Investment in Storage Facilities and Intangible Assets
|12 Months Ended|
Dec. 31, 2018
|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, 2018 and December 31, 2017.
The Company acquired eight self-storage facilities during 2018 and two self-storage facilities during 2017. The acquisitions 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, was assigned to land, buildings, equipment, improvements and in-place customer leases based upon their relative fair values.
The purchase price of the eight facilities acquired in 2018 and the two facilities acquired in 2017 has been assigned as follows:
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.
Non-cash investing activities during 2018 include the issuance of $3.5 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 a mortgage with an acquisition-date fair value of $1.4 million, and the assumption of net other liabilities totaling $198,000. 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.
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).
In-place customer leases are included in other assets on the Company’s consolidated balance sheets at December 31 as follows:
Amortization expense related to in-place customer leases was $0.2 million, $24.8 million, and $29.9 million, for the years ended December 31, 2018, 2017, and 2016, respectively. Amortization expense is expected to be $1.0 million in 2019 based on in-place customer leases at December 31, 2018.
During 2018 the Company sold 13 non-strategic properties and received net cash proceeds of $91.3 million. Twelve of these properties were sold to Life Storage-HIERS Storage LLC, an unconsolidated joint venture in which the Company maintains a 20% ownership interest, resulting in a gain on sale of approximately $55.5 million in 2018. Along with the cash proceeds from this sale, the Company received a $9.1 million equity investment in the joint venture representing the Company’s 20% ownership interest. This represented a non-cash investing activity. 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 November 2019. 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.
Change in Useful Life Estimates
As part of the Company’s capital improvement efforts during 2018 and 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 increases in depreciation expense of approximately $3.1 million and $3.7 million in 2018 and 2017, respectively. The Company estimates that the change in estimated useful lives of buildings identified for replacement as of December 31, 2018 will not have a significant impact on depreciation expense in 2019.
The change in name of the Company’s storage facilities from Uncle Bob’s Self Storage ® to Life Storage ® in 2016 required replacement of signage at all existing storage facilities. 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 increases 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. There was no related impact on depreciation expense in 2018 as the replacement of this signage was completed as of December 31, 2017.
The accelerated depreciation resulting from the events discussed above reduced both basic and diluted earnings per share/unit by approximately $0.07, $0.09, and $0.19 per share/unit in 2018, 2017, and 2016, respectively.
The entire disclosure for certain real estate investment financial statements, real estate investment trust operating support agreements, real estate owned, retail land sales, time share transactions, as well as other real estate related disclosures.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef