What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 45 added, 39 removed, 269 unchanged (24% of the section changed)

41 unchanged sentences

Our ability to correctly assess the influence or control over an entity affects the presentation of the investment in our consolidated financial statements.

As of December 31, 2021 we had one consolidated VIE consisting of four stores.

As of December 31, 2020 we had no consolidated VIEs.

REAL ESTATE ASSETS:

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No material impairments were recorded in the year ended December 31, 2022.

We evaluate goodwill for impairment at least annually and whenever events, circumstances, and other related factors indicate that fair value of the related reporting unit may be less than the carrying value.

If the fair value of the reporting unit is determined to exceed the aggregate carrying amount, no impairment charge is recorded.

Otherwise, an impairment charge is recorded to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.

No impairments were recorded in our evaluations for any period presented herein.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

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We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code.

In order to maintain our qualification as a REIT, among other things, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet certain tests regarding the nature of our income and assets.

In order to maintain our qualification as a REIT, among other requirements, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet certain tests regarding the nature of our income and assets.

As a REIT, we are not subject to U.S.

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Results for the year ended December 31, 2021 included the operations of 1,268 stores (981 wholly-owned, four in consolidated joint ventures, and 283 in joint ventures accounted for using the equity method) compared to the results for the year ended December 31, 2020, which included the operations of 1,197 stores (944 wholly-owned, six in a consolidated joint venture, and 247 in joint ventures accounted for using the equity method).

Results for the year ended December 31, 2022 included the operations of 1,451 stores (1,132 wholly-owned, one in a consolidated joint venture, and 318 in joint ventures accounted for using the equity method) compared to the results for the year ended December 31, 2021, which included the operations of 1,268 stores (981 wholly-owned, four in a consolidated joint venture, and 283 in joint ventures accounted for using the equity method).

Material or unusual changes in the results of our operations are discussed below.

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Total revenues $ 1,924,170 $ 1,577,362 $ 346,808 22.0 %

Property Rental— The increase in property rental revenues for the year ended December 31, 2021 was primarily the result of an increase of $151,217 at our stabilized stores related to high occupancy and increased rents to new and existing customers.

Property Rental— The increase in property rental revenues for the year ended December 31, 2022 was primarily the result of an increase of $220,629 at our stabilized stores related to high occupancy and increased rents to existing customers.

Property rental revenue also increased by $100,601 associated with acquisitions completed in 2022 and 2021.

12 unchanged sentences

Tenant reinsurance 33,560 29,488 4,072 13.8 %

Transaction related costs 1,548 — 1,548 —

General and administrative 129,251 102,194 27,057 26.5 %

1 unchanged sentence

Total expenses $ 888,017 $ 742,169 $ 145,848 19.7 %

Property Operations —The increase in property operations expense consists primarily of an increase of $13,440 related to acquisitions completed in 2021 and 2020.

Property Operations —The increase in property operations expense consists primarily of an increase of $32,242 at stabilized stores due to increased payroll, credit card processing fees, utilities, property taxes and insurance.

The increase was also attributed to $34,547 related to acquisitions completed in 2022 and 2021.

We acquired 153 stores during the year ended December 31, 2022 and acquired 74 stores during the year ended December 31, 2021.

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The increase in tenant reinsurance expense for the year ended December 31, 2022 was due primarily to the increase in total number of stores operated compared to the prior year and major storm events that occurred causing an increase in claim payouts.

Tenant reinsurance expense included a $3,000 charge for tenant reinsurance claims related to damages incurred from Hurricane Ian.

We operated 2,338 stores at December 31, 2022, compared to 2,096 stores at December 31, 2021.

Transaction Related Costs —This represents the costs that were incurred as part of the acquisition of Bargold Storage Systems, LLC ("Bargold").

General and Administrative— General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, travel and professional fees.

These expenses are recognized as incurred.

Our overall expense has increased due to acquisitions, business combinations and growth through our joint venture partners and managed portfolio.

During 2021, we experienced higher than average turnover and extended times to fill.

Additionally, we experienced wage pressure which led to increases in wages of approximately 10% nationwide.

These trends will directly increase general & administrative expenses in 2022.

We experienced wage pressure which led to increases in wages of approximately 10% nationwide.

During 2022, we continued to see these trends but to a lesser extent and as such we do not expect these trends to continue in 2023.

No other material trends in specific travel or other expenses were observed.

7 unchanged sentences

Interest expense (219,171) (166,183) (52,988) 31.9 %

Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes — (3,675) 3,675 (100.0) %

Interest income 69,422 49,703 19,719 39.7 %

Equity in earnings and dividend income from unconsolidated real estate entities 41,428 32,358 9,070 28.0 %

Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest 6,251 — 6,251 100.0 %

Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets — 6,251 (6,251) 100.0 %

Income tax expense (20,925) (20,324) (601) 3.0 %

Total other expense, net $ (114,997) $ 42,565 $ (157,562) (370.2) %

Gain on Real Estate Transactions — During the first quarter of 2021, we sold 16 stores to a newly established unconsolidated joint venture for a total sales price of $168,885 resulting in a gain of $63,477.

Gain on Real Estate Transactions — During the year ended December 31, 2022 we sold two stores.

We recognized a total gain of $14,249 related to the sale of these assets.

During the first quarter of 2021, we sold 16 stores to a newly established unconsolidated joint venture for a total sales price of $168,885 resulting in a gain of $63,477.

Additionally, we sold 16 stores during the fourth quarter of 2021 to a third party for a total sales price of $204,500 resulting in a gain of $73,854.

Interest Expense— The decrease in interest expense during the year ended December 31, 2021 was primarily the result of a lower average interest rate when compared to the same period in the prior year.

Information on the total face value of debt and the average interest rate for each quarter during the years ended December 31, 2021 and December 31, 2020 is set forth in the following table:

For the Three Months Ended December 31, For the Three Months Ended September 30, For the Three Months Ended June 30, For the Three Months Ended March 31,

2021 2020 2021 2020 2021 2020 2021 2020

Interest Expense— The increase in interest expense during the year ended December 31, 2022 was the result of higher overall debt and a higher average interest rate when compared to the same period in the prior year.

Information on the total face value of debt and the average interest rate for the years ended December 31, 2022 and December 31, 2021 is set forth in the following table:

For the Year Ended December 31,

Total face value of debt $ 7,364,424 $ 5,984,113

Average interest rate 4.1 % 2.6 %

Non-cash Interest Expense Related to Amortization of Discount on Equity Component of Exchangeable Senior Notes— Represents the amortization of the discounts related to the equity components of the exchangeable senior notes issued by our Operating Partnership.

The exchangeable senior notes had an effective interest rate of 4.0% relative to the carrying amount of the liability.

The notes were paid in full in November 2020.

Interest Income— Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions, interest earned on bridge loans and debt securities and income earned on notes receivable from common and preferred Operating Partnership unit holders.

In late 2018 we began to provide bridge financing on completed properties owned by third parties that we manage.

Interest Income— Interest income represents interest earned on bridge loans and debt securities, income earned on notes receivable from common and preferred Operating Partnership unit holders and amounts earned on cash and cash equivalents deposited with financial institutions.

The total principal balance of bridge loans receivable as of December 31, 2022 was $491,879, compared to $279,042 as of December 31, 2021.

We also purchased a senior mezzanine note receivable with a principal amount of $103,000 in July 2020.

The increase in interest income during the year ended December 31, 2021 was primarily the result of interest earned on these loans as well as interest earned from our investment in preferred stock of Jernigan Capital, Inc.

("JCAP"), in connection with the acquisition of JCAP by affiliates of NexPoint Advisors, L.P., which was purchased in November 2020 for $300,000.

The increase in interest income during the year ended December 31, 2022 was primarily the result of the higher bridge loan balances along with higher interest rates.

Equity in Earnings and Dividend Income from Unconsolidated Real Estate Entities— Equity in earnings of unconsolidated real estate ventures represents the income earned through our ownership interests in unconsolidated real estate ventures.

1 unchanged sentence

To the extent that cash or profits in excess of these preferred returns are generated, we receive a higher percentage of the excess cash or profits, as applicable.

Dividend income represents dividends from our investment in convertible preferred stock of SmartStop, which was purchased in October 2019 for $150,000 with another $50,000 invested in October 2020.

The increase in earnings for the year ended December 31, 2021 is related in part to the dividend income from the secondary investment of SmartStop preferred stock.

Additionally the increases related to the higher income at our joint ventures are due to store performance and the acquisition of 45 stores with new and existing joint venture partners.

These increases were offset by the sale of our equity interest in 22 stores.

We added a total of 37 stores to new and existing joint ventures for the year ended December 31, 2022 resulting in higher earnings when compared to the prior year.

Dividend income represents dividends from our $200,000 investment in preferred stock of SmartStop.

Equity in Earnings of Unconsolidated Real Estate Ventures—Gain on Sale of Real Estate Assets and Purchase of Joint Venture Partner's Interest— In June 2021, we sold our interest in two unconsolidated single store joint ventures to our joint ventures partner.

9 unchanged sentences

We believe FFO is a meaningful disclosure as a supplement to net earnings.

Net earnings assume that the values of real estate assets diminish

predictably over time as reflected through depreciation and amortization expenses.

Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses.

The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets.

31 unchanged sentences

Same-store net operating income $ 1,104,132 $ 917,970 20.3%

Same-store square foot occupancy as of quarter end 95.3 % 94.9 %

Same-store square foot occupancy as of year end 94.2 % 95.3 %

Properties included in same-store 867 867

Same-store revenues for the year ended December 31, 2021 increased compared to the prior year, due to higher average occupancy, higher average rates to new and existing customers and higher late fees partially offset by higher discounts.

Expenses were lower for the year ended December 31, 2021 compared to the prior year, primarily due to decreases in payroll and marketing expense, partially offset by increases in property taxes, credit card processing fees, repairs and maintenance expense and insurance expense.

Same-store revenues for the year ended December 31, 2022 increased compared to the same periods in 2021

due to higher average rates to existing customers and higher other operating income partially offset by lower occupancy.

Same-store expenses increased for the three months and year ended December 31, 2022 compared to the same periods in 2021

due to increases in payroll, credit card processing fees, utilities, property taxes and insurance.

The same-store expense growth

rate for the year ended December 31, 2022 is amplified by negative expense growth in the 2021 comparable period.

The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:

4 unchanged sentences

Equity in earnings and dividend income from unconsolidated real estate entities (41,428) (32,358)

Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest (6,251) —

Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets — (6,251)

Interest expense 219,171 166,183

1 unchanged sentence

Income tax expense 20,925 20,324

Transaction related costs 1,548 —

General and administrative 129,251 102,194

19 unchanged sentences

Acquisition, development and redevelopment of stores $ (1,353,510) $ (1,289,524) $ (387,448)

Cash paid for business combination $ (157,302) $ — $ —

Gain on real estate transactions $ (14,249) $ (140,760) $ (18,075)

3 unchanged sentences

Proceeds from sale of notes receivable $ 210,048 $ 172,002 $ 62,764

Principal payments received from notes receivable $ 283,636 $ 51,463 $ 10,102

Proceeds from the sale of common stock, net of offering costs $ — $ 273,189 $ 103,468

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We believe that cash flows generated by operations, along with our existing cash and cash equivalents, the availability of funds under our existing lines of credit, and our access to capital markets will be sufficient to meet all of our reasonably anticipated cash needs during the next twelve months.

These cash needs include operating expenses, monthly debt service payments, recurring capital expenditures, acquisitions, funding for new notes receivable for bridge loans, building redevelopments and expansions, distributions to unit holders and dividends to stockholders necessary to maintain our REIT qualification.

These cash needs include operating expenses, monthly debt service payments, recurring capital expenditures, acquisitions, funding for the bridge loan program, building redevelopments and expansions, distributions to unit holders and dividends to stockholders necessary to maintain our REIT qualification.

We expect to generate positive cash flow from operations and we consider projected cash flows in our sources and uses of cash.

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The weighted average interest rate of total debt at December 31, 2022 and 2021 was 4.1% and 2.6%, respectively.

As of December 31, 2022, the weighted average interest rate for all fixed rate debt was 3.4%, and the weighted average interest rate on all variable rate debt was 5.5%.

As of December 31, 2021, the weighted average interest rate for all fixed rate debt was 3.1%, and the weighted average interest rate on all variable rate debt was 1.3%.

In January 2021, we received a Baa2 rating from Moody's Investors Service and in July 2019, we obtained a BBB/Stable rating from S&P.

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We were in compliance with all financial covenants at December 31, 2022.

We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of Operating Partnership units and interest on our outstanding indebtedness, out of our operating cash flow, cash on hand and borrowings under our revolving lines of credit.

We expect to fund our short-term and long-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of Operating Partnership units and interest on our outstanding indebtedness, out of our operating cash flow, cash on hand and borrowings under our revolving lines of credit.

In addition, we are pursuing additional sources of financing based on anticipated funding needs.

1 unchanged sentence

We may from time to time seek to repurchase our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise.

Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Such repurchases, if any, will depend on prevailing market

conditions, our liquidity requirements, contractual restrictions and other factors.

In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds.

We may also use

Operating Partnership units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.

We may also use Operating Partnership units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.

CONTRACTUAL OBLIGATIONS

As of December 31, 2021, the weighted average interest rate for all fixed rate debt was 3.1%, and the weighted average interest rate on all variable rate debt was 1.3%.

For more information on our contractual obligations related to real estate acquisitions, refer to our commitments and contingencies footnote in the notes to the consolidated financial statements in Item 8 of this Form 10-K.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis