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

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

On August 14, 2023, the Company completed its corporate reorganization into a holding company structure commonly referred to as an umbrella partnership real estate investment trust, or UPREIT. Following the Reorganization, substantially all of our business is conducted through Public Storage OP, L.P., a Delaware limited partnership (“PSA OP”) and its subsidiaries, including Public Storage Operating Company (“PSOC”), formerly known as Public Storage. The parent entity, Public Storage, does not have material assets or liabilities, other than through its limited partnership interest of PSA OP and all the membership interest of PSA OP’s general partner, PSOP GP, LLC, a Delaware limited liability company (“PSOP GP”).

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 2023 outlook and all underlying assumptions, our expected acquisition, disposition, development, and redevelopment activity, supply and demand for our self-storage facilities, information relating to operating trends in our markets, expectations regarding operating expenses, including property tax changes, expectations regarding the impacts from inflation and a potential future recession, 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 and 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 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, 2022 filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2023 and in our other filings with the SEC. 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 public health emergencies, international military conflicts, or similar events impacting public health and/or economic activity, increases in the costs of our primary customer acquisition channels, adverse impacts to us and our customers from inflation, unfavorable foreign currency rate fluctuations, changes in federal or state tax laws related to the taxation of REITs, 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 nine months ended September 30, 2023, 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, 2022.

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 and nine months ended September 30, 2023, revenues generated by our Same Store Facilities increased by 2.5% ($21.1 million) and 6.1% ($147.5 million), respectively, as compared to the same periods in 2022, while Same Store cost of operations increased by 2.8% ($5.5 million) and 4.5% ($26.1 million), respectively. Demand and operating trends softened in the second half of 2022 continuing through 2023 as compared to what we experienced in 2020 and 2021. We expect these trends to lead to moderating levels of income growth through 2023.

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 2021, we acquired a total of 459 facilities with 38.0 million net rentable square feet for $8.3 billion. Additionally, within our non-same store portfolio, we have developed and expanded a total of 140 self-storage facilities of 16.3 million net rentable square feet for a total cost of $1.4 billion. During the three and nine months ended September 30, 2023, combined net operating income generated by our Acquired Facilities and Newly Developed and Expanded Facilities increased 23.8% ($23.9 million) and 26.2% ($71.0 million), respectively, as compared to the same periods in 2022.

On September 13, 2023, we acquired BREIT Simply Storage LLC, a self-storage company that owns and operates 127 self-storage facilities (9.4 million square feet) and manages 25 self-storage facilities for third parties, for a purchase price of $2.2 billion in cash (the “Simply Acquisition”). The 127 wholly-owned facilities are geographically diversified across 18 states and located in submarkets with strong demand drivers and other desirable characteristics.

In connection with the Simply Acquisition, on July 26, 2023, we completed a public offering of $2.2 billion aggregate principal amount of unsecured senior notes in various tranches and maturities.

We have experienced recent inflationary impacts on our cost of operations including labor, utilities, and repairs and maintenance, and costs of development and expansion activities, and we may continue to experience such impacts in the future. We have implemented various initiatives to manage the adverse impacts, such as enhancements in operational processes and investments in technology to reduce payroll hours, achievement of economies of scale from recent acquisitions with supervisory payroll allocated over a broader number of self-storage facilities, and investments in solar power and LED lights to lower utility usage.

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 in 2024. We spent approximately $119 million on the program in the nine months ended September 30, 2023 and expect to spend approximately $150 million over 2023 on this effort. We have also embarked on a solar program under which we plan to install solar panels on over 1,000 of our self-storage facilities. We have completed the installations on 395 facilities through September 30, 2023. We spent approximately $38 million on the program in the nine months ended September 30, 2023 and expect to spend $54 million over 2023 on this effort.

Results of Operations

Operating Results for the Three Months Ended September 30, 2023 and 2022

For the three months ended September 30, 2023, net income allocable to our common shareholders was $563.2 million or $3.20 per diluted common share, compared to $2.7 billion or $15.38 per diluted common share for the same period in 2022, representing a decrease of $2.1 billion or $12.18 per diluted common share. The decrease is due primarily to (i) a $2.1 billion gain on sale of our equity investment in PSB in July 2022, (ii) a $52.3 million decrease in foreign currency exchange gains primarily associated with our Euro denominated notes payable, and (iii) a $24.2 million increase in interest expense, partially offset by (iv) a $39.0 million increase in self-storage net operating income and (v) a $19.6 million increase in interest and other income.

The $39.0 million increase in self-storage net operating income in the three months ended September 30, 2023 as compared to the same period in 2022 is a result of a $15.7 million increase attributable to our Same Store Facilities and a $23.3 million increase attributable to our non-same store facilities. Revenues for the Same Store Facilities increased 2.5% or $21.1 million in the three months ended September 30, 2023 as compared to the same period in 2022, due primarily to higher realized annual rent per occupied square foot, partially offset by a decline in occupancy. Cost of operations for the Same Store Facilities increased by 2.8% or $5.5 million in the three months ended September 30, 2023 as compared to the same period in 2022, due primarily to increased property tax expense and marketing expense. The increase in net operating income of $23.3 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2021, 2022, and 2023 and the fill-up of recently developed and expanded facilities.

Operating Results for the Nine Months Ended September 30, 2023 and 2022

For the nine months ended September 30, 2023, net income allocable to our common shareholders was $1.6 billion or $8.85 per diluted common share, compared to $3.8 billion or $21.44 per diluted common share for the same period in 2022, representing a decrease of $2.2 billion or $12.59 per diluted common share. The decrease is due primarily to (i) a $2.1 billion gain on sale of our equity investment in PSB in July 2022, (ii) a $217.3 million decrease in foreign currency exchange gains primarily associated with our Euro denominated notes payable, (iii) a $77.3 million decrease in equity in earnings of unconsolidated real estate entities due to our sale of PSB in July 2022, and (iv) a $32.4 million increase in interest expense, partially offset by (v) a $194.2 million increase in self-storage net operating income and (vi) a $43.0 million increase in interest and other income.

The $194.2 million increase in self-storage net operating income in the nine months ended September 30, 2023 as compared to the same period in 2022 is a result of a $121.4 million increase attributable to our Same Store Facilities and a $72.8 million increase attributable to our non-same store facilities. Revenues for the Same Store Facilities increased 6.1% or $147.5 million in the nine months ended September 30, 2023 as compared to the same period in 2022, due primarily to higher realized annual rent per occupied square foot, partially offset by a decline in occupancy. Cost of operations for the Same Store Facilities increased by 4.5% or $26.1 million in the nine months ended September 30, 2023 as compared to the same period in 2022, due primarily to increased property tax expense, marketing expense, and other direct property costs. The increase in net operating income of $72.8 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2021 and 2022 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 Nareit. We believe that FFO and FFO per share are useful to REIT investors and analysts in measuring our performance because Nareit’s definition of FFO excludes items included in net income that do not relate to or are not indicative of our operating and financial performance. FFO represents net income before real estate-related 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 September 30, 2023, FFO was $4.58 per diluted common share as compared to $4.66 per diluted common share for the same period in 2022, representing a decrease of 1.7%, or $0.08 per diluted common share.

For the nine months ended September 30, 2023, FFO was $12.82 per diluted common share as compared to $13.08 per diluted common share for the same period in 2022, representing a decrease of 2.0%, or $0.26 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, the impact of contingency resolution, due diligence costs incurred in pursuit of strategic transactions, unrealized gain on private equity investments, UPREIT reorganization costs, Simply integration costs, amortization of acquired non real estate-related intangibles from the Simply Acquisition, property losses and tenant claims due to casualties and our equity share of deferred tax benefits of a change in tax status and severance of a senior executive 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 September 30,Nine Months Ended September 30,
20232022Percentage Change20232022Percentage Change
(Amounts in thousands, except per share data)
Reconciliation of Net Income to FFO and Core FFO:
Net income allocable to common shareholders$563,237$2,712,161(79.2)%$1,559,084$3,779,666(58.8)%
Eliminate items excluded from FFO:
Real estate-related depreciation and amortization237,098218,963677,856657,131
Depreciation from unconsolidated real estate investments8,45710,59926,14144,985
Depreciation allocated to noncontrolling interests and restricted share unitholders(1,612)(1,843)(4,817)(4,841)
Gains on sale of real estate investments, including our equity share from investments(167)(1,219)(239)(54,403)
Gain on sale of equity investment in PS Business Parks, Inc.—(2,116,839)—(2,116,839)
FFO allocable to common shares$807,013$821,822(1.8)%$2,258,025$2,305,699(2.1)%
Eliminate the impact of items excluded from Core FFO, including our equity share from investments:
Foreign currency exchange gain(47,880)(100,170)(19,924)(237,270)
Property losses and tenant claims due to casualties—6,118—6,118
Other items3,804(344)(2,422)422
Core FFO allocable to common shares$762,937$727,4264.9%$2,235,679$2,074,9697.7%
Reconciliation of Diluted Earnings per Share to FFO per Share and Core FFO per Share:
Diluted earnings per share$3.20$15.38(79.2)%$8.85$21.44(58.7)%
Eliminate amounts per share excluded from FFO:
Real estate-related depreciation and amortization1.381.293.973.95
Gains on sale of real estate investments, including our equity share from investments—(0.01)—(0.31)
Gain on sale of equity investment in PS Business Parks, Inc.—(12.00)—(12.00)
FFO per share$4.58$4.66(1.7)%$12.82$13.08(2.0)%
Eliminate the per share impact of items excluded from Core FFO, including our equity share from investments:
Foreign currency exchange gain(0.27)(0.57)(0.11)(1.35)
Property losses and tenant claims due to casualties—0.04—0.04
Other items0.02—(0.02)—
Core FFO per share$4.33$4.134.8%$12.69$11.777.8%
Diluted weighted average common shares176,150176,328176,170176,325

Analysis of Net Income — Self-Storage Operations

Our self-storage operations are analyzed in four groups: (i) the 2,343 facilities that we have owned and operated on a stabilized basis since January 1, 2021 (the “Same Store Facilities”), (ii) 459 facilities we acquired since January 1, 2021 (the “Acquired Facilities”), (iii) 140 facilities that have been newly developed or expanded, or that will commence expansion by December 31, 2023 (the “Newly Developed and Expanded Facilities”), and (iv) 86 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2021 (the “Other Non-same Store Facilities”). See Note 14 to our September 30, 2023 consolidated financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.

Self-Storage Operations
SummaryThree Months Ended September 30,Nine Months Ended September 30,
20232022Percentage Change20232022Percentage Change
(Dollar amounts and square footage in thousands)
Revenues:
Same Store Facilities$869,715$848,5962.5%$2,580,649$2,433,1346.1%
Acquired Facilities112,50188,87126.6%306,298235,25930.2%
Newly Developed and Expanded Facilities67,75861,27810.6%195,233169,21115.4%
Other Non-Same Store Facilities28,74728,6290.4%84,84580,0716.0%
1,078,7211,027,3745.0%3,167,0252,917,6758.5%
Cost of operations:
Same Store Facilities202,407196,9552.8%605,491579,3434.5%
Acquired Facilities35,60131,27813.8%100,31682,09222.2%
Newly Developed and Expanded Facilities20,18818,31910.2%58,93751,13815.3%
Other Non-Same Store Facilities9,5898,9187.5%29,33426,38011.2%
267,785255,4704.8%794,078738,9537.5%
Net operating income (a):
Same Store Facilities667,308651,6412.4%1,975,1581,853,7916.5%
Acquired Facilities76,90057,59333.5%205,982153,16734.5%
Newly Developed and Expanded Facilities47,57042,95910.7%136,296118,07315.4%
Other Non-Same Store Facilities19,15819,711(2.8)%55,51153,6913.4%
Total net operating income810,936771,9045.1%2,372,9472,178,7228.9%
Depreciation and amortization expense:
Same Store Facilities133,861126,5755.8%390,456371,4535.1%
Acquired Facilities75,79067,52912.2%207,499213,791(2.9)%
Newly Developed and Expanded Facilities15,36813,00118.2%44,75537,84518.3%
Other Non-Same Store Facilities13,72913,6670.5%39,82138,5193.4%
Total depreciation and amortization expense238,748220,7728.1%682,531661,6083.2%
Net income (loss):
Same Store Facilities533,447525,0661.6%1,584,7021,482,3386.9%
Acquired Facilities1,110(9,936)(111.2)%(1,517)(60,624)(97.5)%
Newly Developed and Expanded Facilities32,20229,9587.5%91,54180,22814.1%
Other Non-Same Store Facilities5,4296,044(10.2)%15,69015,1723.4%
Total net income$572,188$551,1323.8%$1,690,416$1,517,11411.4%
Number of facilities at period end:
Same Store Facilities2,3432,343—%
Acquired Facilities45927666.3%
Newly Developed and Expanded Facilities1401316.9%
Other Non-Same Store Facilities8686—%
3,0282,8366.8%
Net rentable square footage at period end:
Same Store Facilities155,112155,112—%
Acquired Facilities38,04524,99752.2%
Newly Developed and Expanded Facilities16,29614,9918.7%
Other Non-Same Store Facilities7,0497,078(0.4)%
216,502202,1787.1%

(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 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 14 to our September 30, 2023 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, 2021. The composition of our Same Store Facilities allows us more effectively to evaluate the ongoing performance of our self-storage portfolio in 2021, 2022, and 2023 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 (for all periods presented) of these 2,343 facilities (155.1 million net rentable square feet) that represent approximately 72% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at September 30, 2023. 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 (2,343 facilities)

Three Months Ended September 30,Nine Months Ended September 30,
20232022Percentage Change20232022Percentage Change
(Dollar amounts in thousands, except for per square foot data)
Revenues (a):
Rental income$840,066$820,8052.3%$2,494,408$2,355,9685.9%
Late charges and administrative fees29,64927,7916.7%86,24177,16611.8%
Total revenues869,715848,5962.5%2,580,6492,433,1346.1%
Direct cost of operations (a):
Property taxes77,98875,5503.2%231,846223,0763.9%
On-site property manager payroll31,31130,5722.4%95,32892,8652.7%
Repairs and maintenance14,77515,092(2.1)%47,44044,6686.2%
Utilities12,02312,661(5.0)%34,64735,214(1.6)%
Marketing18,02412,98238.8%48,02733,78142.2%
Other direct property costs22,59521,5494.9%67,85763,1637.4%
Total direct cost of operations176,716168,4064.9%525,145492,7676.6%
Direct net operating income (b)692,999680,1901.9%2,055,5041,940,3675.9%
Indirect cost of operations (a):
Supervisory payroll(8,091)(8,622)(6.2)%(25,783)(27,594)(6.6)%
Centralized management costs(15,241)(16,510)(7.7)%(46,335)(47,700)(2.9)%
Share-based compensation(2,359)(3,417)(31.0)%(8,228)(11,282)(27.1)%
Net operating income667,308651,6412.4%1,975,1581,853,7916.5%
Depreciation and amortization expense(133,861)(126,575)5.8%(390,456)(371,453)5.1%
Net income$533,447$525,0661.6%$1,584,702$1,482,3386.9%
Gross margin (before indirect costs, depreciation and amortization expense)79.7%80.2%(0.6)%79.7%79.7%—%
Gross margin (before depreciation and amortization expense)76.7%76.8%(0.1)%76.5%76.2%0.4%
Weighted average for the period:
Square foot occupancy93.4%94.5%(1.2)%93.4%95.3%(2.0)%
Realized annual rental income per (c):
Occupied square foot$23.20$22.383.7%$22.94$21.258.0%
Available square foot$21.65$21.162.3%$21.43$20.245.9%
At September 30:
Square foot occupancy92.1%93.3%(1.3)%
Annual contract rent per occupied square foot (d)$23.44$22.822.7%

(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 customers’ in-place rent and prevailing market rents, among other factors.

Revenues generated by our Same Store Facilities increased 2.5% and 6.1% in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increase is due primarily to (i) a 3.7% and 8.0% increase in realized annual rent per occupied square foot for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, partially offset by (ii) a 1.2% and 2.0% decrease in average occupancy for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022.

The increase in realized annual rent per occupied square foot in the three and nine months ended September 30, 2023 as compared to the same periods in 2022 was due to cumulative rate increases to existing long-term tenants over the past twelve months, partially offset by a 16.0% and 12.8% decrease in average rates per square foot charged to new tenants moving in, respectively. The growth rate in realized annual rent per occupied square foot has decelerated since the second half of 2022 from lower move-in rates and increased promotion discounts offered in order to replace tenants that vacate. At September 30, 2023, annual contract rent per occupied square foot was 2.7% higher as compared to September 30, 2022.

Occupancy levels, although strong, have gradually declined since the second half of 2022 as move-out activity increased and customer demand softened. The weighted average square foot occupancy for our same store facilities was 93.4% for each of the three and nine months ended September 30, 2023, representing a decrease of 1.2% and 2.0%, respectively, as compared to the same periods in 2022. We lowered move-in rental rates and increased promotional activity and advertising spending to increase move-in activity at our facilities, which led to a year-over-year 6.0% and 10.6% increase in move-in volumes that more than offset the year-over-year 2.9% and 7.6% increase in move-out volumes for the three and nine months ended September 30, 2023, respectively. Move-in volumes net of move-out volumes were higher in the nine months ended September 30, 2023 as compared to the same period in 2022, which reduced the year-over-year decline in occupancy levels between December 31, 2022 and September 30, 2023.

Move-out activities from our tenants were higher in the three and nine months ended September 30, 2023 as compared to the same periods in 2022, returning to pre-2020 levels. Average length of stay of our tenants remained at similar high levels in the three and nine months ended September 30, 2023 as compared to the same periods in 2022, which supported our revenue growth by contributing to the number of tenants eligible for rental rate increases.

Demand in the summer months of 2023 was impacted by the lower home-moving activities due to limited housing market transaction volumes. More typical seasonal patterns of demand with lower demand in the winter months returned in 2022 and is expected to continue. Demand fluctuates due to various local and regional factors, including the overall economy. Demand for our facilities is also impacted by new supply of self-storage space and alternatives to self-storage.

We expect weaker industry-wide demand in the remainder of 2023 as compared to 2022 driven by a weaker macroeconomic outlook and more limited home-moving activities, with move-out activities and occupancy levels returning to pre-2020 levels. To mitigate the negative impact of macroeconomic challenges, we will continue to support demand levels for our self-storage facilities with increased marketing expense, lowering rental rates to new customers, and increased promotional discounting. As a result, we expect revenue growth to decline significantly through the course of 2023 as compared to high levels of growth in 2022 and 2021, including the potential for year-over-year declines in revenue in the fourth quarter of 2023.

Late Charges and Administrative Fees

Late charges and administrative fees increased 6.7% and 11.8% for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, due to (i) higher late charges collected on delinquent accounts driven by more delinquent accounts and to a lesser extent (ii) higher administrative fees resulting from higher move-in volumes. Delinquency levels at our same store properties remain below pre-2020 levels.

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 and nine months ended September 30, 2023 and 2022. 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 September 30,Nine Months Ended September 30,
20232022Change20232022Change
(Amounts in thousands, except for per square foot amounts)
Tenants moving in during the period:
Average annual contract rent per square foot$15.96$18.99(16.0)%$16.21$18.60(12.8)%
Square footage28,47726,8696.0%84,26776,21810.6%
Contract rents gained from move-ins$113,623$127,561(10.9)%$1,024,476$1,063,241(3.6)%
Promotional discounts given$14,217$13,8862.4%$44,835$36,82221.8%
Tenants moving out during the period:
Average annual contract rent per square foot$21.64$21.401.1%$21.40$20.414.9%
Square footage29,98029,1462.9%84,31278,3367.6%
Contract rents lost from move-outs$162,192$155,9314.0%$1,353,208$1,199,12812.8%

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 2.8% and 4.5% in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increase during the three-month period is due primarily to increased property tax expense and marketing expense, while the increase during the nine-month period is due primarily to increased property tax expense, marketing expense, and other direct property costs.

Property tax expense increased 3.2% and 3.9% in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, as a result of higher assessed values. We expect property tax expense to grow 5.8% in 2023 due primarily to higher assessed values.

On-site property manager payroll expense increased 2.4% and 2.7% in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, due primarily to increases in wage rates as a result of competitive labor conditions experienced in most geographical markets. We expect an inflationary increase in on-site property manager payroll expense in 2023 driven by increased wage rates, partially offset by expected reduction in labor hours driven by revisions in operational processes.

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 increased marketing expense by 38.8% and 42.2% in the three and nine months ended September 30, 2023, respectively, by utilizing a higher volume of online paid search programs to attract new tenants, as compared to the same periods in 2022 when we refrained from advertising due to strong demand and high occupancy levels in many of our same store properties.

Other direct property costs include administrative expenses specific to each self-storage facility, such as property loss, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, tenant mailings, credit card fees, eviction costs, and the cost of operating each property’s rental office. These costs increased 4.9% and 7.4% in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. These increases were due primarily to an increase in credit card fees as a result of year-over-year increases in revenues, and to a lesser extent, 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 a moderate increase in other direct property costs in the remainder of 2023 primarily driven by an increase in credit card fees.

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 September 30, 2023Three Months Ended September 30,
Number of FacilitiesSquare Feet (millions)Realized Rent per Occupied Square FootAverage OccupancyRealized Rent per Available Square Foot
20232022Change20232022Change20232022Change
Los Angeles21415.5$36.40$33.877.5%95.0%96.5%(1.6)%$34.59$32.685.8%
San Francisco1297.932.7032.161.7%94.4%94.9%(0.5)%30.8830.521.2%
New York926.832.3531.512.7%93.6%94.2%(0.6)%30.2929.672.1%
Miami876.230.4329.254.0%93.2%94.8%(1.7)%28.3727.732.3%
Seattle-Tacoma896.026.3226.001.2%93.0%94.0%(1.1)%24.4724.440.1%
Washington DC905.526.9326.202.8%93.1%93.4%(0.3)%25.0724.472.5%
Dallas-Ft. Worth1117.618.8417.825.7%91.8%94.1%(2.4)%17.3016.773.2%
Chicago1308.220.4220.061.8%94.0%93.4%0.6%19.1818.732.4%
Atlanta1036.818.2118.011.1%91.7%93.6%(2.0)%16.6916.85(0.9)%
Houston1017.517.2116.365.2%92.1%93.2%(1.2)%15.8515.263.9%
Orlando-Daytona694.419.8518.755.9%93.0%95.6%(2.7)%18.4617.933.0%
Philadelphia563.521.5121.60(0.4)%93.6%93.7%(0.1)%20.1320.23(0.5)%
West Palm Beach392.826.8325.923.5%93.1%95.0%(2.0)%24.9924.621.5%
Tampa533.520.2719.613.4%91.3%94.5%(3.4)%18.5018.53(0.2)%
Charlotte523.916.3815.624.9%93.0%95.0%(2.1)%15.2314.852.6%
All other markets92859.018.9318.422.8%93.5%94.5%(1.1)%17.7017.401.7%
Totals2,343155.1$23.20$22.383.7%93.4%94.5%(1.2)%$21.65$21.162.3%

Same Store Facilities Operating Trends by Market (Continued)

Three Months Ended September 30,
Revenues ($000's)Direct Expenses ($000's)Indirect Expenses ($000's)Net Operating Income ($000's)
20232022Change20232022Change20232022Change20232022Change
Los Angeles$137,487$129,7066.0%$17,962$16,6697.8%$2,764$2,888(4.3)%$116,761$110,1496.0%
San Francisco62,27661,5441.2%9,4539,1972.8%1,4071,617(13.0)%51,41650,7301.4%
New York52,75051,3852.7%12,23311,7993.7%1,1481,348(14.8)%39,36938,2383.0%
Miami45,69544,5652.5%8,8158,0988.9%9801,054(7.0)%35,90035,4131.4%
Seattle-Tacoma37,90537,891—%6,5676,2295.4%9121,034(11.8)%30,42630,628(0.7)%
Washington DC35,86934,9372.7%7,0837,197(1.6)%9811,030(4.8)%27,80526,7104.1%
Dallas-Ft. Worth34,38133,2723.3%7,5657,5010.9%1,1341,187(4.5)%25,68224,5844.5%
Chicago40,76839,7182.6%15,66114,4828.1%1,3671,458(6.2)%23,74023,778(0.2)%
Atlanta29,81529,967(0.5)%6,2795,7479.3%1,0771,173(8.2)%22,45923,047(2.6)%
Houston30,95929,8293.8%8,8398,5004.0%1,0391,137(8.6)%21,08120,1924.4%
Orlando-Daytona21,09920,4533.2%4,2863,9039.8%769861(10.7)%16,04415,6892.3%
Philadelphia18,52818,605(0.4)%3,9873,9241.6%574671(14.5)%13,96714,010(0.3)%
West Palm Beach18,05117,7631.6%3,6943,798(2.7)%466503(7.4)%13,89113,4623.2%
Tampa16,87516,898(0.1)%3,8253,6036.2%566596(5.0)%12,48412,699(1.7)%
Charlotte15,68215,2392.9%2,9412,56514.7%480595(19.3)%12,26112,0791.5%
All other markets271,575266,8241.8%57,52655,1944.2%10,02711,397(12.0)%204,022200,2331.9%
Totals$869,715$848,5962.5%$176,716$168,4064.9%$25,691$28,549(10.0)%$667,308$651,6412.4%

Same Store Facilities Operating Trends by Market (Continued)

As of September 30, 2023Nine Months Ended September 30,
Number of FacilitiesSquare Feet (millions)Realized Rent per Occupied Square FootAverage OccupancyRealized Rent per Available Square Foot
20232022Change20232022Change20232022Change
Los Angeles21415.5$35.83$31.6313.3%95.5%97.1%(1.6)%$34.20$30.7111.4%
San Francisco1297.932.4830.984.8%94.3%95.5%(1.3)%30.6429.613.5%
New York926.832.1130.066.8%93.2%94.9%(1.8)%29.9328.515.0%
Miami876.230.1327.589.2%93.4%96.1%(2.8)%28.1526.516.2%
Seattle-Tacoma896.026.1824.745.8%92.6%94.7%(2.2)%24.2523.423.5%
Washington DC905.526.5325.145.5%92.7%93.9%(1.3)%24.5923.614.2%
Dallas-Ft. Worth1117.618.4816.909.3%92.6%94.8%(2.3)%17.1116.036.7%
Chicago1308.220.2018.976.5%93.1%94.4%(1.4)%18.8117.915.0%
Atlanta1036.818.1117.076.1%91.5%94.5%(3.2)%16.5716.142.7%
Houston1017.516.9815.529.4%92.1%93.9%(1.9)%15.6314.587.2%
Orlando-Daytona694.419.7217.5812.2%93.9%96.2%(2.4)%18.5216.919.5%
Philadelphia563.521.5320.674.2%93.2%95.1%(2.0)%20.0719.662.1%
West Palm Beach392.826.5124.607.8%93.7%96.2%(2.6)%24.8423.674.9%
Tampa533.520.0918.588.1%92.3%95.3%(3.1)%18.5417.714.7%
Charlotte523.916.1514.739.6%93.3%95.4%(2.2)%15.0714.067.2%
All other markets92859.018.7317.576.6%93.5%95.2%(1.8)%17.5216.724.8%
Totals2,343155.1$22.94$21.258.0%93.4%95.3%(2.0)%$21.43$20.245.9%

Same Store Facilities Operating Trends by Market (Continued)

Nine Months Ended September 30,
Revenues ($000's)Direct Expenses ($000's)Indirect Expenses ($000's)Net Operating Income ($000's)
20232022Change20232022Change20232022Change20232022Change
Los Angeles$407,515$365,48311.5%$52,436$48,2028.8%$8,262$8,622(4.2)%$346,817$308,65912.4%
San Francisco185,391178,9863.6%28,90026,5468.9%4,4575,084(12.3)%152,034147,3563.2%
New York156,018148,4375.1%37,22936,2172.8%3,6734,176(12.0)%115,116108,0446.5%
Miami135,910127,5216.6%24,78722,9068.2%3,1053,244(4.3)%108,018101,3716.6%
Seattle-Tacoma112,608108,8113.5%19,96218,4678.1%2,9163,082(5.4)%89,73087,2622.8%
Washington DC105,463101,0404.4%21,15021,157—%3,0273,107(2.6)%81,28676,7765.9%
Dallas-Ft. Worth101,95095,2217.1%22,67521,6714.6%3,4993,625(3.5)%75,77669,9258.4%
Chicago119,792113,7225.3%47,60243,7188.9%4,1754,501(7.2)%68,01565,5033.8%
Atlanta88,68485,9993.1%18,42216,72510.1%3,4383,648(5.8)%66,82465,6261.8%
Houston91,52285,2067.4%25,46724,2145.2%3,2173,437(6.4)%62,83857,5559.2%
Orlando-Daytona63,45357,8939.6%12,29811,15110.3%2,4332,610(6.8)%48,72244,13210.4%
Philadelphia55,40554,1762.3%11,83611,941(0.9)%1,9052,038(6.5)%41,66440,1973.6%
West Palm Beach53,77651,1955.0%11,24510,3818.3%1,5041,519(1.0)%41,02739,2954.4%
Tampa50,77148,3765.0%11,02510,1159.0%1,7691,860(4.9)%37,97736,4014.3%
Charlotte46,47843,2347.5%8,5227,37815.5%1,5711,798(12.6)%36,38534,0586.8%
All other markets805,913767,8345.0%171,589161,9785.9%31,39534,225(8.3)%602,929571,6315.5%
Totals$2,580,649$2,433,1346.1%$525,145$492,7676.6%$80,346$86,576(7.2)%$1,975,158$1,853,7916.5%

Acquired Facilities

The Acquired Facilities represent 459 facilities that we acquired in 2021, 2022, and 2023. 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 FACILITIESThree Months Ended September 30,Nine Months Ended September 30,
20232022Change (a)20232022Change (a)
($ amounts in thousands, except for per square foot amounts)
Revenues (b):
2021 Acquisitions$88,818$84,008$4,810$257,403$228,183$29,220
2022 Acquisitions13,0614,8638,19836,8577,07629,781
2023 Acquisitions10,622—10,62212,038—12,038
Total revenues112,50188,87123,630306,298235,25971,039
Cost of operations (b):
2021 Acquisitions27,36828,679(1,311)80,65677,9362,720
2022 Acquisitions5,3042,5992,70516,1664,15612,010
2023 Acquisitions2,929—2,9293,494—3,494
Total cost of operations35,60131,2784,323100,31682,09218,224
Net operating income:
2021 Acquisitions61,45055,3296,121176,747150,24726,500
2022 Acquisitions7,7572,2645,49320,6912,92017,771
2023 Acquisitions7,693—7,6938,544—8,544
Net operating income76,90057,59319,307205,982153,16752,815
Depreciation and amortization expense(75,790)(67,529)(8,261)(207,499)(213,791)6,292
Net income (loss)$1,110$(9,936)$11,046$(1,517)$(60,624)$59,107
At September 30:
Square foot occupancy:
2021 Acquisitions83.4%85.5%(2.5)%
2022 Acquisitions84.4%78.8%7.1%
2023 Acquisitions85.2%—%—%
84.1%84.7%(0.7)%
Annual contract rent per occupied square foot:
2021 Acquisitions$18.75$17.725.8%
2022 Acquisitions13.0211.1117.2%
2023 Acquisitions16.29——%
$17.29$16.952.0%
Number of facilities:
2021 Acquisitions232232—
2022 Acquisitions744430
2023 Acquisitions153—153
459276183
Net rentable square feet (in thousands) (c):
2021 Acquisitions (d)22,00921,830179
2022 Acquisitions4,7403,1671,573
2023 Acquisitions11,296—11,296
38,04524,99713,048

ACQUIRED FACILITIES (Continued)

As of September 30, 2023
Costs to acquire (in thousands):
2021 Acquisitions (d)$5,115,276
2022 Acquisitions730,957
2023 Acquisitions (e)2,502,988
$8,349,221

(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 Acquired Facilities have an aggregate of approximately 38.0 million net rentable square feet, including 13.9 million in Texas, 3.9 million in Maryland, 3.0 million in Florida, 1.9 million in Oklahoma, 1.3 million in South Carolina, 1.2 million in each of North Carolina and Virginia, 1.0 million in Indiana, 0.8 million in Tennessee, 0.7 million in each of California, Georgia, Idaho, and Ohio, 0.6 million in each of Arizona, Colorado, and Michigan, 0.5 million in each of Illinois, Minnesota, Nebraska, New Jersey, and Washington, 0.4 million in each of Mississippi and Oregon, 0.3 million in each of Nevada and New York, and 1.3 million in other states.

(d)We have completed the expansion projects on facilities acquired in 2021 for $26.8 million, adding 179,000 net rentable square feet of storage space as of September 30, 2023.

(e)The amount includes the costs allocated to land, buildings and intangible assets associated with the 127 self-storage facilities from the Simply Acquisition.

We have been active in acquiring facilities in recent years. Since the beginning of 2021, we acquired a total of 459 facilities with 38.0 million net rentable square feet for $8.3 billion. During the three and nine months ended September 30, 2023, these facilities contributed net operating income of $76.9 million and $206.0 million, respectively, consistent with our original underwritten expectations.

On September 13, 2023, we acquired BREIT Simply Storage LLC, a self-storage company that owns and operates 127 self-storage facilities (9.4 million square feet) and manages 25 self-storage facilities (1.8 million square feet) for third parties, for a purchase price of $2.2 billion in cash. Included in the 2023 Acquisition results in the table above are Simply portfolio self-storage revenues of $7.1 million, NOI of $5.8 million (including Direct NOI of $6.2 million), and average square footage occupancy of 89.0% for the three months ended September 30, 2023.

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. As of September 30, 2023, we have completed the expansion projects on four properties of this portfolio for $26.4 million, adding 169,000 net rentable square feet of storage space. Included in the Acquisition results in the table above are ezStorage portfolio revenues of $78.3 million, NOI of $61.4 million (including Direct NOI of $63.2 million), and average square footage occupancy of 86.5% for the nine months ended September 30, 2023.

During 2021, we acquired the All Storage portfolio, consisting of 56 properties (7.5 million net rentable square feet) for $1.5 billion. Included in the Acquisition results in the table above are All Storage portfolio revenues of $66.4 million, NOI of $42.4 million (including Direct NOI of $44.6 million), and average square footage occupancy of 78.3% for the nine months ended September 30, 2023.

We remain active in seeking to acquire additional self-storage facilities. Subsequent to September 30, 2023, we acquired or were under contract to acquire eleven self-storage facilities across eight states with 0.8 million net rentable square feet, for $170.3 million. Future acquisition volume is likely to be impacted by increasing cost of capital requirements and overall macro-economic uncertainties.

Developed and Expanded Facilities

The developed and expanded facilities include 52 facilities that were developed on new sites since January 1, 2018, and 88 facilities expanded to increase their net rentable square footage. Of these expansions, 61 were completed before 2022, 17 were completed in 2022 or 2023, and 10 are currently in process at September 30, 2023. The following table summarizes operating data with respect to the Developed and Expanded Facilities:

DEVELOPED AND EXPANDED FACILITIES
Three Months Ended September 30,Nine Months Ended September 30,
20232022Change (a)20232022Change (a)
($ amounts in thousands, except for per square foot amounts)
Revenues (b):
Developed in 2018$10,275$9,712$563$30,083$26,995$3,088
Developed in 20194,6724,42324913,58812,0461,542
Developed in 20201,9121,7821305,7434,940803
Developed in 20212,8882,3904988,2545,7502,504
Developed in 20222,0311371,8944,7141374,577
Developed in 2023307—307470—470
Expansions completed before 202235,42333,7551,668103,79893,37010,428
Expansions completed in 2022 or 20236,4064,5771,82917,22712,3584,869
Expansions in process3,8444,502(658)11,35613,615(2,259)
Total revenues67,75861,2786,480195,233169,21126,022
Cost of operations (b):
Developed in 20182,9892,896938,6577,883774
Developed in 20191,4771,395824,4384,267171
Developed in 2020493456371,3671,31156
Developed in 20219111,010(99)2,7532,69756
Developed in 20221,0302367942,9752362,739
Developed in 2023343—343838—838
Expansions completed before 202210,25510,2183730,15528,7661,389
Expansions completed in 2022 or 20232,0031,2147895,5993,3642,235
Expansions in process687894(207)2,1552,614(459)
Total cost of operations20,18818,3191,86958,93751,1387,799
Net operating income (loss):
Developed in 20187,2866,81647021,42619,1122,314
Developed in 20193,1953,0281679,1507,7791,371
Developed in 20201,4191,326934,3763,629747
Developed in 20211,9771,3805975,5013,0532,448
Developed in 20221,001(99)1,1001,739(99)1,838
Developed in 2023(36)—(36)(368)—(368)
Expansions completed before 202225,16823,5371,63173,64364,6049,039
Expansions completed in 2022 or 20234,4033,3631,04011,6288,9942,634
Expansions in process3,1573,608(451)9,20111,001(1,800)
Net operating income47,57042,9594,611136,296118,07318,223
Depreciation and amortization expense(15,368)(13,001)(2,367)(44,755)(37,845)(6,910)
Net income$32,202$29,958$2,244$91,541$80,228$11,313
DEVELOPED AND EXPANDED FACILITIES (Continued)
As of September 30,
20232022Change (a)
($ amounts in thousands, except for per square foot amounts)
Square foot occupancy:
Developed in 201888.3%89.4%(1.2)%
Developed in 201987.0%88.4%(1.6)%
Developed in 202091.7%93.1%(1.5)%
Developed in 202186.7%82.7%4.8%
Developed in 202279.8%25.8%209.3%
Developed in 202337.2%—%—%
Expansions completed before 202287.8%88.4%(0.7)%
Expansions completed in 2022 or 202375.9%73.5%3.3%
Expansions in process85.3%85.7%(0.5)%
84.6%85.2%(0.7)%
Annual contract rent per occupied square foot:
Developed in 2018$21.71$20.724.8%
Developed in 201919.0818.204.8%
Developed in 202022.9521.466.9%
Developed in 202119.2417.728.6%
Developed in 202215.6216.19(3.5)%
Developed in 20239.81——%
Expansions completed before 202218.4917.853.6%
Expansions completed in 2022 or 202318.2818.43(0.8)%
Expansions in process29.8429.271.9%
$18.94$18.383.0%
Number of facilities:
Developed in 20181818—
Developed in 20191111—
Developed in 202033—
Developed in 202166—
Developed in 2022853
Developed in 20236—6
Expansions completed before 20226161—
Expansions completed in 2022 or 20231717—
Expansions in process1010—
1401319
Net rentable square feet (in thousands) (c):
Developed in 20182,0692,069—
Developed in 20191,0571,057—
Developed in 2020347347—
Developed in 2021681681—
Developed in 2022631399232
Developed in 2023595—595
Expansions completed before 20228,3998,38217
Expansions completed in 2022 or 20231,9051,432473
Expansions in process612624(12)
16,29614,9911,305
As of September 30, 2023
Costs to develop (in thousands):
Developed in 2018$262,187
Developed in 2019150,387
Developed in 202042,063
Developed in 2021115,632
Developed in 2022100,089
Developed in 202399,893
Expansions completed before 2022 (d)506,594
Expansions completed in 2022 or 2023 (d)173,125
$1,449,970

(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 16.3 million net rentable square feet at September 30, 2023, including 3.9 million in Texas, 3.0 million in Florida, 2.4 million in California, 1.4 million in each of Colorado and Minnesota, 0.8 million in North Carolina, 0.7 million in Michigan, 0.4 million in Missouri, 0.3 million in each of New Jersey, South Carolina, Virginia, and Washington, and 1.1 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, the related construction and development overhead expenses included in general and administrative expense, and the net operating loss from newly developed facilities undergoing fill-up.

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 September 30, 2023. We incurred a total of $679.7 million in direct cost to expand these facilities, demolished a total of 1.2 million net rentable square feet of storage space, and built a total of 6.5 million net rentable square feet of new storage space.

At September 30, 2023, we had 24 additional facilities in development, which will have a total of 2.4 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $501.8 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 September 30, 2023, and together with additional future expansion activities primarily related to our Same Store Facilities at September 30, 2023, we expect to add a total of 2.2 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of $450.3 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, 2021, including facilities undergoing 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 7.0 million net rentable square feet, including 1.2 million in Texas, 0.5 million in Pennsylvania, 0.4 million in each of California, Illinois, Michigan, Minnesota, Ohio, and Washington, 0.3 million in each of Arizona, Florida, and South Carolina, 0.2 million in each of Alabama, Colorado, Georgia, Missouri, and Virginia, and 1.0 million in other states.

During the three and nine months ended September 30, 2023 and 2022, the average occupancy for these facilities totaled 89.4% and 88.1%, respectively, as compared to 91.4% and 90.7% for the same periods in 2022, and the realized rent per occupied square foot totaled $18.45 and $18.22, respectively, as compared to $17.58 and $16.45 for the same periods in 2022.

Depreciation and amortization expense

Depreciation and amortization expense for Self-Storage Operations increased $18.0 million and $20.9 million in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, due to elevated levels of capital expenditures and new facilities that are recently acquired and developed.

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 September 30,Nine Months Ended September 30,
20232022Change20232022Change
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums$51,355$47,960$3,395$151,025$139,842$11,183
Merchandise6,9997,378(379)21,11421,783(669)
Third party property management6,7455,4191,32618,65814,3214,337
Total revenues65,09960,7574,342190,797175,94614,851
Cost of operations:
Tenant reinsurance10,30012,191(1,891)31,77127,6664,105
Merchandise4,2474,517(270)12,94712,948(1)
Third party property management6,6124,8641,74818,31913,6834,636
Total cost of operations21,15921,572(413)63,03754,2978,740
Net operating income:
Tenant reinsurance41,05535,7695,286119,254112,1767,078
Merchandise2,7522,861(109)8,1678,835(668)
Third party property management133555(422)339638(299)
Total net operating income$43,940$39,185$4,755$127,760$121,649$6,111

Tenant reinsurance operations: Tenant reinsurance premium revenue increased $3.4 million or 7.1% for the three months ended September 30, 2023, and increased $11.2 million or 8.0% for the nine months ended September 30, 2023, in each case as compared to the same period in 2022, as a result of 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 $37.7 million and $112.2 million for the three and nine months ended September 30, 2023, respectively, as compared to $36.4 million and $108.2 million for the same periods in 2022, representing an increase of 3.6% and 3.7%, respectively.

We expect future growth will come primarily from customers of newly acquired and developed facilities and the increase of tenant insurance participation at our same store 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 that drive covered customer losses, such as burglary, as well as catastrophic weather events affecting multiple properties such as hurricanes and floods. Tenant reinsurance cost of operations increased $4.1 million for the nine months ended September 30, 2023, respectively, as compared to the same period in 2022, primarily due to increased claim expenses related to fire and flooding events.

Third-party property management: At September 30, 2023, in our third-party property management program, we managed 168 facilities for unrelated third parties, and were under contract to manage 90 additional facilities including 85 facilities that are currently under construction. During the nine months ended September 30, 2023, we added 80 facilities to the program (including 25 third-party facilities from the Simply Acquisition), acquired one facility from the program, and had 13 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

We account for the equity investments in Shurgard and PSB (prior to the sale of our investment in PSB) 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 September 30,Nine Months Ended September 30,
20232022Change20232022Change
(Amounts in thousands)
Equity in earnings:
Shurgard$7,227$4,594$2,633$22,787$19,533$3,254
PSB—3,586(3,586)—80,596(80,596)
Total equity in earnings$7,227$8,180$(953)$22,787$100,129$(77,342)

Investment in Shurgard: For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately 1.057 U.S. Dollars per Euro at September 30, 2023 (1.070 at December 31, 2022), and average exchange rates of 1.088 and 1.008 for the three months ended September 30, 2023 and 2022, respectively, and average exchange rates of 1.083 and 1.065 for the nine months ended September 30, 2023 and 2022, respectively.

Included in our equity earnings from Shurgard for the nine months ended September 30, 2022 is our equity share of gains on sale of real estate totaling $3.5 million (none for the same periods in 2023). Also included were $8.5 million and $26.1 million of our share of depreciation and amortization expense for the three and nine months ended September 30, 2023, respectively, as compared to $8.6 million and $23.6 million for the same periods in 2022.

Investment in PSB: On July 20, 2022, in connection with the closing of the merger of PSB with Blackstone, we completed the sale of our 41% common equity interest in PSB in its entirety. At the close of the merger transaction, we received a total of $2.7 billion of cash proceeds and recognized a gain of $2.1 billion during the third quarter of 2022.

Included in our equity earnings from PSB for the nine months ended September 30, 2022 is our equity share of gains on sale of real estate totaling $49.1 million (none for the three months ended September 30, 2022). Our equity share of earnings from PSB contributed $5.6 million and $57.7 million, respectively, to Core FFO in the three and nine months ended September 30, 2022. Since the sale of PSB in July 2022, we no longer recognize equity in earnings from PSB.

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

Three Months Ended September 30,Nine Months Ended September 30,
20232022Change20232022Change
(Amounts in thousands)
Share-based compensation expense$6,231$9,335$(3,104)$20,033$30,167$(10,134)
Development and acquisition costs4,7572,5712,18612,8039,0853,718
Federal and State tax expense and related compliance costs2,9035,546(2,643)9,28011,661(2,381)
Legal costs6581,100(442)2,4332,320113
Corporate management costs5,9704,99497618,52215,3353,187
Other costs8,1065,9552,15116,53212,8333,699
Total$28,625$29,501$(876)$79,603$81,401$(1,798)

General and administrative expense decreased $0.9 million and $1.8 million in the three and nine months ended September 30, 2023, respectively, as compared to the same period in 2022 due primarily to (i) a decrease in share-based compensation expense driven by the absence of comparable accelerated compensation expense recognized for awards granted to corporate management personnel who are eligible for immediate vesting of their outstanding awards upon retirement, (ii) a decrease in State and local tax expense driven by lower projected annual taxable income, partially offset by (iii) an increase in development and acquisition costs driven by higher write-off of costs related to cancelled development and expansion projects, (iv) an increase in other costs driven by higher spending in IT applications and software development and costs incurred for UPREIT reorganization, and (v) an increase in corporate management costs driven by higher payroll costs.

Interest and other income: The following table sets forth our interest and other income:

Three Months Ended September 30,Nine Months Ended September 30,
20232022Change20232022Change
(Amounts in thousands)
Interest earned on cash balances$28,515$8,149$20,366$53,619$10,307$43,312
Commercial operations2,1433,011(868)7,1107,259(149)
Unrealized gain on private equity investments122344(222)2,6154,641(2,026)
Other1,5151,2322836,0374,1871,850
Total$32,295$12,736$19,559$69,381$26,394$42,987

Interest earned on cash balances increased $20.4 million and $43.3 million in the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022 due primarily to higher average cash balances resulting from temporary cash held from the issuance of $2.2 billion unsecured senior notes on July 26, 2023 until the funding of the Simply Acquisition on September 13, 2023 and higher interest rates in the financial markets in 2023 as compared to 2022.

Interest expense: For the three and nine months ended September 30, 2023, we incurred $61.4 million and $139.3 million, respectively, of interest on our outstanding notes payable, as compared to $35.8 million and $104.4 million for the same periods in 2022. In determining interest expense, these amounts were offset by capitalized interest of $3.0 million and $6.8 million during the three and nine months ended September 30, 2023, respectively, associated with our development activities, as compared to $1.7 million and $4.2 million for the same periods in 2022. The increase of interest expense in the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is due to the issuance of $2.2 billion notes payable in July 2023 and the increase of Compounded SOFR on our $700.0 million variable rate unsecured notes issued in April 2021, partially offset by the interest savings on the $500.0 million unsecured notes redeemed in August 2022. At September 30, 2023, we had $9.0 billion of notes payable outstanding, with a weighted average interest rate of approximately 3.1%.

Foreign Currency Exchange Gain: For the three and nine months ended September 30, 2023, we recorded foreign currency gains of $47.9 million and $19.9 million, respectively, representing primarily the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates. For the three and nine months ended September 30, 2022, we recorded foreign currency gains of $100.2 million and $237.3 million, respectively. The Euro was translated at exchange rates of approximately 1.057 U.S. Dollars per Euro at September 30, 2023, 1.070 at December 31, 2022, 0.980 at September 30, 2022 and 1.134 at December 31, 2021. 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.

Liquidity and Capital Resources

Overview and our 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, our annual operating retained cash flow increased from $200 million to $300 million per year in recent years to approximately $700 million in 2021 and $1 billion in 2022. Retained operating cash flow represents our expected cash flow provided by operating activities (including property operating costs and interest payments described below), less shareholder distributions and capital expenditures. We expect retained cash flow of approximately $500 million for 2023.

Capital needs in excess of retained cash flow are met with: (i) medium and long-term debt, (ii) preferred equity, (iii) limited partnership interests, and (iv) 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 have 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 enables us to effectively access both the public and private capital markets to raise capital.

On June 12, 2023, we amended our revolving line of credit, increasing the borrowing limit from $500 million to $1.5 billion. We increased the size of the revolving line of credit and its associated lender base given our increased levels of debt maturities in coming years and to serve as temporary “bridge” financing until we are able to raise longer term capital. As of September 30, 2023 and October 30, 2023, there were no borrowings outstanding on the revolving line of credit; however, we do have approximately $14.6 million of outstanding letters of credit, which limits our borrowing capacity to $1,485.4 million as of October 30, 2023. Our line of credit matures on June 12, 2027.

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. While the costs of financing have increased recently, based on our strong credit profile and 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 deteriorated significantly for a long period of time, our access to or cost of debt and preferred equity capital could be negatively impacted and potentially affect future investment activities.

Our current and expected capital resources include: (i) $629.8 million of cash as of September 30, 2023 and (ii) approximately $400 million to $450 million of expected retained operating cash flow over the next twelve months. Additionally, we have $1,485.4 million available borrowing capacity on our revolving line of credit, which can be used as temporary “bridge” financing until we are able to raise longer term capital. 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.

As described below, our current committed cash requirements consist of (i) $170.3 million in property acquisitions currently under contract, (ii) $495.0 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 to 24 months, and (iii) $806 million in scheduled principal repayments on our unsecured and mortgage notes in the next twelve months, including $700 million of our U.S. Dollar denominated unsecured notes that mature on April 23, 2024 and €100 million of our Euro denominated unsecured notes that mature on April 12, 2024. We plan to refinance these unsecured notes as they come due in April 2024. Our cash requirements may increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential cash requirements could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or merger and acquisition activities, as and to the extent we determine to engage in such activities.

Over the long term, to the extent that our cash requirements exceed our capital resources, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, debt, and limited partnership interests, 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, 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 financings.

Required Debt Repayments: As of September 30, 2023, the principal outstanding on our debt totaled approximately $9.1 billion, consisting of $7.5 billion of U.S. Dollar denominated unsecured notes payable, $1.6 billion of Euro-denominated unsecured notes payable, and $1.9 million of mortgage notes payable. Approximate principal maturities and interest payments (including $78.7 million in estimated interest on our $1.1 billion variable rate unsecured notes based on rates in effect at September 30, 2023) are as follows (amounts in thousands):

PrincipalInterestTotal
Remainder of 2023$30$58,237$58,267
2024805,868249,7521,055,620
2025656,046221,978878,024
20261,150,138196,2231,346,361
2027500,146184,278684,424
Thereafter5,970,2221,265,5377,235,759
$9,082,450$2,176,005$11,258,455

We have $700 million of our U.S. Dollar denominated unsecured notes that mature on April 23, 2024 and €100 million of our Euro denominated unsecured notes that mature on April 12, 2024. We plan to refinance these unsecured notes as they come due in April 2024.

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.

We spent $158 million of capital expenditures to maintain real estate facilities in the first nine months of 2023 and expect to spend approximately $200 million in 2023. 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 and upgrades to the configuration and layout of the offices and other customer zones to improve the customer experience. We spent approximately $119 million in the first nine months of 2023 and expect to spend $150 million in 2023 on this effort. In addition, we have spent $46 million in LED lighting and the installation of solar panels in the nine months ended September 30, 2023 and we expect to spend $60 million in 2023.

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 Internal Revenue 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.

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 September 30, 2023 is approximately $194.7 million per year.

Real Estate Investment Activities: We continue to seek to acquire additional self-storage facilities from third parties. Subsequent to September 30, 2023, we acquired or were under contract to acquire eleven self-storage facilities for a total purchase price of $170.3 million.

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 September 30, 2023, we had development and expansion projects at a total cost of approximately $952.1 million. Costs incurred through September 30, 2023 were $457.1 million, with the remaining cost to complete of $495.0 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 October 30, 2023, we have two series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice: our 5.150% Series F Preferred Shares ($280.0 million) and our 5.050% Series G Preferred Shares ($300.0 million). See Note 10 to our September 30, 2023 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 nine months ended September 30, 2023, we did not repurchase any of our common shares. From the inception of the repurchase program through October 30, 2023, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. We have no current plans to repurchase shares; however future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.

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