NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Effective
August 15, 2016, the Parent Company changed its name from Sovran Self Storage, Inc. to Life Storage, Inc. and the Operating Partnership changed its name from Sovran Acquisition Limited Partnership to
Life Storage LP. Also, consistent with these name changes, and in connection with the rebranding of our storage facilities from Uncle Bobs Self Storage
®
to
Life Storage
®
, the name of the general partner of the Operating Partnership has been changed from Sovran Holdings, Inc. to Life Storage Holdings, Inc. and
the name of the Parent Companys taxable REIT subsidiary changed from Uncle Bobs Management, LLC to Life Storage Solutions, LLC.
The Parent Company, which operates as a self-administered and self-managed real estate investment trust (a REIT), was formed on
April 19, 1995 to own and operate self-storage facilities throughout the United States. On June 26, 1995, the Parent Company commenced operations effective with the completion of its initial public offering. The Parent Company, the
Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the Company. In addition, terms such as we, us, or our used in this report may refer to the
Company, the Parent Company and/or the Operating Partnership.
At December 31, 2016, we had an ownership interest in, and/or managed
659 self-storage properties in 29 states under the names Life Storage
®
and Uncle Bobs Self Storage
®
. Among our 659 self-storage
properties are 39 properties that we manage for an unconsolidated joint venture (Sovran HHF Storage Holdings LLC) of which we are a 20% owner, 30 properties that we manage for an unconsolidated joint venture (Sovran HHF Storage Holdings II LLC) of
which we are a 15% owner, and 26 properties that we manage and have no ownership interest. Approximately 38% of the Companys revenue is derived from stores in the states of Texas and Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
:
All of the Companys assets are owned by, and all its operations are conducted through the
Operating Partnership. Life Storage Holdings, Inc., a wholly-owned subsidiary of the Parent Company (Holdings), is the sole general partner of the Operating Partnership; the Parent Company is a limited partner of the Operating
Partnership, and through its ownership of Holdings and its limited partnership interest controls the operations of the Operating Partnership, holding a 99.5% ownership interest therein as of December 31, 2016. The remaining ownership interests
in the Operating Partnership (the Units) are held by certain former owners of assets acquired by the Operating Partnership.
We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are consolidated when we control the
entity. Our consolidated financial statements include the accounts of the Parent Company, the Operating Partnership, and Life Storage Solutions, LLC. All intercompany transactions and balances have been eliminated. Investments in joint ventures
that we do not control but for which we have significant influence over are accounted for using the equity method.
Included in the Parent
Companys consolidated balance sheets are noncontrolling redeemable operating partnership units and included in the Operating Partnerships consolidated balance sheets are limited partners redeemable capital interest at redemption
value. These interests are presented in the mezzanine section of the consolidated balance sheets because they do not meet the functional definition of a liability or equity under current accounting literature. These represent the outside
ownership interests of the limited partners in the Operating Partnership. At December 31, 2016, there were 217,481 noncontrolling redeemable operating partnership Units outstanding (168,866 at December 31, 2015). These unitholders are
entitled to receive distributions per unit equivalent to the dividends declared per share on the Parent Companys common stock. The Operating Partnership is obligated to redeem each of these limited partnership Units in the Operating
Partnership at the request of the holder thereof for cash equal to the fair market value of a share of the Companys common stock, at the time of such redemption, provided that the Company at its option may elect to acquire any such Unit
presented for redemption for one common share or cash. The Company accounts for these noncontrolling redeemable Operating Partnership
55
Units under the provisions of EITF D-98,
Classification and Measurement of Redeemable Securities
which was codified in FASB ASC Topic 480-10-S99. The application of the FASB
ASC Topic 480-10-S99 accounting model requires the noncontrolling interest to follow normal noncontrolling interest accounting and then be marked to redemption value at the end of each reporting period if higher (but never adjusted below that normal
noncontrolling interest accounting amount). The offset to the adjustment to the carrying amount of the noncontrolling redeemable Operating Partnership Units is reflected in the Parent Companys dividends in excess of net income and in the
Operating Partnerships general partner and limited partners capital balances. Accordingly, in the accompanying consolidated balance sheets, noncontrolling interests are reflected at redemption value at December 31, 2016 and 2015, equal to
the number of noncontrolling interest units outstanding multiplied by the fair market value of the Parent Companys common stock at that date. Redemption value exceeded the value determined under the Companys historical basis of
accounting at those dates.
The following is a reconciliation of the Parent Companys noncontrolling redeemable Operating Partnership
Units:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Beginning balance noncontrolling redeemable Operating Partnership Units
|
|
$
|
18,171
|
|
|
$
|
13,622
|
|
Redemption of Operating Partnership Units
|
|
|
(4,795
|
)
|
|
|
(1,005
|
)
|
Redemption value in excess of carrying value
|
|
|
|
|
|
|
80
|
|
Issuance of Operating Partnership Units
|
|
|
9,516
|
|
|
|
2,148
|
|
Net income attributable to noncontrolling interests in Operating Partnership
|
|
|
398
|
|
|
|
553
|
|
Distributions
|
|
|
(742
|
)
|
|
|
(555
|
)
|
Adjustment to redemption value
|
|
|
(4,457
|
)
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
Ending balance noncontrolling redeemable Operating Partnership Units
|
|
$
|
18,091
|
|
|
$
|
18,171
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the Operating Partnerships limited partners redeemable
capital interest:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Beginning balance Limited Partners Redeemable Capital Interest
|
|
$
|
18,171
|
|
|
$
|
13,622
|
|
Redemption of Limited Partners Redeemable Capital Interest Units
|
|
|
(4,795
|
)
|
|
|
(1,005
|
)
|
Redemption value in excess of carrying value
|
|
|
|
|
|
|
80
|
|
Issuance of Limited Partners Redeemable Capital Interest Units
|
|
|
9,516
|
|
|
|
2,148
|
|
Net income attributable to Limited Partners Redeemable Capital Interest
|
|
|
398
|
|
|
|
553
|
|
Distributions
|
|
|
(742
|
)
|
|
|
(555
|
)
|
Adjustment to redemption value
|
|
|
(4,457
|
)
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
Ending balance Limited Partners Redeemable Capital Interest
|
|
$
|
18,091
|
|
|
$
|
18,171
|
|
|
|
|
|
|
|
|
|
|
In 2016 the Operating Partnership issued 90,477 Units with a fair value of $9.5 million to acquire
self-storage properties. In 2015 the Company issued 23,382 Units with a fair value of $2.1 million to acquire one self-storage property. The fair value of the Units on the dates of issuance was determined based upon the fair market value of the
Companys common stock on those dates.
Operating Partnership Units redeemed in 2016 were redeemed for a total of 41,862 shares of
the Parent Company.
Cash and Cash Equivalents
:
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
Accounts Receivable
:
Accounts receivable are composed of
trade and other receivables recorded at billed amounts and do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable uncollectible amounts in the Companys existing accounts
receivable. The Company determines the allowance based on a number of factors, including experience, credit worthiness of customers, and current market and economic conditions. The Company reviews the allowance for doubtful accounts on a regular
basis. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts is recorded as a reduction of accounts receivable
and amounted to $1.0 million and $0.4 million at December 31, 2016 and 2015, respectively.
56
Revenue and Expense Recognition
:
Rental income is recognized when earned
pursuant to month-to-month leases for storage space. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Rental income received prior to the start
of the rental period is included in deferred revenue. Equity in earnings of real estate joint ventures that we have significant influence over is recognized based on our ownership interest in the earnings of these entities.
Cost of operations, general and administrative expense, interest expense and advertising costs are expensed as incurred. For the years ended
December 31, 2016, 2015, and 2014, advertising costs were $9.5 million, $7.3 million, and $6.2 million, respectively. The Company accrues property taxes based on estimates and historical trends. If these estimates are incorrect, the timing and
amount of expense recognition would be affected.
Other Operating Income
:
Consists primarily of sales of
storage-related merchandise (locks and packing supplies), insurance administrative fees, incidental truck rentals, and management and acquisition fees from unconsolidated joint ventures.
Investment in Storage Facilities
:
Storage facilities are recorded at cost. The purchase price of acquired facilities is
allocated to land, land improvements, building, equipment, and in-place customer leases based on the fair value of each component. The fair values of land are determined based upon comparable market sales information. The fair values of buildings
are determined based upon estimates of current replacement costs adjusted for depreciation on the properties. For the years ended December 31, 2016, 2015, and 2014, $29.5 million, $3.0 million, and $7.4 million of acquisition related costs were
incurred and expensed, respectively.
Depreciation is computed using the straight-line method over estimated useful lives of forty years
for buildings and improvements, and five to twenty years for furniture, fixtures and equipment. Estimated useful lives are reevaluated when facts and circumstances indicate that the economic lives of assets do not extend to their currently assigned
useful lives. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Depreciation expense was $87.2 million, $55.1 million and $47.7 million for the years ending December 31 206, 2015 and
2014, respectively. Interest and other costs incurred during the construction period of major expansions are capitalized. Capitalized interest during the years ended December 31, 2016, 2015, and 2014 was $0.1 million annually. Repair and
maintenance costs are expensed as incurred.
Whenever events or changes in circumstances indicate that the basis of the Companys
property may not be recoverable, the Companys policy is to complete an assessment of impairment. Impairment is evaluated based upon comparing the sum of the propertys expected undiscounted future cash flows to the carrying value of the
property. If the sum of the undiscounted cash flows is less than the carrying amount of the property, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the years ended
December 31, 2016, 2015 and 2014, no assets have been determined to be impaired under this policy.
In general, sales of real estate
and related profits / losses are recognized when all consideration has changed hands and risks and rewards of ownership have been transferred.
Trade Name
:
The Companys trade name has an indefinite life and is not amortized but is reviewed for impairment
annually or more frequently when facts and circumstances indicate that the carrying value of the Companys trade name may not be recoverable. We may elect to perform a qualitative assessment that considers economic, industry and
company-specific factors as part of our annual test. If, after completing this assessment, it is determined that it is more likely than not that the fair value of the trade name is less than its carrying value, we proceed to a quantitative test. We
did not elect to perform a qualitative assessment in 2016.
Quantitative testing requires a comparison of the fair value of the trade name
to its carrying value. We use a discounted cash flow analysis under the relief-from-royalty method to estimate the fair value of the trade name. This method incorporates various assumptions, including projected revenue growth rates, the terminal
growth rate, the royalty rate to be applied, and the discount rate utilized. If the carrying value exceeds the fair value, the trade name is considered impaired to the extent that the carrying value exceeds the fair value. We did not record any
impairment in 2016, the year in which the trade name was acquired.
57
Other Assets
:
Included in other assets are cash balances held in escrow for
encumbered properties, property deposits and the value placed on in-place customer leases at the time of acquisition. Cash held in escrow for encumbered properties at December 31, 2016 and 2015, totaled $238,000 and $12,000, respectively.
Property deposits at December 31, 2016 and 2015 were $2.4 million and $5.9 million, respectively. In 2016, a decision was made to not proceed with the acquisition of two properties on which the Company had previously made property deposits
totaling $1.8 million. As a result, these property deposits were abandoned and are included in write-off of acquired property deposits on the accompanying consolidated statements of operations. No such expenses were incurred in 2015 or 2014.
The Company allocates a portion of the purchase price of acquisitions to in-place customer leases. The methodology used to determine the fair
value of in-place customer leases is disclosed in Note 8. The Company amortizes in-place customer leases on a straight-line basis over 12 months (the estimated future benefit period).
Investment in Unconsolidated Joint Ventures
: The Companys investment in unconsolidated joint ventures, where the Company
has significant influence, but not control and joint ventures which are variable interest entities in which the Company is not the primary beneficiary, are recorded under the equity method of accounting in the accompanying consolidated financial
statements. Under the equity method, the Companys investment in unconsolidated joint ventures is stated at cost and adjusted for the Companys share of net earnings or losses and reduced by distributions. Equity in earnings of
unconsolidated joint ventures is generally recognized based on the Companys ownership interest in the earnings of each of the unconsolidated joint ventures. For the purposes of presentation in the statement of cash flows, the Company follows
the look through approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate
that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint ventures sale of assets), in which case it is reported as an investing activity.
Accounts Payable and Accrued Liabilities
:
Accounts payable and accrued liabilities consists primarily of trade payables,
accrued interest, and property tax accruals.
Income Taxes
:
The Company qualifies as a REIT under the Internal
Revenue Code of 1986, as amended, and will generally not be subject to corporate income taxes to the extent it distributes its taxable income to its shareholders and complies with certain other requirements.
The Company has elected to treat one of its subsidiaries as a taxable REIT subsidiary. In general, the Companys taxable REIT subsidiary
may perform additional services for tenants and generally may engage in certain real estate or non-real estate related business. A taxable REIT subsidiary is subject to corporate federal and state income taxes. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and liabilities.
For the years ended
December 31, 2016, 2015 and 2014, the Company recorded federal and state income tax expense of $0.4 million, $1.3 million, and $0.9 million, respectively. The 2016 income tax expense includes current expense of $0.1 million and deferred tax
expense of $0.3 million. At December 31, 2016 and 2015, there were no material unrecognized tax benefits. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. As of December 31,
2016 and 2015, the Company had no interest or penalties related to uncertain tax provisions. Net income taxes payable and the net deferred tax liability of our taxable REIT subsidiary are classified within accounts payable and accrued liabilities
and prepaid taxes are classified within prepaid expenses in the consolidated balance sheets. As of December 31, 2016, the Companys taxable REIT subsidiary has prepaid taxes of $0.4 million, deferred tax assets of $1.5 million and a
deferred tax liability of $2.2 million. As of December 31, 2015, the Companys taxable REIT subsidiary had prepaid taxes of $0.2 million and a deferred tax liability of $1.2 million.
Derivative Financial Instruments
:
The Company accounts for derivatives in accordance with ASC Topic 815
Derivatives and Hedging
, which requires companies to carry all derivatives on the balance sheet at fair value. The Company determines the fair value of derivatives using an income approach. The accounting for changes in the fair
value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Companys use of derivative instruments is limited to cash flow hedges of
certain interest rate risks.
58
Recent Accounting Pronouncements
:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires an entity to recognize revenue in a way that depicts the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance
recognized at the date of initial application. We are currently evaluating the alternative methods of adoption and the effect of adopting ASU 2014-09 on our financial statements and related disclosures. We are also in the process of assessing which
of our operating revenue streams will be impacted by the adoption of the new standard. Leases are specifically excluded from the scope of ASU 2014-09, therefore the Company does not anticipate that adoption of the new standard will have any impact
on the timing or amounts of the Companys rental revenue from customers which is a substantial portion of the Companys total operating revenues. The Company intends to make a decision on which method of adoption will be elected by the end
of the second quarter of 2017.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as
a performance condition. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for
share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning
of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The adoption of ASU 2014-12 by the Company did not have a material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 310-40): Disclosure of
Uncertainties about an Entitys Ability to Continue as a Going Concern which is effective for annual periods ending after December 15, 2016 and annual and interim periods thereafter. This ASU requires management to make an assessment
for each annual and interim reporting period as to whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that
the financial statements are issued or available to be issued. If management identifies conditions or events that raise substantial doubt about about the Companys ability to continue as a going concern, certain additional considerations and
disclosures are required to be made. The adoption of ASU 2014-15 by the Company did not have a material impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU
is effective for annual reporting periods beginning after December 15, 2015 including interim periods within that reporting period. ASU 2015-02 amends the current consolidation model specifically as it relates to variable interest entities
(VIEs) and provides reporting entities with a revised consolidation analysis procedure. The adoption of ASU 2015-02 by the Company did not have a material impact on its consolidated financial statements.
During April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs, which amends the requirements for the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. ASU No. 2015-03 is effective for fiscal years, beginning after December 15, 2015 and interim periods within those fiscal years, with retrospective application
required. Consistent with the guidance in ASU No. 2015-03 there are $3.4 million of debt issuance costs that have been presented as a reduction of term notes in our accompanying consolidated balance sheets at December 31, 2015 that were
previously classified in other assets prior to the adoption of ASU No. 2015-03. The implementation of this accounting standards update had no effect on our results of operations or cash flows.
59
In August 2015, the FASB issued Accounting Standards Update 2015-15, Imputation of Interest
(Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-15 codifies an SEC staff announcement that entities are permitted to defer and
present debt issuance costs related to line-of-credit arrangements as assets. ASU No. 2015-15 is effective for fiscal years, beginning after December 15, 2015 and interim periods within those fiscal years. The implementation of this
update did not result in any changes to our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-16 by the Company
did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840
Leases
(ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to
recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use
asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or
finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current
accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. ASU
2016-02 is effective for fiscal years and interim periods, within those years, beginning after December 15, 2018. Early adoption is permitted for all entities. The new leases standard requires a modified retrospective transition approach for
all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in
Debt Instruments. ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit
risks. The new standard will be effective for us on January 1, 2017. The Company has determined that the adoption of ASU 2016-06 will not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying the Transition to
the Equity Method of Accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be
made to the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The new standard will be effective
for us on January 1, 2017. The Company has determined that the adoption of ASU 2016-07 will not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting as part of its simplification
initiative, which involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The
amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has determined that the adoption of ASU 2016-09 will not have a material impact on its
consolidated financial statements.
60
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force) in an effort to reduce existing diversity in practice related to the classification of certain cash receipts and cash payments on the
statements of cash flows. The guidance addresses the classification of cash flows related to, among other things, distributions received from equity method investees. The amendments in this update are effective for annual periods beginning after
December 15, 2017, and interim periods within those annual periods. The Company has not yet completed its assessment of the impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the Emerging Issues
Task Force) which requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The
amendments in this update are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption of this update is permitted. Other than modifications to the statement of cash flows, the
adoption of ASU 2016-18 is not expected to have a material impact on the Companys consolidated financial statements.
In January
2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business which is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. The
amendments in this update are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption of this update is permitted. The adoption of ASU 2017-01 is expected to have potential
impact on the accounting treatment of properties acquired subsequent to the adoption date. Property acquisitions treated as business combinations under current guidance may no longer be treated as business combinations subsequent to the adoption of
ASU 2017-01. We are in the process of evaluating whether the properties we acquire will meet the definition of a business under ASU 2017-01. To the extent they do not meet such definition, future acquisitions of properties may be
accounted for as asset acquisitions resulting in the capitalization of acquisition costs incurred in connection with these transactions and the allocation of the purchase price and related acquisition costs to the assets acquired based on their
relative fair values.
Stock-Based Compensation
:
The Company accounts for stock-based compensation under the
provisions of ASC Topic 718,
Compensation - Stock Compensation
. The Company recognizes compensation cost in its financial statements for all share based payments granted, modified, or settled during the period. For awards with
graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.
The Company recorded
compensation expense (included in general and administrative expense) of $89,000, $210,000, and $223,000, respectively, related to stock options and $7.2 million, $6.3 million, and $4.6 million, respectively, related to amortization of non-vested
stock grants for the years ended December 31, 2016, 2015 and 2014. The Company uses the Black-Scholes Merton option pricing model to estimate the fair value of stock options granted subsequent to the adoption of ASC Topic 718. The application
of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The weighted-average fair value of options granted during the years ended December 31, 2015 and 2014, were $9.90 and
$10.04, respectively. There were no options granted during the year ended December 31, 2016.
To determine expected volatility, the
Company uses historical volatility based on daily closing prices of its Common Stock over periods that correlate with the expected terms of the options granted. The risk-free rate is based on the United States Treasury yield curve at the time of
grant for the expected life of the options granted. Expected dividends are based on the Companys history and expectation of dividend payouts. The expected life of stock options is based on the midpoint between the vesting date and the end of
the contractual term.
During 2016, 2015 and 2014, the Company issued performance based non-vested stock awards to certain executives. The
fair value for the performance based awards in 2016, 2015 and 2014 was estimated at the time the awards were granted using a Monte Carlo pricing model applying the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected life (years)
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
3.0
|
|
Risk free interest rate
|
|
|
1.53
|
%
|
|
|
1.33
|
%
|
|
|
1.18
|
%
|
Expected volatility
|
|
|
19.37
|
%
|
|
|
18.88
|
%
|
|
|
18.42
|
%
|
Fair value
|
|
$
|
80.24
|
|
|
$
|
101.43
|
|
|
$
|
46.95
|
|
61
The Monte Carlo pricing model was not used to value any other 2016, 2015 and 2014 non-vested
shares granted as no market conditions were present in these awards. The value of these other non-vested shares was equal to the stock price on the date of grant.
Reclassification:
As noted below, certain amounts in the 2014 financial statements have been reclassified to conform with the 2015 and 2016
presentation.
Internet advertising expense, which had been included in the general and administrative expense line in financial
statements filed in 2014 and prior years, has been reclassified to property operations and maintenance expense to conform with the current presentation which we implemented in the first quarter of 2015. The Company believes the classification of
internet advertising expenses as property operations and maintenance expense is more consistent with industry trends. The amount of internet advertising expense that was reclassified for the year ended December 31, 2014 was $5.6 million.
Use of Estimates
:
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
3. EARNINGS PER SHARE AND EARNINGS PER UNIT
The Company reports earnings per share and earnings per unit data in accordance with ASC Topic 260,
Earnings Per Share
.
Effective January 1, 2009, FASB ASC Topic 260 was updated for the issuance of FASB Staff Position (FSP) EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
, or FSP EITF 03-6-1, with transition guidance included in FASB ASC Topic 260-10-65-2. Under FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents,
whether paid or unpaid, are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. The Parent Company and the Operating Partnership have calculated their basic and diluted earnings
per share/unit using the two-class method.
The following table sets forth the computation of basic and diluted earnings per common share
utilizing the two-class method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(Amounts in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
85,225
|
|
|
$
|
112,524
|
|
|
$
|
88,531
|
|
Denominator
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
|
|
43,184
|
|
|
|
35,379
|
|
|
|
33,019
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock
|
|
|
223
|
|
|
|
222
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share - adjusted weighted average shares and assumed
conversion
|
|
|
43,407
|
|
|
|
35,601
|
|
|
|
33,191
|
|
Basic Earnings per common share attributable to common shareholders
|
|
$
|
1.97
|
|
|
$
|
3.18
|
|
|
$
|
2.68
|
|
Diluted Earnings per common share attributable to common shareholders
|
|
$
|
1.96
|
|
|
$
|
3.16
|
|
|
$
|
2.67
|
|
62
The following table sets forth the computation of basic and diluted earnings per common unit
utilizing the two-class method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(Amounts in thousands, except per unit data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders
|
|
$
|
85,225
|
|
|
$
|
112,524
|
|
|
$
|
88,531
|
|
Denominator
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per unit - weighted average units
|
|
|
43,184
|
|
|
|
35,379
|
|
|
|
33,019
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock
|
|
|
223
|
|
|
|
222
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share - adjusted weighted average units and assumed
conversion
|
|
|
43,407
|
|
|
|
35,601
|
|
|
|
33,191
|
|
Basic Earnings per common unit attributable to common unitholders
|
|
$
|
1.97
|
|
|
$
|
3.18
|
|
|
$
|
2.68
|
|
Diluted Earnings per common unit attributable to common unitholders
|
|
$
|
1.96
|
|
|
$
|
3.16
|
|
|
$
|
2.67
|
|
Not included in the effect of dilutive securities above are 107,283 unvested restricted shares for the year
ended December 31, 2016; and 5,500 stock options and 152,835 unvested restricted shares for the year ended December 31, 2015; and 5,000 stock options and 151,474 unvested restricted shares for the year ended December 31, 2014, because
their effect would be antidilutive.
4. INVESTMENT IN STORAGE FACILITIES
The following summarizes activity in storage facilities during the years ended December 31, 2016 and December 31, 2015.
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Cost:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,491,702
|
|
|
$
|
2,177,983
|
|
Acquisition of storage facilities
|
|
|
1,714,029
|
|
|
|
278,572
|
|
Improvements and equipment additions
|
|
|
65,860
|
|
|
|
39,807
|
|
Net increase in construction in progress
|
|
|
7,525
|
|
|
|
2,239
|
|
Dispositions
|
|
|
(35,808
|
)
|
|
|
(6,899
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,243,308
|
|
|
$
|
2,491,702
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
465,195
|
|
|
$
|
411,701
|
|
Additions during the year
|
|
|
87,219
|
|
|
|
55,101
|
|
Dispositions
|
|
|
(16,710
|
)
|
|
|
(1,607
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
535,704
|
|
|
$
|
465,195
|
|
|
|
|
|
|
|
|
|
|
On July 15, 2016, the Company acquired all of the outstanding partnership interests in LifeStorage, LP, a
Delaware limited partnership (LS). Pursuant to the acquisition, the Company acquired 83 self-storage properties throughout the country, including the following markets: Chicago, Illinois; Las Vegas, Nevada; Sacramento, California;
Austin, Texas; and Los Angeles, California. Pursuant to the terms of the Agreement and Plan of Merger dated as of May 18, 2016 by and among LS, the Operating Partnership, Solar Lunar Sub, LLC, a Delaware limited liability company and
wholly-owned subsidiary of the Operating Partnership, and Fortis Advisors LLC, a Delaware limited liability company, as Sellers Representative, the Company paid aggregate consideration of approximately $1.3 billion, of which $482 million was
paid to discharge existing indebtedness of LS (including prepayment penalties and defeasance costs totaling $15.5 million). The merger was funded with the existing cash that was generated primarily from the proceeds from the Companys May 2016
common stock offering and the 2026 Senior Notes offering, and draws on the Companys line of credit totaling $482 million.
63
Including the LS acquisition, the Company acquired 122 facilities during 2016. The acquisition of
three stores that were acquired at certificate of occupancy were accounted for as asset acquisitions. The cost of these stores, including closing costs, was assigned to land, building, equipment and improvements components based upon their relative
fair values. The assets and liabilities of the other 119 storage facilities acquired in 2016, which primarily consist of tangible and intangible assets, are measured at fair value on the date of acquisition in accordance with the principles of FASB
ASC Topic 820,
Fair Value Measurements and Disclosures
and were accounted for as business combinations in accordance with the principles of FASB ASC Topic 805 Business Combinations.
The Company acquired 27 facilities during 2015. The four facilities acquired in Connecticut and New York on February 2, 2015 had been
leased by the Company since November 1, 2013. The acquisitions of these four stores and three additional stores that were acquired at certificate of occupancy were accounted for as asset acquisitions. The cost of these seven stores, including
closing costs, was assigned to their land, building, equipment and improvements components based upon their relative fair values. The assets and liabilities of the other 20 storage facilities acquired in 2015, which primarily consist of tangible and
intangible assets, are measured at fair value on the date of acquisition in accordance with the principles of FASB ASC Topic 820,
Fair Value Measurements and Disclosures
and were accounted for as business combinations in
accordance with the principles of FASB ASC Topic 805 Business Combinations.
The purchase price of the 122 facilities acquired
in 2016 and the 27 facilities acquired in 2015 has been assigned as follows (as of December 31, 2016 the purchase price assignments relating to the facilities acquired during the second half of 2016 are preliminary):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Consideration paid
|
|
|
Acquisition Date Fair Value
|
|
States
|
|
Number of
Properties
|
|
|
Date of
Acquisition
|
|
|
Purchase
Price
|
|
|
Cash Paid
|
|
|
Value of
Operating
Partnership
Units
Issued
|
|
|
Mortgage
Assumed
|
|
|
Net Other
Liabilities
Assumed
(Assets
Acquired)
|
|
|
Land
|
|
|
Building,
Equipment,
and
Improvements
|
|
|
In-Place
Customer
Leases
|
|
|
Trade
Name
|
|
|
Closing
Costs
Expensed
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FL
|
|
|
4
|
|
|
|
1/6/2016
|
|
|
$
|
20,350
|
|
|
$
|
20,246
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104
|
|
|
$
|
6,646
|
|
|
$
|
13,339
|
|
|
$
|
365
|
|
|
$
|
|
|
|
$
|
437
|
|
CA
|
|
|
4
|
|
|
|
1/21/2016
|
|
|
|
80,603
|
|
|
|
80,415
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
28,420
|
|
|
|
51,145
|
|
|
|
1,038
|
|
|
|
|
|
|
|
397
|
|
NH
|
|
|
5
|
|
|
|
1/21/2016
|
|
|
|
55,435
|
|
|
|
55,151
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
13,281
|
|
|
|
41,237
|
|
|
|
917
|
|
|
|
|
|
|
|
657
|
|
MA
|
|
|
1
|
|
|
|
1/21/2016
|
|
|
|
11,387
|
|
|
|
11,362
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
4,880
|
|
|
|
6,341
|
|
|
|
166
|
|
|
|
|
|
|
|
81
|
|
TX
|
|
|
3
|
|
|
|
1/21/2016
|
|
|
|
38,975
|
|
|
|
38,819
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
19,796
|
|
|
|
18,598
|
|
|
|
581
|
|
|
|
|
|
|
|
299
|
|
AZ
|
|
|
1
|
|
|
|
2/1/2016
|
|
|
|
9,275
|
|
|
|
9,261
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
988
|
|
|
|
8,224
|
|
|
|
63
|
|
|
|
|
|
|
|
136
|
|
FL
|
|
|
1
|
|
|
|
2/12/2016
|
|
|
|
11,274
|
|
|
|
11,270
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
2,294
|
|
|
|
8,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PA
|
|
|
1
|
|
|
|
2/17/2016
|
|
|
|
5,750
|
|
|
|
5,732
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
1,768
|
|
|
|
3,879
|
|
|
|
103
|
|
|
|
|
|
|
|
164
|
|
CO
|
|
|
1
|
|
|
|
2/29/2016
|
|
|
|
12,600
|
|
|
|
12,549
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
4,528
|
|
|
|
7,915
|
|
|
|
157
|
|
|
|
|
|
|
|
188
|
|
CA
|
|
|
3
|
|
|
|
3/16/2016
|
|
|
|
68,832
|
|
|
|
63,965
|
|
|
|
4,472
|
|
|
|
|
|
|
|
395
|
|
|
|
22,647
|
|
|
|
45,371
|
|
|
|
814
|
|
|
|
|
|
|
|
313
|
|
CA
|
|
|
1
|
|
|
|
3/17/2016
|
|
|
|
17,320
|
|
|
|
17,278
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
6,728
|
|
|
|
10,339
|
|
|
|
253
|
|
|
|
|
|
|
|
132
|
|
CA
|
|
|
1
|
|
|
|
4/11/2016
|
|
|
|
36,750
|
|
|
|
33,346
|
|
|
|
3,294
|
|
|
|
|
|
|
|
110
|
|
|
|
17,445
|
|
|
|
18,840
|
|
|
|
465
|
|
|
|
|
|
|
|
141
|
|
CT
|
|
|
2
|
|
|
|
4/14/2016
|
|
|
|
17,313
|
|
|
|
17,152
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
6,142
|
|
|
|
10,904
|
|
|
|
267
|
|
|
|
|
|
|
|
204
|
|
NY
|
|
|
2
|
|
|
|
4/26/2016
|
|
|
|
24,312
|
|
|
|
20,143
|
|
|
|
|
|
|
|
4,249
|
|
|
|
(80
|
)
|
|
|
5,710
|
|
|
|
18,201
|
|
|
|
401
|
|
|
|
|
|
|
|
372
|
|
FL
|
|
|
1
|
|
|
|
5/2/2016
|
|
|
|
8,100
|
|
|
|
4,006
|
|
|
|
|
|
|
|
4,036
|
|
|
|
58
|
|
|
|
3,018
|
|
|
|
4,922
|
|
|
|
160
|
|
|
|
|
|
|
|
161
|
|
TX
|
|
|
1
|
|
|
|
5/5/2016
|
|
|
|
10,800
|
|
|
|
10,708
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
2,333
|
|
|
|
8,302
|
|
|
|
165
|
|
|
|
|
|
|
|
133
|
|
NY
|
|
|
2
|
|
|
|
5/19/2016
|
|
|
|
8,400
|
|
|
|
8,366
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
714
|
|
|
|
7,521
|
|
|
|
165
|
|
|
|
|
|
|
|
213
|
|
CA, CO, FL, IL, MS, NV, TX, UT, WI
|
|
|
83
|
|
|
|
7/15/2016
|
|
|
|
1,299,740
|
|
|
|
1,335,274
|
|
|
|
|
|
|
|
|
|
|
|
(35,534
|
)
|
|
|
150,660
|
|
|
|
1,085,750
|
|
|
|
46,830
|
|
|
|
16,500
|
|
|
|
25,398
|
|
SC
|
|
|
1
|
|
|
|
7/29/2016
|
|
|
|
8,620
|
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
920
|
|
|
|
7,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CO
|
|
|
1
|
|
|
|
8/4/2016
|
|
|
|
8,900
|
|
|
|
8,831
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
5,062
|
|
|
|
3,679
|
|
|
|
159
|
|
|
|
|
|
|
|
119
|
|
FL
|
|
|
1
|
|
|
|
9/27/2016
|
|
|
|
10,500
|
|
|
|
10,407
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
2,809
|
|
|
|
7,523
|
|
|
|
168
|
|
|
|
|
|
|
|
244
|
|
IL
|
|
|
1
|
|
|
|
11/17/2016
|
|
|
|
8,884
|
|
|
|
7,125
|
|
|
|
1,750
|
|
|
|
|
|
|
|
9
|
|
|
|
371
|
|
|
|
8,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FL
|
|
|
1
|
|
|
|
12/20/2016
|
|
|
|
9,800
|
|
|
|
6,900
|
|
|
|
|
|
|
|
2,966
|
|
|
|
(66
|
)
|
|
|
3,268
|
|
|
|
6,378
|
|
|
|
154
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired 2016
|
|
|
122
|
|
|
|
|
|
|
$
|
1,783,920
|
|
|
$
|
1,796,923
|
|
|
$
|
9,516
|
|
|
$
|
11,251
|
|
|
$
|
(33,770
|
)
|
|
$
|
310,428
|
|
|
$
|
1,403,601
|
|
|
$
|
53,391
|
|
|
$
|
16,500
|
|
|
$
|
29,887
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Consideration paid
|
|
|
Acquisition Date Fair Value
|
|
State
|
|
Number of
Properties
|
|
|
Date of
Acquisition
|
|
|
Purchase
Price
|
|
|
Cash Paid
|
|
|
Value of
Operating
Partnership
Units
Issued
|
|
|
Net Other
Liabilities
Assumed
(Assets
Acquired)
|
|
|
Land
|
|
|
Building,
Equipment,
and
Improvements
|
|
|
In-Place
Customer
Leases
|
|
|
Closing
Costs
Expensed
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CT
|
|
|
2
|
|
|
|
2/2/2015
|
|
|
$
|
61,116
|
|
|
$
|
62,377
|
|
|
$
|
|
|
|
$
|
(1,261
|
)
|
|
$
|
19,389
|
|
|
$
|
41,727
|
|
|
$
|
|
|
|
$
|
|
|
NY
|
|
|
2
|
|
|
|
2/2/2015
|
|
|
|
57,900
|
|
|
|
59,103
|
|
|
|
|
|
|
|
(1,203
|
)
|
|
|
10,084
|
|
|
|
47,816
|
|
|
|
|
|
|
|
|
|
IL
|
|
|
1
|
|
|
|
2/5/2015
|
|
|
|
6,800
|
|
|
|
6,652
|
|
|
|
|
|
|
|
148
|
|
|
|
2,579
|
|
|
|
4,066
|
|
|
|
155
|
|
|
|
146
|
|
IL
|
|
|
1
|
|
|
|
3/9/2015
|
|
|
|
8,690
|
|
|
|
6,466
|
|
|
|
2,148
|
|
|
|
76
|
|
|
|
1,719
|
|
|
|
6,971
|
|
|
|
|
|
|
|
|
|
FL
|
|
|
1
|
|
|
|
4/1/2015
|
|
|
|
6,290
|
|
|
|
6,236
|
|
|
|
|
|
|
|
54
|
|
|
|
1,793
|
|
|
|
4,382
|
|
|
|
115
|
|
|
|
359
|
|
TX
|
|
|
1
|
|
|
|
4/16/2015
|
|
|
|
8,800
|
|
|
|
8,713
|
|
|
|
|
|
|
|
87
|
|
|
|
3,864
|
|
|
|
4,777
|
|
|
|
159
|
|
|
|
140
|
|
FL
|
|
|
1
|
|
|
|
4/21/2015
|
|
|
|
8,750
|
|
|
|
8,687
|
|
|
|
|
|
|
|
63
|
|
|
|
2,118
|
|
|
|
6,501
|
|
|
|
131
|
|
|
|
122
|
|
FL
|
|
|
4
|
|
|
|
5/1/2015
|
|
|
|
32,465
|
|
|
|
32,279
|
|
|
|
|
|
|
|
186
|
|
|
|
12,184
|
|
|
|
19,672
|
|
|
|
609
|
|
|
|
516
|
|
AZ
|
|
|
1
|
|
|
|
6/16/2015
|
|
|
|
7,904
|
|
|
|
7,904
|
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
7,052
|
|
|
|
|
|
|
|
|
|
MA
|
|
|
1
|
|
|
|
6/19/2015
|
|
|
|
10,291
|
|
|
|
10,286
|
|
|
|
|
|
|
|
5
|
|
|
|
2,110
|
|
|
|
8,181
|
|
|
|
|
|
|
|
|
|
NY
|
|
|
4
|
|
|
|
8/25/2015
|
|
|
|
17,900
|
|
|
|
17,690
|
|
|
|
|
|
|
|
210
|
|
|
|
4,685
|
|
|
|
12,826
|
|
|
|
389
|
|
|
|
409
|
|
NC
|
|
|
1
|
|
|
|
9/1/2015
|
|
|
|
3,775
|
|
|
|
3,762
|
|
|
|
|
|
|
|
13
|
|
|
|
718
|
|
|
|
2,977
|
|
|
|
80
|
|
|
|
80
|
|
SC
|
|
|
6
|
|
|
|
9/1/2015
|
|
|
|
44,000
|
|
|
|
43,564
|
|
|
|
|
|
|
|
436
|
|
|
|
17,461
|
|
|
|
25,644
|
|
|
|
895
|
|
|
|
684
|
|
PA
|
|
|
1
|
|
|
|
12/30/2015
|
|
|
|
6,550
|
|
|
|
6,541
|
|
|
|
|
|
|
|
9
|
|
|
|
1,926
|
|
|
|
4,498
|
|
|
|
126
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired 2015
|
|
|
27
|
|
|
|
|
|
|
$
|
281,231
|
|
|
$
|
280,260
|
|
|
$
|
2,148
|
|
|
$
|
(1,177
|
)
|
|
$
|
81,482
|
|
|
$
|
197,090
|
|
|
$
|
2,659
|
|
|
$
|
2,646
|
|
All of the properties acquired were purchased from unrelated third parties. The operating results of the four
facilities which had been leased since November 1, 2013 have been included in the Companys operations since that date. The operating results of the other facilities acquired have been included in the Companys operations since the
respective acquisition dates. The $1,796.9 million of cash paid for the properties acquired during 2016 includes payment for cash acquired of $40.9 million and $5.3 million of deposits that were paid in 2015 when certain of these properties
originally went under contract. Of the $280.3 million paid at closing for the properties acquired during 2015, $250,000 represented deposits that were paid in 2014 when certain of these properties originally went under contract. Closing costs
totaling $345,000 were incurred and expensed in 2015 related to facilities acquired in 2016 and are reflected in totals for the respective 2016 acquisitions in the charts above.
Non-cash investing activities during 2016 include the issuance of $9.5 million in Operating Partnership Units valued based on the market price
of the Companys common stock at the date of acquisition, the assumption of three mortgages with acquisition-date fair values of $11.3 million, and the assumption of net other liabilities of $7.2 million. Non-cash investing activities during
2015 include the issuance of $2.1 million in Operating Partnership Units, the assumption of $1.3 million of other net liabilities and $2.5 million for the settlement of a straight-line rent liability in connection with the acquisition of
self-storage facilities.
The Company measures the fair value of in-place customer lease intangible assets based on the Companys
experience with customer turnover and the estimated cost to replace the in-place leases. The Company amortizes in-place customer leases on a straight-line basis over 12 months (the estimated future benefit period). The Company measures the value of
trade names, which have an indefinite life and are not amortized, by calculating discounted cash flows utilizing the relief from royalty method.
In-place customer leases are included in other assets on the Companys consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
In-place customer leases
|
|
$
|
75,611
|
|
|
$
|
22,320
|
|
Accumulated amortization
|
|
|
(50,782
|
)
|
|
|
(21,017
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value at December 31,
|
|
$
|
24,829
|
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
|
|
65
Amortization expense related to in-place customer leases was $29.9 million, $3.4 million, and
$4.1 million, for the years ended December 31, 2016, 2015, and 2014, respectively. Amortization expense on 2016 acquisitions is expected to be $24.8 million in 2017.
As noted above, during 2016, the Company acquired 122 properties, 119 of which were accounted for as business combinations. The following
unaudited pro forma information is based on the combined historical financial statements of the Company and the 119 properties acquired during 2016, and accounted for as business acquisitions, as if the acquisitions had occurred as of
January 1, 2015:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Total revenues
|
|
$
|
513,565
|
|
|
$
|
465,614
|
|
Net income attributable to common shareholders
|
|
$
|
154,522
|
|
|
$
|
54,144
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.34
|
|
|
$
|
1.17
|
|
Diluted
|
|
$
|
3.33
|
|
|
$
|
1.17
|
|
The above pro forma information includes the results of eight stores acquired by LS in 2016 and 17 stores
acquired by LS in 2015. These stores therefore were not owned by LS for the entire pro forma periods and results prior to LS ownership are not included in the above pro forma information. The above pro forma information also includes increases in
amortization of in-place customer leases totaling $53.4 million in 2015. As noted above, in-place customer leases are amortized over their estimated future benefit period of 12 months. Material, nonrecurring pro forma adjustments directly
attributable to the business combinations and included in the above pro forma financial information include reductions to interest expense related to acquisition bridge financing totaling $7.3 million in 2016, reductions to acquisition costs
totaling $29.5 million in 2016, and reductions to write-off of acquired property deposits totaling $1.8 million in 2016.
The following
table summarizes the revenues and earnings since the acquisition dates that are included in the Companys 2016 consolidated statement of operations related to the 119 properties acquired and accounted for as business combinations during 2016.
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Total revenues
|
|
$
|
68,526
|
|
Net loss attributable to common shareholders
|
|
$
|
(52,814
|
)
|
The above net loss attributable to common shareholders was primarily due to amortization of in-place customer
leases acquired and the acquisition costs incurred in connection with the 2016 acquisitions.
Property Dispositions
During 2016 the Company sold eight non-strategic properties with a carrying value of $18.8 million and received cash proceeds of $34.1 million,
resulting in a $15.3 million gain on sale. During 2015 the Company sold three non-strategic properties purchased in 2014 and 2015 with a carrying value of $5.1 million and received cash proceeds of $4.6 million, resulting in a $0.5 million loss on
sale. During 2014 the Company sold two properties with a carrying value of $5.8 million and received cash proceeds of $11.0 million, resulting in a $5.2 million gain on sale.
66
The following table summarizes the revenues and expenses up to the dates of sale of the 13
properties sold in 2016, 2015 and 2014 that are included in the Companys consolidated statements of operations for 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total revenues
|
|
$
|
2,324
|
|
|
$
|
4,801
|
|
|
$
|
5,782
|
|
Property operations and maintenance expense
|
|
|
(614
|
)
|
|
|
(1,401
|
)
|
|
|
(1,477
|
)
|
Real estate tax expense
|
|
|
(98
|
)
|
|
|
(295
|
)
|
|
|
(424
|
)
|
Depreciation and amortization expense
|
|
|
(359
|
)
|
|
|
(780
|
)
|
|
|
(820
|
)
|
Gain (loss) on sale of storage facilities
|
|
|
15,270
|
|
|
|
(494
|
)
|
|
|
5,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,523
|
|
|
$
|
1,831
|
|
|
$
|
8,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Signage Useful Life Estimates
The change in name of the Companys storage facilities from Uncle Bobs Self
Storage
®
to Life Storage
®
as discussed in Note 1 requires replacement of signage at all existing storage facilities which are currently
included in investment in storage facilities, net on the consolidated balance sheets. The replacement of this signage is being completed at various times based on market, and is expected to be completed in the first half of 2017. The Company has
reassessed the estimated useful lives of the existing signage which resulted in an increase in depreciation expense of approximately $8.2 million in 2016 as depreciation was accelerated over the new useful lives. The Company estimates that this
change will result in depreciation expense of approximately $1 million in 2017 as a result of the replacement of this existing Uncle Bobs Self Storage
®
signage.
The accelerated depreciation reduced 2016 basic and diluted earnings by approximately $0.19 per share/unit.
5. UNSECURED LINE OF CREDIT AND TERM NOTES
Borrowings outstanding on our unsecured line of credit and term notes are as follows:
|
|
|
|
|
|
|
|
|
(
Dollars in thousands
)
|
|
Dec. 31, 2016
|
|
|
Dec. 31, 2015
|
|
Revolving line of credit borrowings
|
|
$
|
253,000
|
|
|
$
|
79,000
|
|
Term note due April 26, 2016
|
|
|
|
|
|
|
150,000
|
|
Term note due June 4, 2020
|
|
|
325,000
|
|
|
|
325,000
|
|
Term note due August 5, 2021
|
|
|
100,000
|
|
|
|
100,000
|
|
Term note due April 8, 2024
|
|
|
175,000
|
|
|
|
175,000
|
|
Senior term note due July 1, 2026
|
|
|
600,000
|
|
|
|
|
|
Term note due July 21, 2028
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total term note principal balance outstanding
|
|
$
|
1,400,000
|
|
|
$
|
750,000
|
|
Less: unamortized debt issuance costs
|
|
|
(9,323
|
)
|
|
|
(3,350
|
)
|
Less: unamortized senior term note discount
|
|
|
(3,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes payable
|
|
$
|
1,387,525
|
|
|
$
|
746,650
|
|
|
|
|
|
|
|
|
|
|
In January 2016, the Company exercised the expansion feature on its existing amended unsecured credit
agreement and increased the revolving credit limit from $300 million to $500 million. The interest rate on the revolving credit facility bears interest at a variable annual rate equal to LIBOR plus a margin based on the Companys credit rating
(at December 31, 2016 the margin is 1.10%), and requires an annual 0.15% facility fee. The Companys unsecured credit agreement also includes a $325 million unsecured term note maturing June 4, 2020, with the term note bearing
interest at LIBOR plus a margin based on the Companys credit rating (at December 31, 2016 the margin is 1.15%). The interest rate at December 31, 2016 on the Companys line of credit was approximately 1.79% (1.72% at
December 31, 2015). At December 31, 2016, there was $247 million available on the unsecured line of credit. The revolving line of credit has a maturity date of December 10, 2019.
67
On May 17, 2016, the Company entered into two senior unsecured acquisition bridge facilities
(the Bridge Facilities) totaling $1,675 million with the Companys third-party advisors to the LS acquisition (see Note 4). In consideration for the bridge financing commitments, the Company paid fees totaling $7.3 million which are
included as interest expense bridge financing commitment fee in the 2016 consolidated statement of operations. The Bridge Facilities commitments were not drawn upon and were terminated on June 29, 2016.
On June 20, 2016, the Operating Partnership issued $600 million in aggregate principal amount of 3.50% unsecured senior notes due
July 1, 2026 (the 2026 Senior Notes). The 2026 Senior Notes were issued at a 0.553% discount to par value. Interest on the 2026 Senior Notes is payable semi-annually in arrears on January 1 and July 1, beginning on
January 1, 2017. The 2026 Senior Notes are fully and unconditionally guaranteed by the Parent Company. Proceeds received upon issuance, net of discount to par of $3.3 million and underwriting discount and other offering expenses of $5.5
million, totaled $591.2 million. The indenture under which the 2026 Senior Notes were issued restricts the ability of the Company and its subsidiaries to incur debt unless the Company and its consolidated subsidiaries comply with a leverage ratio
not to exceed 60% and an interest coverage ratio of more than 1.5:1 on all outstanding debt, after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Company and its subsidiaries to incur secured debt unless
the Company and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant
not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Company and its consolidated subsidiaries. As of December 31, 2016, the Company was in compliance with all of the financial covenants under the 2026
Senior Notes.
On July 21, 2016, the Company entered into a $200 million term note maturing July 21, 2028 bearing interest at a
fixed rate of 3.67%. The proceeds from this term note were used to repay a portion of the then outstanding balance on the Companys line of credit.
On April 8, 2014, the Company entered into a $175 million term note maturing April 2024 bearing interest at a fixed rate of 4.533%. The
interest rate on the term note increases to 6.283% if the Company is not rated by at least one rating agency or if the Companys credit rating is downgraded. The proceeds from this term note were used to repay the $115 million outstanding on
the Companys line of credit at April 8, 2014, with the excess proceeds used for acquisitions.
In 2011, the Company entered
into a $100 million term note maturing August 5, 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on the notes
is downgraded or if the Companys credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures.
The Company had maintained a $150 million unsecured term note maturing April 26, 2016 bearing interest at 6.38%. The Company used a draw
on the line of credit to pay off the balance of this note on April 26, 2016.
The line of credit and term notes require the Company
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 December 31, 2016, the
Company was in compliance with its debt covenants.
We believe that if operating results remain consistent with historical levels and
levels of other debt and liabilities remain consistent with amounts outstanding at December 31, 2016 the entire availability on the line of credit could be drawn without violating our debt covenants.
The Companys fixed rate term notes contain a provision that allows for the noteholders to call the debt upon a change of control of the
Company at an amount that includes a make whole premium based on rates in effect on the date of the change of control.
Subsequent to the
adoption of ASU 2015-03, deferred debt issuance costs and the discount on the 2026 Senior Notes are both presented as reductions of term notes in the accompanying consolidated balance sheets at December 31, 2016 and December 31, 2015.
Amortization expense related to these deferred debt issuance costs, which exclude costs related to the Bridge Facilities, was $1.7 million, $1.2 million and $0.9 million for the periods ended December 31, 2016, 2015 and 2014, respectively, and
is included in interest expense in the consolidated statements of operations.
68
6. MORTGAGES PAYABLE AND DEBT MATURITIES
Mortgages payable at December 31, 2016 and 2015 consist of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
4.98% mortgage note due January 1, 2021 secured by one self-storage facility with an
aggregate net book value of $9.8 million, principal and interest paid monthly (effective interest rate 4.98%)
|
|
$
|
2,966
|
|
|
$
|
|
|
4.065% mortgage note due April 1, 2023, secured by one self-storage facility with an
aggregate net book value of $7.6 million, principal and interest paid monthly (effective interest rate 4.23%)
|
|
|
4,207
|
|
|
|
|
|
5.26% mortgage note due November 1, 2023, secured by one self-storage facility with an
aggregate net book value of $8.1 million, principal and interest paid monthly (effective interest rate 5.48%)
|
|
|
4,002
|
|
|
|
|
|
5.99% mortgage note due May 1, 2026, secured by one self-storage facility with an aggregate
net book value of $4.2 million, principal and interest paid monthly (effective interest rate 6.21%)
|
|
|
1,852
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
Total mortgages payable
|
|
$
|
13,027
|
|
|
$
|
1,993
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the Companys debt obligations and interest rate derivatives at
December 31, 2016. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each
financial instrument. The fair value of the fixed rate term notes and mortgage notes were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. These assumptions are considered Level 2 inputs within the fair value hierarchy as described in Note 8. The carrying values of our variable rate debt instruments approximate their fair values as these debt instruments
bear interest at current market rates that approximate market participant rates. This is considered a Level 2 input within the fair value hierarchy. The use of different market assumptions and estimation methodologies may have a material effect on
the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company would realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date Including Discount
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
Value
|
|
Line of creditvariable rate LIBOR + 1.10% (1.79% at December 31, 2016)
|
|
|
|
|
|
|
|
|
|
$
|
253,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
253,000
|
|
|
$
|
253,000
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notevariable rate LIBOR+1.15% (1.92% at December 31, 2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,000
|
|
|
|
|
|
|
|
|
|
|
$
|
325,000
|
|
|
$
|
325,000
|
|
Term notefixed rate 5.54%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
109,379
|
|
Term notefixed rate 4.533%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
$
|
181,567
|
|
Term notefixed rate 3.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
$
|
574,126
|
|
Term notefixed rate 3.67%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
$
|
188,284
|
|
Mortgage notefixed rate 4.98%
|
|
$
|
51
|
|
|
$
|
53
|
|
|
$
|
56
|
|
|
$
|
58
|
|
|
$
|
2,748
|
|
|
|
|
|
|
$
|
2,966
|
|
|
$
|
2,966
|
|
Mortgage notefixed rate 4.065%
|
|
$
|
88
|
|
|
$
|
92
|
|
|
$
|
96
|
|
|
$
|
99
|
|
|
$
|
104
|
|
|
$
|
3,728
|
|
|
$
|
4,207
|
|
|
$
|
4,210
|
|
Mortgage notefixed rate 5.26%
|
|
$
|
63
|
|
|
$
|
67
|
|
|
$
|
71
|
|
|
$
|
74
|
|
|
$
|
78
|
|
|
$
|
3,649
|
|
|
$
|
4,002
|
|
|
$
|
4,281
|
|
Mortgage notefixed rate 5.99%
|
|
$
|
151
|
|
|
$
|
160
|
|
|
$
|
170
|
|
|
$
|
181
|
|
|
$
|
192
|
|
|
$
|
998
|
|
|
$
|
1,852
|
|
|
$
|
1,997
|
|
Interest rate derivatives liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,015
|
|
69
7. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require
the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged.
Forward starting interest rate swaps are also used by the Company to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. No other cash payments are made unless the contract is
terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters into interest rate swaps with a number of major financial institutions to minimize counterparty credit
risk.
The interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on
variable rate debt. Therefore, the interest rate swaps are recorded in the consolidated balance sheets at fair value and the related gains or losses are deferred in shareholders equity or partners capital as Accumulated Other
Comprehensive Loss (AOCL). These deferred gains and losses are recognized in interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are
not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was de minimis in 2016, 2015, and 2014.
The Company has interest rate swap agreements in effect at December 31, 2016 as detailed below to effectively convert a total of $325
million of variable-rate debt to fixed-rate debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Effective Date
|
|
|
Expiration Date
|
|
|
Fixed
Rate Paid
|
|
|
Floating Rate
Received
|
|
$125 Million
|
|
|
9/1/2011
|
|
|
|
8/1/18
|
|
|
|
2.3700
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
12/30/11
|
|
|
|
12/29/17
|
|
|
|
1.6125
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
9/4/13
|
|
|
|
9/4/18
|
|
|
|
1.3710
|
%
|
|
|
1 month LIBOR
|
|
$100 Million
|
|
|
12/29/17
|
|
|
|
11/29/19
|
|
|
|
3.9680
|
%
|
|
|
1 month LIBOR
|
|
$125 Million
|
|
|
8/1/18
|
|
|
|
6/1/20
|
|
|
|
4.1930
|
%
|
|
|
1 month LIBOR
|
|
In the fourth quarter of 2015, the Company entered into forward starting interest rate swap agreements with a
total notional value of $50 million. In the first quarter of 2016, the Company entered into additional forward starting interest rate swap agreements with a total notional value of $100 million. These forward starting interest rate swap agreements
were entered into to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of fixed rate long-term debt. In conjunction with the issuance of the 2026 Senior Notes (see Note 5), the Company terminated
these hedges and settled the forward starting swap agreements for approximately $9.2 million. The $9.2 million has been deferred in accumulated other comprehensive loss and is being amortized as additional interest expense over the ten-year term of
the 2026 Senior Notes or until such time as interest payments on the 2026 Senior Notes are no longer probable. Approximately $0.5 million of interest expense was recorded in 2016 as a result of this amortization. Consistent with the Companys
accounting policy, the cash outflow related to the settlement of the forward starting swap agreements is reflected as a financing activity in the consolidated statements of cash flows.
The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic 815
Derivatives and
Hedging
, held by the Company. During 2016, 2015, and 2014, the net reclassification from AOCL to interest expense was $4.6 million, $5.2 million, and $5.5 million, respectively, based on payments made under the swap agreements. Based on
current interest rates, the Company estimates that payments under the interest rate swaps will be approximately $4.0 million in 2017. Payments made under the interest rate swap agreements will be reclassified to interest expense as settlements
occur. The fair value of the swap agreements, including accrued interest, was a liability of $13.0 million at December 31, 2016 and an asset of $550,000 and a liability of $15.3 million at December 31, 2015.
The Companys agreements with its interest rate swap counterparties contain provisions pursuant to which the Company could be declared in
default of its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. The interest rate swap agreements also incorporate other loan
covenants of the Company. Failure to comply with the
70
loan covenant provisions would result in the Company being in default on the interest rate swap agreements. As of December 31, 2016, the Company had not posted any collateral related to the
interest rate swap agreements. If the Company had breached any of these provisions as of December 31, 2016, it could have been required to settle its obligations under the agreements at their net termination value of $13.0 million.
The changes in AOCL for the years ended December 31, 2016, 2015 and 2014 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Jan. 1, 2016
to
Dec. 31, 2016
|
|
|
Jan. 1, 2015
to
Dec. 31, 2015
|
|
|
Jan. 1, 2014
to
Dec. 31, 2014
|
|
Accumulated other comprehensive loss beginning of period
|
|
$
|
(14,415
|
)
|
|
$
|
(13,005
|
)
|
|
$
|
(6,402
|
)
|
Realized loss reclassified from accumulated other comprehensive loss to interest expense
|
|
|
5,044
|
|
|
|
5,229
|
|
|
|
5,506
|
|
Unrealized loss from changes in the fair value of the effective portion of the interest rate
swaps
|
|
|
(12,104
|
)
|
|
|
(6,639
|
)
|
|
|
(12,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss included in other comprehensive loss
|
|
|
(7,060
|
)
|
|
|
(1,410
|
)
|
|
|
(6,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss end of period
|
|
$
|
(21,475
|
)
|
|
$
|
(14,415
|
)
|
|
$
|
(13,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC Topic 820
Fair Value Measurements and Disclosures
in determining the fair value of
its financial and nonfinancial assets and liabilities. ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the
hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Refer to Note 6 for
presentation of the fair values of debt obligations which are disclosed at fair value on a recurring basis.
The following table provides
the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2016 and December 31, 2015 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
(Liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(13,015
|
)
|
|
|
|
|
|
$
|
(13,015
|
)
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
550
|
|
|
|
|
|
|
|
550
|
|
|
|
|
|
Interest rate swaps
|
|
|
(15,343
|
)
|
|
|
|
|
|
|
(15,343
|
)
|
|
|
|
|
Interest rate swaps are over the counter securities with no quoted readily available Level 1 inputs, and
therefore are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using the income approach.
During 2016, assets and liabilities measured at fair value on a non-recurring basis included the assets acquired and liabilities assumed in
connection with the acquisition of 122 storage facilities (see note 4), including the LS acquisition. To determine the fair value of land, the Company used prices per acre derived from observed transactions involving comparable land in similar
locations, which is considered a Level 2 input. To determine the fair value of buildings, equipment and improvements, the Company used current replacement cost based on information derived from construction industry data by geographic region which
is considered a Level 2 input. The
71
replacement cost is then adjusted for the age, condition, and economic obsolescence associated with these assets, which are considered Level 3 inputs. The fair value of in-place customer leases
is based on the rent lost due to the amount of time required to replace existing customers and the cost to replace in-place tenants which are based on the Companys historical experience with turnover at its facilities and on market rental
rates and estimated downtime required to replace the in-place leases, all of which are Level 3 inputs. The average downtime is based upon estimated demand information including the number of potential customers exhibited in historical property
interest data. The fair value of trade names is based on royalty payments avoided had the trade name been owned by a third party which is determined using market royalty rates. Other assets acquired and liabilities assumed in the acquisitions
consist primarily of prepaid or accrued real estate taxes and deferred revenues from advance monthly rentals paid by customers. The fair values of these assets and liabilities are based on their carrying values as they typically turn over within one
year from the acquisition date and these are Level 3 inputs.
9. STOCK BASED COMPENSATION
The Company established the 2015 Award and Option Plan (the 2015 Plan) which replaced the expired 2005 Award and Option Plan for
the purpose of attracting and retaining the Companys executive officers and other key employees, such plans being the Plans. There were 561,000 shares authorized for issuance under the 2015 Plan. Options granted under the Plans
vest ratably over four and eight years, and must be exercised within ten years from the date of grant. The exercise price for qualified incentive stock options must be at least equal to the fair market value of the common shares at the date of
grant. As of December 31, 2016, options for 77,206 shares were outstanding under the Plans and options for 435,570 shares of common stock were available for future issuance. The Company may also grant other stock-based awards under the 2015
Plan, including restricted stock and performance-based awards.
The Company also established the 2009 Outside Directors Stock Option
and Award Plan (the Non-employee Plan) which replaced the 1995 Outside Directors Stock Option Plan for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors. Prior to 2016, the
Non-employee Plan provided for the initial granting of options to purchase 3,500 shares of common stock and for the annual granting of options to purchase 2,000 shares of common stock to each eligible director. Such options vest over a one-year
period for initial awards and immediately upon subsequent grants. The issuance of stock options to directors was discontinued in 2016. In addition, each outside director receives non-vested shares annually equal to 80% of the annual fees paid to
them. During the restriction period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends.
During 2016, 1,864 non-vested shares were issued to outside directors. Such non-vested shares vest over a one-year period. The total shares reserved under the Non-employee Plan is 150,000. The exercise price for options granted under the
Non-employee Plan is equal to the fair market value at the date of grant. As of December 31, 2016, options for 18,500 common shares and 16,984 of non-vested shares were outstanding under the Non-employee Plans. As of December 31, 2016
options for 71,016 shares of common stock were available for future issuance.
A summary of the Companys stock option activity and
related information for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
Outstanding at beginning of year:
|
|
|
95,706
|
|
|
$
|
52.08
|
|
|
|
115,606
|
|
|
$
|
48.54
|
|
|
|
130,568
|
|
|
$
|
44.82
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
11,000
|
|
|
|
91.58
|
|
|
|
14,000
|
|
|
|
76.01
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(30,900
|
)
|
|
|
52.87
|
|
|
|
(27,462
|
)
|
|
|
45.34
|
|
Adjusted / (forfeited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
40.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
95,706
|
|
|
$
|
52.08
|
|
|
|
95,706
|
|
|
$
|
52.08
|
|
|
|
115,606
|
|
|
$
|
48.54
|
|
Exercisable at end of year
|
|
|
92,706
|
|
|
$
|
51.31
|
|
|
|
63,815
|
|
|
$
|
48.73
|
|
|
|
67,316
|
|
|
$
|
49.18
|
|
72
A summary of the Companys stock options outstanding at December 31, 2016 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise Price Range
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
$30.00 39.99
|
|
|
1,100
|
|
|
$
|
35.73
|
|
|
|
1,100
|
|
|
$
|
35.73
|
|
$40.00 69.99
|
|
|
77,106
|
|
|
$
|
44.67
|
|
|
|
77,106
|
|
|
$
|
44.67
|
|
$70.00 91.58
|
|
|
17,500
|
|
|
$
|
85.78
|
|
|
|
14,500
|
|
|
$
|
87.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
95,706
|
|
|
$
|
52.08
|
|
|
|
92,706
|
|
|
$
|
51.31
|
|
Intrinsic value of outstanding stock options at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,244,663
|
|
Intrinsic value of exercisable stock options at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,216,643
|
|
The intrinsic value of stock options exercised during the years ended December 31, 2016, 2015, and 2014
was $0, $1.4 million, and $0.9 million, respectively.
Proceeds from stock options exercised during the years ended December 31,
2016, 2015, and 2014 amounted to $0, $1.6 million, and $1.2 million, respectively.
The aggregate intrinsic value is calculated as the
difference between the exercise price of the underlying awards and the quoted price of the Companys common stock at December 31, 2016, or the price on the date of exercise for those exercised during the year. As of December 31, 2016,
there was approximately $22,000 of total unrecognized compensation cost related to stock option compensation arrangements granted under our stock award plans. That cost is expected to be recognized over a weighted-average period of approximately 1.5
years. The weighted average remaining contractual life of all options is 2.9 years, and for exercisable options is 2.8 years.
Non-vested stock
The Company has also issued shares of non-vested stock to employees which vest over one to nine year periods. During the restriction
period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends. For issuances of non-vested
stock during the year ended December 31, 2016, the fair market value of the non-vested stock on the date of grant ranged from $82.52 to $117.27. During 2016, 23,405 shares of non-vested stock were issued to employees and directors with an
aggregate fair value of $2.1 million. The Company charges the fair value ratably to expense over the vesting period. The Company uses the average of the high and low price of its common stock on the date the award is granted as the fair value for
non-vested stock awards that do not have a market condition.
A summary of the status of unvested shares of stock issued to employees and
directors as of and during the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Non-vested
Shares
|
|
|
Weighted
average
grant date
fair value
|
|
|
Non-vested
Shares
|
|
|
Weighted
average
grant date
fair value
|
|
|
Non-
vested
Shares
|
|
|
Weighted
average
grant date
fair value
|
|
Unvested at beginning of year:
|
|
|
305,520
|
|
|
$
|
59.09
|
|
|
|
310,463
|
|
|
$
|
51.93
|
|
|
|
293,196
|
|
|
$
|
49.20
|
|
Granted
|
|
|
23,405
|
|
|
|
89.30
|
|
|
|
64,665
|
|
|
|
94.74
|
|
|
|
92,665
|
|
|
|
60.87
|
|
Vested
|
|
|
(70,762
|
)
|
|
|
69.82
|
|
|
|
(69,187
|
)
|
|
|
60.28
|
|
|
|
(72,876
|
)
|
|
|
53.11
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(421
|
)
|
|
|
76.07
|
|
|
|
(2,522
|
)
|
|
|
28.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of year
|
|
|
258,163
|
|
|
$
|
58.89
|
|
|
|
305,520
|
|
|
$
|
59.09
|
|
|
|
310,463
|
|
|
$
|
51.93
|
|
73
Compensation expense of $7.2 million, $6.3 million, and $4.6 million was recognized for the
vested portion of non-vested stock grants in 2016, 2015, and 2014, respectively. The fair value of non-vested stock that vested during 2016, 2015, and 2014 was $4.9 million, $4.2 million, and $3.9 million, respectively. The total
unrecognized compensation cost related to non-vested stock was $9.6 million at December 31, 2016, and the remaining weighted-average period over which this expense will be recognized was 3.4 years.
Performance-based awards
During 2016 and
2015, the Company granted performance-based awards that entitle the recipients to earn up to 37,082 and 42,538 shares, respectively, if certain performance criteria are achieved over a three year period. The actual number of shares to be issued will
be determined at the end of a three year period, and no performance-based shares were issued in 2016 or 2015. The Company granted and issued a total of 60,654 performance shares under the Plan during 2014 which are included in the table above. The
performance-based awards granted are based upon the Companys performance over a three year period depending on the Companys total shareholder return relative to a group of peer companies. Performance based awards are recognized as
compensation expense based on fair value on date of grant, the number of shares ultimately expected to vest and the vesting period. For accounting purposes, the performance shares are considered to have a market condition. The effect of the market
condition is reflected in the grant date fair value of the award and thus, compensation expense is recognized on this type of award provided that the requisite service is rendered (regardless of whether the market condition is achieved). The Company
estimated the fair value of each performance-based award granted under the Plans on the date of grant using a Monte Carlo simulation that uses the assumptions noted in Note 2.
During 2016, compensation expense of $2.6 million (included in the $7.2 million discussed above) was recognized for performance awards granted
in 2014 and prior. The total unrecognized compensation cost related to non-vested performance awards was $3.9 million at December 31, 2016 and the weighted-average period over which this expense will be recognized is 1.6 years.
Deferred compensation plan for directors
Under the Deferred Compensation Plan for Directors, non-employee Directors may defer all or part of their Directors fees that are
otherwise payable in cash. Directors fees that are deferred under this plan are credited to each Directors account under the plan in the form of Units. The number of Units credited is determined by dividing the amount of Directors
fees deferred by the closing price of the Companys Common Stock on the New York Stock Exchange on the day immediately preceding the day upon which Directors fees otherwise would be paid by the Company. A Director is credited with
additional Units for dividends on the shares of Common Stock represented by Units in such Directors Account. A Director may elect to receive the shares in a lump sum on a date specified by the Director or in quarterly or annual installments
over a specified period and commencing on a specified date. The Directors may not elect to receive cash in lieu of shares. Under this plan there were a total of 20,513 units outstanding at December 31, 2016. Fees that were earned and credited
to Directors accounts are recorded as compensation expense which totaled $0.1 million annually in each of 2016, 2015, and 2014.
10. RETIREMENT
PLAN
Employees of the Company qualifying under certain age and service requirements are eligible to be a participant in a 401(k) Plan.
In 2015 and 2014, the Company contributed to the Plan at the rate of 25% of the first 4% of gross wages that the employee contributes. Beginning on January 1, 2016, the Company contributes to the Plan at the rate of 33% of the first 5% of gross
wages that the employee contributes. Total expense to the Company was approximately $505,000, $276,000, and $192,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
11. INVESTMENT IN JOINT VENTURES
The
Company has a 20% ownership interest in Sovran HHF Storage Holdings LLC (Sovran HHF), a joint venture that owns 39 self-storage properties that are managed by the Company. The carrying value of the Companys investment at
December 31, 2016 and 2015 was $43.8 million and $44.6 million, respectively. In 2014, the Company contributed $28.6 million in cash to the joint venture as its share of capital required to fund property acquisitions. In 2015 the Company
contributed an additional $0.4 million in cash to the joint venture as its share of capital required to fund certain capital expenditures and property taxes related to 2014 acquisitions. As of
74
December 31, 2016, the carrying value of the Companys investment in Sovran HHF exceeds its share of the underlying equity in net assets of Sovran HHF by approximately $1.7 million as a
result of the capitalization of certain acquisition related costs in 2008. This difference is included in the carrying value of the investment, which is assessed for other-than-temporary impairment on a periodic basis. No other-than-temporary
impairments have been recorded on this investment.
The Company has a 15% ownership interest in Sovran HHF Storage Holdings II LLC
(Sovran HHF II), a joint venture that owns 30 self-storage properties that are managed by the Company. The carrying value of the Companys investment at December 31, 2016 and 2015 was $13.5 million and $13.9 million,
respectively. In 2015 the Company contributed $1.7 million in cash to the joint venture as its share of capital required to fund the payoff of a mortgage note. The carrying value of this investment is assessed for other-than-temporary impairment on
a periodic basis and no such impairments have been recorded on this investment.
As manager of Sovran HHF and Sovran HHF II, the Company
earns a management and call center fee of 7% of gross revenues which totaled $4.9 million, $4.9 million, and $3.9 million for 2016, 2015, and 2014, respectively. The Company also received an acquisition fee of $0.4 million for securing purchases for
Sovran HHF and Sovran HHF II in 2014. The Companys share of Sovran HHF and Sovran HHF IIs income for 2016, 2015, and 2014 was $3.4 million, $3.2 million, and $1.9 million, respectively.
The Company has a 49% ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Companys headquarters
and other tenants. The carrying value of the Companys investment is a liability of $0.4 million and $0.5 million at December 31, 2016 and 2015, respectively, and is included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheets. For the years ended December 31, 2016, 2015, and 2014, the Companys share of Iskalo Office Holdings, LLCs income was $214,000, $189,000, and $107,000, respectively. The Company paid rent to Iskalo Office
Holdings, LLC of $1.2 million, $1.1 million, and $1.0 million in 2016, 2015, and 2014, respectively.
The Company holds an 85% equity
interest in Urban Box Coralway Storage, LLC (Urban Box), a joint venture with an unrelated third party. Urban Box was formed in 2015 and is currently developing a self-storage property in Florida. During 2015, the Company contributed $4.0 million to
Urban Box as its share of capital to develop the property, which primarily consists of the acquisition of land in 2015. In 2016, Urban Box entered into a non-recourse mortgage loan in order to finance future development costs. The Company and the
other joint venture member have participation rights which require the agreement of both members in order to implement the activities of Urban Box which are most significant to its economic performance. Accordingly, the investment is accounted for
by the Company using the equity method.
The Company will perform property management services for Urban Box in exchange for a management
fee based on 6% of property revenues. There were no management fees in 2016 or 2015.
The Company holds a 5% equity interest in SNL/Orix
1200 McDonald Ave., LLC (McDonald), a joint venture with an unrelated third party. The joint venture for McDonald was executed in 2016 and is currently developing a self-storage property in New York. During 2016, the Company contributed
$0.4 million of common capital and $2.3 million of preferred capital to McDonald as its share of capital to develop the property. McDonald entered into a non-recourse mortgage loan in order to finance the future development costs. In accordance with
the terms of the McDonald joint venture agreement, the Company has the ability to assert influence over certain business matters. Accordingly, the investment is accounted for by the Company using the equity method.
The Company will perform property management services for McDonald in exchange for a management fee based on property revenues. There were no
management fees in 2016.
The Company holds a 5% equity interest in SNL Orix Merrick, LLC (Merrick), a joint venture with an
unrelated third party. The joint venture for Merrick was executed in 2016 and is currently developing a self-storage property in New York. During 2016, the Company contributed $0.4 million of common capital and $2.1 million of preferred capital to
Merrick as its share of capital to develop the property. Merrick will enter into a non-recourse mortgage loan in order to finance the future development costs. In accordance with the terms of the Merrick joint venture agreement, the Company has the
ability to assert influence over certain business matters. Accordingly, the investment is accounted for by the Company using the equity method.
75
The Company will perform property management services for Merrick in exchange for a management
fee based on property revenues. There were no management fees in 2016.
The Company holds a 20% ownership interest in 191 III Holdings LLC
(191 III), a joint venture that was formed in 2016 to acquire self-storage properties that are managed by the Company. During 2016, the Company contributed $0.7 million to 191 III as its share of capital to fund future acquisitions. In
accordance with the terms of the 191 III joint venture agreement, the Company has the ability to assert influence over certain business matters. Accordingly, the investment is accounted for by the Company using the equity method.
The Company will perform property management and call center services for 191 III in exchange for an aggregate fee based on 7% of the gross
revenues of the joint venture. There were no management fees in 2016.
A summary of the combined unconsolidated joint ventures
financial statements as of and for the year ended December 31, 2016 is as follows:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
Investment in storage facilities, net
|
|
$
|
534,719
|
|
Investment in office building
|
|
|
5,008
|
|
Other assets
|
|
|
17,440
|
|
|
|
|
|
|
Total Assets
|
|
$
|
557,167
|
|
|
|
|
|
|
Due to the Company
|
|
$
|
1,223
|
|
Mortgages payable
|
|
|
220,456
|
|
Other liabilities
|
|
|
7,394
|
|
|
|
|
|
|
Total Liabilities
|
|
|
229,073
|
|
Unaffiliated partners equity
|
|
|
262,944
|
|
Company equity
|
|
|
65,150
|
|
|
|
|
|
|
Total Partners Equity
|
|
|
328,094
|
|
|
|
|
|
|
Total Liabilities and Partners Equity
|
|
$
|
557,167
|
|
|
|
|
|
|
Income Statement Data
:
|
|
|
|
|
Total revenues
|
|
$
|
74,034
|
|
Property operating expenses
|
|
|
(23,879
|
)
|
Administrative, management and call center fees
|
|
|
(5,389
|
)
|
Depreciation and amortization of customer list
|
|
|
(13,946
|
)
|
Amortization of financing fees
|
|
|
(354
|
)
|
Income tax expense
|
|
|
(232
|
)
|
Interest expense
|
|
|
(10,258
|
)
|
|
|
|
|
|
Net income
|
|
$
|
19,976
|
|
|
|
|
|
|
The Company does not guarantee the debt of Sovran HHF, Sovran HHF II, Iskalo Office Holdings, LLC, Urban Box,
McDonald, Merrick, or 191 III.
76
We do not expect to have material future cash outlays relating to these joint ventures outside
our share of capital for future acquisitions of properties. A summary of our revenues, expenses and cash flows arising from the off-balance sheet arrangements with Sovran HHF, Sovran HHF II, Iskalo Office Holdings, LLC, Urban Box, McDonald, Merrick,
and 191 III for the three years ended December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income (management fees and acquisition fee income)
|
|
$
|
4,891
|
|
|
$
|
4,889
|
|
|
$
|
4,231
|
|
General and administrative expenses (corporate office rent)
|
|
|
1,214
|
|
|
|
1,053
|
|
|
|
1,023
|
|
Equity in income of joint ventures
|
|
|
3,665
|
|
|
|
3,405
|
|
|
|
2,086
|
|
Distributions from unconsolidated joint ventures
|
|
|
5,207
|
|
|
|
4,821
|
|
|
|
3,123
|
|
(Advances to) receipts from joint ventures
|
|
|
(294
|
)
|
|
|
(346
|
)
|
|
|
590
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated joint ventures
|
|
|
(6,438
|
)
|
|
|
(6,151
|
)
|
|
|
(28,650
|
)
|
12. SHAREHOLDERS EQUITY
On March 3, 2015, the Company completed the public offering of 1,380,000 shares of its common stock at $90.40 per share. Net proceeds to
the Company after deducting underwriting discounts and commissions and offering expenses were approximately $119.5 million. The Company used the net proceeds from the offering to repay a portion of the indebtedness then outstanding on the
Companys unsecured line of credit.
On January 20, 2016, the Company completed the public offering of 2,645,000 shares of its
common stock at $105.75 per share. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $269.7 million. The Company used the net proceeds from the offering to repay a portion of
the indebtedness then outstanding on the Companys unsecured line of credit.
On May 25, 2016, the Company completed the public
offering of 6,900,000 shares of its common stock at $100.00 per share. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $665.4 million. The Company initially used the net
proceeds from the offering to repay the indebtedness then outstanding on the Companys unsecured line of credit. The proceeds from this offering and the proceeds from the 2026 Senior Notes (see Note 5) were used, along with draws on the
Companys revolving line of credit, to fund the purchase of LS on July 15, 2016 (see Note 4).
On May 12, 2014, the Company
entered into a continuous equity offering program (Equity Program) with Wells Fargo Securities, LLC (Wells Fargo), Jefferies LLC (Jefferies), SunTrust Robinson Humphrey, Inc. (SunTrust), Piper
Jaffray & Co. (Piper), HSBC Securities (USA) Inc. (HSBC), and BB&T Capital Markets, a division of BB&T Securities, LLC (BB&T), pursuant to which the Company may sell from time to time up to
$225 million in aggregate offering price of shares of the Companys common stock. Actual sales under the Equity Program will depend on a variety of factors and conditions, including, but not limited to, market conditions, the trading price of
the Companys common stock, and determinations of the appropriate sources of funding for the Company. The Company expects to continue to offer, sell, and issue shares of common stock under the Equity Program from time to time based on various
factors and conditions, although the Company is under no obligation to sell any shares under the Equity Program.
During 2016, the Company
did not issue any shares of common stock under the Equity Program. As of December 31, 2016, the Company had $59.3 million available for issuance under the Equity Program which expires in May 2017.
During 2015, the Company issued 949,911 shares of common stock under the Equity Program at a weighted average issue price of $96.80 per share,
generating net proceeds of $90.6 million after deducting $1.1 million of sales commissions paid to Jefferies, Piper, and HSBC, as well as other expenses of $0.2 million. The Company used the proceeds from the equity programs to fund a portion of the
acquisition of 27 storage facilities.
77
During 2014, the Company issued 924,403 shares of common stock under the Equity Program at a
weighted average issue price of $79.77 per share, generating net proceeds of $72.8 million after deducting $0.9 million of sales commissions paid to Piper, HSBC and BB&T. During the three months ended March 31, 2014, the Company issued
359,102 shares of common stock under a previous equity program at a weighted average issue price of $74.32 per share, generating net proceeds of $26.4 million after deducting $0.3 million of sales commissions payable to SunTrust. In addition to
sales commissions, the Company incurred expenses of $0.2 million in connection with these equity programs during 2014. The Company used the proceeds from the equity programs to fund a portion of the acquisition of 33 storage facilities.
In 2013, the Company implemented a Dividend Reinvestment Plan. The Company issued 133,666 and 151,246 shares under the plan in 2016 and 2015,
respectively.
13. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of Life Storage Inc. operations for the years ended December 31, 2016 and 2015 (dollars in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
Operating revenue
|
|
$
|
99,124
|
|
|
$
|
107,005
|
|
|
$
|
127,801
|
|
|
$
|
128,678
|
|
Net income (loss)
|
|
|
28,230
|
|
|
|
43,504
|
|
|
|
(4,969
|
)
|
|
|
18,191
|
|
Net income (loss) attributable to common shareholders
|
|
|
28,339
|
|
|
|
43,456
|
|
|
|
(4,738
|
)
|
|
|
18,168
|
|
Net income (loss) per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
1.04
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
1.03
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.39
|
|
|
|
|
|
2015 Quarter Ended
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
Operating revenue
|
|
$
|
85,408
|
|
|
$
|
90,726
|
|
|
$
|
95,428
|
|
|
$
|
95,040
|
|
Net income
|
|
|
22,557
|
|
|
|
28,676
|
|
|
|
31,661
|
|
|
|
30,183
|
|
Net income attributable to common shareholders
|
|
|
22,451
|
|
|
|
28,532
|
|
|
|
31,504
|
|
|
|
30,037
|
|
Net income per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
0.81
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
0.80
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
78
The following is a summary of quarterly results of Life Storage LP operations for the years ended
December 31, 2016 and 2015 (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
Operating revenue
|
|
$
|
99,124
|
|
|
$
|
107,005
|
|
|
$
|
127,801
|
|
|
$
|
128,678
|
|
Net income (loss)
|
|
|
28,230
|
|
|
|
43,504
|
|
|
|
(4,969
|
)
|
|
|
18,191
|
|
Net income (loss) attributable to common unitholders
|
|
|
28,339
|
|
|
|
43,456
|
|
|
|
(4,738
|
)
|
|
|
18,168
|
|
Net income (loss) per unit attributable to common unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
1.04
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
1.03
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.39
|
|
|
|
|
|
2015 Quarter Ended
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
Operating revenue
|
|
$
|
85,408
|
|
|
$
|
90,726
|
|
|
$
|
95,428
|
|
|
$
|
95,040
|
|
Net income
|
|
|
22,557
|
|
|
|
28,676
|
|
|
|
31,661
|
|
|
|
30,183
|
|
Net income attributable to common unitholders
|
|
|
22,451
|
|
|
|
28,532
|
|
|
|
31,504
|
|
|
|
30,037
|
|
Net income per unit attributable to common unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
0.81
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
0.80
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
See note 4 for a discussion of property acquisitions made during 2016 and the depreciation resulting from the
change in estimated useful lives of Uncle Bobs Self Storage
®
signage. See note 6 for financing transactions entered into in 2016.
14. COMMITMENTS AND CONTINGENCIES
The Companys current practice is to conduct environmental investigations in connection with property acquisitions. At this time, the
Company is not aware of any environmental contamination of any of its facilities that individually or in the aggregate would be material to the Companys overall business, financial condition, or results of operations.
Future minimum lease payments on a building lease and the lease of the Companys headquarters are as follows (dollars in thousands):
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2017
|
|
$
|
2,432
|
|
2018
|
|
|
2,332
|
|
2019
|
|
|
2,227
|
|
2020
|
|
|
2,278
|
|
2021
|
|
|
2,288
|
|
Thereafter
|
|
|
13,431
|
|
|
|
|
|
|
Total
|
|
$
|
24,988
|
|
79
At December 31, 2016, the Company was under contract to acquire five self-storage facilities
for cash consideration of approximately $67.0 million. One of the properties was acquired in February 2017 from an unrelated party for $9.8 million. The Company has not yet determined the assignment of the purchase price of this facility to the
individual assets acquired. This acquisition was funded with a draw on the Companys revolving line of credit. The following is a summary of the properties under contract at December 31, 2016 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
No. of
Properties
|
|
|
Contract
Amount
|
|
|
Acquisition
Date
|
|
Illinois*
|
|
|
1
|
|
|
$
|
9,800
|
|
|
|
Feb. 2017
|
|
North Carolina*
|
|
|
1
|
|
|
|
12,425
|
|
|
|
|
|
Texas*
|
|
|
3
|
|
|
|
44,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
$
|
67,025
|
|
|
|
|
|
*
|
Properties purchased or expected to be purchased upon completion of construction.
|
The
purchase of the remaining facilities by the Company is subject to customary conditions to closing, and there is no assurance that these facilities will be acquired.
At December 31, 2016, 191 III was under contract to acquire five self-storage facilities for cash consideration of $109.5 million. Four
of these facilities were acquired by 191 III in January 2017. The Companys cash contribution to 191 III for the purchase of the four facilities was approximately $15.0 million. 191 III is under contract to purchase the remaining facility for
$32.3 million of which the company is committed to contribute $6.5 million. The purchase of this remaining facility by 191 III is subject to customary conditions to closing, and there is no assurance that this facility will be acquired.
At December 31, 2016, the Company has signed contracts in place with third party contractors for expansion and enhancements at its
existing facilities. The Company expects to pay $11.6 million under these contracts in 2017.
On or about August 25, 2014, a putative
class action was filed against the Company in the Superior Court of New Jersey Law Division Burlington County. The action seeks to obtain declaratory, injunctive and monetary relief for a class of consumers based upon alleged violations by the
Company of the New Jersey Truth in Customer Contract, Warranty and Notice Act, the New Jersey Consumer Fraud Act and the New Jersey Insurance Producer Licensing Act. On October 17, 2014, the action was removed from the Superior Court of New
Jersey Law Division Burlington County to the United States District Court for the District of New Jersey. The Company brought a motion to partially dismiss the complaint for failure to state a claim, and on July 16, 2015, the Companys
motion was granted in part and denied in part. On October 20, 2016, the complaint was amended to add a claim that the Companys insurance program violates New Jersey consumer protection laws. The Company intends to vigorously defend the
action, and the possibility of any adverse outcome cannot be determined at this time.
15. SUBSEQUENT EVENTS
On January 4, 2017, the Company declared a quarterly dividend of $0.95 per common share. The dividend was paid on January 26, 2017 to
shareholders of record on January 17, 2017. The total dividend paid amounted to $44.1 million.
In January 2017, the Company executed
a joint venture agreement, Review Avenue Partners, LLC (RAP), with an unrelated third party. The Company holds a 40% interest in RAP and contributed $12.4 million of common capital to RAP on January 4, 2017. RAP is currently
operating a self-storage property in New York and has entered into a non-recourse mortgage loan to finance a portion of the cost of the facility. The Company will perform property management services for RAP in exchange for a management fee based on
property revenues.
80