NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Life Storage, Inc. (the “Parent Company”) and Life Storage LP (the “Operating
Partnership”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2017 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2017.
2. ORGANIZATION
The Parent Company operates as a self-administered and self-managed real estate investment trust (a “REIT”) that owns and operates self-storage
facilities throughout the United States. All of the Parent Company’s assets are owned by, and all its operations are conducted through, the Operating Partnership. Life Storage Holdings, Inc., a wholly-owned subsidiary of the Parent Company
(“Holdings”), is the sole general partner of the Operating Partnership; the Parent Company is a limited partner of the Operating Partnership, and, through its ownership of Holdings and its limited partnership interest, controls the
operations of the Operating Partnership, holding a 99.5% ownership interest therein as of June 30, 2017. 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, 2017, we had an
ownership interest in, and/or managed 697 self-storage properties in 29 states under the name Life Storage
®
. Among our 697 self-storage properties are 57 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, six properties that we
manage for an unconsolidated joint venture (191 III Life Storage Holdings LLC) of which we are a 20% owner, one property that we manage for an unconsolidated joint venture (Review Avenue Partners LLC) of which we are a 40% owner, and 37 properties
that we manage and have no ownership interest.
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, Life Storage Solutions, LLC (the Parent Company’s taxable REIT subsidiary), Warehouse
Anywhere LLC (an entity owned 60% by Life Storage Solutions, LLC), and all other wholly-owned subsidiaries. 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.
12
Included in the Parent Company’s consolidated balance sheets are noncontrolling redeemable Operating
Partnership Units and included in the Operating Partnership’s consolidated balance sheets are limited partners’ redeemable capital interest at redemption value. These interests are presented in the “mezzanine” section of the
consolidated balance 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, 2017 and December 31, 2016, there were 217,481 noncontrolling redeemable Operating Partnership Units outstanding. These unitholders are entitled to receive distributions per unit equivalent to the dividends declared per share on
the Parent Company’s 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 Company’s common stock based on quoted market prices, 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 Accounting Standards Codification (ASC) Topic
480-10-S99.
The
application of the 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
Company’s dividends in excess of net income and in the Operating Partnership’s general partner and limited partners capital balances. Accordingly, in the accompanying consolidated balance sheets, noncontrolling interests are reflected at
redemption value at June 30, 2017 and December 31, 2016, equal to the number of noncontrolling interest units outstanding multiplied by the fair market value of the Parent Company’s common stock at that date. Redemption value exceeded
the value determined under the Company’s historical basis of accounting at those dates.
The following is a reconciliation of the Parent
Company’s noncontrolling redeemable Operating Partnership Units and the Operating Partnership’s limited partners’ redeemable capital interest for the period:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
June 30, 2017
|
|
|
Beginning balance
|
|
$
|
18,091
|
|
|
Net income attributable to noncontrolling interest in the Operating Partnership
|
|
|
172
|
|
|
Distributions
|
|
|
(424
|
)
|
|
Adjustment to redemption value
|
|
|
(1,380
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
16,459
|
|
|
|
|
|
|
|
Approximately 23% and 14% of the Company’s revenue is derived from stores in the states of Texas and Florida,
respectively.
3. STOCK BASED COMPENSATION
The
Company accounts for stock-based compensation under the provisions of ASC Topic 718, “
Compensation - Stock Compensation
”. The Company recognizes compensation cost in its financial statements for all share based payments granted,
modified, or settled during the period.
13
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, 2017 and 2016, the Company recorded compensation expense (included in general and administrative
expense) of $4,000 and $35,000, respectively, related to stock options and $1,657,000 and $1,891,000, respectively, related to amortization of
non-vested
stock grants and performance-based awards. For the six
months ended June 30, 2017 and 2016, the Company recorded compensation expense of $8,000 and $81,000, respectively, related to stock options and $3,246,000 and $3,757,000, respectively, related to amortization of
non-vested
stock grants and performance-based awards.
No stock options were exercised by
employees and directors during the six months ended June 30, 2017 and 2016. During the three months ended June 30, 2017 and 2016, 2,239 and 3,696 shares of
non-vested
stock, respectively, vested.
During the six months ended June 30, 2017 and 2016, 47,028 and 10,881 shares of
non-vested
stock, respectively, vested.
During the six months ended June 30, 2017, the Company issued 8,944 shares of
non-vested
stock to employees which
vest over five years. The fair market value on the date of grant of the
non-vested
stock issued during the six months ended June 30, 2017 was $86.78, resulting in an aggregate fair value of
$0.8 million.
During the six months ended June 30, 2017, the Company granted performance-based awards that entitle the recipients to earn up to
17,888 shares if certain performance criteria are achieved over a three year period. The Company estimated the aggregate fair value of the awards on the grant date to be $0.8 million.
4. INVESTMENT IN STORAGE FACILITIES AND INTANGIBLE ASSETS
The following summarizes our activity in storage facilities during the six months ended June 30, 2017:
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|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Cost:
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,243,308
|
|
|
Acquisition of storage facilities
|
|
|
10,089
|
|
|
Improvements and equipment additions
|
|
|
35,284
|
|
|
Additions to consolidated subsidiary
|
|
|
82
|
|
|
Net increase in construction in progress
|
|
|
10,383
|
|
|
Dispositions
|
|
|
(9,414
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,289,732
|
|
|
|
|
|
|
|
|
Accumulated Depreciation:
|
|
|
|
|
|
Beginning balance
|
|
$
|
535,704
|
|
|
Additions during the period
|
|
|
51,059
|
|
|
Dispositions
|
|
|
(8,375
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
578,388
|
|
|
|
|
|
|
|
The Company acquired one self-storage facility during the six months ended June 30, 2017. The acquisition of this
facility was accounted for as an asset acquisition (see Note 14 for further discussion of the Company’s adoption of the accounting guidance under ASU
2017-01
as of January 1, 2017). The cost of this
facility, including closing costs, was assigned to land, building, equipment and improvements based upon their relative fair values.
14
The purchase price of the facility acquired in 2017 has been preliminarily assigned as follows:
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
|
|
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
|
|
|
IL
|
|
|
1
|
|
|
|
2/23/17
|
|
|
$
|
10,089
|
|
|
$
|
10,076
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
771
|
|
|
$
|
9,318
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The facility acquired was purchased from an unrelated third party. The operating results of the facility acquired have been
included in the Company’s operations since the acquisition date. The $10.1 million of cash paid for the facility includes $0.5 million of deposits that were paid in 2015 when this facility originally went under contract. This amount
is excluded from total cash payments for the acquisition of storage facilities in the consolidated statement of cash flows.
Non-cash
investing activities during the six months ended June 30, 2017 include the assumption of net other liabilities of $13,000.
Non-cash
investing activities during
the six months ended June 30, 2016 include the issuance of $7.8 million in Operating Partnership Units, the assumption of two mortgages with fair values totaling $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
Company’s experience with customer turnover and the cost to replace the
in-place
leases. The Company amortizes
in-place
customer leases on a straight-line basis
over 12 months (the estimated future benefit period). The Company measures the value of trade names, which have an indefinite life and are not amortized, by calculating discounted cash flows utilizing the relief from royalty method.
In-place
customer leases are included in other assets on the Company’s consolidated balance sheets as follows:
|
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|
|
|
|
|
|
|
|
(
Dollars in thousands
)
|
|
Jun. 30,
2017
|
|
|
Dec. 31,
2016
|
|
|
In-place
customer leases
|
|
$
|
75,611
|
|
|
$
|
75,611
|
|
|
Accumulated amortization
|
|
|
(75,478
|
)
|
|
|
(50,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value at the end of period
|
|
$
|
133
|
|
|
$
|
24,829
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to
in-place
customer leases was $11.9 million and
$1.8 million for the three months ended June 30, 2017 and 2016, respectively, and was $24.7 million and $3.0 million for the six months ended June 30, 2017 and 2016, respectively. The Company expects to record
$24.8 million and $0 of amortization expense for the years ended December 31, 2017 and 2018, respectively.
Change in Useful Life
Estimates
The change in name of the Company’s storage facilities from Uncle Bob’s Self Storage
®
to Life Storage
®
required replacement of signage at all existing storage facilities
which are currently included in investment in storage facilities, net on the consolidated balance sheets. The replacement of this signage has been substantially completed as of June 30, 2017. As a result of this replacement of
15
signage, the Company reassessed the estimated useful lives of the then existing signage in 2016. This useful life reassessment resulted in an increase in depreciation expense of approximately
$0.5 million in the first quarter of 2017 as depreciation was accelerated over the new useful lives. The Company does not estimate any further impact on depreciation expense as a result of the replacement of the Uncle Bob’s Self Storage
®
signage which is now fully depreciated.
As part of the Company’s capital improvement efforts
during 2017, buildings at certain self-storage facilities were identified for replacement. As a result of the decision to replace these buildings, the Company reassessed the estimated useful lives of the then existing buildings. This useful life
reassessment resulted in an increase in depreciation expense of approximately $1.4 million and $1.5 million, respectively, during the three and six month periods ending June 30, 2017. The Company estimates that the change in estimated
useful lives of buildings identified for replacement as of June 30, 2017 will result in an additional increase in depreciation expense of approximately $0.5 million during the remainder of 2017.
The accelerated depreciation resulting from the events discussed above reduced both basic and diluted earnings per share/unit by approximately $0.03 and
$0.04, respectively, for the three and six month periods ending June 30, 2017.
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,
2017
|
|
|
Dec. 31,
2016
|
|
|
Revolving line of credit borrowings
|
|
$
|
331,000
|
|
|
$
|
253,000
|
|
|
|
|
|
|
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
|
|
|
|
600,000
|
|
|
Term note due July 21, 2028
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total term note principal balance outstanding
|
|
$
|
1,400,000
|
|
|
$
|
1,400,000
|
|
|
|
|
|
|
Less: unamortized debt issuance costs
|
|
|
(8,634
|
)
|
|
|
(9,323
|
)
|
|
Less: unamortized senior term note discount
|
|
|
(2,986
|
)
|
|
|
(3,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Term notes payable
|
|
$
|
1,388,380
|
|
|
$
|
1,387,525
|
|
|
|
|
|
|
|
|
|
|
|
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 Company’s credit rating (at
June 30, 2017 the margin is 1.10%), and requires an annual 0.15% facility fee. The Company’s unsecured credit agreement also includes a $325 million unsecured term note maturing June 4, 2020, with the term note bearing interest
at LIBOR plus a margin based on the Company’s credit rating (at June 30, 2017 the margin is 1.15%). The interest rate at June 30, 2017 on the Company’s line of credit was approximately 2.32% (1.79% at December 31, 2016). At
June 30, 2017, there was $169 million available on the unsecured revolving line of credit. The revolving line of credit has a maturity date of December 10, 2019.
16
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. The Company was in compliance with all of the financial covenants
under the 2026 Senior Notes as of June 30, 2017.
On July 21, 2016, the Company entered into a $200 million term note maturing
July 21, 2028 bearing interest at a fixed rate of 3.67%.
On April 8, 2014, the Company entered into a $175 million term note maturing
April 8, 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 Company’s credit rating is downgraded.
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 Company’s credit rating is downgraded.
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. The Company was in compliance with its debt covenants at June 30, 2017.
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, 2017, the entire availability on the line of credit could be drawn without violating our debt covenants.
17
The Company’s fixed rate term notes contain a provision that allows for the noteholders to call the debt
upon a change of control of the Company at an amount that includes a make whole premium based on rates in effect on the date of the change of control. At this time no change in control is planned or anticipated.
Deferred debt issuance costs and the discount on the 2026 Senior Notes are both presented as reductions of term notes in the accompanying consolidated balance
sheets at June 30, 2017 and December 31, 2016. Amortization expense related to these deferred debt issuance costs was $0.5 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, and
$1.0 million and $0.7 million for the six months ended June 30, 2017 and 2016, respectively, and is included in interest expense in the consolidated statements of income.
6. MORTGAGES PAYABLE AND DEBT MATURITIES
Mortgages
payable at June 30, 2017 and December 31, 2016 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Jun. 30,
2017
|
|
|
Dec. 31,
2016
|
|
|
4.98% mortgage note due January 1, 2021, secured by one self-storage facility with an
aggregate net book value of $9.7 million, principal and interest paid monthly (effective interest rate 5.21%)
|
|
$
|
2,941
|
|
|
$
|
2,966
|
|
|
4.065% mortgage note due April 1, 2023, secured by one self-storage facility with an
aggregate net book value of $7.7 million, principal and interest paid monthly (effective interest rate 4.29%)
|
|
|
4,162
|
|
|
|
4,207
|
|
|
5.26% mortgage note due November 1, 2023, secured by one self-storage facility with an
aggregate net book value of $8.0 million, principal and interest paid monthly (effective interest rate 5.55%)
|
|
|
3,971
|
|
|
|
4,002
|
|
|
5.99% mortgage note due May 1, 2026, secured by one self-storage facility with an aggregate
net book value of $6.6 million, principal and interest paid monthly (effective interest rate 6.26%)
|
|
|
1,778
|
|
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgages payable
|
|
$
|
12,852
|
|
|
$
|
13,027
|
|
|
|
|
|
|
|
|
|
|
|
18
The table below summarizes the Company’s debt obligations and interest rate derivatives at June 30,
2017. 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date Including Discount
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
Value
|
|
|
Line of credit - variable rate LIBOR + 1.10% (2.32% at June 30, 2017)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
331,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
331,000
|
|
|
$
|
331,000
|
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note - variable rate LIBOR+1.15% (2.33% at June 30, 2017)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
325,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
325,000
|
|
|
$
|
325,000
|
|
|
Term note - fixed rate 5.54%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
100,000
|
|
|
|
—
|
|
|
$
|
100,000
|
|
|
$
|
108,686
|
|
|
Term note - fixed rate 4.533%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
$
|
182,382
|
|
|
Term note - fixed rate 3.50%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
$
|
581,622
|
|
|
Term note - fixed rate 3.67%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
$
|
191,115
|
|
|
Mortgage note - fixed rate 4.98%
|
|
$
|
25
|
|
|
$
|
53
|
|
|
$
|
56
|
|
|
$
|
59
|
|
|
$
|
2,748
|
|
|
|
—
|
|
|
$
|
2,941
|
|
|
$
|
3,090
|
|
|
Mortgage note - fixed rate 4.065%
|
|
$
|
44
|
|
|
$
|
92
|
|
|
$
|
95
|
|
|
$
|
99
|
|
|
$
|
104
|
|
|
$
|
3,728
|
|
|
$
|
4,162
|
|
|
$
|
4,220
|
|
|
Mortgage note - fixed rate 5.26%
|
|
$
|
32
|
|
|
$
|
67
|
|
|
$
|
71
|
|
|
$
|
74
|
|
|
$
|
78
|
|
|
$
|
3,649
|
|
|
$
|
3,971
|
|
|
$
|
4,233
|
|
|
Mortgage note - fixed rate 5.99%
|
|
$
|
77
|
|
|
$
|
160
|
|
|
$
|
170
|
|
|
$
|
181
|
|
|
$
|
192
|
|
|
$
|
998
|
|
|
$
|
1,778
|
|
|
$
|
1,913
|
|
|
Interest rate derivatives - liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
11,526
|
|
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.
19
Ineffectiveness was de minimis for the three and six months ended June 30, 2017 and 2016.
The Company has interest rate swap agreements in effect at June 30, 2017 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) in the second
quarter of 2016, 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 Company’s 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, 2017 and 2016, the net reclassification from AOCL to interest expense was $0.7 million and $1.2 million,
respectively, based on payments made under the swap agreements. During the six months ended June 30, 2017 and 2016, the net reclassification from AOCL to interest expense was $1.6 million and $2.4 million, respectively, based on
payments made under the swap agreements. Based on current interest rates, the Company estimates that payments under the interest rate swaps will be approximately $2.5 million for the 12 months ended June 30, 2018. Payments made under the
interest rate swap agreements will be reclassified to interest expense as swap 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
$11.5 million and $13.0 million at June 30, 2017 and December 31, 2016, respectively.
The Company’s 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, 2017, 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, 2017, it could have been required to settle its
obligations under the agreements at their net termination cost of $11.5 million.
20
The changes in AOCL for the three and six months ended June 30, 2017 and June 30, 2016 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months
Ended
June 30, 2017
|
|
|
Three Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2017
|
|
|
Six Months
Ended
June 30, 2016
|
|
|
Accumulated other comprehensive loss beginning of period
|
|
$
|
(19,853
|
)
|
|
$
|
(26,511
|
)
|
|
$
|
(21,475
|
)
|
|
$
|
(14,415
|
)
|
|
Realized loss reclassified from accumulated other comprehensive loss to interest expense
|
|
|
956
|
|
|
|
1,160
|
|
|
|
2,076
|
|
|
|
2,357
|
|
|
Unrealized loss from changes in the fair value of the effective portion of the interest rate
swaps
|
|
|
(719
|
)
|
|
|
(5,512
|
)
|
|
|
(217
|
)
|
|
|
(18,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) included in other comprehensive loss
|
|
|
237
|
|
|
|
(4,352
|
)
|
|
|
1,859
|
|
|
|
(16,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss end of period
|
|
$
|
(19,616
|
)
|
|
$
|
(30,863
|
)
|
|
$
|
(19,616
|
)
|
|
$
|
(30,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 liability’s classification within the
hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Refer to Note 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 liabilities carried at fair value
measured on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
(Liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(11,526
|
)
|
|
|
—
|
|
|
$
|
(11,526
|
)
|
|
|
—
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(13,015
|
)
|
|
|
—
|
|
|
$
|
(13,015
|
)
|
|
|
—
|
|
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.
21
9. INVESTMENT IN JOINT VENTURES
A summary of the Company’s unconsolidated joint ventures is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venture
|
|
Number of
Properties
|
|
|
Company
common
ownership
interest
|
|
|
Carrying value of
investment at
Jun. 30, 2017
|
|
|
Carrying value of
investment at
Dec. 31, 2016
|
|
|
Sovran HHF Storage Holdings LLC (“Sovran HHF”)
1
|
|
|
57
|
|
|
|
20
|
%
|
|
$
|
86.5 million
|
|
|
$
|
43.8 million
|
|
|
Sovran HHF Storage Holdings II LLC (“Sovran HHF II”)
2
|
|
|
30
|
|
|
|
15
|
%
|
|
$
|
13.4 million
|
|
|
$
|
13.5 million
|
|
|
191 III Holdings LLC (“191 III”)
3
|
|
|
6
|
|
|
|
20
|
%
|
|
$
|
10.0 million
|
|
|
$
|
0.7 million
|
|
|
Life Storage-SERS Storage LLC (“SERS”)
4
|
|
|
0
|
|
|
|
20
|
%
|
|
$
|
0.2 million
|
|
|
|
N/A
|
|
|
Iskalo Office Holdings, LLC (“Iskalo”)
5
|
|
|
N/A
|
|
|
|
49
|
%
|
|
($
|
0.4 million
|
)
|
|
($
|
0.4 million
|
)
|
|
Urban Box Coralway Storage, LLC (“Urban Box”)
6
|
|
|
1
|
|
|
|
85
|
%
|
|
$
|
4.1 million
|
|
|
$
|
4.1 million
|
|
|
SNL/Orix 1200 McDonald Ave., LLC (“McDonald”)
7
|
|
|
1
|
|
|
|
5
|
%
|
|
$
|
2.7 million
|
|
|
$
|
2.7 million
|
|
|
SNL Orix Merrick, LLC (“Merrick”)
8
|
|
|
1
|
|
|
|
5
|
%
|
|
$
|
2.5 million
|
|
|
$
|
2.5 million
|
|
|
Review Avenue Partners, LLC (“RAP”)
9
|
|
|
1
|
|
|
|
40
|
%
|
|
$
|
12.0 million
|
|
|
|
N/A
|
|
|
N 32nd Street Self Storage, LLC (“N32”)
10
|
|
|
1
|
|
|
|
46
|
%
|
|
$
|
1.3 million
|
|
|
|
N/A
|
|
|
1
|
Sovran HHF owns self-storage facilities in Arizona (11), Colorado (4), Florida (3), Georgia (1), Kentucky (2), Nevada (5), New Jersey (2), Ohio (6), Pennsylvania (1),
Tennessee (2) and Texas (20). In June 2017, Sovran HHF acquired 18 self-storage facilities for $330 million in Arizona, Nevada and Tennessee. In connection with this acquisition, Sovran HHF entered into $135 million of mortgage debt
which is secured by 16 of the self-storage facilities acquired. During the six months ended June 30, 2017, the Company contributed $40.0 million as its share of capital to fund the acquisition and an additional $3.2 million to fund
the repayment of certain mortgages held by the joint venture. During the six months ended June 30, 2017, the Company received $1.7 million of distributions from Sovran HHF. As of June 30, 2017, the carrying value of the Company’s
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.
|
|
2
|
Sovran HHF II owns self-storage facilities in New Jersey (17), Pennsylvania (3), and Texas (10). During the six months ended June 30, 2017, the Company received
$0.9 million of distributions from Sovran HHF II.
|
|
3
|
191 III owns six self-storage facilities in California. During the six months ended June 30, 2017, 191 III acquired these six self-storage facilities for a total
of $104.1 million. In connection with the acquisition of these self-storage facilities, 191 III entered into $57.2 million of mortgage debt which is secured by the self-storage facilities acquired. During 2017 and 2016, the Company
contributed $9.5 million and $0.7 million, respectively, as its share of capital to fund these acquisitions. During the six months ended June 30, 2017, the Company received $0.2 million of distributions from 191 III.
|
|
4
|
In May 2017, the Company executed a joint venture agreement, Life Storage-SERS Storage LLC (“SERS”), with an unrelated third party with the purpose of
acquiring and operating self-storage facilities. During the six months ended June 30, 2017, the Company contributed $0.2 million as its share of capital to SERS. At June 30, 2017, SERS is under contract to acquire three self-storage
facilities for a total of $39.0 million, of which the Company is committed to contribute up to $7.8 million. The Company expects SERS to enter into mortgage debt to fund a portion of the acquisition of these three self-storage facilities.
The purchase of these facilities by SERS is subject to customary conditions to closing, and there is no assurance that the facilities will be acquired.
|
|
5
|
Iskalo owns the buildings that houses the Company’s headquarters and other tenants. The Company paid rent to Iskalo of $0.6 million and $0.5 million
during the six months ended June 30, 2017 and 2016, respectively. During the six months ended June 30, 2017, the Company received $0.1 million of distributions from Iskalo.
|
|
6
|
Urban Box is currently developing a self-storage facility in Florida.
|
|
7
|
McDonald is currently developing a self-storage facility 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 entered into a
non-recourse
mortgage loan in order to finance the future development costs.
|
22
|
8
|
Merrick is currently developing a self-storage facility 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 has entered into a
non-recourse
mortgage loan in order to finance the future development costs.
|
|
9
|
In January 2017, the Company executed a joint venture agreement, Review Avenue Partners, LLC (“RAP”), with an unrelated third party. The Company contributed
$12.5 million of common capital to RAP during the six months ended June 30, 2017. RAP is currently operating a self-storage property in New York.
|
|
10
|
In April 2017, the Company executed a joint venture agreement, N 32
nd
Street Self Storage, LLC (“N32”),
with an unrelated third party. The Company contributed $1.3 million of common capital to N32 during the six months ended June 30, 2017. N32 is currently developing a self-storage property in Arizona.
|
Based on the facts and circumstances of each of the Company’s joint ventures, the Company has determined that none of the joint ventures are a variable
interest entity (VIE) in accordance with ASC 810,
Consolidation
. As a result, the Company used the voting model under ASC 810 to determine whether or not to consolidate the joint ventures. Based upon each member’s substantive
participation rights over the activities as stipulated in the joint venture agreements, none of the joint ventures are consolidated by the Company. Due to the Company’s significant influence over the operations of each of the joint ventures,
all joint ventures are accounted for under the equity method of accounting.
The carrying values of the Company’s investments in joint ventures are
assessed for other-than-temporary impairment on a periodic basis and no such impairments have been recorded on any of the Company’s investments in joint ventures.
The Company earns management and/or call center fees ranging from 6% to 7% of joint venture gross revenues as manager of HHF, HHF II, 191 III, and RAP. These
fees, which are included in other operating income in the consolidated statements of operations, totaled $1.5 million and $1.3 million for the three months ended June 30, 2017 and 2016, respectively, and $2.9 million and
$2.5 million for the six months ended June 30, 2017 and 2016, respectively. The Company will also earn management fees upon commencement of the operation of storage facilities owned by SERS, Urban Box, McDonald, Merrick and N32.
The Company’s share of the unconsolidated joint ventures’ income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
Venture
|
|
Three Months
Ended
June 30, 2017
|
|
|
Three Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2017
|
|
|
Six Months
Ended
June 30, 2016
|
|
|
Sovran HHF
|
|
$
|
624
|
|
|
$
|
570
|
|
|
$
|
1,162
|
|
|
$
|
1,078
|
|
|
Sovran HHF II
|
|
|
362
|
|
|
|
370
|
|
|
|
702
|
|
|
|
708
|
|
|
191 III
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
Urban Box
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
14
|
|
|
RAP
|
|
|
(255
|
)
|
|
|
—
|
|
|
|
(501
|
)
|
|
|
—
|
|
|
Iskalo
|
|
|
64
|
|
|
|
54
|
|
|
|
118
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
785
|
|
|
$
|
998
|
|
|
$
|
1,506
|
|
|
$
|
1,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
A summary of the unconsolidated joint ventures’ financial statements as of and for the six months ended
June 30, 2017 is as follows:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Balance Sheet Data:
|
|
|
Investment in storage facilities, net
|
|
$
|
1,034,265
|
|
|
Investment in office building, net
|
|
|
4,919
|
|
|
Other assets
|
|
|
24,401
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,063,585
|
|
|
|
|
|
|
|
|
Due to the Company
|
|
$
|
1,056
|
|
|
Mortgages payable
|
|
|
430,733
|
|
|
Other liabilities
|
|
|
12,059
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
443,848
|
|
|
Unaffiliated partners’ equity
|
|
|
489,344
|
|
|
Company equity
|
|
|
130,393
|
|
|
|
|
|
|
|
|
Total Partners’ Equity
|
|
|
619,737
|
|
|
|
|
|
|
|
|
Total Liabilities and Partners’ Equity
|
|
$
|
1,063,585
|
|
|
|
|
|
|
|
|
Income Statement Data
:
|
|
|
|
|
|
Total revenues
|
|
$
|
41,402
|
|
|
Property operating expenses
|
|
|
(13,793
|
)
|
|
Administrative, management and call center fees
|
|
|
(3,494
|
)
|
|
Depreciation and amortization of customer list
|
|
|
(8,437
|
)
|
|
Amortization of financing fees
|
|
|
(325
|
)
|
|
Income tax expense
|
|
|
(123
|
)
|
|
Interest expense
|
|
|
(5,626
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,604
|
|
|
|
|
|
|
|
The Company does not guarantee the debt of any of its equity method investees.
We do not expect to have material future cash outlays relating to these joint ventures outside our share of capital for future acquisitions of properties.
10. INCOME TAXES
The Company qualifies as a REIT
under the Internal Revenue Code of 1986, as amended, and will generally not be subject to corporate income taxes to the extent it distributes its taxable income to its shareholders and complies with certain other requirements.
The Company has elected to treat one of its subsidiaries as a taxable REIT subsidiary. In general, the Company’s 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.
24
The Company recorded federal and state income tax benefit of $2.5 million for the three months ended
June 30, 2017 and the Company recorded federal and state income tax expense of $0.1 million for the three months ended June 30, 2016. The Company recorded federal and state income tax benefit of $2.2 million for the six months
ended June 30, 2017 and the Company recorded federal and state income tax expense of $0.6 million for the six months ended June 30, 2016. At June 30, 2017 and 2016, 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, 2017 and 2016, the Company had no interest or penalties related to uncertain tax positions. Net income taxes payable at
June 30, 2017 and December 31, 2016 and the net deferred tax liability of our taxable REIT subsidiary at December 31, 2016 are classified within accounts payable and accrued liabilities in the consolidated balance sheets. As of
June 30, 2017, the Company’s taxable REIT subsidiary has a deferred tax liability of $3.0 million and deferred tax assets totaling $5.1 million. The net deferred tax asset of our taxable REIT subsidiary at June 30, 2017 is
included in other assets in the consolidated balance sheets. The tax years 2013-2016 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
.” Under ASC Topic
260-10,
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of
earnings-per-share
pursuant
to the
two-class
method. The Parent Company and the Operating Partnership have calculated their basic and diluted earnings per share/unit using the
two-class
method.
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, 2017
|
|
|
Three Months
Ended
Jun. 30, 2016
|
|
|
Six Months
Ended
Jun. 30, 2017
|
|
|
Six Months
Ended
Jun. 30, 2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
19,355
|
|
|
$
|
43,456
|
|
|
$
|
39,785
|
|
|
$
|
71,796
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average shares
|
|
|
46,365
|
|
|
|
41,980
|
|
|
|
46,335
|
|
|
|
40,196
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
non-vested
stock
|
|
|
113
|
|
|
|
247
|
|
|
|
113
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed
conversion
|
|
|
46,478
|
|
|
|
42,227
|
|
|
|
46,448
|
|
|
|
40,445
|
|
|
Basic earnings per common share attributable to common shareholders
|
|
$
|
0.42
|
|
|
$
|
1.04
|
|
|
$
|
0.86
|
|
|
$
|
1.79
|
|
|
Diluted earnings per common share attributable to common shareholders
|
|
$
|
0.42
|
|
|
$
|
1.03
|
|
|
$
|
0.86
|
|
|
$
|
1.78
|
|
25
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, 2017
|
|
|
Three Months
Ended
Jun. 30, 2016
|
|
|
Six Months
Ended
Jun. 30, 2017
|
|
|
Six Months
Ended
Jun. 30, 2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders
|
|
$
|
19,355
|
|
|
$
|
43,456
|
|
|
$
|
39,785
|
|
|
$
|
71,796
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per unit – weighted average units
|
|
|
46,365
|
|
|
|
41,980
|
|
|
|
46,335
|
|
|
|
40,196
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
non-vested
stock
|
|
|
113
|
|
|
|
247
|
|
|
|
113
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per unit – adjusted weighted average units and assumed
conversion
|
|
|
46,478
|
|
|
|
42,227
|
|
|
|
46,448
|
|
|
|
40,445
|
|
|
Basic earnings per common unit attributable to common unitholders
|
|
$
|
0.42
|
|
|
$
|
1.04
|
|
|
$
|
0.86
|
|
|
$
|
1.79
|
|
|
Diluted earnings per common unit attributable to common unitholders
|
|
$
|
0.42
|
|
|
$
|
1.03
|
|
|
$
|
0.86
|
|
|
$
|
1.78
|
|
Not included in the effect of dilutive securities above for both earnings per share and earnings per unit are 15,500 stock
options and 133,094 unvested restricted shares for the three months ended June 30, 2017, and 102,173 unvested restricted shares for the three months ended June 30, 2016, because their effect would be antidilutive. Not included in the
effect of dilutive securities above are 13,250 stock options and 142,074 unvested restricted shares for the six months ended June 30, 2017, and 116,373 unvested restricted shares for the six months ended June 30, 2016, because their effect
would be antidilutive.
12. SHAREHOLDERS’ EQUITY
The following is a reconciliation of the changes in the Parent Company’s total shareholders’ equity for the period:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
June 30, 2017
|
|
|
Beginning balance of total shareholders’ equity
|
|
$
|
2,088,494
|
|
|
Net proceeds from the issuance of common stock through Dividend Reinvestment Plan
|
|
|
9,760
|
|
|
Earned portion of
non-vested
stock
|
|
|
3,246
|
|
|
Stock option expense
|
|
|
8
|
|
|
Deferred compensation - directors
|
|
|
—
|
|
|
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units
|
|
|
1,380
|
|
|
Net income attributable to common shareholders
|
|
|
39,785
|
|
|
Amortization of terminated hedge included in AOCL
|
|
|
458
|
|
|
Change in fair value of derivatives
|
|
|
1,400
|
|
|
Dividends
|
|
|
(90,231
|
)
|
|
|
|
|
|
|
|
Ending balance of total shareholders’ equity
|
|
$
|
2,054,300
|
|
|
|
|
|
|
|
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.
26
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.
Until May 2017, the Company had maintained 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 could sell up to $225 million in aggregate offering price of shares of the Company’s common stock. The Equity Program expired in May 2017.
During the six months ended June 30, 2017 and June 30, 2016, the Company did not issue any shares of common stock under the Equity Program.
In 2013, the Company implemented a Dividend Reinvestment Plan. The Company issued 118,656 and 66,992 shares under the plan during the six months ended
June 30, 2017 and 2016, respectively. On August 2, 2017, the Company’s Board of Directors suspended the Dividend Reinvestment Plan.
13.
PARTNERS’ CAPITAL
The following is a reconciliation of the changes in total partners’ capital for the period:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Six Months
Ended
June 30, 2017
|
|
|
Beginning balance of total controlling partners’ capital
|
|
$
|
2,088,494
|
|
|
Net proceeds from the issuance of partnership units through Dividend Reinvestment Plan
|
|
|
9,760
|
|
|
Earned portion of
non-vested
stock
|
|
|
3,246
|
|
|
Stock option expense
|
|
|
8
|
|
|
Deferred compensation - directors
|
|
|
—
|
|
|
Adjustment to redemption value on limited partners’ redeemable capital interests
|
|
|
1,380
|
|
|
Net income attributable to common unitholders
|
|
|
39,785
|
|
|
Amortization of terminated hedge included in AOCL
|
|
|
458
|
|
|
Change in fair value of derivatives
|
|
|
1,400
|
|
|
Distributions
|
|
|
(90,231
|
)
|
|
|
|
|
|
|
|
Ending balance of total controlling partners’ capital
|
|
$
|
2,054,300
|
|
|
|
|
|
|
|
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
27
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 modified retrospective transition method). We are currently evaluating the alternative methods of adoption and the effect of adopting ASU
2014-09
on our financial statements and related disclosures. We anticipate electing to adopt the standard using the modified retrospective transition method as of January 1, 2018. However, this election may change as we finalize our analysis of the
impact of the provisions of ASU
2014-09
on the Company. We are also in the process of assessing which of our operating revenue streams will be impacted by the adoption of the new standard. Leases are
specifically excluded from the scope of ASU
2014-09,
therefore the Company does not anticipate that adoption of the new standard will have any impact on the timing or amounts of the Company’s rental
revenue from customers which is a substantial portion of the Company’s total operating revenues.
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 is in the process of completing 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. ASU
2016-06
is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016. The
implementation of this update did not result in any changes to our consolidated financial statements.
In March 2016, the FASB issued ASU
2016-07,
“Investments - Equity 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. ASU
2016-07
is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016. The implementation of this update did not result in any changes to our
consolidated financial statements.
28
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. ASU
2016-09
is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15,
2016. The implementation of this update did not result in any changes to our consolidated financial statements.
In August 2016, the FASB issued ASU
2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)” in an effort to reduce existing diversity in
practice related to the classification of certain cash receipts and cash payments on the statements of cash flows. The guidance addresses the classification of cash flows related to, among other things, distributions received from equity method
investees. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU
2016-15
is not expected to have a material
impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU
2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the Emerging Issues Task Force)” which requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The
amendments in this update are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption of this update is permitted. Other than modifications to the statement of cash flows, the
adoption of
ASU 2016-18
is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU
2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a
Business” which is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. The amendments in this update are effective for annual periods beginning after December 15, 2017 and interim
periods within those fiscal years. Early adoption of this update is permitted and the Company adopted this update effective January 1, 2017. The adoption of ASU
2017-01
is expected to have potential
impact on the accounting treatment of properties acquired subsequent to the adoption date. Property acquisitions treated as business combinations under current guidance may no longer be treated as business combinations subsequent to the adoption of
ASU
2017-01.
To the extent that properties that we acquire do not meet the definition of a “business” under
ASU 2017-01,
future acquisitions of properties
may be accounted for as asset acquisitions resulting in the capitalization of acquisition costs incurred in connection with these transactions and the allocation of the purchase price and related acquisition costs to the assets acquired based on
their relative fair values. There were no properties acquired in the first six months of 2017 that would have been accounted for as business combinations prior to the adoption of ASU
2017-01.
29
In February 2017, the FASB issued ASU
2017-05,
“Other Income –
Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic
610-20):
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” which
clarifies the scope and application of ASC
610-20
on the sale or transfer of nonfinancial assets, including real estate, and in substance nonfinancial assets to noncustomers, including partial sales. The
amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company has not yet completed its assessment of the impact that the adoption of ASU
2017-05
will have on its consolidated financial statements.
15. COMMITMENT AND CONTINGENCIES
At June 30, 2017, the Company was under contract to acquire one self-storage facility for a purchase price of $12.4 million. The purchase of this
facility is subject to customary conditions to closing, and there is no assurance that this facility will be acquired.
At June 30, 2017, SERS is
under contract to acquire three self-storage facilities for a total of $39.0 million, of which the Company is committed to contribute up to $7.8 million. The Company expects SERS to enter into mortgage debt to fund a portion of the
acquisition of these three self-storage facilities. The purchase of these facilities by SERS is subject to customary conditions to closing, and there is no assurance that the facilities will be acquired.
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 various statutory laws. 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 Company’s
motion was granted in part and denied in part. On October 20, 2016, the complaint was amended to add additional claims. The parties have entered into a memorandum of understanding to settle all claims for an aggregate amount of $8.0 million and
will be jointly moving for preliminary judicial approval of the settlement in August 2017. The aggregate settlement amount of $8.0 million ($5.0 million after considering income tax impact) has been recorded as a liability of the Company in the
accompanying consolidated balance sheet as of June 30, 2017. A portion of the settlement expense relates to self-storage facilities that are managed by the Company through its taxable REIT subsidiary. There is an income tax impact to the
Company on that portion of the settlement expense as a result. The settlement is subject to approval by the court, a decision on which is expected later in 2017.
16. SUBSEQUENT EVENTS
On July 5, 2017, the Company
declared a quarterly dividend of $1.00 per common share. The dividend was paid on July 26, 2017 to shareholders of record on July 17, 2017. The total dividend paid amounted to $46.5 million.
On August 2, 2017, the Company’s Board of Directors authorized the repurchase of up to $200 million of the Company’s outstanding common shares (the
Buyback Program). The Buyback Program allows the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market, through privately negotiated transactions, or through other methods of acquiring
shares. The Buyback Program may be suspended or discontinued at any time.
30