Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements and notes thereto.

Critical Accounting Policies

Our MD&A discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our December 31, 2018 financial statements, primarily Note 2, summarize our significant accounting policies.

We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense: We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements.

In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income.

Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.

Accounting for Acquired Real Estate Facilities: We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land

transactions, and (iv) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.

Overview

Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities.

Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.

In the last three years, there has been a marked increase in development of new self-storage facilities in many of the markets we operate in, due to the favorable economics of development which we have also taken advantage of. These newly developed facilities compete with many of the facilities we own, negatively impacting our occupancies, rental rates, and rental growth. This increase in supply has been most notable in Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York, and Portland.

We plan on growing organically as well as through the acquisition and development of new facilities and expanding our existing self-storage facilities. Since the beginning of 2013 through December 31, 2018, we acquired a total of 296 facilities with 20.6 million net rentable square feet from third parties for approximately $2.7 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.2 billion, adding approximately 11.3 million net rentable square feet.

Subsequent to December 31, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $102.4 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.

As of December 31, 2018, we had additional development and redevelopment projects to build approximately 5.2 million net rentable square feet at a total cost of approximately $607.4 million. We expect to continue to seek additional development projects; however, the level of such activity may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities.

We believe that our development and redevelopment activities are beneficial to our business over the long run. However, in the short run, such activities dilute our earnings due to the three to four year period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the cost, combined with related overhead expenses flowing through general and administrative expense. We believe the level of dilution incurred in 2018 will continue at similar levels in 2019 and beyond, assuming realization of our current expectation of maintaining our current level of development for the foreseeable future.

On July 13, 2018, we received a cash distribution from Shurgard Self Storage SA (“Shurgard Europe”) totaling $145.4 million.

On September 18, 2017, we completed a public offering of $1.0 billion in aggregate principal amount of unsecured notes in two equal tranches (collectively, the “U.S. Dollar Notes”), one maturing in September 2022 bearing interest at 2.370%, and another maturing in September 2027 bearing interest at 3.094%. This was our first public offering of debt, which should also serve to facilitate future offerings.

On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 25.0 million of its common shares to third parties at a price of €23 per share, for €575 million in gross proceeds. The gross proceeds were used to repay short-term borrowings, invest in real estate assets, and for other corporate purposes. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to 35.2% as a result of the Offering. While we did not sell any of our shares in the Offering, we did record a gain on disposition in 2018 of $151.6 million, as if we had sold a proportionate share of our investment in Shurgard Europe. See “Investment in Shurgard Europe” below for more information.

On October 18, 2018, we sold our property in West London to Shurgard Europe for $42.1 million and recorded a related gain on sale of real estate of approximately $31.5 million.

As of December 31, 2018, our capital resources over the next year are expected to be approximately $1.1 billion which exceeds our current planned capital needs over the next year of approximately $711.4 million. Our capital resources include: (i) $361.2 million of cash as of December 31, 2018, (ii) $483.8 million of available borrowing capacity on our revolving line of credit, and (iii) approximately $200 million to $250 million of expected retained operating cash flow for the next twelve months. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.

Our planned capital needs over the next year consist of (i) $322.1 million of remaining spend on our current development pipeline, (ii) $102.4 million in property acquisitions currently under contract, (iii) $285.0 million for the redemption of our Series Y Preferred Shares on March 28, 2019, and (iv) $1.9 million in principal repayments on existing debt. Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.

See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.

Results of Operations

Operating results for 2018 and 2017

In 2018, net income allocable to our common shareholders was $1,488.9 million or $8.54 per diluted common share, compared to $1,171.6 million or $6.73 per diluted common share in 2017 representing an increase of $317.3 million or $1.81 per diluted common share. The increase is due primarily to (i) $183.1 million in aggregate gains due to Shurgard Europe’s initial public offering and the sale of our facility in West London to Shurgard Europe, (ii) a $47.1 million increase in self-storage net operating income (described below), (iii) our $37.7 million equity share of gains recorded by PS Business Parks in 2018, (iv) a $68.2 million increase due to the impact of foreign currency exchange gains and losses associated with our euro denominated debt, (v) a $29.3 million allocation to preferred shareholders associated with preferred share redemptions in 2017 and (vi) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma in 2017. These impacts were offset partially by a $36.1 million increase in general and administrative expense due to the acceleration of share-based compensation expense accruals for our former CEO and CFO in 2018 as a result of their retirement on December 31, 2018 and the reversal of share-based compensation accruals forfeited by retiring senior executive officers in 2017.

The $47.1 million increase in self-storage net operating income is a result of a $15.6 million increase in our Same Store Facilities and $31.5 million increase in our Non Same Store Facilities. Revenues for the Same Store Facilities increased 1.5% or $33.3 million in 2018 as compared to 2017, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 3.2% or $17.7 million in 2018 as compared to 2017, due primarily to increased property taxes. The increase in net operating income of $31.5 million for the Non Same Store Facilities is due primarily to the impact of 164 self-storage facilities acquired and developed since January 2016.

Operating results for 2017 and 2016

In 2017, net income allocable to our common shareholders was $1,171.6 million or $6.73 per diluted common share, compared to $1,183.9 million or $6.81 per share in 2016 representing a decrease of $12.3 million or $0.08. The decrease primarily reflects (i) a $67.6 million reduction due to the impact of foreign exchange translation gains and losses associated with our euro denominated debt, (ii) an $8.5 million increase in interest expense associated with higher outstanding debt balances and (iii) a $7.8 million casualty loss and $5.2 million in incremental tenant reinsurance losses related to Hurricanes Harvey and Irma offset partially by (iv) a $66.9 million increase in self-storage net operating income (described below) and (v) an $18.9 million increase in our equity in earnings of unconsolidated real estate entities.

The $66.9 million increase in self-storage net operating income is a result of a $46.2 million increase in our Same Store Facilities (as defined below) and a $20.7 million increase in our Non Same Store Facilities (as defined below). Revenues for the Same Store Facilities increased 3.0% or $64.6 million in 2017 as compared to 2016, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 3.4% or $18.3 million in 2017 as compared to 2016, due primarily to increased property taxes, advertising and selling expense and repairs and maintenance costs, offset partially by lower snow removal costs. The increase in net operating income for the Non Same Store Facilities is due primarily to the impact of recently acquired, developed or expanded facilities.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents GAAP net income before depreciation and amortization, which is excluded because it is based upon historical costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the year ended December 31, 2018, FFO was $10.45 per diluted common share, as compared to $9.70 per diluted common share for each of the years ended December 31, 2017 and 2016, representing an increase in 2018 of 7.7%, or $0.75 per diluted common share.

The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:

	Year Ended December 31,
	2018			2017			2016
Reconciliation of Diluted Earnings per Share to
FFO per Share:
Diluted Earnings per Share	$	8.54		$	6.73		$	6.81
Eliminate amounts per share excluded from FFO:
Depreciation and amortization		3.21			3.00			2.90
Gains on sale of real estate investments and
Shurgard Europe IPO, including our equity share
from investments and other		(1.30)			(0.03)			(0.01)
FFO per share	$	10.45		$	9.70		$	9.70
Computation of FFO per Share:
Net income allocable to common shareholders	$	1,488,900		$	1,171,609		$	1,183,879
Eliminate items excluded from FFO:
Depreciation and amortization		483,646			454,526			433,314
Depreciation from unconsolidated
real estate investments		79,868			71,931			74,407
Depreciation allocated to noncontrolling
interests and restricted share unitholders		(3,646)			(3,567)			(3,549)
Gains on sale of real estate investments and
Shurgard Europe IPO, including our equity share
from investments and other		(227,332)			(4,908)			(768)
FFO allocable to common shares	$	1,821,436		$	1,689,591		$	1,687,283
Diluted weighted average common shares		174,297			174,151			173,878
FFO per share	$	10.45		$	9.70		$	9.70

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities, (iii) acceleration of accruals due to the retirement of our former CEO and CFO and reversals of accruals with respect to share-based awards forfeited by retiring senior executive officers, and (iv) certain other non-cash and/or nonrecurring income or expense items. We review Core FFO per share to evaluate our ongoing operating performance and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.

The following table reconciles FFO per share to Core FFO per share:

				Year Ended December 31,								Year Ended December 31,
										Percentage								Percentage
				2018			2017			Change		2017			2016			Change
FFO per share				$	10.45		$	9.70		7.7%		$	9.70		$	9.70		0.0%
Eliminate the per share impact of items
excluded from Core FFO, including
our equity share from investments:
Foreign currency exchange (gain) loss					(0.10)			0.29					0.29			(0.11)
Application of EITF D-42					-			0.19					0.19			0.17
Casualty losses and tenant claims
due to hurricanes					-			0.07					0.07			-
Shurgard Europe - IPO costs
and casualty loss					0.03			-					-			-
Acceleration (reversal) of share-based
compensation expense due to
executive officer retirement					0.18			(0.03)					(0.03)			-
Other items					-			0.01					0.01			0.03
Core FFO per share				$	10.56		$	10.23		3.2%		$	10.23		$	9.79		4.5%

Analysis of Net Income by Reportable Segment

The following discussion and analysis is presented and organized in accordance with Note 11 to our December 31, 2018 financial statements, “Segment Information.” Accordingly, refer to the tables presented in Note 11 in order to reconcile such amounts to our total net income and for further information on our reportable segments.

Self-Storage Operations

Our self-storage operations are analyzed in two groups: (i) the 2,046 facilities that we have owned and operated on a stabilized basis since January 1, 2016 (the “Same Store Facilities”), and (ii) all other facilities, which are newly acquired, newly developed, recently redeveloped, or are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2016 (the “Non Same Store Facilities”). See Note 11 to our December 31, 2018 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.

Self-Storage Operations
Summary	Year Ended December 31,								Year Ended December 31,
							Percentage								Percentage
	2018			2017			Change		2017			2016			Change
Revenues:
Same Store Facilities	$	2,242,755		$	2,209,427		1.5%		$	2,209,427		$	2,144,872		3.0%
Non Same Store Facilities		354,852			303,006		17.1%			303,006			260,956		16.1%
		2,597,607			2,512,433		3.4%			2,512,433			2,405,828		4.4%
Cost of operations:
Same Store Facilities		579,520			561,774		3.2%			561,774			543,426		3.4%
Non Same Store Facilities		116,211			95,859		21.2%			95,859			74,479		28.7%
		695,731			657,633		5.8%			657,633			617,905		6.4%
Net operating income (a):
Same Store Facilities		1,663,235			1,647,653		0.9%			1,647,653			1,601,446		2.9%
Non Same Store Facilities		238,641			207,147		15.2%			207,147			186,477		11.1%
Total net operating income		1,901,876			1,854,800		2.5%			1,854,800			1,787,923		3.7%
Depreciation and amortization expense:
Same Store Facilities		(360,241)			(355,700)		1.3%			(355,700)			(361,991)		(1.7)%
Non Same Store Facilities		(123,405)			(98,826)		24.9%			(98,826)			(71,323)		38.6%
Total depreciation and
amortization expense		(483,646)			(454,526)		6.4%			(454,526)			(433,314)		4.9%
Net income:
Same Store Facilities		1,302,994			1,291,953		0.9%			1,291,953			1,239,455		4.2%
Non Same Store Facilities		115,236			108,321		6.4%			108,321			115,154		(5.9)%
Total net income	$	1,418,230		$	1,400,274		1.3%		$	1,400,274		$	1,354,609		3.4%
Number of facilities at period end:
Same Store Facilities		2,046			2,046		-			2,046			2,046		-
Non Same Store Facilities		383			341		12.3%			341			291		17.2%
Net rentable square footage at period end (in thousands):
Same Store Facilities		131,180			131,180		-			131,180			131,180		-
Non Same Store Facilities		30,867			26,982		14.4%			26,982			22,155		21.8%

	(a)		Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our December 31, 2018 financial statements for a reconciliation of NOI to our total net income for all periods presented.

Net operating income from our self-storage operations has increased 2.5% in 2018 as compared to 2017 and 3.7% in 2017 as compared to 2016. These increases are due to higher revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities.

Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated at a stabilized level of occupancy, revenues and cost of operations since January 1, 2016. We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 2016, 2017, and 2018. We believe the Same Store information is used by investors and REIT analysts in a similar manner. The following table summarizes the historical operating results of these 2,046 facilities (131.2 million net rentable square feet) that represent approximately 81% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2018.

Selected Operating Data for the Same Store Facilities (2,046 facilities)
	Year Ended December 31,								Year Ended December 31,
							Percentage								Percentage
		2018		2017			Change		2017			2016			Change
Revenues:
Rental income	$	2,144,330		$	2,111,164		1.6%		$	2,111,164		$	2,046,606		3.2%
Late charges and
administrative fees		98,425			98,263		0.2%			98,263			98,266		(0.0)%
Total revenues (a)		2,242,755			2,209,427		1.5%			2,209,427			2,144,872		3.0%
Cost of operations:
Property taxes		210,637			200,005		5.3%			200,005			192,400		4.0%
On-site property manager
payroll		109,713			108,477		1.1%			108,477			107,461		0.9%
Supervisory payroll		35,275			38,175		(7.6)%			38,175			37,123		2.8%
Repairs and maintenance		46,200			46,447		(0.5)%			46,447			44,346		4.7%
Utilities		41,075			39,477		4.0%			39,477			39,769		(0.7)%
Marketing		30,771			28,679		7.3%			28,679			26,025		10.2%
Other direct property costs		59,096			56,975		3.7%			56,975			54,822		3.9%
Allocated overhead		46,753			43,539		7.4%			43,539			41,480		5.0%
Total cost of operations (a)		579,520			561,774		3.2%			561,774			543,426		3.4%
Net operating income		1,663,235			1,647,653		0.9%			1,647,653			1,601,446		2.9%
Depreciation and
amortization expense		(360,241)			(355,700)		1.3%			(355,700)			(361,991)		(1.7)%
Net income	$	1,302,994		$	1,291,953		0.9%		$	1,291,953		$	1,239,455		4.2%
Gross margin (before depreciation
and amortization expense)		74.2%			74.6%		(0.5)%			74.6%			74.7%		(0.1)%
Weighted average for the period:
Square foot occupancy		93.2%			93.8%		(0.6)%			93.8%			94.6%		(0.8)%
Realized annual rental income per (b):
Occupied square foot	$	17.54		$	17.15		2.3%		$	17.15		$	16.50		3.9%
Available square foot	$	16.35		$	16.09		1.6%		$	16.09		$	15.60		3.1%
At December 31:
Square foot occupancy		91.4%			91.2%		0.2%			91.2%			92.5%		(1.4)%
Annual contract rent per
occupied square foot (c)	$	18.17		$	17.94		1.3%		$	17.94		$	17.40		3.1%

	(a)		Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

	(b)		Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.

	(c)		Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in the lease agreement upon move-in and we adjust them from time to time with notice. Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.

Analysis of Same Store Revenue

Revenues generated by our Same Store Facilities increased by 1.5% in 2018 as compared to 2017 and by 3.0% in 2017 as compared to 2016, due primarily to increases in realized annual rent per occupied square foot of 2.3% and 3.9% in 2018 and 2017, respectively, as compared to the previous year.

Same Store revenue growth on a year over year basis declined from 3.0% in 2017 to 1.5% in 2018, due to softness in demand in substantially all of our major markets, which has led to a lack of pricing power with respect to new tenants. We attribute some of this softness to local economic conditions and, in some markets most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York and Portland, increased supply of newly constructed self-storage facilities.

Same Store weighted average square foot occupancy remained strong at 93.2%, 93.8% and 94.6% during 2018, 2017 and 2016.

We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on the Internet and other channels in order to generate sufficient move-in volume to replace tenants that vacate.

Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. An important determinant of the level of rent increases is the number of long-term tenants that we have (generally, those that have been with us for at least a year).

Annual contract rent per foot for customers moving in was $14.22, $14.65, and $14.66 in 2018, 2017, and 2016, respectively, and the related square footage for the space they moved into was 98.7 million, 103.1 million, and 107.9 million, respectively. Annual contract rent per foot for customers moving out was $16.29, $16.09, and $15.66 in 2018, 2017, and 2016, respectively, and the related square footage for the space they moved out of was 98.4 million, 104.8 million, and 108.4 million, respectively.

Annual contract rent per foot for customers moving in was $13.68 and $14.17 for the three months ended December 31, 2018 and 2017, respectively, and the related square footage for the space they moved into was 23.3 million and 23.4 million, respectively. Annual contract rent per foot for customers moving out was $16.25 and $16.15 for the three months ended December 31, 2018 and 2017, respectively, and the related square footage for the space they moved out of was 24.2 million and 26.0 million, respectively.

We ended 2016 with aggregate annualized contract rents per occupied foot up 4.7% on a year over year basis. The year over year increase dropped to 3.1% at the end of 2017 and 1.3% at the end of 2018.

The decreases in year over year growth in annual contract rent from 4.7% at the end of 2016 to 3.1% at the end of 2017 and to 1.3% at the end of 2018 was due to increased rent “roll down” on tenants moving out relative to the rates of move-ins, particularly with respect to 2018 with reduced move-in rates. However, in 2018, our customer trends resulted in fewer move-outs and an increased average length of stay. The increased average length of stay contributed to an increased beneficial effect of rent increases to existing tenants in 2018 as compared to 2017 due to more long-term customers that were eligible for rate increases. The extent to which these positive trends will continue in 2019 is uncertain at this time.

In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer. Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $77.8 million, $82.4 million and $87.6 million for 2018, 2017 and 2016, respectively, and are recorded as a reduction to revenue. The decreases in promotional discounts in 2017 and 2018 are due to reductions in the volume of move-ins as well as in the case of 2018, lower average move-in rates. Promotional discounts totaled $19.8 million and $19.9 million for the three months ended December 31, 2018 and 2017, respectively.

Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage.

We believe rental growth in 2019 will come primarily from continued annual rent increases to existing tenants. Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants.

We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in 2019. However, there can be no assurance of continued revenue growth, because current trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many factors which cannot be predicted, such as the level of consumer demand and competition from newly developed and existing facilities.

We are taking a number of actions to improve demand into our system, including (i) increasing marketing spend on the Internet, (ii) offering competitive rental rates and (iii) continuing to offer promotional discounts to new tenants. Even if these actions are successful in improving demand into our system, in at least the near term, we believe these actions may have a negative impact on our revenue trends due to less growth in initial rental rates and increased promotional discounts.

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 3.2% in 2018 as compared to 2017, and 3.4% in 2017 as compared to 2016, due primarily to increased property tax expense.

Property tax expense increased 5.3% in 2018 as compared to 2017, and 4.0% in 2017 as compared to 2016, due primarily to higher assessed values. We expect property tax expense growth of approximately 5.0% in 2019 due primarily to higher assessed values and, to a lesser extent, increased tax rates.

On-site property manager payroll expense increased 1.1% in 2018 as compared to 2017 and 0.9% in 2017 as compared to 2016. These increases were due to higher wage rates, offset partially by lower hours worked. We expect on-site property manager payroll expense to increase on an inflationary basis in 2019. We have been impacted by a tight labor market across the country, as well as increases in minimum wages in certain jurisdictions, and expect additional impacts in 2019 as existing minimum wage increases become effective and new increases are enacted.

Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 7.6% in 2018 as compared to 2017 and increased

2.8% in 2017 as compared to 2016. The decrease in 2018 is due to reductions in headcount offset by higher wage rates. The increase in 2017 is due primarily to higher wage rates. We expect inflationary increases in wage rates and increased headcount in 2019.

Repairs and maintenance expense decreased 0.5% in 2018 as compared to 2017 and increased 4.7% in 2017 as compared to 2016. Repair and maintenance costs include snow removal expense totaling $3.5 million, $3.0 million and $4.2 million in 2018, 2017 and 2016, respectively. Excluding snow removal costs, repairs and maintenance decreased 1.7% in 2018 as compared to 2017 and increased 8.3% in 2017 as compared to 2016.

Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events. We expect inflationary increases in repairs and maintenance expense in 2019, excluding snow removal expense, which is primarily weather dependent and not predictable.

Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense increased 4.0% in 2018 as compared to 2017 and decreased 0.7% in 2017 as compared to 2016. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable.

Marketing expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center. Marketing expense varies based upon demand, occupancy levels, and other factors. Television and Internet advertising, in particular, can increase or decrease significantly in the short-term. Marketing expense increased 7.3% in 2018 as compared to 2017 and 10.2% in 2017 as compared to 2016 due primarily to increased Internet marketing expenditures. We expect continued increases in marketing expense in 2019.

Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office. These costs increased 3.7% in 2018 as compared to 2017 and 3.9% in 2017 as compared to 2016. These increases included higher credit card fees due to a higher proportion of collections being received from credit cards and higher revenues. The increase in 2018 also includes the impact of upgraded data communication lines. We expect inflationary increases in other direct property costs in 2019.

Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations. Such functions include information technology, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead increased 7.4% in 2018 as compared to 2017 and 5.0% in 2017 as compared to 2016. The increases in both periods were due to increased headcount and information technology expenses. We expect inflationary increases in allocated overhead in 2019.

Analysis of Same Store Depreciation and Amortization

Depreciation and amortization for Same Store Facilities increased 1.3% in 2018 as compared to 2017 and decreased 1.7% in 2017 as compared to 2016. We expect modest increases in depreciation expense in 2019.

The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:

	For the Quarter Ended
	March 31			June 30			September 30			December 31			Entire Year
	(Amounts in thousands, except for per square foot amounts)
Total revenues:
2018	$	548,116		$	558,216		$	574,523		$	561,900		$	2,242,755
2017	$	536,618		$	549,676		$	567,969		$	555,164		$	2,209,427
2016	$	515,444		$	531,654		$	554,591		$	543,183		$	2,144,872
Total cost of operations:
2018	$	153,532		$	150,688		$	152,206		$	123,094		$	579,520
2017	$	148,577		$	146,857		$	148,079		$	118,261		$	561,774
2016	$	142,951		$	139,335		$	145,734		$	115,406		$	543,426
Property taxes:
2018	$	58,359		$	59,138		$	59,004		$	34,136		$	210,637
2017	$	55,831		$	56,032		$	55,822		$	32,320		$	200,005
2016	$	53,477		$	53,674		$	53,485		$	31,764		$	192,400
Repairs and maintenance:
2018	$	11,523		$	11,593		$	11,251		$	11,833		$	46,200
2017	$	11,684		$	11,387		$	11,407		$	11,969		$	46,447
2016	$	11,446		$	10,672		$	11,053		$	11,175		$	44,346
Marketing:
2018	$	6,516		$	7,697		$	7,814		$	8,744		$	30,771
2017	$	6,792		$	8,127		$	6,966		$	6,794		$	28,679
2016	$	5,236		$	5,715		$	7,755		$	7,319		$	26,025
REVPAF:
2018	$	15.97		$	16.31		$	16.75		$	16.38		$	16.35
2017	$	15.63		$	16.03		$	16.54		$	16.17		$	16.09
2016	$	14.98		$	15.49		$	16.12		$	15.81		$	15.60
Weighted average realized annual rent per occupied square foot:
2018	$	17.30		$	17.35		$	17.83		$	17.68		$	17.54
2017	$	16.79		$	16.95		$	17.49		$	17.37		$	17.15
2016	$	15.99		$	16.24		$	16.91		$	16.85		$	16.50
Weighted average occupancy levels for the period:
2018		92.3%			94.0%			94.0%			92.6%			93.2%
2017		93.1%			94.6%			94.6%			93.1%			93.8%
2016		93.7%			95.4%			95.4%			93.7%			94.6%

Analysis of Market Trends

The following table sets forth selected market trends in our Same Store Facilities:

Same Store Facilities Operating Trends by Market
	Year Ended December 31,								Year Ended December 31,
		2018		2017			Change		2017			2016			Change
	(Amounts in thousands, except for weighted average data)
Market (number of facilities,
square footage in millions)
Revenues:
Los Angeles (197, 13.4)	$	339,037		$	327,326		3.6%		$	327,326		$	310,360		5.5%
San Francisco (124, 7.6)		192,620			188,139		2.4%			188,139			181,141		3.9%
New York (82, 5.7)		140,463			136,654		2.8%			136,654			133,280		2.5%
Seattle-Tacoma (81, 5.4)		104,659			102,810		1.8%			102,810			98,538		4.3%
Washington DC (82, 5.1)		105,339			105,228		0.1%			105,228			103,695		1.5%
Miami (73, 5.0)		96,900			95,726		1.2%			95,726			94,239		1.6%
Chicago (129, 8.1)		117,715			120,500		(2.3)%			120,500			120,344		0.1%
Atlanta (98, 6.4)		84,275			82,534		2.1%			82,534			80,275		2.8%
Dallas-Ft. Worth (77, 4.9)		63,393			65,070		(2.6)%			65,070			64,202		1.4%
Houston (70, 4.8)		65,155			64,639		0.8%			64,639			65,771		(1.7)%
Philadelphia (57, 3.6)		57,469			55,759		3.1%			55,759			53,558		4.1%
Orlando-Daytona (64, 4.0)		54,635			52,700		3.7%			52,700			50,074		5.2%
West Palm Beach (38, 2.6)		46,614			45,650		2.1%			45,650			43,721		4.4%
Tampa (47, 3.1)		44,004			43,484		1.2%			43,484			41,590		4.6%
Portland (41, 2.2)		39,603			39,997		(1.0)%			39,997			38,835		3.0%
All other markets (786, 49.3)		690,874			683,211		1.1%			683,211			665,249		2.7%
Total revenues	$	2,242,755		$	2,209,427		1.5%		$	2,209,427		$	2,144,872		3.0%
Net operating income:
Los Angeles	$	280,907		$	272,106		3.2%		$	272,106		$	256,426		6.1%
San Francisco		156,691			153,787		1.9%			153,787			147,851		4.0%
New York		101,662			99,143		2.5%			99,143			96,415		2.8%
Seattle-Tacoma		82,007			81,271		0.9%			81,271			78,465		3.6%
Washington DC		78,780			79,292		(0.6)%			79,292			79,245		0.1%
Miami		72,881			72,307		0.8%			72,307			71,558		1.0%
Chicago		65,155			70,445		(7.5)%			70,445			71,264		(1.1)%
Atlanta		62,500			61,110		2.3%			61,110			59,713		2.3%
Dallas-Ft. Worth		44,642			46,572		(4.1)%			46,572			45,984		1.3%
Houston		43,039			42,546		1.2%			42,546			44,432		(4.2)%
Philadelphia		40,456			39,485		2.5%			39,485			38,077		3.7%
Orlando-Daytona		40,240			38,951		3.3%			38,951			36,517		6.7%
West Palm Beach		34,806			33,868		2.8%			33,868			32,649		3.7%
Tampa		31,796			31,591		0.6%			31,591			30,146		4.8%
Portland		30,767			31,304		(1.7)%			31,304			30,445		2.8%
All other markets		496,906			493,875		0.6%			493,875			482,259		2.4%
Total net operating income	$	1,663,235		$	1,647,653		0.9%		$	1,647,653		$	1,601,446		2.9%

Same Store Facilities Operating Trends by Market (Continued)
		Year Ended December 31,							Year Ended December 31,
		2018		2017			Change		2017			2016			Change
Weighted average square foot
occupancy:
Los Angeles		95.2%			95.7%		(0.5)%			95.7%			96.0%		(0.3)%
San Francisco		94.5%			95.2%		(0.7)%			95.2%			95.9%		(0.7)%
New York		94.3%			94.3%		0.0%			94.3%			94.6%		(0.3)%
Seattle-Tacoma		93.2%			94.5%		(1.4)%			94.5%			95.8%		(1.4)%
Washington DC		92.4%			92.7%		(0.3)%			92.7%			93.2%		(0.5)%
Miami		92.7%			93.5%		(0.9)%			93.5%			94.9%		(1.5)%
Chicago		90.3%			91.2%		(1.0)%			91.2%			92.3%		(1.2)%
Atlanta		93.2%			93.5%		(0.3)%			93.5%			94.7%		(1.3)%
Dallas-Ft. Worth		91.7%			93.3%		(1.7)%			93.3%			95.0%		(1.8)%
Houston		90.8%			91.8%		(1.1)%			91.8%			92.4%		(0.6)%
Philadelphia		94.8%			94.6%		0.2%			94.6%			94.5%		0.1%
Orlando-Daytona		94.4%			95.0%		(0.6)%			95.0%			95.1%		(0.1)%
West Palm Beach		94.1%			94.9%		(0.8)%			94.9%			95.5%		(0.6)%
Tampa		93.0%			94.3%		(1.4)%			94.3%			95.0%		(0.7)%
Portland		94.1%			95.3%		(1.3)%			95.3%			96.6%		(1.3)%
All other markets		93.1%			93.6%		(0.5)%			93.6%			94.3%		(0.7)%
Total weighted average
square foot occupancy		93.2%			93.8%		(0.6)%			93.8%			94.6%		(0.8)%
Realized annual rent per
occupied square foot:
Los Angeles	$	25.72		$	24.67		4.3%		$	24.67		$	23.29		5.9%
San Francisco		26.15			25.30		3.4%			25.30			24.18		4.6%
New York		25.17			24.50		2.7%			24.50			23.80		2.9%
Seattle-Tacoma		20.03			19.39		3.3%			19.39			18.28		6.1%
Washington DC		21.41			21.16		1.2%			21.16			20.69		2.3%
Miami		19.77			19.36		2.1%			19.36			18.72		3.4%
Chicago		15.33			15.56		(1.5)%			15.56			15.33		1.5%
Atlanta		13.19			12.89		2.3%			12.89			12.37		4.2%
Dallas-Ft. Worth		13.34			13.46		(0.9)%			13.46			13.07		3.0%
Houston		14.32			14.06		1.8%			14.06			14.15		(0.6)%
Philadelphia		16.10			15.66		2.8%			15.66			15.04		4.1%
Orlando-Daytona		13.88			13.31		4.3%			13.31			12.61		5.6%
West Palm Beach		18.59			18.08		2.8%			18.08			17.16		5.4%
Tampa		14.25			13.90		2.5%			13.90			13.15		5.7%
Portland		18.70			18.61		0.5%			18.61			17.81		4.5%
All other markets		14.27			14.03		1.7%			14.03			13.55		3.5%
Total realized rent per
occupied square foot	$	17.54		$	17.15		2.3%		$	17.15		$	16.50		3.9%

Same Store Facilities Operating Trends by Market (Continued)
		Year Ended December 31,							Year Ended December 31,
		2018		2017			Change		2017			2016			Change
REVPAF:
Los Angeles	$	24.48		$	23.60		3.7%		$	23.60		$	22.36		5.5%
San Francisco		24.71			24.10		2.5%			24.10			23.19		3.9%
New York		23.74			23.10		2.8%			23.10			22.51		2.6%
Seattle-Tacoma		18.67			18.31		2.0%			18.31			17.52		4.5%
Washington DC		19.78			19.62		0.8%			19.62			19.28		1.8%
Miami		18.32			18.10		1.2%			18.10			17.77		1.9%
Chicago		13.84			14.19		(2.5)%			14.19			14.16		0.2%
Atlanta		12.30			12.06		2.0%			12.06			11.72		2.9%
Dallas-Ft. Worth		12.23			12.57		(2.7)%			12.57			12.41		1.3%
Houston		13.00			12.91		0.7%			12.91			13.08		(1.3)%
Philadelphia		15.26			14.81		3.0%			14.81			14.21		4.2%
Orlando-Daytona		13.10			12.65		3.6%			12.65			11.99		5.5%
West Palm Beach		17.50			17.16		2.0%			17.16			16.39		4.7%
Tampa		13.26			13.11		1.1%			13.11			12.49		5.0%
Portland		17.59			17.74		(0.8)%			17.74			17.19		3.2%
All other markets		13.28			13.13		1.1%			13.13			12.77		2.8%
Total REVPAF	$	16.35		$	16.09		1.6%		$	16.09		$	15.60		3.1%

We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics.

Non Same Store Facilities

The Non Same Store Facilities at December 31, 2018 represent 383 facilities that were not stabilized with respect to occupancies or rental rates since January 1, 2016, or that we did not own as of January 1, 2016. As a result of the stabilization process and timing of when facilities were acquired, developed, or redeveloped, year-over-year changes can be significant.

The following table summarizes operating data with respect to the Non Same Store Facilities:

NON SAME STORE	Year Ended December 31,									Year Ended December 31,
FACILITIES	2018			2017			Change			2017			2016			Change
	(Dollar amounts in thousands, except square foot amounts)
Revenues (a):
2018 acquisitions	$	5,167		$	-		$	5,167		$	-		$	-		$	-
2017 acquisitions		28,704			5,577			23,127			5,577			-			5,577
2016 acquisitions		39,166			36,336			2,830			36,336			18,174			18,162
2016 - 2018 new developments		37,625			17,391			20,234			17,391			2,885			14,506
2013 - 2015 new developments		26,725			24,910			1,815			24,910			20,520			4,390
Other facilities (b)		217,465			218,792			(1,327)			218,792			219,377			(585)
Total revenues		354,852			303,006			51,846			303,006			260,956			42,050
Cost of operations (a):
2018 acquisitions		2,141			-			2,141			-			-			-
2017 acquisitions		9,669			2,006			7,663			2,006			-			2,006
2016 acquisitions		13,523			13,693			(170)			13,693			6,455			7,238
2016 - 2018 new developments		22,120			11,433			10,687			11,433			3,146			8,287
2013 - 2015 new developments		8,031			8,093			(62)			8,093			7,786			307
Other facilities (b)		60,727			60,634			93			60,634			57,092			3,542
Total cost of operations		116,211			95,859			20,352			95,859			74,479			21,380
Net operating income:
2018 acquisitions		3,026			-			3,026			-			-			-
2017 acquisitions		19,035			3,571			15,464			3,571			-			3,571
2016 acquisitions		25,643			22,643			3,000			22,643			11,719			10,924
2016 - 2018 new developments		15,505			5,958			9,547			5,958			(261)			6,219
2013 - 2015 new developments		18,694			16,817			1,877			16,817			12,734			4,083
Other facilities (b)		156,738			158,158			(1,420)			158,158			162,285			(4,127)
Net operating income		238,641			207,147			31,494			207,147			186,477			20,670
Depreciation and
amortization expense		(123,405)			(98,826)			(24,579)			(98,826)			(71,323)			(27,503)
Net income	$	115,236		$	108,321		$	6,915		$	108,321		$	115,154		$	(6,833)
At December 31:
Square foot occupancy:
2018 acquisitions		79.6%			-			-			-			-			-
2017 acquisitions		90.9%			87.2%			4.2%			87.2%			-			-
2016 acquisitions		87.5%			85.9%			1.9%			85.9%			82.9%			3.6%
2016 - 2018 new developments		63.5%			52.3%			21.4%			52.3%			34.6%			51.2%
2013 - 2015 new developments		89.9%			88.9%			1.1%			88.9%			86.2%			3.1%
Other facilities (b)		83.0%			82.9%			0.1%			82.9%			88.8%			(6.6)%
		80.5%			79.3%			1.5%			79.3%			82.3%			(3.6)%
Annual contract rent per
occupied square foot:
2018 acquisitions	$	11.10		$	-			-		$	-		$	-			-
2017 acquisitions		14.81			14.60			1.4%			14.60			-			-
2016 acquisitions		10.42			10.23			1.9%			10.23			9.99			2.4%
2016 - 2018 new developments		11.87			12.11			(2.0)%			12.11			12.65			(4.3)%
2013 - 2015 new developments		15.65			14.94			4.8%			14.94			13.90			7.5%
Other facilities (b)		16.95			17.12			(1.0)%			17.12			16.90			1.3%
	$	14.62		$	15.08			(3.1)%		$	15.08		$	15.18			(0.7)%

NON SAME STORE	Year Ended December 31,										Year Ended December 31,
FACILITIES (Continued)	2018			2017			Change				2017			2016			Change
Number of facilities:
2018 acquisitions		25			-			25			-			-			-
2017 acquisitions		34			34			-			34			-			34
2016 acquisitions		55			55			-			55			55			-
2016 - 2018 new developments		50			32			18			32			16			16
2013 - 2015 new developments		20			20			-			20			20			-
Other facilities (b)		199			200			(1)			200			200			-
		383			341			42			341			291			50
Net rentable square feet (in thousands):
2018 acquisitions		1,629			-			1,629			-			-			-
2017 acquisitions		2,114			2,114			-			2,114			-			2,114
2016 acquisitions		4,247			4,177			70			4,177			4,121			56
2016 - 2018 new developments		6,135			4,181			1,954			4,181			2,141			2,040
2013 - 2015 new developments		1,877			1,877			-			1,877			1,877			-
Other facilities (b)		14,865			14,633			232			14,633			14,016			617
		30,867			26,982			3,885			26,982			22,155			4,827
	As of December 31, 2018
Costs to acquire or develop:
2018 acquisitions	$	181,020
2017 acquisitions (c)		291,329
2016 acquisitions		429,123
2016 - 2018 new developments		753,262
2013 - 2015 new developments		188,049
Other facilities (b)		-
	$	1,842,783

	(a)		Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

	(b)		The “Other facilities” noted above include other self-storage facilities that are not stabilized in 2016, 2017, or 2018 due primarily to either completed or in-process redevelopment activities, as well as casualty events which significantly impacted the operating results. It includes facilities where we recently expanded their square footage at a cost of $249.7 million, as well as facilities in the process of redevelopment where we demolished 596,000 net rentable square feet of storage space. Such expansion costs are not included in “costs to acquire or develop” as it would not be meaningful or consistent with the amounts for the acquired and newly developed facilities.

	(c)		Acquisition costs includes i) $149.8 million paid for 22 facilities acquired from third parties, ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and iii) the $6.3 million historical book value of our existing investment in the legacy institutional partnership.

The facilities included above under “2017 acquisitions” include 22 facilities acquired from third parties and 12 stabilized facilities previously owned by a legacy institutional partnership that we began consolidating effective December 31, 2017.

The facilities included above under “2016 acquisitions”, “2017 acquisitions”, and “2018 acquisitions” have an aggregate of approximately 8.0 million net rentable square feet, including 1.3 million in Ohio, 1.1 million in Oklahoma, 0.8 million in Texas, 0.7 million in Florida, 0.5 million in each of Minnesota, Tennessee, and Kentucky, and 2.6 million in other states.

The facilities included above under “2013 – 2015 new developments” and “2016 – 2018 new developments” have an aggregate of approximately 8.0 million net rentable square feet, including 3.7 million in Texas, 1.2 million in California, 0.7 million each in Colorado and Florida, 0.4 million in Washington, and 1.3 million in other states.

The facilities included above under “Other facilities” have an aggregate of 14.9 million net rentable square feet, including 4.4 million in Texas, 2.7 million in California, 2.0 million in Florida, 0.9 million in Colorado, 0.8 million in South Carolina, 0.6 million each in New York and Washington, and 2.9 million in other states.

For the year ended December 31, 2018, the weighted average annualized yield on cost, based upon net operating income, for i) the facilities acquired in 2016 was 6.0% and ii) the 22 facilities acquired in 2017 from third parties for $149.8 million was 5.4%. The yield for the other facilities acquired are not meaningful due to our limited ownership period in the case of facilities acquired in 2018 and our preexisting ownership interest in and management of the 12 stabilized facilities owned by a legacy institutional partnership.

We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities.

Net operating income with respect to the “Other facilities” declined $1.4 million in 2018 as compared to 2017 and $4.1 million in 2017 as compared to 2016. Such decreases are primarily due to the demolishment of 834,000 net rentable square feet of storage space due to expansion activities, offset partially by increased net operating income with respect to facilities where expansion activities are complete and the added space is filling up. Our current pipeline of $354.0 million in redevelopment projects will result in the demolishment of an additional 86,000 net rentable square feet of space, and the build of an additional 3.5 million net rentable square feet of storage space.

Since the beginning of 2013, we have opened newly developed facilities with a total cost of $941.3 million and redeveloped existing facilities, expanding their square footage, for a total cost of $294.4 million. The newly developed facilities are included in “Developed facilities” and the redeveloped facilities are included in “Other facilities” in the table above. We believe that our development and redevelopment activities are beneficial to our business over the long run. However, in the short run, such activities dilute our earnings due to the three to four year

period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the cost, combined with related overhead expenses flowing through general and administrative expense. We believe the level of dilution incurred in 2018 will continue at similar levels in 2019 and beyond, assuming realization of our current expectation of maintaining our current level of development for the foreseeable future.

We expect the Non Same Store Facilities to continue to provide increased net operating income in 2019 as these facilities approach stabilized occupancy levels and the earnings of the 2018 acquisitions are reflected in our operations for a longer period in 2019 as compared to 2018.

We also expect to increase the number and net rentable square feet of Non Same Store Facilities through development of new self-storage facilities, redevelopment of existing facilities and acquisitions of facilities.

As of December 31, 2018, we had development and redevelopment projects which will add approximately 5.2 million net rentable square feet of storage space at a total cost of approximately $607.4 million. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.

Subsequent to December 31, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $102.4 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefore the dollar value of acquisitions is unpredictable.

Depreciation and amortization with respect to the Non Same Store Facilities totaled $123.4 million, $98.8 million and $71.3 million in 2018, 2017 and 2016, respectively. These amounts include i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to Non Same Store Facilities owned at December 31, 2018, depreciation of buildings and amortization of tenant intangibles is expected to total $107.4 million and $8.7 million, respectively, in 2019. The level of future depreciation and amortization will also depend upon the level of acquisitions of facilities and the level of newly developed storage space.

Ancillary Operations

Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities. The following table sets forth our ancillary operations:

	Year Ended December 31,									Year Ended December 31,
	2018			2017			Change			2017			2016			Change
Revenues:
Tenant reinsurance premiums	$	125,575		$	122,852		$	2,723		$	122,852		$	118,911		$	3,941
Merchandise		31,098			33,243			(2,145)			33,243			35,810			(2,567)
Total revenues		156,673			156,095			578			156,095			154,721			1,374
Cost of Operations:
Tenant reinsurance		25,646			30,554			(4,908)			30,554			29,145			1,409
Merchandise		18,345			19,791			(1,446)			19,791			22,033			(2,242)
Total cost of operations		43,991			50,345			(6,354)			50,345			51,178			(833)
Net income
Tenant reinsurance		99,929			92,298			7,631			92,298			89,766			2,532
Merchandise		12,753			13,452			(699)			13,452			13,777			(325)
Total net income	$	112,682		$	105,750		$	6,932		$	105,750		$	103,543		$	2,207

Tenant reinsurance operations: Our customers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary of Public Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table.

The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in consolidation and is therefore not shown in the above table.

Tenant reinsurance revenue increased from $118.9 million in 2016 to $122.9 million in 2017, and to $125.6 million in 2018, due primarily to an increase in our tenant base due to newly acquired and developed facilities.

Tenant insurance revenues include $103.6 million, $103.9 million and $102.9 million for 2018, 2017 and 2016, respectively, for the Same Store Facilities.

We expect future growth will come primarily from customers of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities.

Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the level of insured tenants, and the level of events affecting claims at particular properties (such as burglary) as well as catastrophic weather events affecting multiple properties such as hurricanes and floods. Cost of operations were $29.1 million in 2016, $30.6 million in 2017, and $25.6 million in 2018. Amounts for 2016 includes flooding in Houston and South Carolina, while claims cost for 2017 includes the impact of Hurricanes Harvey and Irma.

Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in 2019.

Equity in earnings of unconsolidated real estate entities

At December 31, 2018, we have equity investments in PSB and Shurgard Europe, which we account for on the equity method and record our pro-rata share of the net income of these entities for each period. The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:

		Year Ended December 31,									Year Ended December 31,
		2018			2017			Change			2017			2016			Change
Equity in earnings:
PSB		$	89,362		$	46,544		$	42,818		$	46,544		$	31,707		$	14,837
Shurgard Europe			14,133			25,948			(11,815)			25,948			22,324			3,624
Legacy Institutional
Partnership (a)			-			3,163			(3,163)			3,163			2,725			438
Total equity in earnings		$	103,495		$	75,655		$	27,840		$	75,655		$	56,756		$	18,899

	(a)		This represents our equity earnings in a legacy institutional partnership. On December 31, 2017, we acquired the 74.25% interest that we did not own in this partnership for $135.5 million. As a result, no further equity earnings will be recorded.

Investment in PSB: At December 31, 2018 and 2017, we had approximately a 42% common equity interest in PS Business Parks, Inc. (“PSB”), comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.

At December 31, 2018, PSB wholly-owned approximately 28.2 million rentable square feet of commercial space and had a 95% interest in a 395-unit apartment complex. PSB also manages commercial space that we own pursuant to property management agreements.

Equity in earnings from PSB totaled $89.4 million, $46.5 million, and $31.7 million for 2018, 2017, and 2016, respectively. Included in these amounts are i) our equity share of gains on sale of real estate totaling $37.7 million and $3.1 million for 2018 and 2017, respectively, and ii) our equity share of preferred redemption charges totaling $4.5 million and $3.1 million for 2017 and 2016, respectively.

Equity in earnings from PSB, excluding the aforementioned real estate gains and preferred redemption charges, increased $3.7 million in 2018 as compared to 2017 and $13.2 million in 2017 as compared to 2016. The increases in both years reflects improved property operations and, in the case of 2017, lower levels of interest expense and preferred distributions. See Note 4 to our December 31, 2018 financial statements for selected financial information on PSB, as well as PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com.

Investment in Shurgard Europe: At December 31, 2018, we have a 35.2% equity share in Shurgard Europe’s net income, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares.

On July 13, 2018, Shurgard Europe paid a cash distribution totaling $296.7 million, of which we received our 49% equity share totaling $145.4 million. On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”), and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 25.0 million of its common shares to third parties at a price of €23 per share, for an aggregate of €575 million in gross proceeds. Our ownership interest was reduced from 49% to 35.2% as a result of the Offering. While we did not sell any shares in the offering, and have no current plans to do so, we recorded a gain on disposition in 2018 totaling $151.6 million as if we had sold a proportionate share of our investment in Shurgard Europe.

At December 31, 2018, Shurgard Europe’s operations are comprised of 232 wholly-owned facilities with 13 million net rentable square feet. See Note 4 to our December 31, 2018 financial statements for selected financial information on Shurgard Europe for the years ended December 31, 2018, 2017 and 2016. As described in more detail in Note 4 we receive trademark license fees from Shurgard Europe. Shurgard Europe’s public filings and publicly reported information can be obtained on its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu.

Our equity in earnings from Shurgard Europe totaled $14.1 million, $25.9 million, and $22.3 million for 2018, 2017, and 2016, respectively. An aggregate reduction of $5.2 million is reflected in our equity in earnings in 2018 for a casualty loss related to a fire at one of Shurgard’s facilities and the costs of the Offering. Equity in earnings from Shurgard Europe, excluding the aforementioned casualty loss and Offering costs, decreased $6.6 million from 2017 to 2018, and increased $3.6 million from 2016 to 2017. The decrease in 2018 is due to a $6.9 million increase in our equity share of depreciation expense and a reduced average equity ownership interest during the year due to the Offering. The increase in 2017 is due primarily to improved property operations, offset partially by increased tax expense.

In 2018, Shurgard Europe acquired eight self-storage facilities from third parties (five in Sweden and three in the United Kingdom) for an aggregate of $114.5 million. On October 18, 2018, Shurgard acquired our wholly-owned property in West London for $42.1 million in cash. In 2018, Shurgard Europe opened two newly developed facilities, one each in Sweden and Germany at an aggregate total cost of $19.6 million. In 2017, Shurgard Europe opened two newly developed facilities in the United Kingdom with an aggregate total cost of $28.8 million and acquired a property in France for $15.5 million. In 2016, Shurgard Europe opened a newly developed facility in the United Kingdom with a total cost of $12.9 million.

Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the countries in which it does business and incurs tax expense.

We expect a reduction in ongoing equity earnings from Shurgard Europe in 2019 due to the extent to which offering proceeds are not immediately utilized to repay debt or invest in real estate assets. Shurgard Europe also expects to begin distributing a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate. Our future earnings from Shurgard Europe will also be affected by (i) the operating results of its existing facilities, (ii) the level of development and acquisition activities, (iii) income tax rates, and (iv) the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro).

For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated at exchange rates of approximately 1.144 U.S. Dollars per Euro at December 31, 2018 (1.198 at December 31, 2017), and average exchange rates of 1.181 for 2018, 1.129 for 2017 and 1.107 for 2016.

Analysis of items not allocated to segments

General and administrative expense: The following table sets forth our general and administrative expense:

		Year Ended December 31,									Year Ended December 31,
		2018			2017			Change			2017			2016			Change
Share-based compensation expense		$	71,031		$	37,548		$	33,483		$	37,548		$	37,483		$	65
Costs of senior executives			4,822			5,872			(1,050)			5,872			6,052			(180)
Development and acquisition costs			5,441			8,193			(2,752)			8,193			9,721			(1,528)
Tax compliance costs and taxes paid			5,438			4,795			643			4,795			3,859			936
Legal costs			8,234			6,995			1,239			6,995			7,305			(310)
Public company costs			4,712			4,145			567			4,145			3,768			377
Other costs			19,042			15,334			3,708			15,334			15,468			(134)
Total		$	118,720		$	82,882		$	35,838		$	82,882		$	83,656		$	(774)

Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes. Share-based compensation expense varies based upon the level of grants and their related vesting and amortization periods, forfeitures, as well as the Company’s common share price on the date of grant.

In February 2018, we announced that Ron Havner, our CEO and John Reyes, our CFO at the time were retiring from their executive roles at the end of 2018 and would serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods during their service as Trustees. For financial reporting, the end of the service periods for previous stock option and RSU grants for these executives have changed from (i) the various vesting dates to (ii) December 31, 2018. Accordingly, all remaining share-based compensation expense for these two executives was amortized through the end of 2018. Included in share-based compensation expense for 2018 is approximately $30.7 million due to the aforementioned accelerated amortization. Share-based compensation costs in 2017 include a $5.4 million reversal of previously amortized costs, due to the forfeiture of share-based compensation resulting from the retirement of certain senior executives in 2017. See Note 10 to our December 31, 2018 financial statements for further information on our share-based compensation. We expect a reduction in share-based compensation expense in 2019 as compared to 2018.

Costs of senior executives represent the cash compensation paid to our CEO and CFO.

Development and acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities. The amounts in the above table are net of $12.2 million, $9.4 million and $8.5 million for 2018, 2017 and 2016, respectively, in development costs that were capitalized to newly developed and redeveloped self-storage facilities. Development and acquisition costs are expected to remain stable in 2019.

Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules. Such costs vary primarily based upon the tax rates of the various states in which we do business.

Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of legal activity. The future level of legal costs is not determinable.

Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ (our “Board”)

costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Sarbanes-Oxley Act of 2002.

Other costs represent certain professional and consulting fees, payroll, and overhead that are not attributable to our property operations. Such costs vary depending upon the level of corporate activities, initiatives, and other factors and, as such, are not predictable. Amounts for 2018 include approximately $2.4 million in costs incurred to demolish certain buildings that were damaged in flooding in 2017 and are being rebuilt.

Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.

Interest and other income: Interest and other income is comprised primarily of the net income from our commercial operations, our property management operation, interest earned on cash balances, and trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts. Amounts attributable to our commercial operations and property management operations totaled $11.8 million, $10.9 million and $10.6 million in 2018, 2017 and 2016, respectively. The increase in interest and other income is attributable to increased commercial operations and higher interest rates on uninvested cash balances. We do not expect any significant changes in interest and other income in 2019.

Interest expense: For 2018, 2017 and 2016, we incurred $37.3 million, $17.1 million, and $9.4 million, respectively, of interest on our outstanding debt. In determining interest expense, these amounts were offset by capitalized interest of $4.8 million, $4.4 million and $5.1 million during 2018, 2017, and 2016, respectively, associated with our development activities. On September 18, 2017, we completed a public offering of $1.0 billion notes (the “U.S. Dollar Notes”) bearing an average annual interest rate of 2.732%. At December 31, 2018, we had $1.4 billion of debt outstanding, with an average interest rate of 2.6%. See Note 6 to our December 31, 2018 financial statements for further information on our debt balances. Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs.

Foreign Exchange Gain (Loss): For 2018, we recorded a foreign currency translation gain of $18.1 million representing the change in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates (loss of $50.0 million and gain of $17.6 million for 2017 and 2016, respectively). The Euro was translated at exchange rates of approximately 1.144 U.S. Dollars per Euro at December 31, 2018, 1.198 at December 31, 2017 and 1.052 at December 31, 2016. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding.

Casualty Loss: During 2017, we incurred a $7.8 million casualty loss with respect to damage to several of our facilities caused by Hurricanes Harvey and Irma.

Gain on Real Estate Investment Sales: In 2018, 2017 and 2016, we recorded gains on real estate investment sales totaling $37.9 million, $1.4 million and $689,000, respectively. On October 18, 2018, we sold our property in West London to Shurgard Europe for $42.1 million and recorded a related gain on sale of real estate of approximately $31.5 million. The remainder of the gains are primarily in connection with the partial sale of real estate facilities pursuant to eminent domain proceedings.

Gain due to Shurgard Europe Public Offering: In connection with Shurgard Europe’s Offering of its common shares to the public, our equity interest in Shurgard Europe decreased from 49% to 35.2%. While we did not sell any of our shares in the Offering, we recorded a gain on disposition in 2018 of $151.6 million, as if we had sold a proportionate share of our investment in Shurgard Europe.

Net Income Allocable to Preferred Shareholders: Net income allocable to preferred shareholders based upon distributions decreased in 2018 as compared to 2017 and in 2017 as compared to 2016, due primarily to lower average rates offset partially by higher weighted average preferred shares outstanding. We also allocated $29.3 million and $26.9 million of income from our common shareholders to the holders of our preferred shares in

2017 and 2016, respectively, (none in 2018) in connection with the redemption of our preferred shares. Based upon our preferred shares outstanding at December 31, 2018, our quarterly distribution to our preferred shareholders is expected to be approximately $54.1 million ($49.5 million per quarter excluding distributions on our Series Y Cumulative Preferred shares, which will be redeemed on March 28, 2019).

Liquidity and Capital Resources

Financing Strategy: As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important. Historically we have primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferred securities. Over the past three years, we have diversified our capital sources by issuing medium term debt.

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s. Our unsecured debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital. As of December 31, 2018 and February 27, 2019, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $16.2 million of outstanding letters of credit which limits our borrowing capacity to $483.8 million.

Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of additional medium or long term debt, and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the desire for leverage, refinancing risk, and considering potential constraints caused by certain features of capital sources, such as debt covenants.

Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures and distributions to our shareholders for the foreseeable future.

As of December 31, 2018, our capital resources over the next year are expected to be approximately $1.1 billion which exceeds our current planned capital needs over the next year of approximately $711.4 million. Our capital resources include: (i) $361.2 million of cash as of December 31, 2018, (ii) $483.8 million of available borrowing capacity on our revolving line of credit, and (iii) approximately $200 to $250 million of expected retained operating cash flow for the next twelve months. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.

Our planned capital needs over the next year consist of (i) $322.1 million of remaining spend on our current development pipeline, (ii) $102.4 million in property acquisitions currently under contract, (iii) $285.0 million for the redemption of our Series Y Preferred Shares on March 28, 2019 and (iv) $1.9 million in principal repayments on existing debt. Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.

To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.

Required Debt Repayments: As of December 31, 2018, our outstanding debt totaled approximately $1.4 billion, consisting of $27.4 million of secured debt, $391.4 million of Euro-denominated unsecured debt and $1.0 billion of U.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts in thousands):

2019	$	1,867
2020		1,958
2021		1,836
2022		502,522
2023		19,161
Thereafter		891,490
	$	1,418,834

The remaining maturities on our debt over at least the next three years are nominal compared to our expected annual retained operating cash flow.

Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.

Capital expenditures totaled $139.4 million in 2018, and are expected to approximate $200 million in 2019. Our capital expenditures for 2019 include certain projects that are upgrades and not traditional like-for-like replacements of existing components, and in certain circumstances replace existing components before the end of their functional lives. Such projects include installation of LED lighting, replacing existing planting configurations with more drought tolerant and low maintenance configurations, installation of solar panels, improvements to office configurations to provide a more customer-friendly experience, and improvements to outdoor facades and color schemes. Such incremental investments improve customer satisfaction, the attractiveness and competitiveness of our facilities to new and existing customers, or reduce operating costs. The amount and extent to which these expenditures will continue after 2019 is uncertain at this time.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.

On February 19, 2019, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of March 2019. Our consistent, long-term dividend policy has been to distribute only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2018, to be approximately $216.3 million per year ($198.1 million per year excluding distributions on our Series Y Cumulative Preferred shares, which will be redeemed on March 28, 2019).

We estimate we will pay approximately $7.0 million per year in distributions to noncontrolling interests outstanding at December 31, 2018.

Real Estate Investment Activities: Subsequent to December 31, 2018, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $102.4 million. We will continue to

seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.

As of December 31, 2018 we had development and redevelopment projects at a total cost of approximately $607.4 million. Costs incurred through December 31, 2018 were $285.3 million, with the remaining cost to complete of $322.1 million expected to be incurred primarily in the next 18 months. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.

Redemption of Preferred Securities: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. On February 22, 2019, we called for redemption, and on March 28, 2019, we will redeem our 6.375% Series Y Preferred Shares, at par ($285 million). In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of February 27, 2019, we have the following additional series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.625% Series U Preferred Shares ($288 million), our 5.375% Series V Preferred Shares ($495 million), our 5.200% Series W Preferred Shares ($500 million), and our 5.200% Series X Preferred Shares ($225 million). Our 6.000% Series Z Preferred Shares ($288 million) become callable on June 4, 2019. Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities. None of our preferred securities are redeemable at the option of the holders.

Repurchases of Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During 2018, we did not repurchase any of our common shares. From the inception of the repurchase program through February 27, 2019, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.

Contractual Obligations

Our significant contractual obligations at December 31, 2018 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):

		Total			2019			2020			2021			2022			2023			Thereafter
Interest and principal payments
on debt (1)	$	1,650,985		$	38,196		$	38,193		$	37,971		$	535,109		$	42,838		$	958,678
Operating leases (2)		78,519			4,031			4,240			4,356			3,755			3,626			58,511
Construction commitments (3)		138,460			126,247			12,213			-			-			-			-
Total	$	1,867,964		$	168,474		$	54,646		$	42,327		$	538,864		$	46,464		$	1,017,189

	(1)		Represents contractual principal and interest payments. Amounts with respect to certain Euro-denominated debt are based upon exchange rates at December 31, 2018. See Note 6 to our December 31, 2018 financial statements for further information.

(2)Represents future contractual payments on land, equipment and office space under various operating leases.

(3)Represents future expected payments for construction under contract at December 31, 2018.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2018 to be approximately $216.3 million per year ($198.1 million per year excluding distributions on our Series Y Cumulative Preferred shares, which will be redeemed on March 28, 2019). Dividends are paid when and if declared by our Board and accumulate if not paid.

Off-Balance Sheet Arrangements: At December 31, 2018, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.