Annual report pursuant to Section 13 and 15(d)

Investment in Storage Facilities and Intangible Assets

v3.8.0.1
Investment in Storage Facilities and Intangible Assets
12 Months Ended
Dec. 31, 2017
Real Estate [Abstract]  
Investment in Storage Facilities and Intangible Assets

4. INVESTMENT IN STORAGE FACILITIES AND INTANGIBLE ASSETS

The following summarizes activity in storage facilities during the years ended December 31, 2017 and December 31, 2016.

 

(Dollars in thousands)

 

2017

 

 

2016

 

Cost:

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,243,308

 

 

$

2,491,702

 

Acquisition of storage facilities

 

 

22,638

 

 

 

1,714,029

 

Improvements and equipment additions

 

 

84,332

 

 

 

65,860

 

Net (decrease) increase in construction in progress

 

 

(141

)

 

 

7,525

 

Dispositions

 

 

(28,727

)

 

 

(35,808

)

Ending balance

 

$

4,321,410

 

 

$

4,243,308

 

Accumulated Depreciation:

 

 

 

 

 

 

 

 

Beginning balance

 

$

535,704

 

 

$

465,195

 

Additions during the year

 

 

102,674

 

 

 

87,219

 

Dispositions

 

 

(14,064

)

 

 

(16,710

)

Ending balance

 

$

624,314

 

 

$

535,704

 

 

The Company acquired two self-storage facilities during 2017. The acquisition of these facilities were accounted for as asset acquisitions (See Note 2 for further discussion of the Company’s adoption of the accounting guidance under ASU 2017-01 as of January 1, 2017). The cost of these facilities, including closing costs, were assigned to land, buildings, equipment and improvements based upon their relative fair values.

 

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).

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, were 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 two facilities acquired in 2017 and the 122 facilities acquired in 2016 has been assigned as follows:

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Consideration paid

 

 

Acquisition Date Fair Value

 

State

 

Number of

Properties

 

 

Date of

Acquisition

 

Purchase

Price

 

 

Cash Paid

 

 

Net Other

Liabilities

Assumed

(Assets

Acquired)

 

 

Land

 

 

Building,

Equipment,

and

Improvements

 

 

Closing

Costs

Expensed

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IL

 

 

1

 

 

2/23/2017

 

$

10,089

 

 

$

10,076

 

 

$

13

 

 

$

771

 

 

$

9,318

 

 

$

 

NC

 

 

1

 

 

12/14/2017

 

 

12,549

 

 

 

12,550

 

 

 

(1

)

 

 

1,110

 

 

 

11,439

 

 

 

 

Total acquired 2017

 

 

2

 

 

 

 

$

22,638

 

 

$

22,626

 

 

$

12

 

 

$

1,881

 

 

$

20,757

 

 

$

 

 

(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

 

 

All properties acquired were purchased from unrelated third parties. The operating results of the facilities acquired have been included in the Company’s operations since the respective acquisition dates. The $22.6 million of cash paid for the facilities acquired in 2017 includes $0.5 million of deposits that were paid in 2015 and $0.6 million of deposits that were paid in 2016, when these facilities originally went under contract. 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. 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 chart above.

Non-cash investing activities during 2017 include the assumption of net other liabilities totaling $12,000. 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 Company’s 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 Company’s 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 Company’s consolidated balance sheets at December 31 as follows:

 

(dollars in thousands)

 

2017

 

 

2016

 

In-place customer leases

 

$

75,241

 

 

$

75,611

 

Accumulated amortization

 

 

(75,241

)

 

 

(50,782

)

Net carrying value at the end of period

 

$

-

 

 

$

24,829

 

 

Amortization expense related to in-place customer leases was $24.8 million, $29.9 million, and $3.4 million, for the years ended December 31, 2017, 2016, and 2015, respectively. No amortization expense is expected in 2018.

Property Dispositions

During 2017 the Company sold two non-strategic properties and received net cash proceeds of $16.9 million. The Company has subsequently leased one of the properties sold during 2017 and will continue to operate the property through March 2020. Due to the Company’s continuing involvement in this property, the related gain on the sale of this property has been deferred and will be recognized by the Company upon termination of this lease. During 2016 the Company sold eight non-strategic properties and received net cash proceeds of $34.1 million. During 2015 the Company sold three non-strategic properties and received cash proceeds of $4.6 million.

 

Change in Useful Life Estimates

The change in name of the Company’s storage facilities from Uncle Bob’s Self Storage ® to Life Storage ® required 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 has been completed as of December 31, 2017. As a result of this replacement of signage, the Company reassessed the estimated useful lives of the then existing signage in 2016. This useful life reassessment resulted in an increase in depreciation expense of approximately $0.5 million in 2017 and $8.2 million in 2016 as depreciation was accelerated over the new remaining useful lives. The Company does not estimate any further impact on depreciation expense as a result of the replacement of the Uncle Bob’s Self Storage ® signage which is now fully depreciated.

As part of the Company’s capital improvement efforts during 2017, 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 $3.9 million in 2017. The Company estimates that the change in estimated useful lives of buildings identified for replacement as of December 31, 2017 will result in an increase in depreciation expense of approximately $0.3 million in 2018.

The accelerated depreciation resulting from the events discussed above reduced both basic and diluted earnings per share/unit by approximately $0.09 and approximately $0.19 per share/unit in 2017 and 2016, respectively.