Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements relating to our 2022 outlook and all underlying assumptions, our expected acquisition, disposition, development and redevelopment activity, supply and demand for our self-storage facilities, the consummation of PSB’s recently announced merger transaction and the related consequences to the Company, information relating to operating trends in our markets, expectations regarding operating expenses, including property tax changes, our strategic priorities, expectations with respect to financing activities, rental rates, cap rates and yields, leasing expectations, our credit ratings, and all other statements other than statements of historical fact. Such statements are based on management’s beliefs and assumptions made based on information currently available to management. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words “outlook,” “guidance,” “expects,” “believes,” “anticipates,” “should,” “estimates,” and similar expressions.

These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Factors and risks that may impact future results and performance include, but are not limited to, the risk that the PSB merger will not be consummated on the existing terms or at all, and those factors and risks described in Part 1, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2022 and in our other filings with the SEC including. These include changes in demand for our facilities, impacts of natural disasters, adverse changes in laws and regulations including governing property tax, evictions, rental rates, minimum wage levels and insurance, adverse economic effects from the COVID-19 pandemic, international military conflicts, or similar events impacting public health and/or economic activity, increases in the costs of our primary customer acquisition channels, unfavorable foreign currency rate fluctuations, changes in federal or state tax laws related to the taxation of REITs, and security breaches, including ransomware, or a failure of our networks, systems or technology.

These forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this cautionary statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether because of new information, new estimates, or other factors, events or circumstances after the date of these forward-looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenues, and expenses that are not readily apparent from other sources.

During the three months ended March 31, 2022, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Overview

Our self-storage operations generate most of our net income and our earnings growth is impacted by the levels of growth within our Same Store Facilities (as defined below) as well as within our Acquired Facilities and Newly Developed and Expanded Facilities (both as defined below). Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facility portfolio.

During the three months ended March 31, 2022, revenues generated by our Same Store Facilities increased by 15.8% ($102.1 million), as compared to the same period in 2021, while Same Store cost of operations increased by 3.6% ($6.5 million). Demand and operating trends have continued to improve, leading to increases in our self-storage rental rates and reduction in marketing expense while maintaining high levels of occupancy.

In addition to managing our existing facilities for organic growth, we have grown and plan to continue to grow through the acquisition and development of new facilities and expansion of our existing self-storage facilities. Since the beginning of 2020, we acquired a total of 304 facilities with 27.7 million net rentable square feet for $6.0 billion, and within our non-same store portfolio have developed and expanded self-storage space for a total cost of $1.4 billion, adding 16.6 million net rentable square feet. During the three months ended March 31, 2022, net operating income generated by our Acquired Facilities and Newly Developed and Expanded Facilities increased 241.8% ($67.9 million), as compared to the same period in 2021.

Our strong financial profile continues to enable effective access to capital markets in order to support our growth. During the three months ended March 31, 2022, we raised $250 million in a public offering of our preferred shares.

In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed facilities), we have embarked on our multi-year Property of Tomorrow program to (i) rebrand our properties with more pronounced, attractive, and clearly identifiable color schemes and signage, (ii) enhance the energy efficiency of our properties, and (iii) upgrade the configuration and layout of the offices and other customer zones to improve the customer experience. We expect to complete the program by the end of 2025. We expect to spend approximately $180 million over 2022 on this effort.

Refer to Note 15. Subsequent Events for information regarding PSB’s recently announced merger transaction, including with respect to anticipated cash proceeds, tax treatment and a related distribution to our common shareholders. The transaction is expected to close in the third quarter of 2022, subject to approval by PSB’s stockholders and other customary closing conditions. Following consummation of the transaction, our future operating results will no longer reflect contributions from our investment in PSB.

Results of Operations

Operating Results for the Three Months Ended March 31, 2022 and 2021

For the three months ended March 31, 2022, net income allocable to our common shareholders was $464.1 million or $2.63 per diluted common share, compared to $385.8 million or $2.21 per diluted common share in 2021, representing an increase of $78.3 million or $0.42 per diluted common share. The increase is due primarily to (i) a $167.3 million increase in self-storage net operating income and (ii) our $23.6 million equity share of gains on sale of real estate recorded by PS Business Parks, Inc. in 2022, partially offset by (iii) a $75.3 million increase in depreciation and amortization expense, (iv) a $17.9 million increase in interest expense, (v) a $10.0 million decrease in foreign currency exchange gains associated with our Euro denominated notes payable, and (vi) a $9.4 million gain on sale of real estate recognized in the three months ended March 31, 2021.

The $167.3 million increase in self-storage net operating income in the three months ended March 31, 2022 as compared to the same period in 2021 is a result of a $95.6 million increase in our Same Store Facilities and a $71.7 million increase in our non-same store facilities. Revenues for the Same Store Facilities increased 15.8% or $102.1 million in the three months ended March 31, 2022 as compared to 2021, due primarily to higher realized annual rent per available square foot. Cost of operations for the Same Store Facilities increased by 3.6% or $6.5 million in the three months ended March 31, 2022 as compared to 2021, due primarily to (i) a 4.8% ($3.2 million) increase in property tax expense, (ii) a 19.0% ($2.5 million) increase in repairs and maintenance expense, and (iii) a 17.5% ($2.3 million) increase in centralized management costs, partially offset by (iv) a 23.1% ($3.4 million) decrease in marketing expense. The increase in net operating income of $71.7 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2021 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 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 net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our consolidated statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the three months ended March 31, 2022, FFO was $3.83 per diluted common share as compared to $3.08 per diluted common share for the same period in 2021, representing an increase of 24.4%, or $0.75 per diluted common share.

We also present “Core FFO” and “Core FFO per share,” non-GAAP measures that represent FFO and FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) charges related to the redemption of preferred securities, and (iii) certain other non-cash and/or nonrecurring income or expense items primarily representing, with respect to the periods presented below, our equity share of the impact of severance of senior executive and casualties from our equity investees. We review Core FFO and Core FFO per share to evaluate our ongoing operating performance and we believe they are used by investors and REIT analysts in a similar manner. However, Core FFO and Core FFO per share are not substitutes for net income and net income per share. Because other REITs may not compute Core FFO or Core FFO per share in the same manner as we do, may not use the same terminology or may not present such measures, Core FFO and Core FFO per share may not be comparable among REITs.

The following table reconciles net income to FFO and Core FFO and reconciles diluted earnings per share to FFO per share and Core FFO per share:

			Three Months Ended March 31,
			2022						2021						Percentage Change
			(Amounts in thousands, except per share data)
Reconciliation of Net Income to FFO and Core FFO:
Net income allocable to common shareholders			$	464,124					$	385,810					20.3		%
Eliminate items excluded from FFO:
Depreciation and amortization			220,795						145,869
Depreciation from unconsolidated real estate investments			18,037						17,933
Depreciation allocated to noncontrolling interests and restricted share unitholders			(1,657)						(971)
Gains on sale of real estate investments, including our equity share from investments			(25,095)						(9,387)
FFO allocable to common shares			$	676,204					$	539,254					25.4		%
Eliminate the impact of items excluded from Core FFO, including our equity share from investments:
Foreign currency exchange gain			(35,377)						(45,385)
Other items			2,547						(349)
Core FFO allocable to common shares			$	643,374					$	493,520					30.4		%
Reconciliation of Diluted Earnings per Share to FFO per Share and Core FFO per Share:
Diluted Earnings per share			$	2.63					$	2.21					19.0		%
Eliminate amounts per share excluded from FFO:
Depreciation and amortization			1.35						0.93
Gains on sale of real estate investments, including our equity share from investments			(0.15)						(0.06)
FFO per share			$	3.83					$	3.08					24.4		%
Eliminate the per share impact of items excluded from Core FFO, including our equity share from investments:
Foreign currency exchange gain			(0.20)						(0.26)
Other items			0.02						—
Core FFO per share			$	3.65					$	2.82					29.4		%
Diluted weighted average common shares			176,336						174,840

Analysis of Net Income - Self-Storage Operations

Our self-storage operations are analyzed in four groups: (i) the 2,282 facilities that we have owned and operated on a stabilized basis since January 1, 2020 (the “Same Store Facilities”), (ii) 304 facilities we acquired since January 1, 2020 (the “Acquired Facilities”), (iii) 145 facilities that have been newly developed or expanded, or that will commence expansion by December 31, 2022 (the “Newly Developed and Expanded Facilities”), and (iv) 66 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2020 (the “Other Non-same Store Facilities”). See Note 13 to our March 31, 2022 consolidated financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.

Self-Storage Operations
Summary			Three Months Ended March 31,
			2022						2021						Percentage Change
			(Dollar amounts and square footage in thousands)
Revenues:
Same Store Facilities			$	749,270					$	647,200					15.8		%
Acquired Facilities			86,371						11,123						676.5		%
Newly Developed and Expanded Facilities			60,076						41,477						44.8		%
Other Non-Same Store Facilities			21,298						16,547						28.7		%
			917,015						716,347						28.0		%
Cost of operations:
Same Store Facilities			187,929						181,419						3.6		%
Acquired Facilities			31,031						7,177						332.4		%
Newly Developed and Expanded Facilities			19,417						17,335						12.0		%
Other Non-Same Store Facilities			7,117						6,174						15.3		%
			245,494						212,105						15.7		%
Net operating income (a):
Same Store Facilities			561,341						465,781						20.5		%
Acquired Facilities			55,340						3,946						1302.4		%
Newly Developed and Expanded Facilities			40,659						24,142						68.4		%
Other Non-Same Store Facilities			14,181						10,373						36.7		%
Total net operating income			671,521						504,242						33.2		%
Depreciation and amortization expense:
Same Store Facilities			(113,251)						(110,663)						2.3		%
Acquired Facilities			(84,465)						(11,473)						636.2		%
Newly Developed and Expanded Facilities			(14,627)						(15,269)						(4.2)		%
Other Non-Same Store Facilities			(9,785)						(9,454)						3.5		%
Total depreciation and amortization expense			(222,128)						(146,859)						51.3		%
Net income (loss):
Same Store Facilities			448,090						355,118						26.2		%
Acquired Facilities			(29,125)						(7,527)						286.9		%
Newly Developed and Expanded Facilities			26,032						8,873						193.4		%
Other Non-Same Store Facilities			4,396						919						378.3		%
Total net income			$	449,393					$	357,383					25.7		%
Number of facilities at period end:
Same Store Facilities			2,282						2,282						—
Acquired Facilities			304						77						294.8		%
Newly Developed and Expanded Facilities			145						138						5.1		%
Other Non-Same Store Facilities			66						66						—
			2,797						2,563						9.1		%
Net rentable square footage at period end:
Same Store Facilities			149,476						149,476						—
Acquired Facilities			27,686						6,162						349.3		%
Newly Developed and Expanded Facilities			16,641						15,240						9.2		%
Other Non-Same Store Facilities			5,315						5,287						0.5		%
			199,118						176,165						13.0		%

(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 financial measures, in evaluating our operating results. See Note 13 to our March 31, 2022 consolidated financial statements for a reconciliation of NOI to our total net income for all periods presented.

Same Store Facilities

The Same Store Facilities consist of facilities we have owned and operated on a stabilized level of occupancy, revenues, and cost of operations since January 1, 2020. Our Same Store Facilities increased from 2,274 facilities at December 31, 2021 to 2,282 at March 31, 2022. The composition of our Same Store Facilities allows us more effectively to evaluate the ongoing performance of our self-storage portfolio in 2020, 2021, and 2022 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. We believe investors and analysts use Same Store information in a similar manner. However, because other REITs may not compute Same Store Facilities in the same manner as we do, may not use the same terminology or may not present such a measure, Same Store Facilities may not be comparable among REITs.

The following table summarizes the historical operating results of these 2,282 facilities (149.5 million net rentable square feet) that represent approximately 75% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at March 31, 2022. It includes various measures and detail that we do not include in the analysis of the developed, acquired, and other non-same store facilities, due to the relative magnitude and importance of the Same Store Facilities relative to our other self-storage facilities.

Selected Operating Data for the Same Store Facilities (2,282 facilities)

			Three Months Ended March 31,
			2022						2021						Percentage Change
			(Dollar amounts in thousands, except for per square foot data)
Revenues (a):
Rental income			$	725,433					$	627,153					15.7%
Late charges and administrative fees			23,837						20,047						18.9%
Total revenues			749,270						647,200						15.8%
Direct cost of operations (a):
Property taxes			70,004						66,782						4.8%
On-site property manager payroll			30,700						28,744						6.8%
Repairs and maintenance			15,490						13,021						19.0%
Utilities			11,446						10,796						6.0%
Marketing			11,240						14,610						(23.1)%
Other direct property costs			20,066						18,364						9.3%
Total direct cost of operations			158,946						152,317						4.4%
Direct net operating income (b)			590,324						494,883						19.3%
Indirect cost of operations (a):
Supervisory payroll			(9,567)						(10,330)						(7.4)%
Centralized management costs			(15,557)						(13,237)						17.5%
Share-based compensation			(3,859)						(5,535)						(30.3)%
Net operating income			561,341						465,781						20.5%
Depreciation and amortization expense			(113,251)						(110,663)						2.3%
Net income			$	448,090					$	355,118					26.2%
Gross margin (before indirect costs, depreciation and amortization expense)			78.8%						76.5%						3.0%
Gross margin (before depreciation and amortization expense)			74.9%						72.0%						4.0%
Weighted average for the period:
Square foot occupancy			95.6%						95.6%						—%
Realized annual rental income per (c):
Occupied square foot			$	20.29					$	17.54					15.7%
Available square foot			$	19.40					$	16.78					15.6%
At March 31:
Square foot occupancy			95.1%						95.9%						(0.8)%
Annual contract rent per occupied square foot (d)			$	20.84					$	17.97					16.0%

(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)Direct net operating income (“Direct NOI”), a subtotal within NOI, is a non-GAAP financial measure that excludes the impact of supervisory payroll, centralized management costs and share-based compensation in addition to depreciation and amortization expense. We utilize direct net operating income in evaluating property performance and in evaluating property operating trends as compared to our competitors.

(c)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.

(d)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

We believe a balanced occupancy and rate strategy maximizes our revenues over time. We regularly adjust rental rates and promotional discounts offered (generally, “$1.00 rent for the first month”), as well as our marketing efforts to maximize revenue from new tenants to replace tenants that vacate.

We typically increase rental rates to our long-term tenants (generally, those who have been with us for at least a year) every six to twelve months. 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 evaluating the additional revenue from the increase against the negative impact of incremental move-outs, by considering the customer’s in-place rent and prevailing market rents, among other factors.

Revenues generated by our Same Store Facilities increased 15.8% in the three months ended March 31, 2022, as compared to the same period in 2021, due primarily to a 15.7% increase in realized annual rent per occupied square foot.

Our growth in revenues, realized annual rent per occupied square foot, and REVPAF for the three months ended March 31, 2022 as compared to the same period in 2021 was evident in each of our markets. Our weighted average square foot occupancy remained strong across our markets for the three months ended March 31, 2022.

The increase of realized annual rent per occupied square foot in the three months ended March 31, 2022 as compared to the same period in 2021 was due to (i) rate increases to existing long-term tenants in substantially all of our markets in 2022 as compared to curtailed increases in certain markets in 2021, combined with (ii) a 15.1% year over year increase in average rates per square foot charged to new tenants moving in as a result of strong customer demand across all markets. At March 31, 2022, annual contract rent per occupied square foot was 16.0% higher as compared to March 31, 2021.

We experienced high occupancy levels throughout the first three months of 2022. Our average square foot occupancy levels remained unchanged on a year over year basis at 95.6% during the three months ended March 31, 2022. Move-out volumes increased 5.0% and move-in volumes decreased 4.9% in the three months ended March 31, 2022 as compared to the same period in 2021, leading to a lower square foot occupancy at March 31, 2022 of 95.1% as compared to 95.9% at March 31, 2021. Move-out volumes were impacted by rental rate increases to our existing tenants, while move-in volumes were impacted by the higher rental rates charged to new tenants in the three months ended March 31, 2022 as compared to the same period in 2021. Average length of stay increased in the three months ended March 31, 2022 as compared to the same period in 2021, which supported revenue growth through rate increases to long-term tenants. With strong occupancy, we reduced promotional discounts given to new move-in customers for the three months ended March 31, 2022 by 43.7% as compared to the same period in 2021.

Demand historically has been higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants have typically been 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 expect continued revenue growth for the remainder of 2022 supported by consistently high customer demand and a stable tenant base leading to increasing realized annual rent per occupied square foot while maintaining a high level of occupancy.

Late Charges and Administrative Fees

Late charges and administrative fees increased 18.9% for the three months ended March 31, 2022 as compared to the same period in 2021, due to (i) higher late charges collected on delinquent accounts and to a lesser extent (ii) higher administrative charge per move-in.

Selected Key Statistical Data

The following table sets forth average annual contract rent per square foot and total square footage for tenants moving in and moving out during the three months ended March 31, 2022 and 2021. It also includes promotional discounts, which vary based upon the move-in contractual rates, move-in volume, and percentage of tenants moving in who receive the discount.

			Three Months Ended March 31,
			2022						2021						Change
			(Amounts in thousands, except for per square foot amounts)
Tenants moving in during the period:
Average annual contract rent per square foot			$	17.15					$	14.90					15.1%
Square footage			23,366						24,561						(4.9)%
Contract rents gained from move-ins			$	100,182					$	91,490					9.5%
Promotional discounts given			$	9,339					$	16,577					(43.7)%
Tenants moving out during the period:
Average annual contract rent per square foot			$	19.35					$	16.21					19.4%
Square footage			22,933						21,849						5.0%
Contract rents lost from move-outs			$	110,938					$	88,543					25.3%

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 3.6% in the three months ended March 31, 2022 as compared to the same period in 2021, due primarily to increased property tax expense, repairs and maintenance expense and centralized management costs, partially offset by decreased marketing expense.

Property tax expense increased 4.8% in the three months ended March 31, 2022 as compared to the same period in 2021, as a result of higher recently assessed values. We expect property tax expense growth of approximately 5.0% in the remainder of 2022.

On-site property manager payroll expense increased 6.8% in the three months ended March 31, 2022 as compared to the same period in 2021. The increase is primarily due to wage increases effective in late 2021 in response to competitive labor conditions experienced in most geographical markets, partially offset by a year-over-year decline in hours worked due to staffing reductions from revisions to other operational processes. We expect on-site property manager payroll expense to further increase in the remainder of 2022 as compared to 2021 due in part to continued competitive labor conditions.

Repairs and maintenance expense increased 19.0% in the three months ended March 31, 2022 as compared to the same period in 2021. Repairs and maintenance expense includes snow removal costs totaling $3.3 million and $2.0 million in the three months ended March 31, 2022 and 2021, respectively. Excluding snow removal costs, repairs and maintenance expense increased 10.2% in in the three months ended March 31, 2022 as compared to the same period in 2021. Repairs and maintenance expense levels are dependent upon many factors such as (i) 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.

Marketing expense includes Internet advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprising 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. We decreased marketing expense by 23.1% in the three months ended March 31, 2022 as compared to the same period in 2021 due primarily to lower volume of paid search programs we utilized given strong demand and high occupancies in many of our same store properties.

Centralized management costs represents administrative and cash compensation 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, facilities management, customer service, pricing and marketing, operational accounting and finance, and legal costs. Centralized management costs increased 17.5% in the three months ended March 31, 2022 as compared to the same period in 2021. The increase was due primarily to an increase in technology and data team costs that support property operations. We expect increases in centralized management costs in the remainder of 2022 due to continued investment in our technology and data platforms that support our property operations.

Share-based compensation expense includes the amortization of restricted share units and stock options granted to management personnel who directly and indirectly supervise the on-site property managers, as well as those employees responsible for providing shared general corporate functions to the extent their efforts are devoted to self-storage operations. Such functions are listed above under centralized management costs. 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 each grant. Share-based compensation decreased 30.3% in the three months ended March 31, 2022 as compared to the same period in 2021. The decrease in 2022 is due primarily to higher expense recognized in 2021 for certain performance-based awards estimated to achieve above-target results.

Analysis of Market Trends

The following tables set forth selected market trends in our Same Store Facilities:

Same Store Facilities Operating Trends by Market

			As of March 31, 2022						Three Months Ended March 31,
			Number of Facilities			Square Feet (millions)			Realized Rent per Occupied Square Foot									Average Occupancy									Realized Rent per Available Square Foot
			2022			2021			Change			2022			2021			Change			2022			2021			Change
Los Angeles			212			15.3			$	29.45		$	26.34		11.8		%	97.8		%	97.9		%	(0.1)		%	$	28.79		$	25.77		11.7		%
San Francisco			128			7.8			29.89			26.96			10.9		%	96.0		%	97.5		%	(1.5)		%	28.70			26.28			9.2		%
New York			90			6.4			28.96			26.39			9.7		%	95.5		%	96.0		%	(0.5)		%	27.66			25.33			9.2		%
Miami			83			5.8			25.81			20.46			26.1		%	96.9		%	96.3		%	0.6		%	25.02			19.71			26.9		%
Seattle-Tacoma			86			5.7			23.61			20.60			14.6		%	95.0		%	94.9		%	0.1		%	22.43			19.54			14.8		%
Washington DC			90			5.5			24.13			21.36			13.0		%	94.0		%	95.1		%	(1.2)		%	22.69			20.32			11.7		%
Atlanta			101			6.6			16.17			13.33			21.3		%	94.9		%	94.6		%	0.3		%	15.34			12.61			21.6		%
Dallas-Ft. Worth			106			7.0			16.18			13.58			19.1		%	95.3		%	94.8		%	0.5		%	15.42			12.87			19.8		%
Chicago			129			8.1			18.01			15.42			16.8		%	94.5		%	94.9		%	(0.4)		%	17.03			14.62			16.5		%
Houston			95			6.8			14.87			12.68			17.3		%	94.1		%	93.5		%	0.6		%	14.00			11.86			18.0		%
Orlando-Daytona			70			4.5			16.48			13.73			20.0		%	96.2		%	95.3		%	0.9		%	15.85			13.09			21.1		%
Philadelphia			56			3.5			19.82			17.49			13.3		%	96.0		%	96.7		%	(0.7)		%	19.03			16.92			12.5		%
West Palm Beach			37			2.6			23.64			19.27			22.7		%	97.1		%	96.3		%	0.8		%	22.95			18.56			23.7		%
Tampa			51			3.4			17.60			14.11			24.7		%	95.8		%	95.6		%	0.2		%	16.86			13.48			25.1		%
Charlotte			50			3.8			13.92			11.41			22.0		%	95.5		%	94.8		%	0.7		%	13.29			10.81			22.9		%
All other markets			898			56.7			16.88			14.47			16.7		%	95.4		%	95.4		%	—		%	16.10			13.80			16.7		%
Totals			2,282			149.5			$	20.29		$	17.54		15.7		%	95.6		%	95.6		%	—		%	$	19.40		$	16.78		15.6		%

Same Store Facilities Operating Trends by Market (Continued)

			Three Months Ended March 31,
			Revenues ($000's)									Direct Expenses ($000's)									Indirect Expenses ($000's)									Net Operating Income ($000's)
			2022			2021			Change			2022			2021			Change			2022			2021			Change			2022			2021			Change
Los Angeles			$	112,345		$	100,330		12.0		%	$	15,778		$	15,320		3.0		%	$	2,900		$	2,961		(2.1)		%	$	93,667		$	82,049		14.2		%
San Francisco			57,158			52,087			9.7		%	8,834			8,555			3.3		%	1,710			1,807			(5.4)		%	46,614			41,725			11.7		%
New York			45,608			41,818			9.1		%	12,194			11,264			8.3		%	1,368			1,463			(6.5)		%	32,046			29,091			10.2		%
Miami			37,591			29,759			26.3		%	6,841			6,470			5.7		%	1,059			1,134			(6.6)		%	29,691			22,155			34.0		%
Seattle-Tacoma			32,807			28,550			14.9		%	5,935			5,922			0.2		%	1,011			1,084			(6.7)		%	25,861			21,544			20.0		%
Washington DC			32,377			28,938			11.9		%	7,217			6,834			5.6		%	1,039			1,097			(5.3)		%	24,121			21,007			14.8		%
Atlanta			26,762			21,992			21.7		%	5,070			4,810			5.4		%	1,258			1,289			(2.4)		%	20,434			15,893			28.6		%
Dallas-Ft. Worth			27,928			23,345			19.6		%	6,384			6,380			0.1		%	1,158			1,202			(3.7)		%	20,386			15,763			29.3		%
Chicago			35,827			30,751			16.5		%	14,901			12,520			19.0		%	1,587			1,502			5.7		%	19,339			16,729			15.6		%
Houston			24,700			20,898			18.2		%	6,788			6,737			0.8		%	1,117			1,159			(3.6)		%	16,795			13,002			29.2		%
Orlando-Daytona			18,400			15,220			20.9		%	3,689			3,545			4.1		%	919			853			7.7		%	13,792			10,822			27.4		%
Philadelphia			17,500			15,521			12.8		%	4,183			3,850			8.6		%	690			723			(4.6)		%	12,627			10,948			15.3		%
West Palm Beach			15,594			12,622			23.5		%	3,140			2,867			9.5		%	488			543			(10.1)		%	11,966			9,212			29.9		%
Tampa			14,822			11,894			24.6		%	3,133			2,999			4.5		%	623			634			(1.7)		%	11,066			8,261			34.0		%
Charlotte			13,202			10,750			22.8		%	2,378			2,315			2.7		%	613			572			7.2		%	10,211			7,863			29.9		%
All other markets			236,649			202,725			16.7		%	52,481			51,929			1.1		%	11,443			11,079			3.3		%	172,725			139,717			23.6		%
Totals			$	749,270		$	647,200		15.8		%	$	158,946		$	152,317		4.4		%	$	28,983		$	29,102		(0.4)		%	$	561,341		$	465,781		20.5		%

Acquired Facilities

The Acquired Facilities represent 304 facilities that we acquired in 2020, 2021, and 2022. As a result of the stabilization process and timing of when these facilities were acquired (and resulting reclassification to Same-Store Facilities), year-over-year changes can be significant. The following table summarizes operating data with respect to the Acquired Facilities:

ACQUIRED FACILITIES			Three Months Ended March 31,
			2022						2021						Change (a)
			($ amounts in thousands, except for per square foot amounts)
Revenues (b):
2020 Acquisitions			$	17,068					$	10,291					$	6,777
2021 Acquisitions			68,825						832						67,993
2022 Acquisitions			478						—						478
Total revenues			86,371						11,123						75,248
Cost of operations (b):
2020 Acquisitions			6,814						6,626						188
2021 Acquisitions			23,898						551						23,347
2022 Acquisitions			319						—						319
Total cost of operations			31,031						7,177						23,854
Net operating income:
2020 Acquisitions			10,254						3,665						6,589
2021 Acquisitions			44,927						281						44,646
2022 Acquisitions			159						—						159
Net operating income			55,340						3,946						51,394
Depreciation and amortization expense			(84,465)						(11,473)						(72,992)
Net loss			$	(29,125)					$	(7,527)					$	(21,598)
At March 31:
Square foot occupancy:
2020 Acquisitions			89.8%						73.1%						22.8%
2021 Acquisitions			82.3%						67.6%						21.7%
2022 Acquisitions			43.5%						—						—
			82.6%						72.2%						14.4%
Annual contract rent per occupied square foot:
2020 Acquisitions			$	15.27					$	12.40					23.1%
2021 Acquisitions			15.87						13.64						16.3%
2022 Acquisitions			12.80						—						—
			$	15.71					$	12.60					24.7%
Number of facilities:
2020 Acquisitions			62						62						—
2021 Acquisitions			232						15						217
2022 Acquisitions			10						—						10
			304						77						227
Net rentable square feet (in thousands):
2020 Acquisitions			5,075						5,075						—
2021 Acquisitions			21,830						1,087						20,743
2022 Acquisitions			781						—						781
			27,686						6,162						21,524

ACQUIRED FACILITIES (Continued)

			As of March 31, 2022
Costs to acquire (in thousands):
2020 Acquisitions			$	796,065
2021 Acquisitions			5,115,276
2022 Acquisitions			127,703
			$	6,039,044

(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.

During 2021, we acquired the ezStorage portfolio, consisting of 48 properties (4.1 million net rentable square feet) for acquisition cost of $1.8 billion, which includes 47 self-storage facilities and one property that is under construction. Included in the Acquisition results in the table above are revenues of $24.0 million, NOI of $18.6 million (including Direct NOI of $19.4 million), and average square footage occupancy of 88.0% for the three months ended March 31, 2022.

During 2021, we acquired the All Storage portfolio, consisting of 56 properties (7.5 million net rentable square feet) for $1.5 billion, with 55 properties closed in the fourth quarter of 2021 and one property closed in February 2022. Included in the Acquisition results in the table above are revenues of $16.8 million, NOI of $10.5 million (including Direct NOI of $11.2 million), and average square footage occupancy of 77.3% for the three months ended March 31, 2022.

Subsequent to March 31, 2022, we acquired or were under contract to acquire eleven self-storage facilities across nine states with 0.9 million net rentable square feet, for $147.2 million.

Developed and Expanded Facilities

The developed and expanded facilities include 54 facilities that were developed on new sites since January 1, 2017, and 91 facilities expanded to increase their net rentable square footage. Of these expansions, 51 were completed before 2021, 17 were completed in 2021 or 2022, and 23 are currently in process at March 31, 2022. The following table summarizes operating data with respect to the Developed and Expanded Facilities:

DEVELOPED AND EXPANDED FACILITIES
			Three Months Ended March 31,
			2022						2021						Change (a)
			($ amounts in thousands, except for per square foot amounts)
Revenues (b):
Developed in 2017			$	7,942					$	6,043					$	1,899
Developed in 2018			8,293						6,053						2,240
Developed in 2019			3,626						2,338						1,288
Developed in 2020			1,482						369						1,113
Developed in 2021			1,429						4						1,425
Expansions completed before 2021			21,416						14,271						7,145
Expansions completed in 2021 or 2022			8,637						5,010						3,627
Expansions in process			7,251						7,389						(138)
Total revenues			60,076						41,477						18,599
Cost of operations (b):
Developed in 2017			2,628						2,504						124
Developed in 2018			2,555						2,561						(6)
Developed in 2019			1,368						1,408						(40)
Developed in 2020			428						399						29
Developed in 2021			855						83						772
Expansions completed before 2021			7,601						7,076						525
Expansions completed in 2021 or 2022			2,362						1,523						839
Expansions in process			1,620						1,781						(161)
Total cost of operations			19,417						17,335						2,082
Net operating income (loss):
Developed in 2017			5,314						3,539						1,775
Developed in 2018			5,738						3,492						2,246
Developed in 2019			2,258						930						1,328
Developed in 2020			1,054						(30)						1,084
Developed in 2021			574						(79)						653
Expansions completed before 2021			13,815						7,195						6,620
Expansions completed in 2021 or 2022			6,275						3,487						2,788
Expansions in process			5,631						5,608						23
Net operating income			40,659						24,142						16,517
Depreciation and amortization expense			(14,627)						(15,269)						642
Net income			$	26,032					$	8,873					$	17,159

DEVELOPED AND EXPANDED FACILITIES (Continued)
			As of March 31,
			2022						2021						Change (a)
			($ amounts in thousands, except for per square foot amounts)
Square foot occupancy:
Developed in 2017			92.1%						92.9%						(0.9)%
Developed in 2018			88.6%						89.6%						(1.1)%
Developed in 2019			88.4%						88.2%						0.2%
Developed in 2020			92.0%						55.7%						65.2%
Developed in 2021			67.4%						13.1%						414.5%
Expansions completed before 2021			87.6%						80.2%						9.2%
Expansions completed in 2021 or 2022			85.1%						95.6%						(11.0)%
Expansions in process			86.2%						91.4%						(5.7)%
			87.2%						84.9%						2.7%
Annual contract rent per occupied square foot:
Developed in 2017			$	16.79					$	12.94					29.8%
Developed in 2018			18.06						13.41						34.7%
Developed in 2019			15.54						10.61						46.5%
Developed in 2020			19.08						11.20						70.4%
Developed in 2021			15.28						14.25						7.2%
Expansions completed before 2021			14.31						10.83						32.1%
Expansions completed in 2021 or 2022			20.32						18.61						9.2%
Expansions in process			22.87						20.63						10.9%
			$	16.91					$	13.17					28.4%
Number of facilities:
Developed in 2017			16						16						—
Developed in 2018			18						18						—
Developed in 2019			11						11						—
Developed in 2020			3						3						—
Developed in 2021			6						1						5
Expansions completed before 2021			51						51						—
Expansions completed in 2021 or 2022			17						15						2
Expansions in process			23						23						—
			145						138						7
Net rentable square feet (in thousands) (c):
Developed in 2017			2,040						2,040						—
Developed in 2018			2,069						2,069						—
Developed in 2019			1,057						1,057						—
Developed in 2020			347						347						—
Developed in 2021			681						200						481
Expansions completed before 2021			6,877						6,877						—
Expansions completed in 2021 or 2022			2,133						1,133						1,000
Expansions in process			1,437						1,517						(80)
			16,641						15,240						1,401

			As of March 31, 2022
Costs to develop (in thousands):
Developed in 2017			$	239,871
Developed in 2018			262,187
Developed in 2019			150,387
Developed in 2020			42,063
Developed in 2021			115,632
Expansions completed before 2021 (d)			478,659
Expansions completed in 2021 or 2022 (d)			123,499
			$	1,412,298

(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 sales generated at the facilities. See “Ancillary Operations” below for more information.

(c)The facilities included above have an aggregate of approximately 16.6 million net rentable square feet at March 31, 2022, including 5.0 million in Texas, 2.8 million in Florida, 2.2 million in California, 1.5 million in Colorado, 1.2 million in Minnesota, 0.9 million in North Carolina, 0.6 million in Michigan, 0.4 million in each of Missouri and Washington, 0.3 million in each of New Jersey, South Carolina and Virginia and 0.7 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.

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.

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 typically underwrite new developments to stabilize at approximately an 8.0% NOI yield on cost. Our developed facilities have thus far leased up as expected and are at various stages of their revenue stabilization periods. The actual annualized yields that we may achieve on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property and the level of new and existing supply.

The facilities under “expansions completed” represent those facilities where the expansions have been completed at March 31, 2022. We incurred a total of $602.2 million in direct cost to expand these facilities, demolished a total of 1.1 million net rentable square feet of storage space, and built a total of 5.7 million net rentable square feet of new storage space.

At March 31, 2022, we had 26 additional facilities in development, which will have a total of 2.2 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $406.1 million. We expect these facilities to open over the next 18 to 24 months.

The facilities under "expansion in process" represent those facilities where construction is in process at March 31, 2022, and together with additional expansion activities primarily related to our Same Store Facilities at March 31, 2022, we expect to add a total of 2.6 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of $427.7 million.

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, 2020, including facilities under fill-up as well as facilities damaged in casualty events such as hurricanes, floods, and fires.

The Other Non-Same Store Facilities have an aggregate of 5.3 million net rentable square feet, including 1.1 million in Texas, 0.6 million in each of Florida and Washington, 0.4 million in each of California and Virginia, 0.3 million in each of Indiana and South Carolina, 0.2 million in each of Georgia, Kentucky, Massachusetts and Tennessee and 0.8 million in other states.

During the three months ended March 31, 2022 and 2021, the average occupancy for these facilities totaled 91.7% and 90.6%, respectively, and the realized rent per occupied square foot totaled $16.90 and $13.23, respectively.

Depreciation and amortization expense

Depreciation and amortization expense for Self-Storage Operations increased $75.3 million in the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to newly acquired facilities of $5.1 billion in 2021. We expect continued increases in depreciation expense in the remainder of 2022 as a result of elevated levels of capital expenditures and new facilities that are acquired, developed or expanded in the remainder of 2022.

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, sale of merchandise at our self-storage facilities, and management of property owned by unrelated third parties. The following table sets forth our ancillary operations:

			Three Months Ended March 31,
			2022						2021						Change
			(Amounts in thousands)
Revenues:
Tenant reinsurance premiums			$	45,195					$	39,681					$	5,514
Merchandise			6,871						7,036						(165)
Third party property management			4,364						4,198						166
Total revenues			56,430						50,915						5,515
Cost of operations:
Tenant reinsurance			7,277						7,824						(547)
Merchandise			3,904						3,966						(62)
Third party property management			4,334						4,528						(194)
Total cost of operations			15,515						16,318						(803)
Net operating income (loss):
Tenant reinsurance			37,918						31,857						6,061
Merchandise			2,967						3,070						(103)
Third party property management			30						(330)						360
Total net operating income			$	40,915					$	34,597					$	6,318

Tenant reinsurance operations: Tenant reinsurance premium revenue increased $5.5 million or 13.9% in the three months ended March 31, 2022 over the same period in 2021 as a result of higher average premiums and an increase in our tenant base with respect to acquired, newly developed, and expanded facilities and the third party properties we manage. Tenant reinsurance premium revenue generated from tenants at our Same-Store Facilities were $34.4 million and $33.2 million in the three months ended March 31, 2022 and 2021, respectively, representing a 3.6% increase.

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 as well as claims adjustment expenses. Claims expenses vary based upon the number of insured tenants and the volume of events which drive covered customer losses, such as burglary, as well as catastrophic weather events affecting multiple properties such as hurricanes and floods.

Merchandise sales: Sales of locks, boxes, and packing supplies at our self-storage facilities are 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 the remainder of 2022.

Third-party property management: At March 31, 2022, we managed 97 facilities for unrelated third parties, and were under contract to manage 64 additional facilities including 58 facilities that are currently under construction. During the three months ended March 31, 2022, we added 15 facilities to the program, acquired one facility from the program, and had five properties exit the program due to sales to other buyers. While we expect this business to increase in scope and size, we do not expect any significant changes in overall profitability of this business in the near term as we seek new properties to manage and are in the earlier stages of fill-up for newly managed properties.

Analysis of items not allocated to segments

Equity in earnings of unconsolidated real estate entities

For all periods presented, we have equity investments in PSB and Shurgard, which we account for using the equity method and record our pro-rata share of the net income of these entities. The following table, and the discussion below, sets forth our equity in earnings of unconsolidated real estate entities:

			Three Months Ended March 31,
			2022						2021						Change
			(Amounts in thousands)
Equity in earnings:
PSB			$	36,886					$	14,476					$	22,410
Shurgard			6,538						4,980						1,558
Total equity in earnings			$	43,424					$	19,456					$	23,968

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 approximate 41% common equity interest in PSB as of March 31, 2022 (41% as of December 31, 2021). The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.

At March 31, 2022, PSB wholly-owned approximately 27 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.

Included in our equity earnings from PSB for the three months ended March 31, 2022 is our equity share of gains on sale of real estate totaling $23.6 million (none for the same period in 2021). For the three months ended March 31, 2022 and 2021, our share of earnings from PSB contributed $25.5 million and $24.2 million, respectively, to Core FFO.

On April 24, 2022, PSB entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby affiliates of Blackstone Real Estate ("Blackstone") will acquire all outstanding shares of PSB's common stock for $187.50 per share in cash. Subject to the terms and conditions set forth in the Merger Agreement, each share of PSB common stock and each common unit of partnership interest will be converted into the right to receive an amount in cash equal to $187.50, without interest. If the transaction is consummated, we expect to (i) receive approximately $2.7 billion of cash proceeds in exchange for the approximate 41% common equity interest we hold in PSB, (ii) recognize an approximate $2.2 billion gain on the sale of our equity investment in PSB in the Consolidated Statement of Income, and (iii) distribute a $2.3 billion estimated tax gain on the sale to our common shareholders. The merger transaction is expected to close in the third quarter of 2022, however, the merger transaction is subject to customary closing conditions, including approval by PSB’s common stockholders. Pursuant to a support agreement entered into with PSB and Blackstone, we have committed to vote our equity interests in favor of the transaction, subject to certain conditions.

PSB’s filings and selected financial information, including discussion of the factors that affect its earnings, 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 Quarterly Report on Form 10-Q.

Investment in Shurgard: Throughout all periods presented, we effectively owned, directly and indirectly, 31,268,459 Shurgard common shares, representing an approximate 35% equity interest in Shurgard. Shurgard’s common shares trade on Euronext Brussels under the “SHUR” symbol.

At March 31, 2022, Shurgard owned 254 self-storage facilities with approximately 14 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 March 31, 2022 consolidated financial statements.

Shurgard’s public filings and publicly reported information, including discussion of the factors that affect its earnings, 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 Quarterly Report on Form 10-Q.

For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately 1.111 U.S. Dollars per Euro at March 31, 2022 (1.134 at December 31, 2021), and average exchange rates of 1.122 and 1.205 for the three months ended March 31, 2022 and 2021, respectively.

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

			Three Months Ended March 31,
			2022						2021						Change
			(Amounts in thousands)
Share-based compensation expense			$	8,798					$	7,680					$	1,118
Development and acquisition costs			2,840						1,807						1,033
Tax compliance costs and taxes paid			2,734						1,609						1,125
Legal costs			240						1,143						(903)
Corporate management costs			5,846						4,176						1,670
Other costs			2,611						3,159						(548)
Total			$	23,069					$	19,574					$	3,495

Share-based compensation expense includes the amortization of restricted share units and stock options granted to certain corporate employees and trustees.

Share-based compensation expense for management personnel who directly and indirectly supervise the on-site property managers, as well as those employees responsible for providing shared general corporate functions to the extent their efforts are devoted to self-storage operations, are included as self-storage cost of operations. See “Same Store Facilities” for further information. 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 each grant.

Share-based compensation expense classified as general and administrative expense increased $1.1 million in the three months ended March 31, 2022 as compared to the same period in 2021 due primarily to accelerated compensation expense recognized for awards granted to corporate management personnel who are eligible for immediate vesting of their outstanding awards upon retirement.

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 $4.3 million and $3.2 million for the three months ended March 31, 2022 and 2021, respectively, in development costs that were capitalized to newly developed and redeveloped self-storage facilities.

Interest and other income: Interest and other income is comprised of the revenue and cost associated with our commercial operations, 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. For the three months ended March 31, 2022 and 2021, we recognized $3.4 million and $2.9 million interest and other income, respectively. Amounts attributable to commercial operations was $2.1 million and $2.0 million in the three months ended March 31, 2022 and 2021, respectively. Excluding the aforementioned amounts attributable to our commercial operations, interest and other income increased $0.4 million from the three months ended March 31, 2021 to the same period in 2022.

Interest expense: For the three months ended March 31, 2022 and 2021, we incurred $34.3 million and $16.2 million, respectively, of interest on our outstanding notes payable. In determining interest expense, these amounts were offset by capitalized interest of $1.2 million and $0.9 million during each of the three months ended March 31, 2022 and 2021, respectively, associated with our development activities. The increase of interest expense in the three months ended March 31, 2022 as compared to the same period in 2021 is due to our issuances of debt. At March 31, 2022, we had $7.4 billion of notes payable outstanding, with a weighted average interest rate of approximately 1.8%.

Foreign Currency Exchange Gain: For the three months ended March 31, 2022 and 2021, we recorded foreign currency gains of $35.4 million and $45.4 million, respectively, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates. The Euro was translated at exchange rates of approximately 1.111 U.S. Dollars per Euro at March 31, 2022, 1.134 at December 31, 2021, 1.173 at March 31, 2021 and 1.226 at December 31, 2020. Future gains and losses on foreign currency will be dependent upon changes in the relative value of the Euro to the U.S. Dollar and the level of Euro-denominated notes payable outstanding.

Gain on Sale of Real Estate: In the three months ended March 31, 2021, we recorded gains on sale of real estate totaling $9.4 million (none in the three months ended March 31, 2022), in connection with the complete sale of a real estate facility pursuant to eminent domain proceeding in Saint Louis, Missouri.

Liquidity and Capital Resources

Overview

As of March 31, 2022, our expected material cash requirements for the next twelve months and thereafter comprised (i) contractually obligated expenditures, including payments of principal and interest; (ii) other essential expenditures, including property operating expenses, maintenance capital expenditures and dividends paid in accordance with REIT distribution requirements; and (iii) opportunistic expenditures, including acquisitions and developments and repurchases of our securities. We expect to satisfy these cash requirements through operating cash flow and opportunistic debt and equity financing.

Sources of Capital

While operating as a REIT allows us to minimize the payment of U.S. federal corporate income tax expense, we are required to distribute at least 90% of our taxable income to our shareholders. Notwithstanding this requirement, we are nonetheless able to retain operating cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures. Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures. Our annual operating retained cash flow increased from $200 million to $300 million per year in recent years to approximately $700 million in 2021. We anticipate retained operating cash flow over the next twelve months will be similar to 2021.

The REIT distribution requirement limits cash flow from operations that can be retained and reinvested in the business, increasing our reliance upon raising capital to fund growth. Capital needs in excess of retained cash flow are met with: (i) medium and long-term debt, (ii) preferred equity, 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 any short-term bank loans, as bridge financing.

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 notes payable 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 enable us to effectively access both the public and private capital markets to raise capital.

We have a $500.0 million revolving line of credit which we are able to use as temporary “bridge” financing until we are able to raise longer term capital. As of March 31, 2022 and May 3, 2022, there were no borrowings outstanding on the revolving line of credit; however, we do have approximately $21.2 million of outstanding letters of credit which limits our borrowing capacity to $478.8 million. Our line of credit matures on April 19, 2024.

We believe that we have significant financial flexibility to adapt to changing conditions and opportunities and we have significant access to sources of capital including debt and preferred equity. Based upon our substantial current liquidity relative to our capital requirements noted below, we would not expect any potential capital market dislocations to have a material impact upon our expected capital and growth plans over the next 12 months. However, if capital market conditions were to change significantly in the long run, our access to or cost of debt and preferred equity capital could be negatively impacted and potentially affect future investment activities.

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

Our expected capital resources include: (i) $940.5 million of cash as of March 31, 2022 and (ii) approximately $700.0 million of expected retained operating cash flow over the next twelve months. In addition, upon the consummation of the PSB merger, which PSB has announced is expected to close in the third quarter of 2022, we expect to receive approximately $2.7 billion of cash proceeds. The transaction will generate a tax gain of approximately $2.3 billion which, in order to satisfy our REIT qualification distribution requirements, we expect to distribute to our shareholders.

Over the long term, to the extent that our capital needs exceed our capital resources, 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.

Cash Requirements

The following summarizes our expected material cash requirements which comprise (i) contractually obligated expenditures, (ii) other essential expenditures, and (iii) opportunistic expenditures. We expect our capital needs to increase over the next year as we add projects to our development pipeline and acquire additional properties.

Required Debt Repayments: As of March 31, 2022, the principal outstanding on our debt totaled approximately $7.5 billion, consisting of $23.0 million of secured notes payable, $1.7 billion of Euro-denominated unsecured notes payable and $5.8 billion of U.S. Dollar denominated unsecured notes payable. Approximate principal maturities and interest payments are as follows (amounts in thousands):

Remainder of 2022			$	595,837
2023			136,252
2024			924,590
2025			377,965
2026			1,251,728
Thereafter			4,987,294
			$	8,273,666

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 $91.3 million in the first three months of 2022 and are expected to approximate $300 million for the year ending December 31, 2022. In addition to standard capital repairs of building elements reaching the end of their useful lives, our capital expenditures in recent years have included incremental expenditures to enhance the competitive position of certain of our facilities relative to local competitors pursuant to a multi-year program. Such investments include development of more pronounced, attractive, and clearly identifiable color schemes and signage, upgrades to the configuration and layout of the offices and other customer zones to improve the customer experience. We spent approximately $42 million in the first three months of 2022 and expect to spend $180 million in 2022 on this effort. In addition, we have made investments in LED lighting and the installation of solar panels, which approximated $15 million for the three months ended March 31, 2022 and we expect to spend $30 million in 2022.

We believe that these incremental investments improve customer satisfaction, the attractiveness and competitiveness of our facilities to new and existing customers and, in the case of LED lighting and solar panels, reduce operating costs.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. For each taxable year in which we qualify for taxation as a REIT, we will not be subject to U.S. federal corporate income tax on our “REIT taxable income” (generally, taxable income subject to specified adjustments,

including a deduction for dividends paid and excluding our net capital gain) that is distributed to our shareholders. We believe we have met these requirements in all periods presented herein, and we expect to continue to qualify as a REIT.

On April 28, 2022, 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 June 2022. Our consistent, long-term dividend policy has been to distribute 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.

The annual distribution requirement with respect to our Preferred Shares outstanding at March 31, 2022 is approximately $194.7 million per year.

As discussed above, in connection with the PSB merger transaction, we expect to distribute approximately $2.3 billion of taxable gain associated with the transaction to our common shareholders.

Real Estate Investment Activities: We continue to seek to acquire additional self-storage facilities from third parties. Subsequent to March 31, 2022, we acquired or were under contract to acquire eleven self-storage facilities for a total purchase price of $147.2 million. Five of these properties are under construction and expected to close as they are completed in the remainder of 2022 and the first quarter of 2023.

We are actively seeking to acquire additional facilities. However, future acquisition volume will depend upon whether additional owners will be motivated to market their facilities, which will in turn depend upon factors such as economic conditions and the level of seller confidence.

As of March 31, 2022, we had development and expansion projects at a total cost of approximately $833.8 million. Costs incurred through March 31, 2022 were $337.6 million, with the remaining cost to complete of $496.2 million expected to be incurred primarily in the next 18 to 24 months. Some of these projects are subject to contingencies such as entitlement approval. We expect to continue to seek to add projects to maintain and increase our robust pipeline. Our ability to do so continues to be challenged by various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations, and challenges in obtaining building permits for self-storage facilities in certain municipalities.

Property Operating Expenses: The direct and indirect cost of our operations impose significant cash requirements. Direct operating costs include property taxes, on-site property manager payroll, repairs and maintenance, utilities and marketing. Indirect operating costs include supervisory payroll and centralized management costs. The cash requirements from these operating costs will vary year to year based on, among other things, changes in the size of our portfolio and changes in property tax rates and assessed values, wage rates and marketing costs in our markets.

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 May 3, 2022, we have no series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice. See Note 9 to our March 31, 2022 consolidated financial statements for the redemption dates of all of our 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 the three months ended March 31, 2022, we did not repurchase any of our common shares. From the inception of the repurchase program through May 3, 2022, 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.