LIFE STORAGE, INC. The following discussion and analysis of the Company's consolidated financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this document, the words "intends," "believes," "expects," "anticipates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934. All forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
this report. Any forward-looking statements should be considered in light of the
risks referenced in "Part I. Item 1A. Risk Factors" in our 2022 annual report on
form 10-K filed with the
•
adverse changes in general economic conditions, the real estate industry and in the markets in which we operate;
•
risks associated with our ability to consummate the Mergers with
•
the effect of competition from new self-storage facilities or other storage alternatives, which would cause rents and occupancy rates to decline;
•
impacts from the COVID-19 pandemic or the future outbreak of other highly
infectious or contagious diseases on the
•
potential liability for uninsured losses and environmental contamination;
•
the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts ("REITs"), tenant reinsurance and other aspects of our business, which could adversely affect our results;
•
loss of key personnel;
•
the Company's ability to evaluate, finance and integrate acquired self-storage facilities on expected terms into the Company's existing business and operations;
•
the Company's ability to effectively compete in the industry in which it does business;
•
disruptions in credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates or at all, which could impede our ability to grow;
•
the Company's existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms;
•
interest rates may increase, impacting costs associated with the Company's outstanding floating rate debt, if any, and impacting the Company's ability to comply with debt covenants;
•
exposure to litigation or other claims;
•
risks associated with breaches of our data security;
•
the regional concentration of the Company's business may subject the Company to
economic downturns in the states of
27
--------------------------------------------------------------------------------
•
the Company's cash flow may be insufficient to meet required payments of operating expenses, principal, interest and dividends; and
•
failure to maintain our REIT status for
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our securities.
RESULTS OF OPERATIONS
FOR THE PERIOD
We recorded rental revenues of
Property operations and maintenance expenses increased
Net operating income increased
Net operating income, or "NOI," is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, operating lease expense, depreciation and amortization expense, any losses on sale of real estate, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, any gains on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure to investors in evaluating our operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. Additionally, NOI is widely used in the real estate industry and the self-storage industry to measure the performance and value of real estate assets without regard to various items included in net income that do not relate to or are not indicative of operating performance, such as depreciation and amortization, which can vary depending on accounting methods and the book value of assets. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income. There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these
28
--------------------------------------------------------------------------------
limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income.
The following table reconciles our net income presented in the consolidated
financial statements to NOI generated by our self-storage facilities for the
three months ended
Three Months ended
March 31,
(dollars in thousands) 2023 2022
Net income $ 83,266 $ 75,418
General and administrative 27,818 15,826
Depreciation and amortization 47,769 46,401
Interest expense 33,113 24,240
Interest income (12 ) (15 )
Equity in income of joint ventures (1,629 ) (2,118 )
Net operating income $ 190,325 $ 159,752
Net operating income
Same store $ 152,523 $ 135,169 Other stores, tenant reinsurance related income
management fee income, and gain on sale of
non-real estate assets 37,802 24,583 Total net operating income$ 190,325 $ 159,752
Our 2023 same store results consist of only those properties that have been
owned by the Company and included in our consolidated results since
Same Store Summary
Three Months ended
March 31, Percentage
(dollars in thousands) 2023 2022 Change
Same store rental income $ 211,534 $ 190,883 10.8 %
Same store other operating income 1,746 2,062 (15.3 )%
Total same store operating income 213,280 192,945 10.5 %
Payroll and benefits 12,754 12,368 3.1 %
Real estate taxes 23,613 22,418 5.3 %
Utilities 5,413 5,083 6.5 %
Repairs and maintenance 6,295 5,995 5.0 %
Office and other operating expenses 5,782 5,342 8.2 %
Insurance 2,250 2,045 10.0 %
Advertising - 60 (100.0 )%
Internet marketing 4,650 4,465 4.1 %
Total same store operating expenses 60,757 57,776 5.2 %
Same store net operating income $ 152,523 $ 135,169 12.8 %
Change
Quarterly same store move ins 58,659 58,042 617 Quarterly same store move outs 61,161 57,040 4,121
We believe the increase in same store move ins was due to additional spaces
available to rent as well as incremental demand linked to elevated levels of
mobility, decluttering, and home buying during the three months ended
29
--------------------------------------------------------------------------------
months ended
General and administrative expenses for the three months ended
Depreciation and amortization expense increased to
Gain on sale of non-real estate assets increased by
Total interest expense increased by
FUNDS FROM OPERATIONS
We believe that Funds from Operations ("FFO") provides relevant and meaningful information about our operating performance that is necessary, along with net earnings and cash flows, for an understanding of our operating results. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful supplemental measure in evaluating our operating performance by disregarding (or adding back) historical cost depreciation.
FFO is defined by the
Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, or as an indicator of our ability to make cash distributions.
Reconciliation of Net Income to Funds From Operations (unaudited)
Three Months ended March 31,
(in thousands) 2023 2022
Net income attributable to common shareholders
interests in the Operating Partnership 1,333 847
Net income attributable to noncontrolling preferred
interests in the Operating Partnership 330 -
Depreciation of real estate and amortization of
intangible assets exclusive of debt issuance costs 47,573 45,866
Depreciation and amortization from unconsolidated
joint ventures 3,187 1,802
Funds from operations allocable to noncontrolling
interest in the Operating Partnership (2,154 ) (1,389 )
Funds from operations available to common
shareholders$ 131,877 $ 120,701 30
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our line of credit and term notes require us to meet certain financial covenants
measured on a quarterly basis, including prescribed leverage, fixed charge
coverage, minimum net worth, limitations on additional indebtedness, and
limitations on dividend payouts. At
Our ability to retain cash flow is limited because we operate as a REIT. To maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally-generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements.
Cash flows from operating activities were
Cash used in investing activities was
Cash used in financing activities was
Note 6 and Note 7 to the consolidated financial statements include details related to the Company's unsecured line of credit, term notes, mortgages, and other indebtedness. Note 13 to the consolidated financial statements includes details of our shareholders' equity and activity related thereto.
Our line of credit facility and term notes have an investment grade rating from Standard and Poor's (BBB) and Moody's (Baa2).
We expect to fund operating expenses, future acquisitions, our expansion and enhancement program, and share repurchases, if any, and any other cash requirements with future cash flows from operations, draws on our line of credit, issuance of common and/or preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program and/or any share repurchases.
31
--------------------------------------------------------------------------------
ACQUISITION AND DISPOSITION OF PROPERTIES
The Company did not acquire any self-storage facilities during the three months
ended
In 2022, we acquired 49 self-storage facilities comprising 3.8 million square
feet in
We may acquire additional stabilized or newly constructed properties in 2023,
however, there is no assurance that the Company will do so. Additionally, there
can be no assurance that if significant additional opportunities were to arise,
we would be able to raise capital at a reasonable cost to allow us to take
advantage of such opportunities. We are actively pursuing acquisitions in 2023
and at
The Company did not sell or otherwise dispose of any properties during the three
months ended
As part of our ongoing strategy to improve overall operating efficiencies and portfolio quality, we may seek to sell self-storage facilities to third-parties or joint venture partners in 2023.
FUTURE ACQUISITION AND DEVELOPMENT PLANS
Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations or to expand into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2023, including potential acquisitions by unconsolidated joint ventures.
During the three months ended
We also expect to continue investing in capital expenditures on our properties.
This includes roofing, paving, and remodeling of store offices. For the three
months ended
REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that we satisfy certain requirements, including distributing at least 90% of our REIT taxable income for a taxable year. These distributions must be made in the year to which they relate, or in the following year if declared before we file our federal income tax return, and if they are paid not later than the date of the first regular dividend of the following year. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends.
Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.
32
--------------------------------------------------------------------------------
UMBRELLA PARTNERSHIP REIT
We are formed as an
INTEREST RATE RISK
The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.
Based on our outstanding unsecured floating rate debt of
INFLATION
We do not believe that inflation has had or will have a direct effect on our operations. Substantially all of the leases at our facilities are on a month-to-month basis which provides us with the opportunity to increase rental rates in a timely manner in response to any potential future inflationary pressures.
SEASONALITY
Our revenues typically have been higher in the third and fourth quarters, primarily because self-storage facilities tend to experience greater occupancy during the late spring, summer and early fall months due to the greater incidences of residential moves and college student activity during these periods. However, we believe that our customer mix, diverse geographic locations, rental structure and expense structure provide adequate protection against undue fluctuations in cash flows and net revenues during off-peak seasons. Thus, we do not expect seasonality to materially affect distributions to shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
None that materially affect the Company.
33
--------------------------------------------------------------------------------
© Edgar Online, source
