|
(21,017
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value at the end of period
|
|
$
|
4,325
|
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to in-place customer leases was $1.8 million and $1.0 million for the three months ended
June 30, 2016 and 2015, respectively and was $3.0 million and $2.0 million for the six months ended June 30, 2016 and 2015, respectively. The Company expects to record $6.3 million and $1.0 million of amortization expense for the years
ended December 31, 2016 and 2017, respectively.
During the six months ended June 30, 2016, the Company acquired 34 properties. On July 15,
2016, the Company acquired LifeStorage, LP (See Note 16). The following pro forma information is based on the combined historical financial statements of the Company, the 34 properties acquired during the six months ended June 30, 2016, and
LifeStorage, LP as if the acquisitions had all occurred as of January 1, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Three
Months
Ended
June 30,
2016
|
|
|
Three
Months
Ended
June 30,
2015
|
|
|
Six
Months
Ended
June 30,
2016
|
|
|
Six
Months
Ended
June 30,
2015
|
|
Total revenues
|
|
$
|
128,494
|
|
|
$
|
113,999
|
|
|
$
|
251,813
|
|
|
$
|
221,356
|
|
Net income attributable to common shareholders
|
|
$
|
53,890
|
|
|
$
|
12,771
|
|
|
$
|
84,239
|
|
|
$
|
18,490
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.17
|
|
|
$
|
0.28
|
|
|
$
|
1.83
|
|
|
$
|
0.40
|
|
Diluted
|
|
$
|
1.16
|
|
|
$
|
0.28
|
|
|
$
|
1.82
|
|
|
$
|
0.40
|
|
16
The above pro forma information includes the results of eight stores acquired by LifeStorage, LP in 2016 and 17
stores acquired by LifeStorage, LP in 2015. These stores therefore were not owned for the entire pro forma periods. The above pro forma information also includes increases in amortization of in-place customer leases totaling $13.2 million and
$26.5 million for the three and six month periods ending June 30, 2015, respectively. As noted above, in-place customer leases are amortized over their estimated future benefit period of 12 months. Material, nonrecurring pro forma
adjustments directly attributable to the business combinations and included in the above pro forma financial information include reductions to interest expense related to acquisition bridge financing totaling $7.3 million for the three and six
months ended June 30, 2016 and reductions to acquisition costs totaling $1.7 million and $4.1 million for the three and six months ended June 30, 2016, respectively.
The following table summarizes the revenues and earnings since the acquisition dates that are included in the Companys consolidated statements of
operations for the six months ended June 30, 2016 related to the 34 properties acquired during the three and six months ended June 30, 2016.
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2016
|
|
Total revenues
|
|
$
|
7,967
|
|
|
$
|
11,720
|
|
Net loss attributable to common shareholders
|
|
$
|
(376
|
)
|
|
$
|
(2,275
|
)
|
The above net losses attributable to common shareholders were primarily due to the acquisition costs incurred in connection
with the 2016 acquisitions.
17
Property Dispositions
During 2016 the Company sold eight non-strategic properties with a carrying value of $18.8 million and received cash proceeds of $34.1 million, resulting in a
$15.3 million gain on sale. During 2015 the Company sold three non-strategic properties purchased in 2014 and 2015 with a carrying value of $5.1 million and received cash proceeds of $4.6 million, resulting in a $0.5 million loss on sale. The
following table summarizes the revenues and expenses up to the dates of sale of the 11 properties sold in 2016 and 2015 that are included in the Companys consolidated statements of operations for 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months
Ended
June 30, 2016
|
|
|
Three Months
Ended
June 30, 2015
|
|
|
Six Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2016
|
|
Total operating revenues
|
|
$
|
1,171
|
|
|
$
|
1,140
|
|
|
$
|
2,324
|
|
|
$
|
2,258
|
|
Property operations and maintenance expense
|
|
|
(299
|
)
|
|
|
(321
|
)
|
|
|
(614
|
)
|
|
|
(644
|
)
|
Real estate tax expense
|
|
|
(25
|
)
|
|
|
(69
|
)
|
|
|
(98
|
)
|
|
|
(138
|
)
|
Depreciation and amortization expense
|
|
|
(179
|
)
|
|
|
(174
|
)
|
|
|
(359
|
)
|
|
|
(350
|
)
|
Gain (loss) on sale of storage facilities
|
|
|
15,270
|
|
|
|
|
|
|
|
15,270
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,938
|
|
|
$
|
576
|
|
|
$
|
16,523
|
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. UNSECURED LINE OF CREDIT AND TERM NOTES
Borrowings outstanding on our unsecured line of credit and term notes are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Jun. 30,
2016
|
|
|
Dec. 31,
2015
|
|
Revolving line of credit borrowings
|
|
$
|
|
|
|
$
|
79,000
|
|
|
|
|
Term note due April 26, 2016
|
|
|
|
|
|
|
150,000
|
|
Term note due June 4, 2020
|
|
|
325,000
|
|
|
|
325,000
|
|
Term note due August 5, 2021
|
|
|
100,000
|
|
|
|
100,000
|
|
Term note due April 8, 2024
|
|
|
175,000
|
|
|
|
175,000
|
|
Senior term note due July 1, 2026
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal balance outstanding
|
|
|
1,200,000
|
|
|
|
750,000
|
|
Less: unamortized debt issuance costs
|
|
|
(8,912
|
)
|
|
|
(3,350
|
)
|
Less: unamortized senior term note discount
|
|
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes payable
|
|
$
|
1,187,770
|
|
|
$
|
746,650
|
|
|
|
|
|
|
|
|
|
|
In January 2016, the Company exercised the expansion feature on its existing amended unsecured credit agreement and increased
the revolving credit limit from $300 million to $500 million. The interest rate on the revolving credit facility bears interest at a variable annual rate equal to LIBOR plus a margin based on the Companys credit rating (at June 30, 2016
the margin is 1.10%), and requires an annual 0.15% facility fee. The amended agreement also reduced the interest rate on the $325 million unsecured term note issued under this credit agreement maturing June 4, 2020, with the term note bearing
interest at LIBOR plus a margin based on the Companys credit rating (at June 30, 2016 the margin is 1.15%). The interest rate at June 30, 2016 on the Companys line of credit was approximately 1.54% (1.72% at December 31,
2015). At June 30, 2016, there was $500 million available on the unsecured line of credit. The revolving line of credit has a maturity date of December 10, 2019.
18
On April 8, 2014, the Company entered into a $175 million term note maturing April 2024 bearing interest at
a fixed rate of 4.533%. The interest rate on the term note increases to 6.283% if the Company is not rated by at least one rating agency or if the Companys credit rating is downgraded. The proceeds from this term note were used to repay the
$115 million outstanding on the Companys line of credit at April 8, 2014, with the excess proceeds used for acquisitions.
In 2011, the Company
entered into a $100 million term note maturing August 5, 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on
the notes is downgraded or if the Companys credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures.
The Company has maintained a $150 million unsecured term note maturing April 26, 2016 bearing interest at 6.38%. The Company used a draw on the line of
credit to pay off the balance of this note on April 26, 2016.
The line of credit and term notes require the Company to meet certain financial
covenants, measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness and limitations on dividend payouts. At June 30, 2016, the Company was in compliance with
its debt covenants.
We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain
consistent with amounts outstanding at June 30, 2016 the entire availability on the line of credit could be drawn without violating our debt covenants.
On May 17, 2016, the Company entered into two senior unsecured acquisition bridge facilities (the Bridge Facilities) totaling $1,675 million
with the Companys third-party advisors to the LifeStorage, LP acquisition (see Note 16). In consideration for the bridge financing commitments, the Company paid fees totaling $7.3 million which are included as interest expense
acquisition bridge loan commitment fee in the consolidated statements of operations for the three and six month periods ending June 30, 2016. The Bridge Facilities commitments were terminated on June 29, 2016.
On June 20, 2016, the Operating Partnership issued $600 million in aggregate principal amount of 3.50% unsecured senior notes due July 1, 2026 (the
2026 Senior Notes). The 2026 Senior Notes were issued at a 0.553% discount to par value. Interest on the 2026 Senior Notes is payable semi-annually in arrears on January 1 and July 1, beginning on January 1, 2017. The 2026
Senior Notes are fully and unconditionally guaranteed by the Parent Company. Proceeds received upon issuance, net of discount to par of $3.3 million and underwriting discount and other offering expenses of $5.5 million, totaled $591.2 million. The
indenture under which the 2026 Senior Notes were issued restricts the ability of the Company and its subsidiaries to incur debt unless the Company and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest
coverage ratio of more than 1.5:1 on all outstanding debt, after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Company and its subsidiaries to incur secured debt unless the Company and its consolidated
subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with
a value less than 150% of the unsecured indebtedness of the Company and its consolidated subsidiaries. As of June 30, 2016, the Company was in compliance with all of the financial covenants under the 2026 Senior Notes.
19
During April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs, which amends the requirements for the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU No. 2015-03 is effective for fiscal years, beginning after December 15, 2015 and interim periods within those fiscal years. Consistent with the
guidance in ASU No. 2015-03 there are $3.4 million of debt issuance costs that have been presented as a reduction of term notes in our accompanying consolidated balance sheets at December 31, 2015 that were previously classified in other
assets prior to the adoption of ASU No. 2015-03. The implementation of this accounting standards update had no effect on our results of operations or cash flows.
In August 2015, the FASB issued Accounting Standards Update 2015-15, Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-15 codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line-of-credit
arrangements as assets. ASU No. 2015-15 is effective for fiscal years, beginning after December 15, 2015 and interim periods within those fiscal years. The implementation of this update did not result in any changes to our
consolidated financial statements.
The Companys fixed rate term notes contain a provision that allows for the noteholders to call the debt upon a
change of control of the Company at an amount that includes a make whole premium based on rates in effect on the date of the change of control. At this time no change in control is planned or anticipated.
6. MORTGAGES PAYABLE AND DEBT MATURITIES
Mortgages
payable at June 30, 2016 and December 31, 2015 consist of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
4.065% mortgage note due April 1, 2023, secured by one self-storage facility with an
aggregate net book value of $7.6 million, principal and interest paid monthly (effective interest rate 4.29%)
|
|
|
4,249
|
|
|
|
|
|
5.26% mortgage note due November 1, 2023, secured by one self-storage facility with an
aggregate net book value of $8.2 million, principal and interest paid monthly (effective interest rate 5.58%)
|
|
|
4,033
|
|
|
|
|
|
5.99% mortgage note due May 1, 2026, secured by one self-storage facility with an aggregate
net book value of $4.3 million, principal and interest paid monthly (effective interest rate 6.24%)
|
|
|
1,923
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
Total mortgages payable
|
|
$
|
10,205
|
|
|
$
|
1,993
|
|
|
|
|
|
|
|
|
|
|
20
The table below summarizes the Companys debt obligations and interest rate derivatives at June 30,
2016. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The
fair value of the fixed rate term notes and mortgage notes were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining
maturities. These assumptions are considered Level 2 inputs within the fair value hierarchy as described in Note 8. The carrying values of our variable rate debt instruments approximate their fair values as these debt instruments bear interest at
current market rates that approximate market participant rates. This is considered a Level 2 input within the fair value hierarchy. The use of different market assumptions and estimation methodologies may have a material effect on the reported
estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company would realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date Including Discount
|
|
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
Value
|
|
Line of credit - variable rate LIBOR + 1.10%
(1.54% at June 30, 2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note - variable rate LIBOR+1.15%
(1.61% at June 30, 2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,000
|
|
|
|
|
|
|
$
|
325,000
|
|
|
$
|
325,000
|
|
Term note - fixed rate 5.54%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
114,096
|
|
Term note - fixed rate 4.533%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
$
|
190,191
|
|
Term note - fixed rate 3.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
$
|
606,553
|
|
Mortgage note - fixed rate 4.065%
|
|
$
|
42
|
|
|
$
|
88
|
|
|
$
|
92
|
|
|
$
|
96
|
|
|
$
|
99
|
|
|
$
|
3,832
|
|
|
$
|
4,249
|
|
|
$
|
4,255
|
|
Mortgage note - fixed rate 5.26%
|
|
$
|
30
|
|
|
$
|
63
|
|
|
$
|
67
|
|
|
$
|
71
|
|
|
$
|
74
|
|
|
$
|
3,728
|
|
|
$
|
4,033
|
|
|
$
|
4,332
|
|
Mortgage note - fixed rate 5.99%
|
|
$
|
71
|
|
|
$
|
151
|
|
|
$
|
160
|
|
|
$
|
170
|
|
|
$
|
181
|
|
|
$
|
1,190
|
|
|
$
|
1,923
|
|
|
$
|
2,083
|
|
Interest rate derivatives liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,010
|
|
7. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to
pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. Forward
starting interest rate swaps are also used by the Company to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. No other cash payments are made unless the contract is terminated
prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters into interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.
The interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore,
the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders equity or partners capital as Accumulated Other Comprehensive Loss (AOCL).
These deferred gains and losses are recognized in interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the
change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately.
21
Ineffectiveness was de minimis for the three and six months ended June 30, 2016, and 2015.
The
Company has interest rate swap agreements in effect at June 30, 2016 as detailed below to effectively convert a total of $325 million of variable-rate debt to fixed-rate debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Effective Date
|
|
|
Expiration Date
|
|
|
Fixed
Rate Paid
|
|
|
Floating Rate
Received
|
|
$125 Million
|
|
|
9/1/2011
|
|
|
|
8/1/18
|
|
|
|
2.3700
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
12/30/11
|
|
|
|
12/29/17
|
|
|
|
1.6125
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
9/4/13
|
|
|
|
9/4/18
|
|
|
|
1.3710
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
12/29/17
|
|
|
|
11/29/19
|
|
|
|
3.9680
|
%
|
|
|
1 month LIBOR
|
|
$125 Million
|
|
|
8/1/18
|
|
|
|
6/1/20
|
|
|
|
4.1930
|
%
|
|
|
1 month LIBOR
|
|
In the fourth quarter of 2015, the Company entered into forward starting interest rate swap agreements with a total notional
value of $50 million. In the first quarter of 2016, the Company entered into additional forward starting interest rate swap agreements with a total notional value of $100 million. These forward starting interest rate swap agreements were entered
into to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of fixed rate long-term debt. In conjunction with the issuance of the $600 million 2026 Senior Notes (see Note 5), the Company settled the
forward starting swap agreements for a loss of approximately $9.2 million. The loss was recorded as accumulated other comprehensive loss and is being amortized as additional interest expense over the ten-year term of the $600 million 2026 Senior
Notes. Consistent with the Companys accounting policy, the cash outflow related to the settlement of the forward starting swap agreements is reflected as a financing activity in the consolidated statements of cash flows.
The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic 815
Derivatives and Hedging
, held by
the Company. During the three months ended June 30, 2016 and 2015, the net reclassification from AOCL to interest expense was $1.2 million and $1.4 million, respectively, based on payments made under the swap agreements. During the six months
ended June 30, 2016 and 2015, the net reclassification from AOCL to interest expense was $2.4 million and $2.7 million, respectively, based on payments made under the swap agreements. Reclassification of amounts included in AOCL at
June 30, 2016 to interest expense will be approximately $5.4 million for the 12 months ended June 30, 2017. Payments made under the interest rate swap agreements will be reclassified to interest expense as settlements occur or as payments
under the 2026 Senior Notes are made. The fair value of the swap agreements, including accrued interest, was a liability of $22.0 million at June 30, 2016, and an asset of $550,000 and a liability of $15.3 million at December 31, 2015.
The Companys agreements with its interest rate swap counterparties contain provisions pursuant to which the Company could be declared in default of
its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. The interest rate swap agreements also incorporate other loan covenants of
the Company. Failure to comply with the loan covenant provisions would result in the Company being in default on the interest rate swap agreements. As of June 30, 2016, the Company had not posted any collateral related to the interest rate swap
agreements. If the Company had breached any of these provisions as of June 30, 2016, it could have been required to settle its obligations under the agreements at their net termination cost of $22.0 million.
22
The changes in AOCL for the three and six months ended June 30, 2016 and June 30, 2015 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Apr. 1, 2016
to
Jun. 30, 2016
|
|
|
Apr. 1, 2015
to
Jun. 30, 2015
|
|
|
Jan. 1, 2016
to
Jun. 30, 2016
|
|
|
Jan. 1, 2015
to
Jun. 30, 2015
|
|
Accumulated other comprehensive loss beginning of period
|
|
$
|
(26,511
|
)
|
|
$
|
(16,992
|
)
|
|
$
|
(14,415
|
)
|
|
$
|
(13,005
|
)
|
Realized loss reclassified from accumulated other comprehensive loss to interest expense
|
|
|
1,160
|
|
|
|
1,359
|
|
|
|
2,357
|
|
|
|
2,718
|
|
Unrealized loss from changes in the fair value of the effective portion of the interest rate
swaps
|
|
|
(5,512
|
)
|
|
|
1,062
|
|
|
|
(18,805
|
)
|
|
|
(4,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss included in other comprehensive loss
|
|
|
(4,352
|
)
|
|
|
2,421
|
|
|
|
(16,448
|
)
|
|
|
(1,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss end of period
|
|
$
|
(30,863
|
)
|
|
$
|
(14,571
|
)
|
|
$
|
(30,863
|
)
|
|
$
|
(14,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC Topic 820
Fair Value Measurements and Disclosures
in determining the fair value of its financial
and nonfinancial assets and liabilities. ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs
are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value measurement.
Refer to Note 6 for presentation of the fair values of debt
obligations which are disclosed at fair value on a recurring basis.
The following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
(Liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(22,010
|
)
|
|
|
|
|
|
$
|
(22,010
|
)
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
550
|
|
|
|
|
|
|
$
|
550
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(15,343
|
)
|
|
|
|
|
|
$
|
(15,343
|
)
|
|
|
|
|
Interest rate swaps are over the counter securities with no quoted readily available Level 1 inputs, and therefore are
measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using the income approach.
During 2016, assets and liabilities measured at fair value on a non-recurring basis included the assets acquired and liabilities assumed in connection with
the acquisition of 34 storage facilities (see note 4). To determine the fair value of land, the Company used prices per acre derived from observed transactions involving comparable land in similar locations, which is considered a
23
Level 2 input. To determine the fair value of buildings, equipment and improvements, the Company used current replacement cost based on information derived from construction industry data by
geographic region which is considered a Level 2 input. The replacement cost is then adjusted for the age, condition, and economic obsolescence associated with these assets, which are considered Level 3 inputs. The fair value of in-place customer
leases is based on the rent lost due to the amount of time required to replace existing customers which is based on the Companys historical experience with turnover at its facilities, which is a Level 3 input. Other assets acquired and
liabilities assumed in the acquisitions consist primarily of prepaid or accrued real estate taxes and deferred revenues from advance monthly rentals paid by customers. The fair values of these assets and liabilities are based on their carrying
values as they typically turn over within one year from the acquisition date and these are Level 3 inputs.
9. INVESTMENT IN JOINT VENTURES
The Company has a 20% ownership interest in Sovran HHF Storage Holdings LLC (Sovran HHF), a joint venture that was formed in May 2008 to acquire
self-storage properties that are managed by the Company. The carrying value of the Companys investment at June 30, 2016 and December 31, 2015 was $44.1 million and $44.6 million, respectively. Twenty-five properties were acquired by
Sovran HHF in 2008 for approximately $171.5 million and 14 additional properties were acquired by Sovran HHF in 2014 for $187.2 million. In 2008, the Company contributed $18.6 million to the joint venture as its share of capital required to fund the
acquisitions. In 2012 the Company contributed an additional $1.2 million to the joint venture. In 2013 the Company received a return of capital distribution of $3.4 million as part of the refinancing of Sovran HHF. In 2014 the Company contributed an
additional $28.6 million in cash to the joint venture as its share of capital required to fund acquisitions. In 2015 the Company contributed an additional $0.4 million in cash to the joint venture as its share of capital required to fund certain
capital expenditures and property taxes related to 2014 acquisitions. As of June 30, 2016, the carrying value of the Companys investment in Sovran HHF exceeds its share of the underlying equity in net assets of Sovran HHF by approximately
$1.7 million as a result of the capitalization of certain acquisition related costs in 2008. This difference is included in the carrying value of the investment, which is assessed for other-than-temporary impairment on a periodic basis. No
other-than-temporary impairments have been recorded on this investment.
The Company has a 15% ownership interest in Sovran HHF Storage Holdings II LLC
(Sovran HHF II), a joint venture that was formed in 2011 to acquire self-storage properties that are managed by the Company. The carrying value of the Companys investment at June 30, 2016 and December 31, 2015 was $13.8
million and $13.9 million, respectively. Twenty properties were acquired by Sovran HHF II during 2011 for approximately $166.1 million. During 2011, the Company contributed $12.8 million to the joint venture as its share of capital required to fund
the acquisitions. Ten additional properties were acquired by Sovran HHF II during 2012 for approximately $29 million. During 2012, the Company contributed $2.4 million to the joint venture as its share of capital required to fund the acquisitions.
In 2015 the Company contributed an additional $1.7 million in cash to the joint venture as its share of capital required to fund the payoff of a mortgage note. The carrying value of this investment is assessed for other-than-temporary impairment on
a periodic basis and no such impairments have been recorded on this investment.
24
As manager of Sovran HHF and Sovran HHF II, the Company earns a management and call center fee of 7% of gross
revenues which totaled $1.3 million and $1.2 million for the three months ended June 30, 2016 and 2015, respectively. The management and call center fees earned by the Company for the six months ended June 30, 2016 and 2015, totaled $2.5
million and $2.4 million, respectively.
The Companys share of Sovran HHF and Sovran HHF IIs income for the three months ended June 30,
2016 and 2015 was $0.9 million and $0.8 million, respectively. The Companys share of Sovran HHF and Sovran HHF IIs income for the six months ended June 30, 2016 and 2015 was $1.8 million and $1.4 million, respectively.
The Company has a 49% ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Companys headquarters and other
tenants. The carrying value of the Companys investment is a liability of $0.5 million at June 30, 2016 and December 31, 2015, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance
sheets. For the three months ended June 30, 2016, and 2015, the Companys share of Iskalo Office Holdings, LLCs income was $54,000 and $46,000, respectively. For the six months ended June 30, 2016, and 2015, the Companys
share of Iskalo Office Holdings, LLCs income was $113,000 and $104,000, respectively. The Company paid rent to Iskalo Office Holdings, LLC of $0.5 million during the six months ended June 30, 2016 and 2015.
The Company holds an 85% equity interest in Urban Box Coralway Storage, LLC (Urban Box), a joint venture with an unrelated third party. Urban Box was formed
in 2015 and is currently developing a self-storage property in Florida. During 2015, the Company contributed $4.0 million to Urban Box as its share of capital to develop the property, which primarily consists of the acquisition of land in 2015.
Urban Box has entered into a non-recourse mortgage loan in order to finance the future development costs. The Company and the other joint venture member have participation rights which require the agreement of both members in order to implement the
activities of Urban Box which are most significant to its economic performance. Accordingly, the interest is recorded using the equity method.
The
Company will perform property management services for Urban Box in exchange for a management fee based on 6% of property revenues. There were no management fees in 2016 or 2015.
The Company holds a 5% equity interest in SNL/Orix 1200 McDonald Ave., LLC (McDonald), a joint venture with an unrelated third party. The joint venture for
McDonald was executed in 2016 and is currently developing a self-storage property in New York. During 2016, the Company contributed $0.4 million of common capital and $2.3 million of preferred capital to McDonald as its share of capital to develop
the property. McDonald will enter into a non-recourse mortgage loan in order to finance the future development costs. In accordance with the terms of the McDonald joint venture agreement, the Company has the ability to assert influence over certain
business matters. Accordingly, the interest is recorded using the equity method.
The Company will perform property management services for McDonald in
exchange for a management fee based on property revenues. There were no management fees in 2016 or 2015.
The Company holds a 5% equity interest in SNL
Orix Merrick, LLC (Merrick), a joint venture with an unrelated third party. The joint venture for Merrick was executed in 2016 and is currently developing a self-storage property in New York. During 2016, the Company contributed $0.4 million of
common capital and $2.1 million of preferred capital to Merrick as its share of capital to develop the property. Merrick will enter into a non-recourse mortgage loan in
25
order to finance the future development costs. In accordance with the terms of the Merrick joint venture agreement, the Company has the ability to assert influence over certain business matters.
Accordingly, the interest is recorded using the equity method.
The Company will perform property management services for Merrick in exchange for a
management fee based on property revenues. There were no management fees in 2016 or 2015.
A summary of the unconsolidated joint ventures financial
statements as of and for the six months ended June 30, 2016 is as follows:
|
|
|
|
|
(dollars in thousands)
|
|
Balance Sheet Data
:
|
|
|
|
|
Investment in storage facilities, net
|
|
$
|
535,791
|
|
Investment in office building, net
|
|
|
5,054
|
|
Other assets
|
|
|
17,701
|
|
|
|
|
|
|
Total Assets
|
|
$
|
558,546
|
|
|
|
|
|
|
Due to the Company
|
|
$
|
1,060
|
|
Mortgages payable
|
|
|
222,971
|
|
Other liabilities
|
|
|
6,836
|
|
|
|
|
|
|
Total Liabilities
|
|
|
230,867
|
|
Unaffiliated partners equity
|
|
|
262,724
|
|
Company equity
|
|
|
64,955
|
|
|
|
|
|
|
Total Partners Equity
|
|
|
327,679
|
|
|
|
|
|
|
Total Liabilities and Partners Equity
|
|
$
|
558,546
|
|
|
|
|
|
|
Income Statement Data
:
|
|
|
|
|
Total revenues
|
|
$
|
36,569
|
|
Property operating expenses
|
|
|
(11,881
|
)
|
Administrative, management and call center fees
|
|
|
(2,657
|
)
|
Depreciation and amortization of customer list
|
|
|
(6,229
|
)
|
Amortization of financing fees
|
|
|
(177
|
)
|
Income tax expense
|
|
|
(116
|
)
|
Interest expense
|
|
|
(5,154
|
)
|
|
|
|
|
|
Net income
|
|
$
|
10,355
|
|
|
|
|
|
|
The Company does not guarantee the debt of Sovran HHF, Sovran HHF II, Iskalo Office Holdings, LLC, Urban Box, McDonald, or
Merrick.
We do not expect to have material future cash outlays relating to these joint ventures outside our share of capital for future acquisitions of
properties.
The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and
will generally not be subject to corporate income taxes to the extent it distributes its taxable income to its shareholders and complies with certain other requirements.
The Company has elected to treat one of its subsidiaries as a taxable REIT subsidiary. In general, the Companys taxable REIT subsidiary may perform
additional services for tenants and generally may engage in certain real estate or non-real estate related business. A taxable REIT subsidiary is subject to corporate federal and state income taxes. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities.
26
For the three months ended June 30, 2016 and 2015, the Company recorded federal and state income tax expense
of $0.1 million and $0.6 million, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded federal and state income tax expense of $0.6 million and $1.0 million, respectively. At June 30, 2016 and 2015, there
were no material unrecognized tax benefits. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. As of June 30, 2016 and 2015, the Company had no interest or penalties related to
uncertain tax positions. Net income taxes payable and the deferred tax liability of our taxable REIT subsidiary are classified within accounts payable and accrued liabilities in the consolidated balance sheets. As of June 30, 2016, the
Companys taxable REIT subsidiary has current accrued taxes of $0.6 million and a deferred tax liability of $1.2 million. The tax years 2013-2015 remain open to examination by the major taxing jurisdictions to which the Company is subject.
|
|
|
11. EARNINGS PER SHARE AND EARNINGS PER
UNIT
|
The Company reports earnings per share and earnings per unit data in accordance ASC Topic 260,
Earnings Per
Share
. Effective January 1, 2009, FASB ASC Topic 260 was updated for the issuance of FASB Staff Position (FSP) EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
, or FSP EITF 03-6-1, with transition guidance included in FASB ASC Topic 260-10-65-2. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. The Parent Company and the Operating Partnership have calculated their basic and
diluted earnings per share/unit using the two-class method. The following table sets forth the computation of basic and diluted earnings per common share utilizing the two-class method.
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands except per share data)
|
|
Three Months
Ended
Jun. 30, 2016
|
|
|
Three Months
Ended
Jun. 30, 2015
|
|
|
Six Months
Ended
Jun. 30, 2016
|
|
|
Six Months
Ended
Jun. 30, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
43,456
|
|
|
$
|
28,532
|
|
|
$
|
71,796
|
|
|
$
|
50,983
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average shares
|
|
|
41,980
|
|
|
|
35,378
|
|
|
|
40,196
|
|
|
|
34,854
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock
|
|
|
247
|
|
|
|
225
|
|
|
|
249
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted average shares and assumed
conversion
|
|
|
42,227
|
|
|
|
35,603
|
|
|
|
40,445
|
|
|
|
35,079
|
|
Basic earnings per common share attributable to common shareholders
|
|
$
|
1.04
|
|
|
$
|
0.81
|
|
|
$
|
1.79
|
|
|
$
|
1.46
|
|
Diluted earnings per common share attributable to common shareholders
|
|
$
|
1.03
|
|
|
$
|
0.80
|
|
|
$
|
1.78
|
|
|
$
|
1.45
|
|
27
Earnings Per Unit
The following table sets forth the computation of basic and diluted earnings per common unit utilizing the two-class method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands except per unit data)
|
|
Three Months
Ended
Jun. 30, 2016
|
|
|
Three Months
Ended
Jun. 30, 2015
|
|
|
Six Months
Ended
Jun. 30, 2016
|
|
|
Six Months
Ended
Jun. 30, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders
|
|
$
|
43,456
|
|
|
$
|
28,532
|
|
|
$
|
71,796
|
|
|
$
|
50,983
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per unit weighted average units
|
|
|
41,980
|
|
|
|
35,378
|
|
|
|
40,196
|
|
|
|
34,854
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock
|
|
|
247
|
|
|
|
225
|
|
|
|
249
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per unit adjusted weighted average units and assumed
conversion
|
|
|
42,227
|
|
|
|
35,603
|
|
|
|
40,445
|
|
|
|
35,079
|
|
Basic earnings per common unit attributable to common unitholders
|
|
$
|
1.04
|
|
|
$
|
0.81
|
|
|
$
|
1.79
|
|
|
$
|
1.46
|
|
Diluted earnings per common unit attributable to common unitholders
|
|
$
|
1.03
|
|
|
$
|
0.80
|
|
|
$
|
1.78
|
|
|
$
|
1.45
|
|
Not included in the effect of dilutive securities above for both earnings per share and earnings per unit are 102,173 unvested
restricted shares for the three months ended June 30, 2016, and 11,000 stock options and 161,412 unvested restricted shares for the three months ended June 30, 2015, because their effect would be antidilutive. Not included in the effect of
dilutive securities above are 116,373 unvested restricted shares for the six months ended June 30, 2016, and 5,500 stock options and 166,316 unvested restricted shares for the six months ended June 30, 2015, because their effect would be
antidilutive.
The following is a reconciliation of the changes in the Parent Companys total shareholders equity for the period:
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
June 30, 2016
|
|
Beginning balance of total shareholders equity
|
|
$
|
1,202,315
|
|
Net proceeds from the issuance of common stock
|
|
|
942,150
|
|
Conversion of operating partnership units to common shares
|
|
|
4,795
|
|
Exercise of stock options
|
|
|
|
|
Earned portion of non-vested stock
|
|
|
3,757
|
|
Stock option expense
|
|
|
81
|
|
Deferred compensationdirectors
|
|
|
45
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units
|
|
|
920
|
|
Net income attributable to common shareholders
|
|
|
71,796
|
|
Change in fair value of derivatives
|
|
|
(16,448
|
)
|
Dividends
|
|
|
(68,637
|
)
|
|
|
|
|
|
Ending balance of total shareholders equity
|
|
$
|
2,140,774
|
|
|
|
|
|
|
28
On January 20, 2016, the Company completed the public offering of 2,645,000 shares of its common stock at
$105.75 per share. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $269.7 million. The Company used the net proceeds from the offering to repay a portion of the indebtedness
outstanding on the Companys unsecured line of credit.
On May 25, 2016, the Company completed the public offering of 6,900,000 shares of its
common stock at $100.00 per share. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $665.4 million. The Company initially used the net proceeds from the offering to repay the
indebtedness outstanding on the Companys unsecured line of credit. The proceeds from this offering and the proceeds from the 2026 Senior Notes (see Note 5) were used, along with draws on the Companys revolving line of credit, to fund the
purchase of LifeStorage, LP on July 15, 2016 (see Note 16).
On May 12, 2014, the Company entered into a continuous equity offering program
(Equity Program) with Wells Fargo Securities, LLC (Wells Fargo), Jefferies LLC (Jefferies), SunTrust Robinson Humphrey, Inc. (SunTrust), Piper Jaffray & Co. (Piper), HSBC
Securities (USA) Inc. (HSBC), and BB&T Capital Markets, a division of BB&T Securities, LLC (BB&T), pursuant to which the Company may sell from time to time up to $225 million in aggregate offering price of shares
of the Companys common stock. Actual sales under the Equity Program will depend on a variety of factors and conditions, including, but not limited to, market conditions, the trading price of the Companys common stock, and determinations
of the appropriate sources of funding for the Company. The Company expects to continue to offer, sell, and issue shares of common stock under the Equity Program from time to time based on various factors and conditions, although the Company is under
no obligation to sell any shares under the Equity Program.
During the six months ended June 30, 2016, the Company did not issue any shares of common
stock under the Equity Program. As of June 30, 2016, the Company had $59.3 million available for issuance under the Equity Program.
During the six
months ended June 30, 2015, the Company issued 199,700 shares of common stock under the Equity Program at a weighted average issue price of $91.53 per share, generating net proceeds of $18.0 million after deducting $0.2 million of sales
commissions paid to Jefferies.
In 2013, the Company implemented a Dividend Reinvestment Plan. The Company issued 66,992 and 73,186 shares under the plan
during the six months ended June 30, 2016 and June 30, 2015, respectively.
29
The following is a reconciliation of the changes in total partners capital for the period:
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
June 30, 2016
|
|
Beginning balance of total controlling partners capital
|
|
$
|
1,202,315
|
|
Net proceeds from the issuance of partnership units
|
|
|
942,150
|
|
Conversion of operating partnership units to common shares
|
|
|
4,795
|
|
Exercise of stock options
|
|
|
|
|
Earned portion of non-vested stock
|
|
|
3,757
|
|
Stock option expense
|
|
|
81
|
|
Deferred compensationdirectors
|
|
|
45
|
|
Adjustment to redemption value on limited partners redeemable capital interests
|
|
|
920
|
|
Net income attributable to common unitholders
|
|
|
71,796
|
|
Change in fair value of derivatives
|
|
|
(16,448
|
)
|
Distributions
|
|
|
(68,637
|
)
|
|
|
|
|
|
Ending balance of total controlling partners capital
|
|
$
|
2,140,774
|
|
|
|
|
|
|
|
|
|
14. RECENT ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue
recognition requirements in Revenue Recognition (Topic 605), and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has the option to apply the
provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company has not yet
completed its assessment of the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.
In June 2014, the FASB issued
ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires a reporting entity to treat a performance target that
affects vesting and that could be achieved after the requisite service period as a performance condition. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early
adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective
approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The adoption of ASU 2014-12 by the
Company did not have a material impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation
(Topic 810): Amendments to the Consolidation Analysis. This ASU is effective for annual reporting periods beginning after December 15, 2015 including interim periods within that reporting period. ASU 2015-02 amends the current
consolidation model specifically as it relates to variable interest entities (VIEs) and provides reporting entities with a revised consolidation analysis procedure. The adoption of ASU 2015-02 by the Company did not have a
material impact on its consolidated financial statements.
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In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined. ASU 2015-16 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-16 by the Company did not have a material impact on its consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance revises existing practice related to
accounting for leases under Accounting Standards Codification Topic 840
Leases
(ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all
of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such
as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line
expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new
standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. ASU 2016-02 is effective for fiscal years and interim periods, within those
years, beginning after December 15, 2018. Early adoption is permitted for all entities. The Company has not yet completed its assessment of the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. ASU 2016-06
simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. The new standard will be
effective for us on January 1, 2017. The Company has not yet completed its assessment of the impact that the adoption of ASU 2016-06 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity
Method of Accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the
investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The new standard will be effective for us on
January 1, 2017. The Company has not yet completed its assessment of the impact that the adoption of ASU 2016-07 will have on its consolidated financial statements.
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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
as part of its simplification initiative, which involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has not yet completed its assessment of the impact that the
adoption of ASU 2016-09 will have on its consolidated financial statements.
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15. COMMITMENT AND CONTINGENCIES
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At June 30, 2016, the Company was under contract to acquire 84 self-storage facilities included with the acquisition of
LifeStorage, LP for approximately $1.3 billion (see Note 16). The Company was also under contract at June 30, 2016 to acquire an additional five self-storage facilities unrelated to the LifeStorage, LP acquisition for an aggregate purchase
price of approximately $49 million. On July 29, 2016, we completed the acquisition of one of these five facilities for a purchase price of $8.4 million and on August 4, 2016, we completed the acquisition of another of these five facilities
for a purchase price of $8.9 million. The purchase of the three remaining facilities is subject to customary conditions to closing, and there is no assurance that these four facilities will be acquired.
At June 30, 2016, the Company had commitments totaling $6.3 million to third party advisors related to the LifeStorage, LP acquisition. The commitments
were contingent upon the closing of the LifeStorage, LP acquisition. Payment was made to the third party advisors in July 2016 in connection with the closing of the LifeStorage, LP acquisition and the related expense was recorded as acquisition
costs in the third quarter of 2016.
On or about August 25, 2014, a putative class action was filed against the Company in the Superior Court of New
Jersey Law Division Burlington County. The action seeks to obtain declaratory, injunctive and monetary relief for a class of consumers based upon alleged violations by the Company of the New Jersey Truth in Customer Contract, Warranty and Notice
Act, the New Jersey Consumer Fraud Act and the New Jersey Insurance Producer Licensing Act. On October 17, 2014, the action was removed from the Superior Court of New Jersey Law Division Burlington County to the United States District Court for
the District of New Jersey. The Company brought a motion to partially dismiss the complaint for failure to state a claim, and on July 16, 2015, the Companys motion was granted in part and denied in part. The Company intends to vigorously
defend the action, and the possibility of any adverse outcome cannot be determined at this time.
On July 1, 2016, the Company declared a quarterly dividend of $0.95 per common share. The dividend was paid on
July 26, 2016 to shareholders of record on July 15, 2016. The total dividend paid amounted to $43.9 million.
On July 15, 2016, the Company
acquired all of the outstanding partnership interests in LifeStorage, LP, a Delaware limited partnership (LifeStorage). Pursuant to the acquisition, the Company acquired 84 self-storage properties throughout the country, including the following
markets: Chicago, Illinois; Las Vegas, Nevada; Sacramento, California; Austin, Texas; and Los Angeles, California. Pursuant to the terms of the Agreement and Plan of Merger dated as of May 18, 2016 by and among LifeStorage, the Operating
Partnership, Solar Lunar Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Operating Partnership (Merger Sub), and Fortis Advisors LLC, a Delaware limited liability company, as Sellers
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Representative, the Company paid aggregate consideration of approximately $1.3 billion, of which $482 million was paid to discharge existing indebtedness of LifeStorage (including certain
prepayment and defeasance costs). The merger was funded with the existing cash that was generated primarily from the proceeds from the Companys May 2016 common stock offering and the 2026 Senior Notes offering, and draws on the Companys
line of credit totaling $482 million.
Disclosures related to the preliminary allocation of purchase price for the LifeStorage acquisition are not
currently available as the Company is in the process of assigning value to the major assets acquired which primarily include investment in storage facilities, the LifeStorage tradename and in-place customer leases. See Note 4 for pro forma
information.
On July 18, 2016, the Company announced that it will rebrand all storage facilities it presently operates as Uncle Bobs Self
Storage to Life Storage beginning in August, 2016. This will require replacement of signage at all existing storage facilities which is currently included in investment in storage facilities, net on the consolidated balance sheets.
The Company has reassessed the estimated useful lives of the existing signage and currently estimates an increase in depreciation expense of approximately $8 million combined in the third and fourth quarters of 2016, and approximately $1 million in
2017.
On July 21, 2016, the Company entered into a $200 million term note maturing July 2028 bearing interest at a fixed rate of 3.67%. The proceeds
from this term note were used to repay a portion of the outstanding balance on the Companys line of credit. The outstanding balance on the Companys line of credit after the LifeStorage, LP acquisition and the paydown with the proceeds
from this term note was $298 million.
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