filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our December 31, 2019 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.
Allocating Purchase Price for Acquired Real Estate Facilities: We estimate the fair values of land and buildings for purposes of allocating the aggregate purchase price of acquired properties. The related estimation processes involve significant judgment. We estimate the fair value of acquired buildings by determining the current cost to build new purpose-built self-storage facilities in the same location, and adjusting those costs for the actual age, quality, condition, amenities, and configuration of the buildings acquired. We estimate the fair value of acquired land by considering the most directly comparable recently transacted land sales (“Land Comps”) and adjusting the
transacted values for differentials to the acquired land such as location quality, parcel size, and date of sale, in order to derive the estimated value of the underlying acquired land. These adjustments to the Land Comps require significant judgment, particularly when there is a low volume of Land Comps or the available Land Comps lack similarity to the acquired property in proximity, date of sale, or location quality. 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, as well as the level of land and buildings on our balance sheet.
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 within the local trade area, which is generally a three to five mile radius. In addition to local competition, 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 where we operate, due to the favorable economics of developing new properties. 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, Miami, New York, and Portland.
The quality of the new supply may also allow these new facilities to compete more effectively with existing self-storage assets. Much of this new supply, including our own, represents “fifth generation” facilities which often have a more fresh and vibrant appearance, more amenities such as climate control, more attractive office configurations, newer elements, and a more imposing and attractive retail presence as compared to the existing stock of self-storage facilities which were built over the last 50 years.
In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed “fifth generation” facilities), we have commenced a comprehensive program to rebrand our properties, in order to develop more pronounced, attractive, and clearly identifiable color schemes and signage, as well as to upgrade the configuration and layout of the offices and other customer zones to improve the customer experience. This program has initially been concentrated in properties located in a limited number of markets. The extent to which we continue this program in additional markets, and the relative scope of work, will depend in part upon the results of the initial implementation of the program.
In addition to managing our existing facilities for organic growth, we plan on growing through the acquisition and development of new facilities and expanding our existing self-storage facilities. Since the beginning of 2013 through December 31, 2019, we acquired a total of 340 facilities with 23.8 million net rentable square feet from third parties for approximately $3.1 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.6 billion, adding approximately 15.1 million net rentable square feet.
Subsequent to December 31, 2019, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities, with approximately 1.1 million net rentable square feet, for $245.3 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.
At December 31, 2019, we had a development pipeline to develop 12 new self-storage facilities and expand 35 existing self-storage facilities, which will add approximately 4.4 million net rentable square feet at a cost of $619.2 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 generate favorable risk-adjusted returns over the long run. However, in the short run, our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses included in general and administrative expense. We believe the level of dilution incurred in 2019 will continue at similar levels in 2020.
On October 15, 2018, Shurgard Self Storage SA (“Shurgard”) 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 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 approximately 35% as a result of the Offering. See “Investment in Shurgard” below for more information.
As of December 31, 2019, we expect capital resources over the next year of approximately $1.7 billion, which exceeds our currently identified capital needs of approximately $722.6 million. Our expected capital resources include: (i) $409.7 million of cash as of December 31, 2019, (ii) $484.1 million of available borrowing capacity on our revolving line of credit, (iii) $545.2 million in net proceeds from the public issuance of senior Euro-denominated notes and (iv) approximately $200 million to $250 million of expected retained operating cash flow in the next year. 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 currently identified capital needs consist primarily of $245.3 million in property acquisitions currently under contract and $477.3 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 months. We have no substantial principal payments on debt until 2022. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential capital needs could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or mergers and acquisition activities such as a potential acquisition of National Storage REIT described in Note 15, “Subsequent Events” to our December 31, 2019 financial statements; however, there can be no assurance of any such activities transpiring in the near or longer term.
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 2019 and 2018
In 2019, net income allocable to our common shareholders was $1,272.8 million or $7.29 per diluted common share, compared to $1,488.9 million or $8.54 per diluted common share in 2018 representing a decrease of $216.1 million or $1.25 per diluted common share. The decrease is due primarily to (i) $183.1 million in aggregate gains due to Shurgard’s initial public offering and the sale of our facility in West London to Shurgard in October 2018, (ii) our $37.7 million equity share of gains recorded by PS Business Parks during 2018, (iii) a $10.3 million decrease due to the impact of foreign currency exchange gains associated with our euro denominated debt and (iv) a $32.7 million allocation to our preferred shareholders associated with our preferred share redemption activities in 2019. These impacts were offset partially by a $30.1 million increase in self-storage net operating income (described below) and a reduction in general and administrative expense attributable to $30.7 million in incremental share-based compensation expense in 2018 for the planned retirement of our former CEO and CFO.
The $30.1 million increase in self-storage net operating income is a result of a $2.6 million increase in our Same Store Facilities and $27.5 million increase in our non-Same Store Facilities. Revenues for the Same Store
Facilities increased 1.4% or $33.3 million in 2019 as compared to 2018, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 5.0% or $30.6 million in 2019 as compared to 2018, due primarily to 47.2% ($15.3 million) increase in marketing expenses and increased property taxes. The increase in net operating income of $27.5 million for the non-Same Store Facilities is due primarily to the impact of facilities acquired in 2018 and 2019 and the fill-up of recently developed and expanded facilities.
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’s initial public offering and the sale of our facility in West London to Shurgard, (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 $14.8 million increase in our Same Store Facilities and $32.3 million increase in our non-Same Store Facilities. Revenues for the Same Store Facilities increased 1.4% or $32.5 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 3.0% or $17.6 million in 2018 as compared to 2017, due primarily to increased property taxes. The increase in net operating income of $32.3 million for the non-Same Store Facilities is due primarily to the impact of facilities acquired in 2018 and 2017 and the fill-up of recently developed and 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, 2019, FFO was $10.58 per diluted common share, as compared to $10.45 and $9.70 per diluted common share for the years ended December 31, 2018 and 2017, respectively, representing an increase in 2019 of 1.2%, or $0.13 per diluted common share, as compared to 2018.
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, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| (Amounts in thousands, except per share data) | ||||||||
| Reconciliation of Diluted Earnings per Share to | ||||||||
| FFO per Share: | ||||||||
| Diluted Earnings per Share | $ | 7.29 | $ | 8.54 | $ | 6.73 | ||
| Eliminate amounts per share excluded from FFO: | ||||||||
| Depreciation and amortization | 3.32 | 3.21 | 3.00 | |||||
| Gains on sale of real estate investments | ||||||||
| and Shurgard IPO, including our equity | ||||||||
| share from investments | (0.03) | (1.30) | (0.03) | |||||
| FFO per share | $ | 10.58 | $ | 10.45 | $ | 9.70 | ||
| Computation of FFO per Share: | ||||||||
| Net income allocable to common shareholders | $ | 1,272,767 | $ | 1,488,900 | $ | 1,171,609 | ||
| Eliminate items excluded from FFO: | ||||||||
| Depreciation and amortization | 511,413 | 483,646 | 454,526 | |||||
| Depreciation from unconsolidated | ||||||||
| real estate investments | 71,725 | 79,868 | 71,931 | |||||
| Depreciation allocated to noncontrolling | ||||||||
| interests and restricted share unitholders | (4,208) | (3,646) | (3,567) | |||||
| Gains on sale of real estate investments and | ||||||||
| Shurgard IPO, including our equity share | ||||||||
| from investments and other | (5,896) | (227,332) | (4,908) | |||||
| FFO allocable to common shares | $ | 1,845,801 | $ | 1,821,436 | $ | 1,689,591 | ||
| Diluted weighted average common shares | 174,530 | 174,297 | 174,151 | |||||
| FFO per share | $ | 10.58 | $ | 10.45 | $ | 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 or reduction of accruals due to the departure of senior executives, 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 | |||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | |||||||||||||||
| FFO per share | $ | 10.58 | $ | 10.45 | 1.2% | $ | 10.45 | $ | 9.70 | 7.7% | ||||||||||
| Eliminate the per share impact of items | ||||||||||||||||||||
| excluded from Core FFO, including | ||||||||||||||||||||
| our equity share from investments: | ||||||||||||||||||||
| Foreign currency exchange (gain) loss | (0.04) | (0.10) | (0.10) | 0.29 | ||||||||||||||||
| Application of EITF D-42 | 0.21 | - | - | 0.19 | ||||||||||||||||
| Casualty losses and tenant claims | ||||||||||||||||||||
| due to hurricanes | - | - | - | 0.07 | ||||||||||||||||
| Shurgard - IPO costs and casualty loss | - | 0.03 | 0.03 | - | ||||||||||||||||
| (Forfeiture)/Acceleration of share- | ||||||||||||||||||||
| based compensation expense due | ||||||||||||||||||||
| to the departure of senior executives | (0.01) | 0.18 | 0.18 | (0.03) | ||||||||||||||||
| Other items | 0.01 | - | - | 0.01 | ||||||||||||||||
| Core FFO per share | $ | 10.75 | $ | 10.56 | 1.8% | $ | 10.56 | $ | 10.23 | 3.2% |
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, 2019 financial statements, “Segment Information.” Accordingly, refer to the table 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 four groups: (i) the 2,159 facilities that we have owned and operated on a stabilized basis since January 1, 2017 (the “Same Store Facilities”), (ii) 103 facilities we acquired after December 31, 2016 (the “Acquired facilities”), (iii) 141 facilities that have been newly developed or expanded, or that we are in the process of expanding at December 31, 2019 (the “Newly developed and expanded facilities”) and (iv) 80 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2017 (the “Other non-same store facilities”). See Note 11 to our December 31, 2019 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 | ||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||
| (Dollar amounts and square footage in thousands) | |||||||||||||||
| Revenues: | |||||||||||||||
| Same Store facilities | $ | 2,394,572 | $ | 2,361,298 | 1.4% | $ | 2,361,298 | $ | 2,328,833 | 1.4% | |||||
| Acquired facilities | 59,206 | 33,871 | 74.8% | 33,871 | 5,577 | 507.3% | |||||||||
| Newly developed and expanded facilities | 150,571 | 121,694 | 23.7% | 121,694 | 99,864 | 21.9% | |||||||||
| Other non-same store facilities | 80,203 | 80,744 | (0.7)% | 80,744 | 78,159 | 3.3% | |||||||||
| 2,684,552 | 2,597,607 | 3.3% | 2,597,607 | 2,512,433 | 3.4% | ||||||||||
| Cost of operations: | |||||||||||||||
| Same Store facilities | 641,918 | 611,273 | 5.0% | 611,273 | 593,637 | 3.0% | |||||||||
| Acquired facilities | 22,472 | 11,810 | 90.3% | 11,810 | 2,006 | 488.7% | |||||||||
| Newly developed and expanded facilities | 63,360 | 47,870 | 32.4% | 47,870 | 36,810 | 30.0% | |||||||||
| Other non-same store facilities | 24,829 | 24,778 | 0.2% | 24,778 | 25,180 | (1.6)% | |||||||||
| 752,579 | 695,731 | 8.2% | 695,731 | 657,633 | 5.8% | ||||||||||
| Net operating income (a): | |||||||||||||||
| Same Store facilities | 1,752,654 | 1,750,025 | 0.2% | 1,750,025 | 1,735,196 | 0.9% | |||||||||
| Acquired facilities | 36,734 | 22,061 | 66.5% | 22,061 | 3,571 | 517.8% | |||||||||
| Newly developed and expanded facilities | 87,211 | 73,824 | 18.1% | 73,824 | 63,054 | 17.1% | |||||||||
| Other non-same store facilities | 55,374 | 55,966 | (1.1)% | 55,966 | 52,979 | 5.6% | |||||||||
| Total net operating income | 1,931,973 | 1,901,876 | 1.6% | 1,901,876 | 1,854,800 | 2.5% | |||||||||
| Depreciation and amortization expense: | |||||||||||||||
| Same Store facilities | (389,737) | (382,864) | 1.8% | (382,864) | (382,326) | 0.1% | |||||||||
| Acquired facilities | (34,980) | (23,809) | 46.9% | (23,809) | (5,668) | 320.1% | |||||||||
| Newly developed and expanded facilities | (54,065) | (45,851) | 17.9% | (45,851) | (36,848) | 24.4% | |||||||||
| Other non-same store facilities | (34,136) | (31,122) | 9.7% | (31,122) | (29,684) | 4.8% | |||||||||
| Total depreciation and | |||||||||||||||
| amortization expense | (512,918) | (483,646) | 6.1% | (483,646) | (454,526) | 6.4% | |||||||||
| Net income: | |||||||||||||||
| Same Store facilities | 1,362,917 | 1,367,161 | (0.3)% | 1,367,161 | 1,352,870 | 1.1% | |||||||||
| Acquired facilities | 1,754 | (1,748) | (200.3)% | (1,748) | (2,097) | (16.6)% | |||||||||
| Newly developed and expanded facilities | 33,146 | 27,973 | 18.5% | 27,973 | 26,206 | 6.7% | |||||||||
| Other non-same store facilities | 21,238 | 24,844 | (14.5)% | 24,844 | 23,295 | 6.6% | |||||||||
| Total net income | $ | 1,419,055 | $ | 1,418,230 | 0.1% | $ | 1,418,230 | $ | 1,400,274 | 1.3% | |||||
| Number of facilities at period end: | |||||||||||||||
| Same Store facilities | 2,159 | 2,159 | - | 2,159 | 2,159 | - | |||||||||
| Acquired facilities | 103 | 59 | 74.6% | 59 | 34 | 73.5% | |||||||||
| Newly developed and expanded facilities | 141 | 130 | 8.5% | 130 | 112 | 16.1% | |||||||||
| Other non-same store facilities | 80 | 81 | (1.2)% | 81 | 82 | (1.2)% | |||||||||
| 2,483 | 2,429 | 2.2% | 2,429 | 2,387 | 1.8% | ||||||||||
| Net rentable square footage at period end: | |||||||||||||||
| Same Store facilities | 139,315 | 139,315 | - | 139,315 | 139,315 | - | |||||||||
| Acquired facilities | 6,968 | 3,743 | 86.2% | 3,743 | 2,114 | 77.1% | |||||||||
| Newly developed and expanded facilities | 16,533 | 12,807 | 29.1% | 12,807 | 10,608 | 20.7% | |||||||||
| Other non-same store facilities | 6,092 | 6,182 | (1.5)% | 6,182 | 6,125 | 0.9% | |||||||||
| 168,908 | 162,047 | 4.2% | 162,047 | 158,162 | 2.5% |
(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, operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our December 31, 2019 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 1.6% in 2019 as compared to 2018 and 2.5% in 2018 as compared to 2017. These increases are due primarily to the acquisition and development of new facilities and the fill-up of unstabilized facilities.
Same Store Facilities
The Same Store Facilities consist of facilities that have been owned and operated on a stabilized level of occupancy, revenues and cost of operations since January 1, 2017. Accordingly, our Same Store Facilities exclude (i) facilities acquired after December 31, 2016, (ii) newly developed or expanded facilities, (iii) facilities under expansion by December 31, 2019, (iv) facilities whose operating trends are significantly affected by factors such as casualty events, and (v) facilities which were otherwise not stabilized at December 31, 2016 (such as recently developed facilities acquired from third parties before December 31, 2016). The composition of our Same Store Facilities allows us to more effectively evaluate the ongoing performance of our self-storage portfolio in 2017, 2018, and 2019 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. 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 2,159 facilities (139.3 million net rentable square feet) that represent approximately 82% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2019.
| Selected Operating Data for the Same Store Facilities (2,159 facilities) | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| Percentage | Percentage | ||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||
| (Dollar amounts in thousands, except weighted average amounts) | |||||||||||||||
| Revenues: | |||||||||||||||
| Rental income | $ | 2,290,721 | $ | 2,258,099 | 1.4% | $ | 2,258,099 | $ | 2,225,727 | 1.5% | |||||
| Late charges and | |||||||||||||||
| administrative fees | 103,851 | 103,199 | 0.6% | 103,199 | 103,106 | 0.1% | |||||||||
| Total revenues (a) | 2,394,572 | 2,361,298 | 1.4% | 2,361,298 | 2,328,833 | 1.4% | |||||||||
| Cost of operations: | |||||||||||||||
| Property taxes | 233,453 | 223,088 | 4.6% | 223,088 | 212,565 | 5.0% | |||||||||
| On-site property manager | |||||||||||||||
| payroll | 118,450 | 115,531 | 2.5% | 115,531 | 114,212 | 1.2% | |||||||||
| Supervisory payroll | 37,771 | 37,179 | 1.6% | 37,179 | 40,222 | (7.6)% | |||||||||
| Repairs and maintenance | 50,032 | 48,488 | 3.2% | 48,488 | 48,735 | (0.5)% | |||||||||
| Utilities | 42,209 | 43,457 | (2.9)% | 43,457 | 41,771 | 4.0% | |||||||||
| Marketing | 47,622 | 32,344 | 47.2% | 32,344 | 30,251 | 6.9% | |||||||||
| Other direct property costs | 63,572 | 62,042 | 2.5% | 62,042 | 59,990 | 3.4% | |||||||||
| Allocated overhead | 48,809 | 49,144 | (0.7)% | 49,144 | 45,891 | 7.1% | |||||||||
| Total cost of operations (a) | 641,918 | 611,273 | 5.0% | 611,273 | 593,637 | 3.0% | |||||||||
| Net operating income | 1,752,654 | 1,750,025 | 0.2% | 1,750,025 | 1,735,196 | 0.9% | |||||||||
| Depreciation and | |||||||||||||||
| amortization expense | (389,737) | (382,864) | 1.8% | (382,864) | (382,326) | 0.1% | |||||||||
| Net income | $ | 1,362,917 | $ | 1,367,161 | (0.3)% | $ | 1,367,161 | $ | 1,352,870 | 1.1% | |||||
| Gross margin (before depreciation | |||||||||||||||
| and amortization expense) | 73.2% | 74.1% | (1.2)% | 74.1% | 74.5% | (0.5)% | |||||||||
| Weighted average for the period: | |||||||||||||||
| Square foot occupancy | 93.5% | 93.1% | 0.4% | 93.1% | 93.7% | (0.6)% | |||||||||
| Realized annual rental income per (b): | |||||||||||||||
| Occupied square foot | $ | 17.60 | $ | 17.41 | 1.1% | $ | 17.41 | $ | 17.05 | 2.1% | |||||
| Available square foot | $ | 16.45 | $ | 16.21 | 1.5% | $ | 16.21 | $ | 15.97 | 1.5% | |||||
| At December 31: | |||||||||||||||
| Square foot occupancy | 91.8% | 91.3% | 0.5% | 91.3% | 91.1% | 0.2% | |||||||||
| Annual contract rent per | |||||||||||||||
| occupied square foot (c) | $ | 18.12 | $ | 18.03 | 0.5% | $ | 18.03 | $ | 17.82 | 1.2% |
(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 1.4% each in 2019 as compared to 2018 and in 2018 as compared to 2017, due primarily to increases of 1.1% and 2.1% in realized annual rent per occupied square foot in 2019 and 2018, respectively, as compared to the previous year.
Same Store revenue growth is lower than long-term historical averages due to softness in demand for our storage space, which has led to lower move-in rental rates for new tenants (see below). We attribute some of this softness to local economic conditions and, in some markets most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, Miami, New York and Portland, increased supply of newly constructed self-storage facilities.
Same Store weighted average square foot occupancy remained strong at 93.5%, 93.1% and 93.7% during 2019, 2018 and 2017.
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.
Annual contract rent per foot for customers moving in was $13.63, $14.09, and $14.54 in 2019, 2018, and 2017, respectively, and the related square footage for the space they moved into was 102.7 million, 104.4 million, and 109.4 million, respectively. Annual contract rent per foot for customers moving out was $16.12, $16.19, and $16.01 in 2019, 2018, and 2017, respectively, and the related square footage for the space they moved out of was 102.1 million, 104.1 million, and 111.1 million, respectively.
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 $77.4 million, $81.6 million, and $86.9 million for 2019, 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 typically increase rental rates to our long-term tenants (generally, those that have been with us for at least a year) once per year. As a result, the number of long-term tenants we have in our facilities is an important factor in our revenue growth. The level of rate increases to long-term tenants is based upon balancing the additional revenue from the increase against the negative impact of incremental move-outs.
Throughout 2018 and 2019, we have had an increased average length of stay and fewer move-outs. The increased average length of stay contributed to an increased beneficial effect of rent increases to existing tenants, due to more long-term customers that were eligible for rate increases. However, this was offset partially by the impact of
lower move-in rates and resulting increased “rent roll down” for new tenants relative to existing tenants that moved out. The extent to which the net positive impact of these trends will continue in 2020 is uncertain at this time.
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 2020, with rental growth in 2020 coming primarily from continued annual rent increases to existing tenants.
However, such short-term current trends can be limited in their ability to suggest future revenue growth. Other factors affecting revenue growth can be volatile and hard to predict, such as (i) the level of consumer demand, (ii) competition from newly developed and existing facilities, (iii) the length of stay of our existing customers, and (iv) local and state laws and regulations that can limit, and have limited, the rents we can charge to new tenants or the extent to which we can increase rents to existing tenants.
We are continuing to take a number of actions to improve demand into our system, including increasing marketing spend on the Internet and offering lower rental rates to new customers.
Analysis of Same Store Cost of Operations
Cost of operations (excluding depreciation and amortization) increased 5.0% in 2019 as compared to 2018, and 3.0% in 2018 as compared to 2017, due primarily to increased property tax and marketing expense.
Property tax expense increased 4.6% in 2019 as compared to 2018, and 5.0% in 2018 as compared to 2017. We expect property tax expense growth of approximately 5.0% in 2020 due primarily to higher assessed values (excluding the potential impact of the California initiative noted below) and, to a lesser extent, increased tax rates.
As a result of Proposition 13, which limits increases in assessed values to 2% per year, the assessed value and property taxes we pay in California is less than it would be if the properties were assessed at current values. An initiative on California’s November 2020 statewide ballot, if approved by voters, could result in the reassessment of our California properties and substantially increase our property tax expense. It is uncertain (i) whether an initiative will pass, and (ii) if it does pass, the timing and level of the reassessment and related property tax increases. See “Risk Factors – We have exposure to increased property tax in California” for further information such as our aggregate net operating income and property tax expense in California.
On-site property manager payroll expense increased 2.5% in 2019 as compared to 2018 and 1.2% in 2018 as compared to 2017. These increases were due primarily to higher wage rates, offset partially by lower hours worked in 2018. We have been impacted by a tight labor market across the country, as well as increases in minimum wages in certain jurisdictions. We expect continued wage rate increases in 2020 due to tighter labor markets.
Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, increased 1.6% in 2019 as compared to 2018 due primarily to higher wage rates and decreased 7.6% in 2018 as compared to 2017 due to reductions in headcount offset by higher wage rates. We expect inflationary increases in wage rates and increased headcount in 2020.
Repairs and maintenance expense increased 3.2% in 2019 as compared to 2018 and decreased 0.5% in 2018 as compared to 2017. Repair and maintenance costs include snow removal expense totaling $4.0 million, $3.6 million, and $3.1 million in 2019, 2018, and 2017, respectively. Excluding snow removal costs, repairs and maintenance increased 2.6% in 2019 as compared to 2018 and decreased 1.7% in 2018 as compared to 2017.
Repairs and maintenance expense levels are dependent upon many factors such as (i) sporadic occurrences such as accidents, damage, and equipment malfunctions, (ii) short-term local supply and demand factors for material and labor, and (iii) weather conditions, which can impact costs such as snow removal, roof repairs, and HVAC maintenance and repairs. Accordingly, it is difficult to estimate future repairs and maintenance expense.
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 decreased 2.9% in 2019 as compared to 2018 and increased 4.0% in 2018 as compared to 2017. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable. We are making investments in energy saving technology such as solar power and LED lights which should generate favorable returns on investment in the form of lower utility usage. However, the actual reduction experienced in 2020 will be relatively modest, based upon the expected level of and timing of such investments.
Marketing expense is comprised principally of Internet advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprised primarily of keyword search fees assessed on a “per click” basis, varies based upon demand for self-storage space, the quantity of people inquiring about self-storage through online search, occupancy levels, the number and aggressiveness of bidding competitors and other factors. These factors are volatile; accordingly, Internet advertising can increase or decrease significantly in the short-term. Marketing expense increased 47.2% in 2019 as compared to 2018 and 6.9% in 2018 as compared to 2017. These increases are due primarily to higher Internet advertising spending, as we have sought to attract more customers for our space and cost per click for keyword search terms increased due to more keyword bidding competition from existing self-storage owners and operators, including owners of newly developed facilities and nontraditional storage providers. We expect continued increases in 2020.
Other direct property costs include administrative expenses specific to each self-storage facility, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, tenant mailings, credit card fees, and the cost of operating each property’s rental office. These costs increased 2.5% in 2019 as compared to 2018 and 3.4% in 2018 as compared to 2017. We continue to experience increased credit card fees due to a long-term trend of more customers paying with credit cards rather than cash, checks, or other methods of payment with lower transaction costs. We expect inflationary increases in other direct property costs in 2020.
Allocated overhead represents administrative expenses for shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions include information technology support, hardware, and software, as well as centralized administration of payroll, benefits, training, repairs and maintenance, customer service, pricing and marketing, operational accounting and finance, and legal costs. These amounts also include the costs of senior executives responsible for these processes (other than our Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead decreased 0.7% in 2019 as compared to 2018 and increased 7.1% in 2018 as compared to 2017. The increase in 2018 as compared to 2017 was due to increased headcount and information technology expenses. We expect minimal increases in allocated overhead in 2020.
Analysis of Same Store Depreciation and Amortization
Depreciation and amortization for Same Store Facilities increased 1.8% in 2019 as compared to 2018 and 0.1% in 2018 as compared to 2017. We expect modest increases in depreciation expense in 2020 due to elevated levels of capital expenditures.
Quarterly Financial Data
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: | ||||||||||||||
| 2019 | $ | 586,004 | $ | 599,244 | $ | 611,227 | $ | 598,097 | $ | 2,394,572 | ||||
| 2018 | $ | 577,310 | $ | 587,793 | $ | 604,705 | $ | 591,490 | $ | 2,361,298 | ||||
| 2017 | $ | 566,136 | $ | 579,443 | $ | 598,402 | $ | 584,852 | $ | 2,328,833 | ||||
| Total cost of operations: | ||||||||||||||
| 2019 | $ | 168,359 | $ | 166,913 | $ | 170,865 | $ | 135,781 | $ | 641,918 | ||||
| 2018 | $ | 162,034 | $ | 158,857 | $ | 160,543 | $ | 129,839 | $ | 611,273 | ||||
| 2017 | $ | 156,854 | $ | 155,239 | $ | 156,392 | $ | 125,152 | $ | 593,637 | ||||
| Property taxes: | ||||||||||||||
| 2019 | $ | 64,945 | $ | 65,671 | $ | 65,450 | $ | 37,387 | $ | 233,453 | ||||
| 2018 | $ | 61,858 | $ | 62,571 | $ | 62,373 | $ | 36,286 | $ | 223,088 | ||||
| 2017 | $ | 59,214 | $ | 59,579 | $ | 59,149 | $ | 34,623 | $ | 212,565 | ||||
| Repairs and maintenance: | ||||||||||||||
| 2019 | $ | 13,369 | $ | 11,687 | $ | 12,785 | $ | 12,191 | $ | 50,032 | ||||
| 2018 | $ | 12,124 | $ | 12,081 | $ | 11,855 | $ | 12,428 | $ | 48,488 | ||||
| 2017 | $ | 12,179 | $ | 11,951 | $ | 12,005 | $ | 12,600 | $ | 48,735 | ||||
| Marketing: | ||||||||||||||
| 2019 | $ | 8,751 | $ | 12,084 | $ | 13,934 | $ | 12,853 | $ | 47,622 | ||||
| 2018 | $ | 6,855 | $ | 8,090 | $ | 8,221 | $ | 9,178 | $ | 32,344 | ||||
| 2017 | $ | 7,175 | $ | 8,577 | $ | 7,346 | $ | 7,153 | $ | 30,251 | ||||
| REVPAF: | ||||||||||||||
| 2019 | $ | 16.08 | $ | 16.48 | $ | 16.79 | $ | 16.44 | $ | 16.45 | ||||
| 2018 | $ | 15.84 | $ | 16.17 | $ | 16.60 | $ | 16.23 | $ | 16.21 | ||||
| 2017 | $ | 15.53 | $ | 15.92 | $ | 16.41 | $ | 16.04 | $ | 15.97 | ||||
| Weighted average realized annual rent per occupied square foot: | ||||||||||||||
| 2019 | $ | 17.38 | $ | 17.53 | $ | 17.82 | $ | 17.66 | $ | 17.60 | ||||
| 2018 | $ | 17.19 | $ | 17.23 | $ | 17.69 | $ | 17.55 | $ | 17.41 | ||||
| 2017 | $ | 16.71 | $ | 16.85 | $ | 17.38 | $ | 17.26 | $ | 17.05 | ||||
| Weighted average occupancy levels for the period: | ||||||||||||||
| 2019 | 92.5% | 94.0% | 94.2% | 93.1% | 93.5% | |||||||||
| 2018 | 92.1% | 93.8% | 93.8% | 92.5% | 93.1% | |||||||||
| 2017 | 92.9% | 94.4% | 94.4% | 92.8% | 93.7% |
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, | ||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||
| (Amounts in thousands, except for weighted average data) | |||||||||||||||
| Market (number of facilities, | |||||||||||||||
| square footage in millions) | |||||||||||||||
| Revenues: | |||||||||||||||
| Los Angeles (204, 14.1) | $ | 362,057 | $ | 352,672 | 2.7% | $ | 352,672 | $ | 340,987 | 3.4% | |||||
| San Francisco (127, 7.9) | 203,195 | 199,162 | 2.0% | 199,162 | 194,614 | 2.3% | |||||||||
| New York (86, 6.0) | 151,526 | 148,676 | 1.9% | 148,676 | 144,875 | 2.6% | |||||||||
| Washington DC (88, 5.4) | 113,607 | 110,642 | 2.7% | 110,642 | 110,670 | (0.0)% | |||||||||
| Seattle-Tacoma (83, 5.5) | 107,639 | 106,261 | 1.3% | 106,261 | 104,394 | 1.8% | |||||||||
| Miami (81, 5.7) | 112,734 | 114,428 | (1.5)% | 114,428 | 113,710 | 0.6% | |||||||||
| Atlanta (98, 6.4) | 85,885 | 84,450 | 1.7% | 84,450 | 82,663 | 2.2% | |||||||||
| Chicago (128, 8.1) | 118,293 | 117,094 | 1.0% | 117,094 | 119,859 | (2.3)% | |||||||||
| Dallas-Ft. Worth (98, 6.2) | 82,281 | 83,155 | (1.1)% | 83,155 | 85,562 | (2.8)% | |||||||||
| Orlando-Daytona (69, 4.3) | 60,640 | 59,901 | 1.2% | 59,901 | 57,627 | 3.9% | |||||||||
| Houston (78, 5.3) | 67,962 | 71,266 | (4.6)% | 71,266 | 70,805 | 0.7% | |||||||||
| Philadelphia (56, 3.5) | 59,120 | 56,747 | 4.2% | 56,747 | 55,064 | 3.1% | |||||||||
| Tampa (50, 3.3) | 46,083 | 46,377 | (0.6)% | 46,377 | 45,751 | 1.4% | |||||||||
| West Palm Beach (37, 2.4) | 43,959 | 43,630 | 0.8% | 43,630 | 42,909 | 1.7% | |||||||||
| Portland (42, 2.2) | 40,163 | 40,622 | (1.1)% | 40,622 | 41,096 | (1.2)% | |||||||||
| All other markets (834, 53.0) | 739,428 | 726,215 | 1.8% | 726,215 | 718,247 | 1.1% | |||||||||
| Total revenues | $ | 2,394,572 | $ | 2,361,298 | 1.4% | $ | 2,361,298 | $ | 2,328,833 | 1.4% | |||||
| Net operating income: | |||||||||||||||
| Los Angeles | $ | 298,725 | $ | 292,281 | 2.2% | $ | 292,281 | $ | 283,333 | 3.2% | |||||
| San Francisco | 163,878 | 162,202 | 1.0% | 162,202 | 159,265 | 1.8% | |||||||||
| New York | 107,992 | 107,351 | 0.6% | 107,351 | 104,815 | 2.4% | |||||||||
| Washington DC | 84,329 | 82,745 | 1.9% | 82,745 | 83,452 | (0.8)% | |||||||||
| Seattle-Tacoma | 84,315 | 83,375 | 1.1% | 83,375 | 82,638 | 0.9% | |||||||||
| Miami | 84,269 | 87,277 | (3.4)% | 87,277 | 87,222 | 0.1% | |||||||||
| Atlanta | 63,630 | 62,519 | 1.8% | 62,519 | 61,091 | 2.3% | |||||||||
| Chicago | 63,228 | 64,906 | (2.6)% | 64,906 | 70,143 | (7.5)% | |||||||||
| Dallas-Ft. Worth | 56,623 | 58,461 | (3.1)% | 58,461 | 61,332 | (4.7)% | |||||||||
| Orlando-Daytona | 44,116 | 44,066 | 0.1% | 44,066 | 42,465 | 3.8% | |||||||||
| Houston | 42,380 | 47,071 | (10.0)% | 47,071 | 46,473 | 1.3% | |||||||||
| Philadelphia | 41,773 | 40,097 | 4.2% | 40,097 | 39,188 | 2.3% | |||||||||
| Tampa | 32,416 | 33,378 | (2.9)% | 33,378 | 33,048 | 1.0% | |||||||||
| West Palm Beach | 32,192 | 32,397 | (0.6)% | 32,397 | 31,702 | 2.2% | |||||||||
| Portland | 30,511 | 31,548 | (3.3)% | 31,548 | 32,191 | (2.0)% | |||||||||
| All other markets | 522,277 | 520,351 | 0.4% | 520,351 | 516,838 | 0.7% | |||||||||
| Total net operating income | $ | 1,752,654 | $ | 1,750,025 | 0.2% | $ | 1,750,025 | $ | 1,735,196 | 0.9% |
| Same Store Facilities Operating Trends by Market (Continued) | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||
| Weighted average square foot | |||||||||||||||
| occupancy: | |||||||||||||||
| Los Angeles | 95.2% | 95.0% | 0.2% | 95.0% | 95.5% | (0.5)% | |||||||||
| San Francisco | 94.3% | 94.4% | (0.1)% | 94.4% | 95.2% | (0.8)% | |||||||||
| New York | 94.1% | 94.3% | (0.2)% | 94.3% | 94.3% | 0.0% | |||||||||
| Washington DC | 93.4% | 92.4% | 1.1% | 92.4% | 92.7% | (0.3)% | |||||||||
| Seattle-Tacoma | 93.1% | 93.2% | (0.1)% | 93.2% | 94.3% | (1.2)% | |||||||||
| Miami | 93.0% | 92.9% | 0.1% | 92.9% | 93.6% | (0.7)% | |||||||||
| Atlanta | 93.0% | 93.2% | (0.2)% | 93.2% | 93.5% | (0.3)% | |||||||||
| Chicago | 92.1% | 90.3% | 2.0% | 90.3% | 91.2% | (1.0)% | |||||||||
| Dallas-Ft. Worth | 92.0% | 91.4% | 0.7% | 91.4% | 92.9% | (1.6)% | |||||||||
| Orlando-Daytona | 94.1% | 94.5% | (0.4)% | 94.5% | 95.0% | (0.5)% | |||||||||
| Houston | 89.7% | 90.9% | (1.3)% | 90.9% | 91.8% | (1.0)% | |||||||||
| Philadelphia | 95.3% | 94.9% | 0.4% | 94.9% | 94.6% | 0.3% | |||||||||
| Tampa | 92.6% | 92.9% | (0.3)% | 92.9% | 94.0% | (1.2)% | |||||||||
| West Palm Beach | 93.9% | 93.8% | 0.1% | 93.8% | 94.7% | (1.0)% | |||||||||
| Portland | 94.0% | 94.0% | 0.0% | 94.0% | 95.3% | (1.4)% | |||||||||
| All other markets | 93.5% | 92.9% | 0.6% | 92.9% | 93.4% | (0.5)% | |||||||||
| Total weighted average | |||||||||||||||
| square foot occupancy | 93.5% | 93.1% | 0.4% | 93.1% | 93.7% | (0.6)% | |||||||||
| Realized annual rent per | |||||||||||||||
| occupied square foot: | |||||||||||||||
| Los Angeles | $ | 26.11 | $ | 25.47 | 2.5% | $ | 25.47 | $ | 24.46 | 4.1% | |||||
| San Francisco | 26.73 | 26.14 | 2.3% | 26.14 | 25.29 | 3.4% | |||||||||
| New York | 26.05 | 25.51 | 2.1% | 25.51 | 24.88 | 2.5% | |||||||||
| Washington DC | 21.51 | 21.27 | 1.1% | 21.27 | 21.06 | 1.0% | |||||||||
| Seattle-Tacoma | 20.20 | 19.94 | 1.3% | 19.94 | 19.31 | 3.3% | |||||||||
| Miami | 20.31 | 20.63 | (1.6)% | 20.63 | 20.35 | 1.4% | |||||||||
| Atlanta | 13.44 | 13.15 | 2.2% | 13.15 | 12.85 | 2.3% | |||||||||
| Chicago | 15.17 | 15.33 | (1.0)% | 15.33 | 15.56 | (1.5)% | |||||||||
| Dallas-Ft. Worth | 13.63 | 13.88 | (1.8)% | 13.88 | 14.05 | (1.2)% | |||||||||
| Orlando-Daytona | 14.12 | 13.90 | 1.6% | 13.90 | 13.31 | 4.4% | |||||||||
| Houston | 13.52 | 14.01 | (3.5)% | 14.01 | 13.79 | 1.6% | |||||||||
| Philadelphia | 16.65 | 16.04 | 3.8% | 16.04 | 15.62 | 2.7% | |||||||||
| Tampa | 14.12 | 14.13 | (0.1)% | 14.13 | 13.78 | 2.5% | |||||||||
| West Palm Beach | 18.50 | 18.37 | 0.7% | 18.37 | 17.91 | 2.6% | |||||||||
| Portland | 18.52 | 18.71 | (1.0)% | 18.71 | 18.64 | 0.4% | |||||||||
| All other markets | 14.20 | 14.03 | 1.2% | 14.03 | 13.80 | 1.7% | |||||||||
| Total realized rent per | |||||||||||||||
| occupied square foot | $ | 17.60 | $ | 17.41 | 1.1% | $ | 17.41 | $ | 17.05 | 2.1% |
| Same Store Facilities Operating Trends by Market (Continued) | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||
| REVPAF: | |||||||||||||||
| Los Angeles | $ | 24.87 | $ | 24.20 | 2.8% | $ | 24.20 | $ | 23.36 | 3.6% | |||||
| San Francisco | 25.20 | 24.67 | 2.1% | 24.67 | 24.07 | 2.5% | |||||||||
| New York | 24.50 | 24.05 | 1.9% | 24.05 | 23.45 | 2.6% | |||||||||
| Washington DC | 20.09 | 19.65 | 2.2% | 19.65 | 19.52 | 0.7% | |||||||||
| Seattle-Tacoma | 18.81 | 18.57 | 1.3% | 18.57 | 18.21 | 2.0% | |||||||||
| Miami | 18.88 | 19.16 | (1.5)% | 19.16 | 19.05 | 0.6% | |||||||||
| Atlanta | 12.50 | 12.25 | 2.0% | 12.25 | 12.01 | 2.0% | |||||||||
| Chicago | 13.97 | 13.84 | 0.9% | 13.84 | 14.19 | (2.5)% | |||||||||
| Dallas-Ft. Worth | 12.54 | 12.68 | (1.1)% | 12.68 | 13.05 | (2.8)% | |||||||||
| Orlando-Daytona | 13.29 | 13.14 | 1.1% | 13.14 | 12.64 | 4.0% | |||||||||
| Houston | 12.13 | 12.73 | (4.7)% | 12.73 | 12.66 | 0.6% | |||||||||
| Philadelphia | 15.86 | 15.22 | 4.2% | 15.22 | 14.77 | 3.0% | |||||||||
| Tampa | 13.08 | 13.13 | (0.4)% | 13.13 | 12.96 | 1.3% | |||||||||
| West Palm Beach | 17.37 | 17.23 | 0.8% | 17.23 | 16.96 | 1.6% | |||||||||
| Portland | 17.40 | 17.58 | (1.0)% | 17.58 | 17.75 | (1.0)% | |||||||||
| All other markets | 13.28 | 13.03 | 1.9% | 13.03 | 12.88 | 1.2% | |||||||||
| Total REVPAF | $ | 16.45 | $ | 16.21 | 1.5% | $ | 16.21 | $ | 15.97 | 1.5% |
We believe that our geographic diversification and scale across substantially all major metropolitan markets in the U.S. provides some insulation from localized economic effects and enhances 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.
Acquired Facilities
The Acquired Facilities represent 103 facilities that we acquired in 2017, 2018, and 2019. As a result of the stabilization process and timing of when these facilities were acquired, year-over-year changes can be significant.
The following table summarizes operating data with respect to the Acquired Facilities:
| ACQUIRED FACILITIES | |||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||
| 2019 | 2018 | Change (a) | 2018 | 2017 | Change (a) | ||||||||||||
| ($ amounts in thousands, except for per square foot amounts) | |||||||||||||||||
| Revenues (b): | |||||||||||||||||
| 2017 Acquisitions | $ | 30,473 | $ | 28,704 | $ | 1,769 | $ | 28,704 | $ | 5,577 | $ | 23,127 | |||||
| 2018 Acquisitions | 16,029 | 5,167 | 10,862 | 5,167 | - | 5,167 | |||||||||||
| 2019 Acquisitions | 12,704 | - | 12,704 | - | - | - | |||||||||||
| Total revenues | 59,206 | 33,871 | 25,335 | 33,871 | 5,577 | 28,294 | |||||||||||
| Cost of operations (b): | |||||||||||||||||
| 2017 Acquisitions | 10,203 | 9,669 | 534 | 9,669 | 2,006 | 7,663 | |||||||||||
| 2018 Acquisitions | 7,197 | 2,141 | 5,056 | 2,141 | - | 2,141 | |||||||||||
| 2019 Acquisitions | 5,072 | - | 5,072 | - | - | - | |||||||||||
| Total cost of operations | 22,472 | 11,810 | 10,662 | 11,810 | 2,006 | 9,804 | |||||||||||
| Net operating income: | |||||||||||||||||
| 2017 Acquisitions | 20,270 | 19,035 | 1,235 | 19,035 | 3,571 | 15,464 | |||||||||||
| 2018 Acquisitions | 8,832 | 3,026 | 5,806 | 3,026 | - | 3,026 | |||||||||||
| 2019 Acquisitions | 7,632 | - | 7,632 | - | - | - | |||||||||||
| Net operating income | 36,734 | 22,061 | 14,673 | 22,061 | 3,571 | 18,490 | |||||||||||
| Depreciation and | |||||||||||||||||
| amortization expense | (34,980) | (23,809) | (11,171) | (23,809) | (5,668) | (18,141) | |||||||||||
| Net income (loss) | $ | 1,754 | $ | (1,748) | $ | 3,502 | $ | (1,748) | $ | (2,097) | $ | 349 | |||||
| At December 31: | |||||||||||||||||
| Square foot occupancy: | |||||||||||||||||
| 2017 Acquisitions | 89.4% | 90.9% | (1.7)% | 90.9% | 87.2% | 4.2% | |||||||||||
| 2018 Acquisitions | 82.6% | 79.6% | 3.8% | 79.6% | - | - | |||||||||||
| 2019 Acquisitions | 73.6% | - | - | - | - | - | |||||||||||
| 80.7% | 85.9% | (6.1)% | 85.9% | 87.2% | (1.5)% | ||||||||||||
| Annual contract rent per | |||||||||||||||||
| occupied square foot: | |||||||||||||||||
| 2017 Acquisitions | $ | 15.40 | $ | 14.81 | 4.0% | 14.81 | 14.60 | 1.4% | |||||||||
| 2018 Acquisitions | 11.98 | 11.10 | 7.9% | 11.10 | - | - | |||||||||||
| 2019 Acquisitions | 12.27 | - | - | - | - | - | |||||||||||
| $ | 13.30 | $ | 13.31 | (0.1)% | $ | 13.31 | $ | 14.60 | (8.8)% | ||||||||
| Number of facilities: | |||||||||||||||||
| 2017 Acquisitions | 34 | 34 | - | 34 | 34 | - | |||||||||||
| 2018 Acquisitions | 25 | 25 | - | 25 | - | 25 | |||||||||||
| 2019 Acquisitions | 44 | - | 44 | - | - | - | |||||||||||
| 103 | 59 | 44 | 59 | 34 | 25 | ||||||||||||
| Net rentable square feet (in thousands): | |||||||||||||||||
| 2017 Acquisitions | 2,206 | 2,114 | 92 | 2,114 | 2,114 | - | |||||||||||
| 2018 Acquisitions | 1,629 | 1,629 | - | 1,629 | - | 1,629 | |||||||||||
| 2019 Acquisitions | 3,133 | - | 3,133 | - | - | - | |||||||||||
| 6,968 | 3,743 | 3,225 | 3,743 | 2,114 | 1,629 |
| ACQUIRED FACILITIES (Continued) | As of December 31, 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Costs to acquire (in thousands): | |||||||||||||||||
| 2017 Acquisitions (c) | $ | 291,329 | |||||||||||||||
| 2018 Acquisitions | 181,020 | ||||||||||||||||
| 2019 Acquisitions | 429,850 | ||||||||||||||||
| $ | 902,199 |
(a)Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.
(b)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.
(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.
We believe that our economies of scale in marketing and operations 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.
The facilities included above under “2017 acquisitions,” “2018 acquisitions,” and “2019 acquisitions” have an aggregate of approximately 7.0 million net rentable square feet, including 0.9 million in Texas, 0.8 million in Virginia, 0.6 million in each of Florida and Minnesota, 0.4 million in each of Georgia, Indiana, North Carolina and South Carolina, 0.3 million in each of Nebraska and Ohio, 0.2 million in each of California, Kentucky, Massachusetts, New York, Tennessee and Washington, and 0.7 million in other states.
For 2019, the weighted average annualized yield on cost, based upon net operating income, for (i) the 22 facilities acquired in 2017 from third parties was 6.1%, (ii) the 12 stabilized facilities owned by a legacy institutional partnership, with respect to the 74.25% interest we acquired was 6.1%, and (iii) the 25 properties acquired in 2018 was 4.9%. The yield for the facilities acquired in 2019 is not meaningful due to our limited ownership period.
Subsequent to December 31, 2019, we acquired or were under contract to acquire 14 self-storage facilities (four in Ohio, three in California, two each in New York and Tennessee and one each in Indiana, Massachusetts, and Nebraska) with 1.1 million net rentable square feet, for $245.3 million.
Analysis of Depreciation and Amortization of Acquired Facilities
Depreciation and amortization with respect to the Acquired Facilities totaled $35.0 million, $23.8 million and $5.7 million for 2019, 2018, and 2017, respectively. These amounts include (i) depreciation of the acquired buildings, which is recorded generally on a straight line basis over a 25 year period, 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 the Acquired Facilities owned at December 31, 2019, depreciation of buildings and amortization of tenant intangibles is expected to aggregate approximately $36.2 million in the year ending December 31, 2020. There will be additional depreciation and amortization of tenant intangibles with respect to new buildings that are acquired in 2020.
Developed and Expanded Facilities
The developed and expanded facilities include 81 facilities that were developed on new sites since January 1, 2013, and 60 facilities subject to expansion of their net rentable square footage. Of these expansions, 49 are completed at December 31, 2019 and 11 are currently in process at December 31, 2019.
The following table summarizes operating data with respect to the Developed and Expanded Facilities:
| DEVELOPED AND EXPANDED | |||||||||||||||||
| FACILITIES | Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2019 | 2018 | Change (a) | 2018 | 2017 | Change (a) | ||||||||||||
| ($ amounts in thousands, except for per square foot amounts) | |||||||||||||||||
| Revenues (b): | |||||||||||||||||
| Developed in 2013 - 2015 | $ | 28,331 | $ | 26,725 | $ | 1,606 | $ | 26,725 | $ | 24,910 | $ | 1,815 | |||||
| Developed in 2016 and 2017 | 43,358 | 34,233 | 9,125 | 34,233 | 17,391 | 16,842 | |||||||||||
| Developed in 2018 and 2019 | 15,230 | 3,392 | 11,838 | 3,392 | - | 3,392 | |||||||||||
| Completed Expansions | 49,214 | 41,879 | 7,335 | 41,879 | 41,773 | 106 | |||||||||||
| Expansions in process | 14,438 | 15,465 | (1,027) | 15,465 | 15,790 | (325) | |||||||||||
| Total revenues | 150,571 | 121,694 | 28,877 | 121,694 | 99,864 | 21,830 | |||||||||||
| Cost of operations (b): | |||||||||||||||||
| Developed in 2013 - 2015 | 8,284 | 8,031 | 253 | 8,031 | 8,093 | (62) | |||||||||||
| Developed in 2016 and 2017 | 18,188 | 17,984 | 204 | 17,984 | 11,433 | 6,551 | |||||||||||
| Developed in 2018 and 2019 | 11,195 | 4,136 | 7,059 | 4,136 | - | 4,136 | |||||||||||
| Completed Expansions | 21,579 | 13,756 | 7,823 | 13,756 | 13,427 | 329 | |||||||||||
| Expansions in process | 4,114 | 3,963 | 151 | 3,963 | 3,857 | 106 | |||||||||||
| Total cost of operations | 63,360 | 47,870 | 15,490 | 47,870 | 36,810 | 11,060 | |||||||||||
| Net operating income: | |||||||||||||||||
| Developed in 2013 - 2015 | 20,047 | 18,694 | 1,353 | 18,694 | 16,817 | 1,877 | |||||||||||
| Developed in 2016 and 2017 | 25,170 | 16,249 | 8,921 | 16,249 | 5,958 | 10,291 | |||||||||||
| Developed in 2018 and 2019 | 4,035 | (744) | 4,779 | (744) | - | (744) | |||||||||||
| Completed Expansions | 27,635 | 28,123 | (488) | 28,123 | 28,346 | (223) | |||||||||||
| Expansions in process | 10,324 | 11,502 | (1,178) | 11,502 | 11,933 | (431) | |||||||||||
| Net operating income | 87,211 | 73,824 | 13,387 | 73,824 | 63,054 | 10,770 | |||||||||||
| Depreciation and | |||||||||||||||||
| amortization expense | (54,065) | (45,851) | (8,214) | (45,851) | (36,848) | (9,003) | |||||||||||
| Net income | $ | 33,146 | $ | 27,973 | $ | 5,173 | $ | 27,973 | $ | 26,206 | $ | 1,767 | |||||
| At December 31: | |||||||||||||||||
| Square foot occupancy: | |||||||||||||||||
| Developed in 2013 - 2015 | 90.9% | 89.9% | 1.1% | 89.9% | 88.9% | 1.1% | |||||||||||
| Developed in 2016 and 2017 | 78.4% | 73.5% | 6.7% | 73.5% | 52.3% | 40.5% | |||||||||||
| Developed in 2018 and 2019 | 56.7% | 42.1% | 34.7% | 42.1% | - | - | |||||||||||
| Completed Expansions | 62.5% | 67.0% | (6.7)% | 67.0% | 66.4% | 0.9% | |||||||||||
| Expansions in process | 83.1% | 88.1% | (5.7)% | 88.1% | 88.4% | (0.3)% | |||||||||||
| 69.7% | 69.9% | (0.3)% | 69.9% | 66.4% | 5.3% | ||||||||||||
| Annual contract rent per occupied square foot: | |||||||||||||||||
| Developed in 2013 - 2015 | $ | 16.56 | $ | 15.65 | 5.8% | $ | 15.65 | $ | 14.94 | 4.8% | |||||||
| Developed in 2016 and 2017 | 13.70 | 12.28 | 11.6% | 12.28 | 12.11 | 1.4% | |||||||||||
| Developed in 2018 and 2019 | 12.03 | 10.36 | 16.1% | 10.36 | - | - | |||||||||||
| Completed Expansions | 13.00 | 15.40 | (15.6)% | 15.40 | 15.73 | (2.1)% | |||||||||||
| Expansions in process | 21.92 | 22.25 | (1.5)% | 22.25 | 21.99 | 1.2% | |||||||||||
| $ | 14.06 | $ | 14.41 | (2.4)% | $ | 14.41 | $ | 15.03 | (4.1)% |
| DEVELOPED AND EXPANDED | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FACILITIES (Continued) | Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2019 | 2018 | Change (a) | 2018 | 2017 | Change (a) | ||||||||||||
| (Amounts in thousands, except for number of facilities) | |||||||||||||||||
| Number of facilities: | |||||||||||||||||
| Developed in 2013 - 2015 | 20 | 20 | - | 20 | 20 | - | |||||||||||
| Developed in 2016 and 2017 | 32 | 32 | - | 32 | 32 | - | |||||||||||
| Developed in 2018 and 2019 | 29 | 18 | 11 | 18 | - | 18 | |||||||||||
| Completed Expansions | 49 | 49 | - | 49 | 49 | - | |||||||||||
| Expansions in process | 11 | 11 | - | 11 | 11 | - | |||||||||||
| 141 | 130 | 11 | 130 | 112 | 18 | ||||||||||||
| Net rentable square feet (c): | |||||||||||||||||
| Developed in 2013 - 2015 | 1,877 | 1,877 | - | 1,877 | 1,877 | - | |||||||||||
| Developed in 2016 and 2017 | 4,181 | 4,181 | - | 4,181 | 4,181 | - | |||||||||||
| Developed in 2018 and 2019 | 3,126 | 1,954 | 1,172 | 1,954 | - | 1,954 | |||||||||||
| Completed Expansions | 6,621 | 4,047 | 2,574 | 4,047 | 3,774 | 273 | |||||||||||
| Expansions in process | 728 | 748 | (20) | 748 | 776 | (28) | |||||||||||
| 16,533 | 12,807 | 3,726 | 12,807 | 10,608 | 2,199 | ||||||||||||
| As of December 31, 2019 | |||||||||||||||||
| Costs to develop: | |||||||||||||||||
| Developed in 2013 - 2015 | $ | 188,049 | |||||||||||||||
| Developed in 2016 and 2017 | 497,456 | ||||||||||||||||
| Developed in 2018 and 2019 | 412,574 | ||||||||||||||||
| Completed Expansions (d) | 381,940 | ||||||||||||||||
| Expansions in process (e) | - | ||||||||||||||||
| $ | 1,480,019 |
(a)Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.
(b)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.
(c)The facilities included above have an aggregate of approximately 16.5 million net rentable square feet at December 31, 2019, including 6.5 million in Texas, 2.4 million in California, 1.7 million in Florida, 1.5 million in Colorado, 0.9 million in Minnesota, 0.7 million in Washington, 0.6 million in North Carolina, 0.4 million in Arizona, 0.3 million each in Georgia and Michigan, and 1.2 million in other states.
(d)These amounts only include the direct cost incurred to expand and renovate these facilities, and do not include (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.
(e)We have a development pipeline to add 3.1 million net rentable square feet by expanding existing facilities at an aggregate cost of approximately $410.5 million, not including (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.
It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Physical occupancy can be achieved as early as two to three years following completion of the development or expansion, through offering lower rental rates during fill-up. As a result, even after achieving
high occupancy, there can still be a period of elevated revenue growth as the tenant base matures and higher rental rates are achieved. Our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses in general and administrative expense. Despite this short-term dilution, we believe that our development and expansion activities generate favorable risk-adjusted returns over the long run.
Newly Developed Facilities
The facilities included under “Developed in 2013-2015” were opened in 2013, 2014, and 2015, and we believe they have reached stabilization at December 31, 2019. The annualized yield on cost, based upon the net operating income for 2019 was 10.7%.
The facilities included under “Developed in 2016 and 2017” and “Developed in 2018 and 2019” are not stabilized with respect to occupancy or revenues at December 31, 2019, and we expect continued growth in these facilities throughout 2020 and beyond as they continue to stabilize. The annualized yields that may be achieved on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property such as consumer demand and the level of new and existing supply. Accordingly, the 10.7% yield achieved on the facilities under “Developed in 2013 - 2015” may not be indicative of the yield on cost to be achieved on these facilities.
We have 12 additional newly developed facilities in process, which will have a total of 1.3 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $208.7 million. We expect these facilities to open over the next 18 months.
Expansions of Existing Facilities
The expansion of an existing facility involves the construction of new space on an existing facility, either on existing unused land or through the demolition of existing buildings in order to facilitate densification. The construction costs for an expanded facility may include, in addition to adding space, adding amenities such as climate control to existing space, improving the visual appeal of the facility, and to a much lesser extent, the replacement of existing doors, roofs, and HVAC.
The return profile on the expansion of existing facilities differs from a new facility, due to a lack of land cost, and there can be less cash flow risk because we have more direct knowledge of the local demand for space on the site as compared to a new facility. However, expansions involve the demolition of existing revenue-generating space with the loss of the related revenues during the construction and fill-up period.
The facilities under “completed expansions” represent those facilities where the expansions have been completed at December 31, 2019. We incurred a total of $381.9 million in direct cost to expand these facilities, demolished a total of 1.0 million net rentable square feet of storage space, and built a total of 4.3 million net rentable square feet of new storage space.
The facilities under “expansions in process” represent those facilities where development is in process at December 31, 2019. We have a pipeline to add a total of 3.1 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of $410.5 million. We have already demolished 0.1 million net rentable square feet of space in connection with our expansion projects, and expect to demolish an additional 0.4 million net rentable square feet.
Analysis of Depreciation and Amortization of Developed and Expanded Facilities
Depreciation and amortization with respect to the Developed and Expanded Facilities totaled $54.1 million, $45.9 million and $36.8 million for 2019, 2018, and 2017, respectively. These amounts represent depreciation of the developed buildings and, in the case of the expanded facilities, the legacy depreciation on the existing buildings. With respect to the Developed and Expanded Facilities completed at December 31, 2019, depreciation of buildings is
expected to aggregate approximately $62.1 million in 2020. There will be additional depreciation of new buildings that are developed or expanded in 2020.
Other non-same store facilities
The “Other non-same store facilities” represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized since January 1, 2017, due primarily to casualty events such as hurricanes, floods, and fires, as well as facilities acquired from third parties prior to January 1, 2017 that were recently developed or expanded by the previous owner.
The Other non-same store facilities have an aggregate of 6.1 million net rentable square feet, including 1.1 million in Texas, 0.8 million in Oklahoma, 0.7 million in California, 0.6 million in each of Florida, Ohio and South Carolina, 0.4 million in each of New York and Washington, 0.3 million in Tennessee, and 0.6 million in other states.
The net operating income for these facilities increased from $53.0 million in 2017 to $56.0 million in 2018 and decreased from $56.0 million in 2018 to $55.4 million in 2019. During 2019, 2018, and 2017, the average occupancy for these facilities totaled 88.8%, 88.1%, and 87.7%, respectively, and the realized rent per occupied square feet totaled $14.20, $14.39, and $14.20, respectively.
Over the longer term, we expect the growth in operations of these facilities to be similar to that of our Same Store facilities. However, in the short run, year over year comparisons will vary due to the impact of the underlying events which resulted in these facilities being classified as non-same store.
Depreciation and amortization with respect to the other non-same store facilities totaled $34.1 million, $31.1 million and $29.7 million for 2019, 2018, and 2017, respectively. We expect depreciation for these facilities to in 2020 to approximate the depreciation incurred in 2019.
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, | ||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||
| (Amounts in thousands) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Tenant reinsurance premiums | $ | 131,913 | $ | 125,575 | $ | 6,338 | $ | 125,575 | $ | 122,852 | $ | 2,723 | |||||
| Merchandise | 30,358 | 31,098 | (740) | 31,098 | 33,243 | (2,145) | |||||||||||
| Total revenues | 162,271 | 156,673 | 5,598 | 156,673 | 156,095 | 578 | |||||||||||
| Cost of Operations: | |||||||||||||||||
| Tenant reinsurance | 26,202 | 25,646 | 556 | 25,646 | 30,554 | (4,908) | |||||||||||
| Merchandise | 18,002 | 18,345 | (343) | 18,345 | 19,791 | (1,446) | |||||||||||
| Total cost of operations | 44,204 | 43,991 | 213 | 43,991 | 50,345 | (6,354) | |||||||||||
| Net operating income | |||||||||||||||||
| Tenant reinsurance | 105,711 | 99,929 | 5,782 | 99,929 | 92,298 | 7,631 | |||||||||||
| Merchandise | 12,356 | 12,753 | (397) | 12,753 | 13,452 | (699) | |||||||||||
| Total net operating income | $ | 118,067 | $ | 112,682 | $ | 5,385 | $ | 112,682 | $ | 105,750 | $ | 6,932 |
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 $2.7 million or 2.2% from $122.9 million in 2017 to $125.6 million in 2018, and $6.3 million or 5.0% from $125.6 million in 2018 to $131.9 million in 2019. These increases are due primarily to an increase in our tenant base with respect to acquired, newly developed, and expanded facilities. Tenant reinsurance revenue with respect to the Same Store Facilities decreased $0.2 million or 0.2% from $109.3 million in 2017 to $109.1 million in 2018, and increased $2.0 million or 1.8% from $109.1 million in 2018 to $111.1 million in 2019.
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 $26.2 million in 2019, $25.6 million in 2018, and $30.6 million in 2017. Amounts 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 2020.
Equity in earnings of unconsolidated real estate entities
At December 31, 2019, we have equity investments in PSB and Shurgard 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, | |||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||||
| Equity in earnings: | ||||||||||||||||||
| PSB | $ | 54,090 | $ | 89,362 | $ | (35,272) | $ | 89,362 | $ | 46,544 | $ | 42,818 | ||||||
| Shurgard | 15,457 | 14,133 | 1,324 | 14,133 | 25,948 | (11,815) | ||||||||||||
| Legacy Institutional | ||||||||||||||||||
| Partnership (a) | - | - | - | - | 3,163 | (3,163) | ||||||||||||
| Total equity in earnings | $ | 69,547 | $ | 103,495 | $ | (33,948) | $ | 103,495 | $ | 75,655 | $ | 27,840 |
(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: Throughout all periods presented, we owned 7,158,354 shares of PS Business Parks, Inc. (“PSB”) common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB, representing an aggregate approximately 42% common equity interest. 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, 2019, PSB wholly-owned approximately 27.6 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 $54.1 million, $89.4 million, and $46.5 million for 2019, 2018, and 2017, respectively. Included in these amounts are i) our equity share of gains on sale of real estate totaling $4.4 million, $37.7 million and $3.1 million for 2019, 2018, and 2017, respectively, and ii) our equity share of preferred redemption charges totaling $4.6 million and $4.5 million for 2019 and 2017, respectively.
Equity in earnings from PSB, excluding the aforementioned real estate gains and preferred redemption charges, increased $2.6 million in 2019 as compared to 2018 and $3.7 million in 2018 as compared to 2017 due primarily to improved property operations. See Note 4 to our December 31, 2019 financial statements for further discussion regarding PSB. PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com. Information on this website is not incorporated by reference herein and is not a part of this Annual Report on Form 10-K.
Investment in Shurgard: Throughout all periods presented, we effectively owned, directly and indirectly 31.3 million Shurgard common shares. On October 15, 2018, Shurgard completed an initial global offering (the “Offering”), issuing 25.0 million of its common shares to third parties at a price of €23 per share (€575 million in gross proceeds), reducing our ownership interest from 49% to approximately 35%. Following the Offering, Shurgard’s shares trade on Euronext Brussels under the “SHUR” symbol. 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.
At December 31, 2019, Shurgard owned 234 self-storage facilities with approximately 13 million net rentable square feet. Shurgard pays us license fees for use of the “Shurgard” trademark, as described in more detail in Note 4 to our December 31, 2019 financial statements.
Shurgard paid €0.67 per share in dividends to its shareholders during 2019, of which our share totaled $23.1 million. During 2018, Shurgard paid a cash dividend totaling $296.7 million to its shareholders at the time, of which our 49% equity share was $145.4 million.
In 2019, 2018, and 2017, Shurgard acquired three facilities, eight facilities, and one facility, respectively, for an aggregate cost of $17.6 million, $114.5 million, and $15.5 million, respectively. In each of 2019, 2018, and 2017, Shurgard opened two newly developed facilities at an aggregate cost totaling $22.2 million, $19.6 million, and $28.8 million, respectively.
Our equity in earnings from Shurgard totaled $15.5 million, $14.1 million, and $25.9 million for 2019, 2018, and 2017, respectively. The increase of $1.4 million from 2018 to 2019 is due to (i) a $10.1 million decrease in our equity share of depreciation expense, (ii) a $5.2 million decrease in our equity share of costs due to a casualty loss occurring in 2018 and the costs of the Offering, offset partially by (iii) a reduced average equity ownership interest during 2019 due to the Offering as well as approximately $220 million in uninvested offering proceeds at December 31, 2019, and (iv) a 5.2% reduction in average exchange rates of the U.S. Dollar to the Euro. The $11.8 million decrease in 2018 as compared to 2017 is due primarily to a $6.9 million increase in our equity share of depreciation expense as well as the aforementioned casualty loss in 2018 and costs of the Offering.
Our future earnings from Shurgard will also be affected by (i) the operating results of its existing facilities, (ii) the level of development and acquisition activities, (iii) the income tax rates applicable in the various European jurisdictions in which Shurgard operates, and (iv) the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard conducts its business (principally the Euro). Shurgard expects to distribute a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate. The level of equity income in the near term will also depend on the portion of the proceeds of the Offering which remain uninvested.
Shurgard’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. Information on these websites is not incorporated by reference herein and is not a part of this Annual Report on Form 10-K.
For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately 1.122 U.S. Dollars per Euro at December 31, 2019 (1.144 at December 31, 2018), and average exchange rates of 1.120 for 2019, 1.181 for 2018, and 1.129 for 2017.
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, | |||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||||
| Share-based compensation expense | $ | 26,612 | $ | 71,031 | $ | (44,419) | $ | 71,031 | $ | 37,548 | $ | 33,483 | ||||||
| Costs of senior executives | 2,309 | 4,822 | (2,513) | 4,822 | 5,872 | (1,050) | ||||||||||||
| Development and acquisition costs | 6,850 | 5,441 | 1,409 | 5,441 | 8,193 | (2,752) | ||||||||||||
| Tax compliance costs and taxes paid | 5,081 | 5,438 | (357) | 5,438 | 4,795 | 643 | ||||||||||||
| Legal costs | 7,692 | 8,234 | (542) | 8,234 | 6,995 | 1,239 | ||||||||||||
| Public company costs | 5,007 | 4,712 | 295 | 4,712 | 4,145 | 567 | ||||||||||||
| Other costs | 18,432 | 19,042 | (610) | 19,042 | 15,334 | 3,708 | ||||||||||||
| Total | $ | 71,983 | $ | 118,720 | $ | (46,737) | $ | 118,720 | $ | 82,882 | $ | 35,838 |
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 our CEO and CFO at the time were retiring from their executive roles at the end of 2018 and would serve only as Trustees of the Company. Accordingly, all remaining share-based compensation expense for these two executives was amortized through the end of 2018, resulting in approximately $30.7 million in incremental share-based compensation expense for 2018. The remaining decreases in 2019 are due primarily to reductions in ongoing share-based compensation awards. See Note 10 to our December 31, 2019 financial statements for further information on our share-based compensation.
In early 2020, our share-based compensation plans were revised to allow vesting (“Retirement Vesting”), rather than forfeiture, of all unvested share-based grants upon termination of service, for employees that meet certain requirements, such as minimum age, minimum years of service, notice, and who cooperate as needed in a transition plan. This change is expected to increase share-based compensation expense in 2020, due primarily to accelerated amortization of share-based grants that are expected to be eligible for Retirement Vesting at an earlier date than the original vesting date.
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 $12.0 million, $12.2 million, and $9.4 million for 2019, 2018, and 2017, 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 2020.
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 include nonrecurring and variable items, the level of which depend upon corporate activities and initiatives and, as a result, such costs are not predictable.
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, as well as sundry other income items that are received from time to time in varying amounts. Excluding amounts attributable to the aggregate of our commercial operations and property management operations totaling $10.7 million, $11.8 million, and $10.9 million in 2019, 2018, and 2017, respectively, interest and other income increased in 2019 due primarily to increased levels of uninvested cash balances and increased in 2018
due primarily to increased average interest rates. We do not expect any significant changes in income from commercial and property management operations in 2020. The level of other interest and income items in 2020 will be dependent upon the level of cash balances we retain, interest rates, and the level of sundry other income items.
Interest expense: For 2019, 2018 and 2017, we incurred $49.6 million, $37.3 million, and $17.1 million, respectively, of interest on our outstanding debt. In determining interest expense, these amounts were offset by capitalized interest of $3.9 million, $4.8 million and $4.4 million during 2019, 2018, and 2017, respectively, associated with our development activities. The increase in 2019, 2018, and 2017 is due to the issuance of debt. At December 31, 2019, we had $1.9 billion of debt outstanding, with an average interest rate of approximately 2.9%. On January 24, 2020, we issued, in a public offering, €500 million ($551.6 million) aggregate principal amount of senior notes bearing interest at an annual rate of 0.875% and maturing on January 24, 2032.
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 2019, we recorded a foreign currency translation gain of $7.8 million representing the change in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates (gain of $18.1 million and loss of $50.0 million for 2018 and 2017, respectively). The Euro was translated at exchange rates of approximately 1.122 U.S. Dollars per Euro at December 31, 2019, 1.144 at December 31, 2018 and 1.198 at December 31, 2017. 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 (which includes our aforementioned January 24, 2020 public offering of €500 million of senior notes).
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 2019, 2018 and 2017, we recorded gains on real estate investment sales totaling $0.3 million, $37.9 million and $1.4 million, respectively. On October 18, 2018, we sold our property in West London to Shurgard 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 Public Offering: In connection with Shurgard’s Offering of its common shares to the public, our equity interest in Shurgard 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.
Net Income Allocable to Preferred Shareholders: Net income allocable to preferred shareholders based upon distributions totaled $210.2 million, $216.3 million, and $236.5 million in 2019, 2018, and 2017, respectively. These decreases are due primarily to lower average coupon rates due to redemptions of preferred shares with the proceeds from the issuance of new series with lower market coupon rates. We also allocated $32.7 million and $29.3 million of income from our common shareholders to the holders of our preferred shares in 2019 and 2017, respectively, (none in 2018) in connection with the redemption of our preferred shares. Based upon our preferred shares outstanding at December 31, 2019, our quarterly distribution to our preferred shareholders is expected to be approximately $52.0 million.
Liquidity and Capital Resources
While being a REIT allows us to minimize the payment of federal income tax expense, we are required to distribute 100% of our taxable income to our shareholders. This requirements limits cash flow from operations that can be retained and reinvested in the business, increasing our reliance upon raising capital to fund growth.
Because raising capital is important to our growth, we endeavor to maintain a strong financial profile 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 senior 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 enable us to effectively access both the public and private capital markets to raise capital.
While we must distribute our taxable income, we are nonetheless able to retain operating cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures. In recent years, we have retained approximately $200 million to $300 million per year in cash flow.
Capital needs in excess of retained cash flow are met with: (i) preferred equity, (ii) medium and long-term debt, and (iii) common equity. We select among these sources of capital based upon relative cost, availability, the desire for leverage, and considering potential constraints caused by certain features of capital sources, such as debt covenants. We view our line of credit, as well as short-term bank loans, as bridge financing.
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, 2019 and February 25, 2020, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $15.9 million of outstanding letters of credit which limits our borrowing capacity to $484.1 million. Our line of credit matures on April 19, 2024.
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, 2019, we expect capital resources over the next year of approximately $1.7 billion, which exceeds our currently identified capital needs of approximately $722.6 million. Our expected capital resources include: (i) $409.7 million of cash as of December 31, 2019, (ii) $484.1 million of available borrowing capacity on our revolving line of credit, (iii) $545.2 million in net proceeds from the public issuance of senior Euro-denominated notes, and (iv) approximately $200 million to $250 million of expected retained operating cash flow in the next year. 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 currently identified capital needs consist primarily of $245.3 million in property acquisitions currently under contract and $477.3 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 months. We have no substantial principal payments on debt until 2022. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential capital needs could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or mergers and acquisition activities such as a potential acquisition of National Storage REIT described in Note 15, “Subsequent Events” to our December 31, 2019 financial statements; however, there can be no assurance of any such activities transpiring in the near or longer term.
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, 2019, the principal outstanding on our debt totaled approximately $1.9 billion, consisting of $27.3 million of secured debt, $383.6 million of Euro-denominated unsecured debt and $1.5 billion of U.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts in thousands):
| 2020 | $ | 2,015 |
| 2021 | 1,871 | |
| 2022 | 502,584 | |
| 2023 | 19,219 | |
| 2024 | 112,280 | |
| Thereafter | 1,272,895 | |
| $ | 1,910,864 |
On January 24, 2020, we completed a public offering of €500 million ($551.6 million) aggregate principal amount of senior notes bearing interest at an annual rate of 0.875% and maturing on January 24, 2032.
The remaining maturities on our debt over at the next two years are nominal. Our debt is well-laddered, with material debt maturities at least 18 months apart, which moderates refinancing risk.
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 $192.5 million in 2019, and are expected to approximate $250 million in 2020. Our capital expenditures for 2019, and estimated capital expenditures for 2020 are expected to 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 and customer zone 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 $250 million in capital expenditures expected for 2020, as well as the $192.5 million incurred in 2019, represent a substantial increase from the amounts incurred of $139.4 million, $124.8 million and $86.0 million in 2018, 2017, and 2016, respectively. We expect continued elevated capital expenditures beyond 2020; however, the level and persistence of this elevation 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 21, 2020, our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $350 million, which will be paid at the end of March 2020. 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, 2019, to be approximately $208.0 million per year.
We estimate we will pay approximately $6.0 million per year in distributions to noncontrolling interests outstanding at December 31, 2019.
Real Estate Investment Activities: Subsequent to December 31, 2019, we acquired or were under contract to acquire (subject to customary closing conditions) 14 self-storage facilities for $245.3 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, 2019 we had development and expansion projects at a total cost of approximately $619.2 million. Costs incurred through December 31, 2019 were $141.9 million, with the remaining cost to complete of $477.3 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. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of February 25, 2020, we have the following series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; 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). See Note 8 to our December 31, 2019 financial statements for the redemption dates of our other series of preferred shares. 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 2019, we did not repurchase any of our common shares. From the inception of the repurchase program through February 25, 2020, 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, 2019 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||
| Interest and principal payments | ||||||||||||||||||||
| on debt (1) | $ | 2,265,819 | $ | 55,085 | $ | 54,839 | $ | 552,002 | $ | 59,724 | $ | 150,874 | $ | 1,393,295 | ||||||
| Leases and other commitments (2) | 77,210 | 4,290 | 4,336 | 3,737 | 3,515 | 3,527 | 57,805 | |||||||||||||
| Construction commitments (3) | 77,168 | 69,648 | 7,520 | - | - | - | - | |||||||||||||
| Total | $ | 2,420,197 | $ | 129,023 | $ | 66,695 | $ | 555,739 | $ | 63,239 | $ | 154,401 | $ | 1,451,100 |
(1)Represents contractual principal and interest payments. Amounts with respect to certain Euro-denominated debt are based upon exchange rates at December 31, 2019. See Note 6 to our December 31, 2019 financial statements for further information.
(2)Represents future contractual payments on land, equipment and office space under various leases and other commitments.
(3)Represents future expected payments for construction under contract at December 31, 2019.
We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2019 to be approximately $208.0 million per year. Dividends are paid when and if declared by our Board and accumulate if not paid.
Off-Balance Sheet Arrangements: At December 31, 2019, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.
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