UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Commission file number:

1-13820 (Life Storage, Inc.)

0-24071 (Life Storage LP)

 

LIFE STORAGE, INC.

LIFE STORAGE LP

(Exact name of Registrant as specified in its charter)

 

 

Maryland (Life Storage, Inc.)

16-1194043

Delaware (Life Storage LP)

16-1481551

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

6467 Main Street

Williamsville, NY 14221

(Address of principal executive offices) (Zip code)

(716) 633-1850

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Life Storage, Inc.

Yes  

No  

Life Storage LP

Yes  

No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Life Storage, Inc.

Yes  

No  

Life Storage LP

Yes  

No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Life Storage, Inc.:

 

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-accelerated Filer

Smaller Reporting Company

 

 

 

 

Emerging Growth Company

 

 

Life Storage LP:

 

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-accelerated Filer

Smaller Reporting Company

 

 

 

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Life Storage, Inc.    

Life Storage LP       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Life Storage, Inc.

Yes  

No  

Life Storage LP

Yes  

No  

As of April 20, 2018, 46,517,198 shares of Common Stock, $.01 par value per share, were outstanding.

 

 

 


 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2018 of Life Storage, Inc. (the “Parent Company”) and Life Storage LP (the “Operating Partnership”). The Parent Company is a real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. 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.

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 March 31, 2018. The remaining ownership interests in the Operating Partnership are held by certain former owners of assets acquired by the Operating Partnership. As the owner of the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.

Management operates the Parent Company and the Operating Partnership as one enterprise. The management teams of the Parent Company and the Operating Partnership are identical.

There are few differences between the Parent Company and the Operating Partnership, which are reflected in the note disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as a consolidated enterprise. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the owner of the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and, directly or indirectly, holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership.

The substantive difference between the Parent Company’s filings and the Operating Partnership’s filings is the fact that the Parent Company is a REIT with public equity, while the Operating Partnership is a partnership with no publicly traded equity. In the financial statements, this difference is primarily reflected in the equity (or capital for the Operating Partnership) section of the consolidated balance sheets and in the Shareholders’ Equity and Partners’ Capital notes to the financial statements. Apart from the different equity treatment, the consolidated financial statements of the Parent Company and the Operating Partnership are nearly identical.

The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will:

 

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

 

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and

 

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.

2


 

As the owner of the general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company’s operations on a consolidated basis and how management operates the Company.

This report also includes separate Item 4 - Controls and Procedures sections, signature pages and Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of the Parent Company and the Chief Executive Officer and the Chief Financial Officer of the Operating Partnership have made the requisite certifications and that the Parent Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended and 18 U.S.C. §1350.

3


 

Part I. Financial Information

Item 1. Financial Statements

LIFE STORAGE, INC.

CONSOLIDATED BALANCE SHEETS

 

(dollars in thousands, except share data)

 

March 31,

2018

(unaudited)

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Investment in storage facilities:

 

 

 

 

 

 

 

 

Land

 

$

786,628

 

 

$

786,628

 

Building, equipment, and construction in progress

 

 

3,541,631

 

 

 

3,534,782

 

 

 

 

4,328,259

 

 

 

4,321,410

 

Less: accumulated depreciation

 

 

(647,130

)

 

 

(624,314

)

Investment in storage facilities, net

 

 

3,681,129

 

 

 

3,697,096

 

Cash and cash equivalents

 

 

7,778

 

 

 

9,167

 

Accounts receivable

 

 

7,286

 

 

 

7,331

 

Receivable from unconsolidated joint ventures

 

 

900

 

 

 

1,397

 

Investment in unconsolidated joint ventures

 

 

133,106

 

 

 

133,458

 

Prepaid expenses

 

 

17,335

 

 

 

6,757

 

Fair value of interest rate swap agreements

 

 

277

 

 

 

205

 

Trade name

 

 

16,500

 

 

 

16,500

 

Other assets

 

 

4,603

 

 

 

4,863

 

Total Assets

 

$

3,868,914

 

 

$

3,876,774

 

Liabilities

 

 

 

 

 

 

 

 

Line of credit

 

$

130,000

 

 

$

105,000

 

Term notes, net

 

 

1,609,576

 

 

 

1,609,089

 

Accounts payable and accrued liabilities

 

 

69,227

 

 

 

92,941

 

Deferred revenue

 

 

10,347

 

 

 

9,374

 

Mortgages payable

 

 

12,581

 

 

 

12,674

 

Total Liabilities

 

 

1,831,731

 

 

 

1,829,078

 

Noncontrolling redeemable Operating Partnership Units at redemption value

 

 

17,846

 

 

 

19,373

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock $.01 par value, 100,000,000 shares authorized, 46,514,198

   shares outstanding at March 31, 2018 (46,552,222 at December 31, 2017)

 

 

465

 

 

 

466

 

Additional paid-in capital

 

 

2,364,671

 

 

 

2,363,171

 

Dividends in excess of net income

 

 

(338,489

)

 

 

(327,727

)

Accumulated other comprehensive loss

 

 

(7,310

)

 

 

(7,587

)

Total Shareholders’ Equity

 

 

2,019,337

 

 

 

2,028,323

 

Noncontrolling interest in consolidated subsidiary

 

 

 

 

 

 

Total Equity

 

 

2,019,337

 

 

 

2,028,323

 

Total Liabilities and Shareholders’ Equity

 

$

3,868,914

 

 

$

3,876,774

 

 

See notes to consolidated financial statements.

4


 

LIFE STORAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(dollars in thousands, except per share data)

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

Rental income

 

$

121,624

 

 

$

118,594

 

Other operating income

 

 

11,470

 

 

 

9,726

 

Total operating revenues

 

 

133,094

 

 

 

128,320

 

Expenses

 

 

 

 

 

 

 

 

Property operations and maintenance

 

 

30,449

 

 

 

29,796

 

Real estate taxes

 

 

15,419

 

 

 

14,435

 

General and administrative

 

 

12,044

 

 

 

11,436

 

Payments for rent

 

 

141

 

 

 

 

Depreciation and amortization

 

 

24,764

 

 

 

37,642

 

Total operating expenses

 

 

82,817

 

 

 

93,309

 

Income from operations

 

 

50,277

 

 

 

35,011

 

Other income (expenses)

 

 

 

 

 

 

 

 

Interest expense

 

 

(17,204

)

 

 

(15,210

)

Interest income

 

 

4

 

 

 

3

 

Equity in income of joint ventures

 

 

972

 

 

 

721

 

Net income

 

 

34,049

 

 

 

20,525

 

Net income attributable to noncontrolling

   interest in the Operating Partnership

 

 

(160

)

 

 

(96

)

Net loss attributable to noncontrolling

   interest in consolidated subsidiary

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

33,889

 

 

$

20,429

 

Earnings per common share attributable

   to common shareholders – basic

 

$

0.73

 

 

$

0.44

 

Earnings per common share attributable

   to common shareholders – diluted

 

$

0.73

 

 

$

0.44

 

Common shares used in basic earnings per share

   calculation

 

 

46,452,492

 

 

 

46,304,568

 

Common shares used in diluted earnings per share

   calculation

 

 

46,536,672

 

 

 

46,418,891

 

Dividends declared per common share

 

$

1.00

 

 

$

0.95

 

 

See notes to consolidated financial statements.

5


 

LIFE STORAGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(dollars in thousands)

 

2018

 

 

2017

 

Net income

 

$

34,049

 

 

$

20,525

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Effective portion of gain on derivatives net

   of reclassification to interest expense

 

 

277

 

 

 

1,622

 

Total comprehensive income

 

 

34,326

 

 

 

22,147

 

Comprehensive income attributable to noncontrolling

   interest in the Operating Partnership

 

 

(161

)

 

 

(104

)

Comprehensive loss attributable to noncontrolling

   interest in consolidated subsidiary

 

 

 

 

 

 

Comprehensive income attributable to common shareholders

 

$

34,165

 

 

$

22,043

 

 

See notes to consolidated financial statements.

6


 

LIFE STORAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

 

Three Months

Ended

March 31, 2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

34,049

 

 

$

20,525

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,764

 

 

 

37,642

 

Amortization of debt issuance costs and bond discount

 

 

891

 

 

 

832

 

Equity in income of joint ventures

 

 

(972

)

 

 

(721

)

Distributions from unconsolidated joint ventures

 

 

2,037

 

 

 

1,357

 

Non-vested stock earned

 

 

1,495

 

 

 

1,612

 

Stock option expense

 

 

4

 

 

 

4

 

Deferred income taxes

 

 

148

 

 

 

 

Changes in assets and liabilities (excluding the effects of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

45

 

 

 

(281

)

Prepaid expenses

 

 

(10,578

)

 

 

(3,773

)

Receipts from (advances to) joint ventures

 

 

497

 

 

 

(73

)

Accounts payable and other liabilities

 

 

(23,749

)

 

 

(29,033

)

Deferred revenue

 

 

973

 

 

 

48

 

Net cash provided by operating activities

 

 

29,604

 

 

 

28,139

 

Investing Activities

 

 

 

 

 

 

 

 

Acquisitions of storage facilities, net of cash acquired

 

 

 

 

 

(9,576

)

Improvements, equipment additions, and construction in progress

 

 

(8,755

)

 

 

(20,739

)

Investment in unconsolidated joint ventures

 

 

(706

)

 

 

(22,387

)

Property deposit

 

 

29

 

 

 

 

Net cash used in investing activities

 

 

(9,432

)

 

 

(52,702

)

Financing Activities

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock

 

 

 

 

 

4,216

 

Proceeds from line of credit

 

 

68,000

 

 

 

73,000

 

Repayments of line of credit

 

 

(43,000

)

 

 

(27,000

)

Dividends paid - common stock

 

 

(46,121

)

 

 

(44,113

)

Distributions to noncontrolling interest holders

 

 

(217

)

 

 

(207

)

Mortgage principal payments

 

 

(93

)

 

 

(89

)

Net cash (used in) provided by financing activities

 

 

(21,431

)

 

 

5,807

 

Net decrease in cash and restricted cash

 

 

(1,259

)

 

 

(18,756

)

Cash and restricted cash at beginning of period

 

 

9,459

 

 

 

23,923

 

Cash and restricted cash at end of period

 

$

8,200

 

 

$

5,167

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

19,140

 

 

$

21,993

 

Cash paid for income taxes, net of refunds

 

$

322

 

 

$

220

 

 

See notes to consolidated financial statements.

7


 

LIFE STORAGE LP

CONSOLIDATED BALANCE SHEETS

 

(dollars in thousands)

 

March 31,

2018

(unaudited)

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Investment in storage facilities:

 

 

 

 

 

 

 

 

Land

 

$

786,628

 

 

$

786,628

 

Building, equipment, and construction in progress

 

 

3,541,631

 

 

 

3,534,782

 

 

 

 

4,328,259

 

 

 

4,321,410

 

Less: accumulated depreciation

 

 

(647,130

)

 

 

(624,314

)

Investment in storage facilities, net

 

 

3,681,129

 

 

 

3,697,096

 

Cash and cash equivalents

 

 

7,778

 

 

 

9,167

 

Accounts receivable

 

 

7,286

 

 

 

7,331

 

Receivable from unconsolidated joint ventures

 

 

900

 

 

 

1,397

 

Investment in unconsolidated joint ventures

 

 

133,106

 

 

 

133,458

 

Prepaid expenses

 

 

17,335

 

 

 

6,757

 

Fair value of interest rate swap agreements

 

 

277

 

 

 

205

 

Trade name

 

 

16,500

 

 

 

16,500

 

Other assets

 

 

4,603

 

 

 

4,863

 

Total Assets

 

$

3,868,914

 

 

$

3,876,774

 

Liabilities

 

 

 

 

 

 

 

 

Line of credit

 

$

130,000

 

 

$

105,000

 

Term notes, net

 

 

1,609,576

 

 

 

1,609,089

 

Accounts payable and accrued liabilities

 

 

69,227

 

 

 

92,941

 

Deferred revenue

 

 

10,347

 

 

 

9,374

 

Mortgages payable

 

 

12,581

 

 

 

12,674

 

Total Liabilities

 

 

1,831,731

 

 

 

1,829,078

 

Limited partners’ redeemable capital interest at redemption value

   (217,481 units outstanding at March 31, 2018 and December 31, 2017)

 

 

17,846

 

 

 

19,373

 

Partners’ Capital

 

 

 

 

 

 

 

 

General partner (467,317 and 467,697 units outstanding at March 31, 2018 and

   December 31, 2017, respectively)

 

 

20,373

 

 

 

20,478

 

Limited partners (46,046,881 and 46,084,525 units outstanding at March 31, 2018

   and December 31, 2017, respectively)

 

 

2,006,274

 

 

 

2,015,432

 

Accumulated other comprehensive loss

 

 

(7,310

)

 

 

(7,587

)

Total Controlling Partners’ Capital

 

 

2,019,337

 

 

 

2,028,323

 

Noncontrolling interest in consolidated subsidiary

 

 

 

 

 

 

Total Partners’ Capital

 

 

2,019,337

 

 

 

2,028,323

 

Total Liabilities and Partners’ Capital

 

$

3,868,914

 

 

$

3,876,774

 

 

See notes to consolidated financial statements.

8


 

LIFE STORAGE LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(dollars in thousands, except per unit data)

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

Rental income

 

$

121,624

 

 

$

118,594

 

Other operating income

 

 

11,470

 

 

 

9,726

 

Total operating revenues

 

 

133,094

 

 

 

128,320

 

Expenses

 

 

 

 

 

 

 

 

Property operations and maintenance

 

 

30,449

 

 

 

29,796

 

Real estate taxes

 

 

15,419

 

 

 

14,435

 

General and administrative

 

 

12,044

 

 

 

11,436

 

Payments for rent

 

 

141

 

 

 

 

Depreciation and amortization

 

 

24,764

 

 

 

37,642

 

Total operating expenses

 

 

82,817

 

 

 

93,309

 

Income from operations

 

 

50,277

 

 

 

35,011

 

Other income (expenses)

 

 

 

 

 

 

 

 

Interest expense

 

 

(17,204

)

 

 

(15,210

)

Interest income

 

 

4

 

 

 

3

 

Equity in income of joint ventures

 

 

972

 

 

 

721

 

Net income

 

 

34,049

 

 

 

20,525

 

Net income attributable to noncontrolling interest

   in the Operating Partnership

 

 

(160

)

 

 

(96

)

Net loss attributable to noncontrolling interest

   in consolidated subsidiary

 

 

 

 

 

 

Net income attributable to common unitholders

 

$

33,889

 

 

$

20,429

 

Earnings per common unit attributable to

   common unitholders – basic

 

$

0.73

 

 

$

0.44

 

Earnings per common unit attributable to

   common unitholders – diluted

 

$

0.73

 

 

$

0.44

 

Common units used in basic earnings per unit

   calculation

 

 

46,452,492

 

 

 

46,304,568

 

Common units used in diluted earnings per unit

   calculation

 

 

46,536,672

 

 

 

46,418,891

 

Distributions declared per common unit

 

$

1.00

 

 

$

0.95

 

Net income attributable to general  partner

 

$

340

 

 

$

205

 

Net income attributable to limited partners

 

$

33,549

 

 

$

20,224

 

 

See notes to consolidated financial statements.

9


 

LIFE STORAGE LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(dollars in thousands)

 

2018

 

 

2017

 

Net income

 

$

34,049

 

 

$

20,525

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Effective portion of gain on derivatives net of

   reclassification to interest expense

 

 

277

 

 

 

1,622

 

Total comprehensive income

 

 

34,326

 

 

 

22,147

 

Comprehensive income attributable to noncontrolling

   interest in the Operating Partnership

 

 

(161

)

 

 

(104

)

Comprehensive loss attributable to noncontrolling interest

   in consolidated subsidiary

 

 

 

 

 

 

Comprehensive income attributable to common unitholders

 

$

34,165

 

 

$

22,043

 

 

See notes to consolidated financial statements.

10


 

LIFE STORAGE LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

 

Three Months

Ended

March 31, 2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

34,049

 

 

$

20,525

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,764

 

 

 

37,642

 

Amortization of debt issuance costs and bond discount

 

 

891

 

 

 

832

 

Equity in income of joint ventures

 

 

(972

)

 

 

(721

)

Distributions from unconsolidated joint ventures

 

 

2,037

 

 

 

1,357

 

Non-vested stock earned

 

 

1,495

 

 

 

1,612

 

Stock option expense

 

 

4

 

 

 

4

 

Deferred income taxes

 

 

148

 

 

 

 

Changes in assets and liabilities (excluding the effects of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

45

 

 

 

(281

)

Prepaid expenses

 

 

(10,578

)

 

 

(3,773

)

Receipts from (advances to) joint ventures

 

 

497

 

 

 

(73

)

Accounts payable and other liabilities

 

 

(23,749

)

 

 

(29,033

)

Deferred revenue

 

 

973

 

 

 

48

 

Net cash provided by operating activities

 

 

29,604

 

 

 

28,139

 

Investing Activities

 

 

 

 

 

 

 

 

Acquisitions of storage facilities, net of cash acquired

 

 

 

 

 

(9,576

)

Improvements, equipment additions, and construction in progress

 

 

(8,755

)

 

 

(20,739

)

Investment in unconsolidated joint ventures

 

 

(706

)

 

 

(22,387

)

Property deposit

 

 

29

 

 

 

 

Net cash used in investing activities

 

 

(9,432

)

 

 

(52,702

)

Financing Activities

 

 

 

 

 

 

 

 

Net proceeds from sale of partnership units

 

 

 

 

 

4,216

 

Proceeds from line of credit

 

 

68,000

 

 

 

73,000

 

Repayments of line of credit

 

 

(43,000

)

 

 

(27,000

)

Distributions to unitholders

 

 

(46,121

)

 

 

(44,113

)

Distributions to noncontrolling interest holders

 

 

(217

)

 

 

(207

)

Mortgage principal payments

 

 

(93

)

 

 

(89

)

Net cash (used in) provided by financing activities

 

 

(21,431

)

 

 

5,807

 

Net decrease in cash and restricted cash

 

 

(1,259

)

 

 

(18,756

)

Cash and restricted cash at beginning of period

 

 

9,459

 

 

 

23,923

 

Cash and restricted cash at end of period

 

$

8,200

 

 

$

5,167

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

19,140

 

 

$

21,993

 

Cash paid for income taxes, net of refunds

 

$

322

 

 

$

220

 

 

See notes to consolidated financial statements.

11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements of Life Storage, Inc. (the “Parent Company”) and Life Storage LP (the “Operating Partnership”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

2. ORGANIZATION

The Parent Company operates as a self-administered and self-managed real estate investment trust (a “REIT”) that owns and operates self-storage facilities throughout the United States. All of the Parent Company’s 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 March 31, 2018. The remaining ownership interests in the Operating Partnership (the “Units”) are held by certain former owners of assets acquired by the Operating Partnership. 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 March 31, 2018, we had an ownership interest in, and/or managed 711 self-storage properties in 28 states under the name Life Storage®. Among our 711 self-storage properties are 98 properties that we manage for unconsolidated joint ventures (see Note 10) and 47 properties that we manage and have no ownership interest.

We consolidate all wholly-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, Life Storage Solutions, LLC (the Parent Company’s taxable REIT subsidiary), Warehouse Anywhere LLC (an entity owned 60% by Life Storage Solutions, LLC), and all other wholly-owned subsidiaries. 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 Company’s consolidated balance sheets are noncontrolling redeemable Operating Partnership Units and included in the Operating Partnership’s consolidated balance sheets are limited partners’ redeemable capital interest at redemption value. These interests are presented in the “mezzanine” section of the consolidated balance sheet 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 March 31, 2018 and December 31, 2017, there were 217,481 noncontrolling redeemable Operating Partnership Units outstanding. These unitholders are entitled to receive distributions per unit equivalent to the dividends declared per share on the Parent Company’s 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 Parent Company’s common stock based on a 10-day average of the daily market price, 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 Units under the provisions of Accounting Standards Codification (ASC) Topic 480-10-S99. The application of the 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 interests is reflected in the Company’s dividends in excess of net income and in the Operating Partnership’s general partner and limited partners capital balances. Accordingly, in the accompanying consolidated balance sheets, noncontrolling interests are reflected at redemption value at March 31, 2018 and December 31, 2017, equal to the number of noncontrolling interest units outstanding multiplied by the fair market value of the Parent Company’s common stock at that date. Redemption value exceeded the value determined under the Company’s historical basis of accounting at those dates.

12


 

The following is a reconciliation of the Parent Company’s noncontrolling redeemable Operating Partnership Units and the Operating Partnership’s limited partners’ redeemable capital interest for the period:

 

(dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

Beginning balance

 

$

19,373

 

Net income attributable to noncontrolling interest in the

   Operating Partnership

 

 

160

 

Distributions

 

 

(217

)

Adjustment to redemption value

 

 

(1,470

)

Ending balance

 

$

17,846

 

 

The disaggregated revenues of the Company presented in accordance with ASC Topic 606 “Revenue from Contracts with Customers” are as follows:

 

(dollars in thousands)

 

Three Months

Ended

March 31, 2018

 

 

Three Months

Ended

March 31, 2017

 

Rental income

 

$

121,624

 

 

$

118,594

 

Management fee income

 

 

2,395

 

 

 

1,818

 

Revenues related to tenant insurance

 

 

5,717

 

 

 

5,353

 

Other

 

 

3,358

 

 

 

2,555

 

Total operating revenues

 

$

133,094

 

 

$

128,320

 

 

Management fee income and revenues related to tenant insurance are included in other operating income in the consolidated statements of operations.

 

During 2018, approximately 22% and 13% of the Company’s revenue was derived from self-storage facilities in the states of Texas and Florida, respectively.

3. 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.

For the three months ended March 31, 2018 and 2017, the Company recorded compensation expense (included in general and administrative expense) of $4,000 and $4,000, respectively, related to stock options and $1,495,000 and $1,589,000, respectively, related to amortization of non-vested stock grants and performance-based awards.    

No stock options were exercised by employees and directors during the three months ended March 31, 2018 and 2017. During the three months ended March 31, 2018 and 2017, 36,191 and 44,789 shares of non-vested stock, respectively, vested.

During the three months ended March 31, 2018, the Company issued 242 shares of non-vested stock to non-employee directors which vest over one year. The per share fair market value on the date of grant of the non-vested stock issued during the three months ended March 31, 2018 was $81.86, resulting in an aggregate fair value of approximately $20,000.

 

13


 

4. CASH AND RESTRICTED CASH

Restricted cash represents those amounts required to be placed in escrow by banks with whom the Company has entered into mortgages and is included in other assets in the consolidated balance sheets. The following table provides a reconciliation of cash and restricted cash reported within the consolidated statement of cash flows:

 

(Dollars in thousands)

 

Mar. 31,

2018

 

 

Dec. 31,

2017

 

 

Mar. 31,

2017

 

Cash

 

$

7,778

 

 

$

9,167

 

 

$

4,819

 

Restricted cash

 

 

422

 

 

 

292

 

 

 

348

 

Total cash and restricted cash

 

 

8,200

 

 

 

9,459

 

 

 

5,167

 

 

5. INVESTMENT IN STORAGE FACILITIES AND INTANGIBLE ASSETS

The following summarizes our activity in storage facilities during the three months ended March 31, 2018:

 

(dollars in thousands)

 

 

 

 

Cost:

 

 

 

 

Beginning balance

 

$

4,321,410

 

Improvements and equipment additions

 

 

3,497

 

Net increase in construction in progress

 

 

5,336

 

Dispositions

 

 

(1,984

)

Ending balance

 

$

4,328,259

 

Accumulated  Depreciation:

 

 

 

 

Beginning balance

 

$

624,314

 

Additions during the period

 

 

24,731

 

Dispositions

 

 

(1,915

)

Ending balance

 

$

647,130

 

We did not acquire any self-storage facilities during the three months ended March 31, 2018.

The Company measures the fair value of in-place customer lease intangible assets based on the Company’s experience with customer turnover and the 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 Company’s consolidated balance sheets as follows:

 

(Dollars in thousands)

 

Mar. 31,

2018

 

 

Dec. 31,

2017

 

In-place customer leases

 

$

75,241

 

 

$

75,241

 

Accumulated amortization

 

 

(75,241

)

 

 

(75,241

)

Net carrying value at the end of period

 

 

 

 

 

 

 

Amortization expense related to in-place customer leases was $12.8 million for the three months ended March 31, 2017. The Company did not record any amortization expense during the three months ended March 31, 2018 as all in-place customer leases were fully amortized at the beginning of the period.

Change in Useful Life Estimates

As part of the Company’s capital improvement efforts during 2017 and 2018, buildings at certain self-storage facilities were identified for replacement. As a result of the decision to replace these buildings, the Company reassessed the estimated useful lives of the then existing buildings. This useful life reassessment resulted in an increase in depreciation expense of approximately $0.3 million during the three month period ended March 31, 2018. The Company estimates that the change in estimated useful lives of buildings identified for replacement as of March 31, 2018 will have minimal additional impact on depreciation expense during the remainder of 2018.

14


 

The accelerated depreciation resulting from the events discussed above reduced both basic and diluted earnings per share/unit by approximately $0.01 for the three month period ended March 31, 2018.

6. UNSECURED LINE OF CREDIT AND TERM NOTES

Borrowings outstanding on our unsecured line of credit and term notes are as follows:

 

(Dollars in thousands)

 

Mar. 31,

2018

 

 

Dec. 31,

2017

 

Revolving line of credit borrowings

 

$

130,000

 

 

$

105,000

 

 

 

 

 

 

 

 

 

 

Term note due June 4, 2020

 

 

100,000

 

 

 

100,000

 

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

 

 

 

600,000

 

Senior term note due December 15, 2027

 

 

450,000

 

 

 

450,000

 

Term note due July 21, 2028

 

 

200,000

 

 

 

200,000

 

Total term note principal balance outstanding

 

$

1,625,000

 

 

$

1,625,000

 

Less: unamortized debt issuance costs

 

 

(10,612

)

 

 

(10,962

)

Less: unamortized senior term note discount

 

 

(4,812

)

 

 

(4,949

)

Term notes payable

 

$

1,609,576

 

 

$

1,609,089

 

 

The Company’s unsecured amended credit agreement includes a revolving credit facility with a limit of $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 Company’s credit rating (at March 31, 2018 the margin is 1.10%), and requires an annual 0.15% facility fee. The interest rate at March 31, 2018 on the Company’s line of credit was approximately 2.97% (2.63% at December 31, 2017).  At March 31, 2018, there was $369.2 million available on the unsecured revolving line of credit. The revolving line of credit has a maturity date of December 10, 2019. The Company’s unsecured credit agreement also includes an unsecured term note maturing June 4, 2020, which term note was initially in the principal amount of $325 million. In 2017, the Company repaid $225 million under this term note, resulting in $100 million outstanding at March 31, 2018. The term note bears interest at LIBOR plus a margin based on the Company’s credit rating (at March 31, 2018 the margin is 1.15%). The interest rate at March 31, 2018 on the term note was approximately 2.84% (2.53% at December 31, 2017).

On December 7, 2017, the Operating Partnership issued $450 million in aggregate principal amount of 3.875% unsecured senior notes due December 15, 2027 (the “2027 Senior Notes”).  The 2027 Senior Notes were issued at a 0.477% discount to par value.  Interest on the 2027 Senior Notes is payable semi-annually on each June 15 and December 15, beginning on June 15, 2018.  The 2027 Senior Notes are fully and unconditionally guaranteed by the Parent Company.  Proceeds received upon issuance, net of discount to par of $2.1 million and underwriting discount and other offering expenses of $4.0 million, totaled $443.9 million.

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 each January 1 and July 1. 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 2027 Senior Notes and 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. At March 31, 2018, the Company was in compliance with such covenants.

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%.

15


 

On April 8, 2014, the Company entered into a $175 million term note maturing April 8, 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 Company’s credit rating is downgraded.

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 Company’s credit rating is downgraded.

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 March 31, 2018, the Company was in compliance with such 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 March 31, 2018, the entire availability on the line of credit could be drawn without violating our debt covenants.

The Company’s 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.

Deferred debt issuance costs and the discount on the outstanding term notes are both presented as reductions of term notes in the accompanying consolidated balance sheets at March 31, 2018 and December 31, 2017. Amortization expense related to these deferred debt issuance costs was $0.5 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively, and is included in interest expense in the consolidated statements of operations.

7. MORTGAGES PAYABLE AND DEBT MATURITIES

Mortgages payable at March 31, 2018 and December 31, 2017 consist of the following:

 

(dollars in thousands)

 

Mar. 31,

2018

 

 

Dec. 31,

2017

 

4.98% mortgage note due January 1, 2021, secured by one

   self-storage facility with an aggregate net book value of $9.6

   million, principal and interest paid monthly

   (effective interest rate 5.16%)

 

$

2,902

 

 

$

2,916

 

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 4.25%)

 

 

4,096

 

 

 

4,119

 

5.26% mortgage note due November 1, 2023, secured by one

   self-storage facility with an aggregate net book value of $8.0

   million, principal and interest paid monthly

   (effective interest rate 5.50%)

 

 

3,922

 

 

 

3,939

 

5.99% mortgage note due May 1, 2026, secured by one self-

   storage facility with an aggregate net book value of $6.6

   million, principal and interest paid monthly

   (effective interest rate 6.29%)

 

 

1,661

 

 

 

1,700

 

Total mortgages payable

 

$

12,581

 

 

$

12,674

 

 

16


 

The table below summarizes the Company’s debt obligations at March 31, 2018. 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 9. 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)

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

 

Fair Value

 

Line of credit - variable rate

   LIBOR + 1.10% (2.97% at

March 31, 2018)