NATIONAL STORAGE AFFILIATES TRUST – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and notes thereto included in Item 8. "Financial Statements and Supplementary Data" as well as Item 1. "Business," Item 1A. "Risk Factors," and Item 2. "Properties," respectively, in this Annual Report on Form 10-K.
Overview
National Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment trust organized in the state ofMaryland onMay 16, 2013 . We have elected and we believe that we have qualified to be taxed as a REIT commencing with our taxable year endedDecember 31, 2015 . We serve as the sole general partner of our operating partnership, aDelaware limited partnership formed onFebruary 13, 2013 to conduct our business, which is focused on the ownership, operation, and acquisition of self storage properties predominantly located within the top 100 MSAs throughoutthe United States .
Our organization
Our structure promotes operator accountability as subordinated performance units issued to our PROs in exchange for the contribution of their properties are entitled to distributions only after those properties satisfy minimum performance thresholds. In the event of a material reduction in operating cash flow, distributions on our subordinated performance units will be reduced before or disproportionately to distributions on our common shares held by our common shareholders. In addition, we expect our PROs will generally co-invest subordinated equity in the form of subordinated performance units in each acquisition that they source, and the value of these subordinated performance units will fluctuate with the performance of their managed portfolios. Therefore, our PROs are incentivized to select acquisitions that are expected to exceed minimum performance thresholds, thereby increasing the value of their subordinated equity stake. We expect that our shareholders will benefit from the higher levels of property performance that our PROs are incentivized to deliver.
Our PROs
We had ten PROs as ofDecember 31, 2021 : Northwest, Optivest, Move It, Guardian, Southern, Blue Sky, Moove In, Hide Away, Storage Solutions and Personal Mini. We seek to further expand our platform by continuing to recruit additional established self storage operators, while integrating our operations through the implementation of centralized initiatives, including management information systems, revenue enhancement, and cost optimization programs. Our national platform allows us to capture cost savings by eliminating redundancies and utilizing economies of scale across the property management platforms of our PROs while also providing greater access to lower-cost capital. During the year endedDecember 31, 2021 , one of our largest PROs, Northwest, notified us of Northwest's election to retire as a PRO effectiveJanuary 1, 2022 . As a result of the retirement, onJanuary 1, 2022 , management of our properties in the Northwest managed portfolio was transferred to us and the Northwest brand name and related intellectual property was internalized by us, and we discontinued payment of any supervisory and administrative fees or reimbursements to Northwest. In addition, onJanuary 1, 2022 , we issued a notice of non-voluntary conversion to convert all of the subordinated performance units related to Northwest's managed portfolio into OP units. As part of the internalization, most of Northwest's employees were offered and provided employment by us and continue managing Northwest's portfolio of properties as members of our existing property management platform.
Our property management platform
Through our property management platform, we direct, manage and control the day-to-day operations and affairs of certain consolidated properties and our unconsolidated real estate ventures under our iStorage and SecurCare brands. As ofDecember 31, 2021 , our property management platform managed and controlled 415 of our consolidated properties and 177 of our unconsolidated real estate venture properties. We earn certain customary fees for managing and operating the properties in the unconsolidated real estate ventures and we facilitate tenant insurance and/or tenant warranty protection programs for tenants at these properties in exchange for half of all proceeds from such programs. 36 -------------------------------------------------------------------------------- Table of C ontents OurConsolidated Properties We seek to own properties that are well located in high quality sub-markets with highly accessible street access and attractive supply and demand characteristics, providing our properties with strong and stable cash flows that are less sensitive to the fluctuations of the general economy. Many of these markets have multiple barriers to entry against increased supply, including zoning restrictions against new construction and new construction costs that we believe are higher than our properties' fair market value. As ofDecember 31, 2021 , we owned a geographically diversified portfolio of 873 self storage properties, located in 39 states andPuerto Rico , comprising approximately 55.1 million rentable square feet, configured in approximately 429,000 storage units. Of these properties, 298 were acquired by us from our PROs, 574 were acquired by us from third-party sellers and one was acquired by us from the 2016 Joint Venture.
Our
Advertising
We seek to opportunistically partner with institutional funds and other institutional investors to acquire attractive portfolios utilizing a promoted return structure. We believe there is significant opportunity for continued external growth by partnering with institutional investors seeking to deploy capital in the self storage industry.
Joint Venture 2018
From
interest, owned and operated a portfolio of 103 properties containing
approximately 7.8 million leasable square feet, configured in approximately
64,000 storage units and located in 17 states.
Joint Venture 2016
From
participation, owned and operated a portfolio of 74 properties containing
approximately 4.9 million leasable square feet, configured in approximately
40,000 storage units and located in 13 states.
COVID-19[female[feminine
We continue to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business. The outbreak of COVID-19 in many countries, including
As of the date of this report, our stores continue to operate and we are in compliance with federal, state and local COVID-19 guidelines and mandates. In response to the pandemic, we have continued to maintain increased levels and frequency of cleaning and sanitation of our self storage facilities and the recommended social distancing guidelines. Many of our stores feature online rental capabilities whereby a customer can complete the entire rental process online and receive an access code to the storage facility. For the remainder of our stores that do not yet benefit from the online rental feature, the combination of call center and email communication eliminates the need for any physical contact between customers and employees. Due to the pandemic, we experienced a slowdown in overall business activity during the second quarter of 2020. However, we observed sustained improvement in our property operating results during the third and fourth quarters of 2020 and continuing through the year endedDecember 31, 2021 .
Operating results
When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired 229 self storage properties during the year endedDecember 31, 2021 and 77 self storage properties during the year endedDecember 31, 2020 . As a result of these and other factors, we do not believe that our historical results of operations discussed and analyzed below are comparable or necessarily indicative of our future results of operations or cash flows. To help analyze the operating performance of our self storage properties, we also discuss and analyze operating results relating to our same store portfolio. Our same store portfolio is defined as those properties owned and operated since the first day of the earliest year presented, excluding any properties sold, expected to be sold or subject to significant changes such as expansions or casualty events which cause the portfolio's year-over-year operating results to no longer be comparable. 37
-------------------------------------------------------------------------------- Table of C ontents The following discussion and analysis of the results of our operations and financial condition for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 should be read in conjunction with the accompanying consolidated financial statements included in Item 8. The discussion and analysis of the results of our operations and financial condition for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , can be found in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onFebruary 26, 2021 . Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Year ended
Net income was$146.9 million for the year endedDecember 31, 2021 , compared to$79.5 million for the year endedDecember 31, 2020 , an increase of$67.4 million . The increase was primarily due to an increase in net operating income ("NOI") resulting from self storage properties acquired during 2020 and 2021 and increases in equity in earnings from the Company's unconsolidated real estate ventures, partially offset by increases in depreciation and amortization, interest expense and general and administrative expenses. For a description of NOI, see "Non-GAAP Financial measures - NOI".
Overview
As ofDecember 31, 2021 , our same store portfolio consisted of 560 self storage properties. See "---Results of Operations" above for the definition of our same store portfolio. The following table illustrates the changes in rental revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other expenses for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 (dollars in thousands): Year Ended December 31, 2021 2020 Change Rental revenue Same store portfolio$ 423,974 $ 368,185 $ 55,789 Non-same store portfolio 117,573 26,475 91,098 Total rental revenue 541,547 394,660 146,887 Other property-related revenue Same store portfolio 15,358 13,420
1,938
Non-same store portfolio 4,392 1,104
3,288
Total other property-related revenue 19,750 14,524 5,226
Property operating expenses
Same store portfolio 117,672 113,165 4,507
Non-same store portfolio 37,593 10,321 27,272
Total property operating expenses 155,265 123,486 31,779
Net operating income
Same store portfolio 321,660 268,440 53,220
Non-same store portfolio 84,372 17,258 67,114
Total net operating income 406,032 285,698 120,334
Management fees and other revenue 24,374 23,038 1,336
General and administrative expenses (51,001) (43,640) (7,361)
Depreciation and amortization (158,312) (117,174) (41,138)
Other (2,853) (808) (2,045)
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Table of C ontents
Year Ended December 31,
2021 2020 Change
Other (expense) income
Interest expense (72,062) (62,595) (9,467)
Equity in earnings of unconsolidated real estate
ventures 5,294 265 5,029
Acquisition costs (1,941) (2,424) 483
Non-operating (expense) income (906) (1,211) 305
Other expense (69,615) (65,965) (3,650)
Income before income taxes 148,625 81,149 67,476
Income tax expense (1,690) (1,671) (19)
Net income 146,935 79,478 67,457
Net income attributable to noncontrolling
interests (41,682) (30,869) (10,813)
Net income attributable to National Storage
Affiliates Trust 105,253 48,609 56,644
Distributions to preferred shareholders (13,104) (13,097) (7)
Net income attributable to common shareholders
Total Revenue Our total revenue increased by$153.4 million , or 35.5%, for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . This increase was primarily attributable to incremental revenue from 229 self storage properties acquired during the year endedDecember 31, 2021 , increases in management fees and other revenue from our unconsolidated real estate ventures and an increase in total portfolio average occupancy from 89.3% for the year endedDecember 31, 2020 to 94.2% for the year endedDecember 31, 2021 . Average occupancy is calculated based on the average of the month-end occupancy immediately preceding the period presented and the month-end occupancies included in the respective period presented.
Rental income
Rental revenue increased by$146.9 million , or 37.2%, for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The increase in rental revenue was due to a$91.1 million increase in non-same store rental revenue which was primarily attributable to incremental rental revenue of$56.6 million from 229 self storage properties acquired during 2021, and$32.8 million from 77 self storage properties acquired during 2020. Same store portfolio rental revenues increased$55.8 million , or 15.2%, due to a 8.3% increase, from$12.14 to$13.15 , in annualized same store rental revenue (including fees and net of any discounts and uncollectible customer amounts) divided by average occupied square feet ("average annualized rental revenue per occupied square foot"), driven primarily by increased contractual lease rates for in-place tenants and an increase in average occupancy from 89.3% for the year endedDecember 31, 2020 to 94.9% for the year endedDecember 31, 2021 .
Other property-related income
Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and sales of storage supplies. Other property-related revenue increased by$5.2 million , or 36.0%, for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . This increase primarily resulted from a$1.9 million , or 14.4%, increase in same store other property-related revenue and a$3.3 million increase in non-same store other property-related revenue which was primarily attributable to incremental other property-related revenue of$2.1 million from 229 self storage properties acquired during 2021, and$1.1 million from 77 self storage properties acquired during 2020.
Management fees and other income
Management fees and other revenue, which are primarily related to managing and operating the unconsolidated real estate ventures, were$24.4 million for the year endedDecember 31, 2021 , compared to$23.0 million for the year endedDecember 31, 2020 , an increase of$1.3 million or 5.8%. This increase was primarily attributable to increased property management fees due to growth in unconsolidated real estate venture revenue. 39 -------------------------------------------------------------------------------- Table of C ontents Property Operating Expenses Property operating expenses were$155.3 million for the year endedDecember 31, 2021 compared to$123.5 million for the year endedDecember 31, 2020 , an increase of$31.8 million , or 25.7%. The increase in property operating expenses resulted from a$4.5 million , or 4.0%, increase in same store property operating expenses and a$27.3 million increase in non-same store property operating expenses that was primarily attributable to incremental property operating expenses of$17.1 million from 229 self storage properties acquired during 2021, and$9.7 million from 77 self storage properties acquired during 2020.
General and administrative expenses
General and administrative expenses increased$7.4 million , or 16.9%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . This increase was attributable to increases in supervisory and administrative fees charged by our PROs of$4.0 million , due to increases in property revenue and acquisitions of additional properties managed by our PROs, as well as increases in equity based compensation expense and personnel costs.
Depreciation and amortization
Depreciation and amortization increased$41.1 million , or 35.1%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . This increase was primarily attributable to incremental depreciation expense related to the 229 self storage properties acquired during 2021 and 77 self storage properties acquired during 2020. The increase in depreciation and amortization includes an increase in amortization of customer in-place leases from$9.0 million for the year endedDecember 31, 2020 to$20.7 million for the year endedDecember 31, 2021 . Interest Expense Interest expense increased$9.5 million , or 15.1%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase in interest expense was attributable to higher outstanding borrowings including (i) theOctober 2020 issuance of$150.0 million of 2.99% senior unsecured notes dueAugust 5, 2030 and$100.0 million of 3.09% senior unsecured notes dueAugust 5, 2032 , (ii) theMay 2021 issuance of$55.0 million of 3.10% senior unsecured notes dueMay 4, 2033 , (iii) theJuly 2021 issuance of$35.0 million of 2.16% senior unsecured notes dueMay 4, 2026 and$90.0 million of 3.00% senior unsecured notes dueMay 4, 2031 , (iv) theSeptember 2021 issuance of$125.0 million of term loan debt under our credit facility with an effective interest rate of 1.25% as ofDecember 31, 2021 , and (v) theDecember 14, 2021 issuance of$75.0 million of 2.72% senior unsecured notes dueNovember 30, 2030 ,$175.0 million of 2.81% senior unsecured notes dueNovember 30, 2031 and$75.0 million of 3.06% senior unsecured notes dueNovember 30, 2036 and (vi) an increase in borrowings under our revolving line of credit with an effective interest rate of 1.35% as ofDecember 31, 2021 .
Equity in earnings of unconsolidated real estate ventures represents our share of earnings and losses incurred through our 25% ownership interests in the 2018 Joint Venture and the 2016 Joint Venture. During the year endedDecember 31, 2021 , we recorded$5.3 million of equity in earnings from our unconsolidated real estate ventures compared to$0.3 million for the year endedDecember 31, 2020 .
Net income attributable to non-controlling interests
As discussed in Note 2 to the consolidated financial statements in Item 8, we allocateU.S. generally accepted accounting principles ("GAAP") income (loss) utilizing the HLBV method, in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating partnership at period end after adjusting for any distributions or contributions made during such period. Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests. Net income attributable to noncontrolling interests was$41.7 million for the year endedDecember 31, 2021 , compared to$30.9 million for the year endedDecember 31, 2020 . 40
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Contents
Significant Accounting Policies and Use of Estimates
Our financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those that impact our most critical accounting policies. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation, uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Actual results may differ from these estimates. We believe the following are our most critical accounting policies.
Principles of consolidation and presentation of non-controlling interests
Our consolidated financial statements include the accounts of our operations
partnership and its controlled subsidiaries. All material intercompany relationships
balances and transactions have been eliminated upon consolidation of the entities.
The limited partner ownership interests in our operating partnership that are
held by owners other than us are referred to as noncontrolling interests.
Noncontrolling interests also include ownership interests in DownREIT
partnerships held by entities other than our operating partnership.
Noncontrolling interests in a subsidiary are generally reported as a separate
component of equity in our consolidated balance sheets. In our consolidated
statements of operations, the revenues, expenses and net income or loss related
to noncontrolling interests in our operating partnership are included in the
consolidated amounts, with net income or loss attributable to the noncontrolling
interests deducted separately to arrive at the net income or loss solely
attributable to us.
When we obtain an economic interest in an entity, we evaluate the entity to
determine if the entity is deemed a variable interest entity ("VIE"), and if we
are deemed to be the primary beneficiary, in accordance with authoritative
guidance issued on the consolidation of VIEs. When an entity is not deemed to be
a VIE, we consider the provisions of additional guidance to determine whether
the general partner controls a limited partnership or similar entity when the
limited partners have certain rights. We consolidate all entities that are VIEs
and of which the Company is deemed to be the primary beneficiary.
Self storage properties are carried at historical cost less accumulated
depreciation and any impairment losses. When self storage properties are
acquired, the purchase price is allocated to the tangible and intangible assets
acquired and liabilities assumed based on estimated fair values. The purchase
price is allocated to the individual properties based on the fair value
determined using an income approach or a cash flow analysis using appropriate
risk adjusted capitalization rates, which take into account the relative size,
age, and location of the individual properties along with current and projected
occupancy and relative rental rates or appraised values, if available. Tangible
assets are allocated to land, buildings and related improvements, and furniture
and equipment.
In allocating the purchase price for a self storage property acquisition, we
determine whether the acquisition includes intangible assets. We allocate a
portion of the purchase price to an intangible asset attributed to the value of
customer in-place leases. Because the majority of tenant leases are on a
month-to-month basis, this intangible asset represents the estimated value of
the leases in effect on the acquisition date. This intangible asset is amortized
to expense using the straight-line method over 12 months, the estimated average
remaining rental period for the leases.
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Table of C ontents Non-GAAP Financial Measures FFO and Core FFO Funds from operations, or FFO, is a widely used performance measure for real estate companies and is provided here as a supplemental measure of our operating performance. TheDecember 2018 Nareit Funds From Operations White Paper - 2018 Restatement, which we refer to as the White Paper, defines FFO as net income (as determined under GAAP), excluding: real estate depreciation and amortization, gains and losses from the sale of certain real estate assets, gains and losses from change in control, mark-to-market changes in value recognized on equity securities, impairment write-downs of certain real estate assets and impairment of investments in entities when it is directly attributable to decreases in the value of depreciable real estate held by the entity and after items to record unconsolidated partnerships and joint ventures on the same basis. Distributions declared on subordinated performance units and DownREIT subordinated performance units represent our allocation of FFO to noncontrolling interests held by subordinated performance unitholders and DownREIT subordinated performance unitholders. For purposes of calculating FFO attributable to common shareholders, OP unitholders, and LTIP unitholders, we exclude distributions declared on subordinated performance units, DownREIT subordinated performance units, preferred shares and preferred units. We define Core FFO as FFO, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. These further adjustments consist of acquisition costs, organizational and offering costs, gains on debt forgiveness, gains (losses) on early extinguishment of debt, and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO and Core FFO as key performance indicators in evaluating the operations of our properties. Given the nature of our business as a real estate owner and operator, we consider FFO and Core FFO as key supplemental measures of our operating performance that are not specifically defined by GAAP. We believe that FFO and Core FFO are useful to management and investors as a starting point in measuring our operational performance because FFO and Core FFO exclude various items included in net income (loss) that do not relate to or are not indicative of our operating performance such as gains (or losses) from sales of self storage properties and depreciation, which can make periodic and peer analyses of operating performance more difficult. Our computation of FFO and Core FFO may not be comparable to FFO reported by other REITs or real estate companies. FFO and Core FFO should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income (loss). FFO and Core FFO do not represent cash generated from operating activities determined in accordance with GAAP and are not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO and Core FFO should be compared with our reported net income (loss) and considered in addition to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements. 42 -------------------------------------------------------------------------------- Table of C ontents The following table presents a reconciliation of net income (loss) to FFO and Core FFO for the periods presented (in thousands, except per share and unit amounts): Year Ended December 31, 2021 2020 2019 Net income$ 146,935 $ 79,478 $ 66,013 Add (subtract): Real estate depreciation and amortization 156,930 115,757 103,835 Company's share of unconsolidated real estate venture real estate depreciation and amortization 15,408 15,297 19,889 Gain on sale of self storage properties - - (2,814) Mark-to-market changes in value on equity securities - 142 (610) Company's share of unconsolidated real estate venture loss on sale of properties - - 202 Distributions to preferred shareholders and unitholders (14,070) (14,055) (13,243) FFO attributable to subordinated performance unitholders(1) (49,810) (29,708) (34,121) FFO attributable to common shareholders, OP unitholders, and LTIP unitholders 255,393 166,911 139,151 Add: Acquisition costs 1,941 2,424 1,317 Core FFO attributable to common shareholders, OP unitholders, and LTIP unitholders$ 257,334 $
169,335
Weighted average shares and units outstanding – FFO
and Core FFO:(2)
Weighted average number of shares outstanding – basic
81,195 66,547 58,208 Weighted average restricted common shares outstanding 33 30 28 Weighted average effect of outstanding forward offering agreement(3) 100 60 - Weighted average OP units outstanding 30,127 29,863 30,277 Weighted average DownREIT OP unit equivalents outstanding 1,925 1,906 1,848 Weighted average LTIP units outstanding 542 543 585 Total weighted average shares and units outstanding - FFO and Core FFO 113,922 98,949 90,946 FFO per share and unit$ 2.24 $ 1.69 $ 1.53 Core FFO per share and unit$ 2.26 $ 1.71 $ 1.54 (1) Amounts represent distributions declared for subordinated performance unitholders and DownREIT subordinated performance unitholders for the periods presented. (2)NSA combines OP units and DownREIT OP units with common shares because, after the applicable lock-out periods, OP units in the Company's operating partnership are redeemable for cash or, atNSA's option, exchangeable for common shares on a one-for-one basis and DownREIT OP units are also redeemable for cash or, atNSA's option, exchangeable for OP units in our operating partnership on a one-for-one basis, subject to certain adjustments in each case. Subordinated performance units, DownREIT subordinated performance units, and LTIP units may also, under certain circumstances, be convertible into or exchangeable for common shares (or other units that are convertible into or exchangeable for common shares). See footnote(1) to the following table for additional discussion of subordinated performance units, DownREIT subordinated performance units, and LTIP units in the calculation of FFO and Core FFO per share and unit. (3) Represents the dilutive effect of the forward offering from the application of the treasury stock method. 43
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Table of C ontents
The following table presents a reconciliation of earnings (loss) per share -
diluted to FFO and Core FFO per share and unit for the periods presented:
Year
Ended
2021 2020 2019 Earnings (loss) per share - diluted$ 0.98 $
0.53
Impact of weighted average number difference
shares(1)
0.18 (0.16) 0.05 Impact of GAAP accounting for noncontrolling interests, two-class method and treasury stock method(2) - 0.30 0.69 Add real estate depreciation and amortization 1.38 1.17 1.14Add Company's share unconsolidated venture real estate depreciation and amortization 0.14 0.15 0.22 Subtract gain on sale of self storage properties - - (0.03) Mark-to-market changes in value recognized on equity securities - - (0.01) FFO attributable to subordinated performance unitholders (0.44) (0.30) (0.38) FFO per share and unit 2.24 1.69 1.53 Add acquisition costs and Company's share of unconsolidated real estate venture acquisition costs 0.02 0.02 0.01 Core FFO per share and unit$ 2.26 $ 1.71 $ 1.54 (1) Adjustment accounts for the difference between the weighted average number of shares used to calculate diluted earnings per share and the weighted average number of shares used to calculate FFO and Core FFO per share and unit. Diluted earnings per share is calculated using the two-class method for the company's restricted common shares, the treasury stock method for certain unvested LTIP units, and includes the assumption of a hypothetical conversion of subordinated performance units and DownREIT subordinated performance units into OP units, even though such units may only be convertible into OP units (i) after a lock-out period and (ii) upon certain events or conditions. For additional information about the conversion of subordinated performance units, DownREIT subordinated performance units and LTIP units into OP units, see Note 10 to the consolidated financial statements in Item 8. The computation of weighted average shares and units for FFO and Core FFO per share and unit includes all restricted common shares and LTIP units that participate in distributions and excludes all subordinated performance units and DownREIT subordinated performance units because their effect has been accounted for through the allocation of FFO to the related unitholders based on distributions declared. (2) Represents the effect of adjusting the numerator to consolidated net income (loss) prior to GAAP allocations for noncontrolling interests, after deducting preferred share and unit distributions, and before the application of the two-class method and treasury stock method, as described in footnote (1).
NO I
Net operating income, or NOI, represents rental income plus other
income related to real estate minus the operating expenses of the building. NOI is not a measure
performance calculated in accordance with GAAP.
We believe the NOI is useful for investors to assess our operational performance
because:
•NOI is one of the primary measures used by our management and our PROs to
evaluate the economic productivity of our properties, including our ability to
lease our properties, increase pricing and occupancy and control our property
operating expenses;
•NOI is widely used in the real estate industry and the self storage industry to
measure the performance and value of real estate assets without regard to
various items included in net income that do not relate to or are not indicative
of operating performance, such as depreciation and amortization, which can vary
depending upon accounting methods, the book value of assets, and the impact of
our capital structure; and
•We believe NOI helps our investors to meaningfully compare the results of our
operating performance from period to period by removing the impact of our
capital structure (primarily interest expense on our outstanding indebtedness)
and depreciation of the cost basis of our assets from our operating results.
There are material limitations to using a non-GAAP measure such as NOI,
including the difficulty associated with comparing results among more than one
company and the inability to analyze certain significant items, including
depreciation and interest expense, that directly affect our net income (loss).
We compensate for these limitations by considering the economic effect of the
excluded expense items independently as well as in connection
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Table of C ontents
with our analysis of net income (loss). NOI should be considered in addition to,
but not as a substitute for, other measures of financial performance reported in
accordance with GAAP, such as total revenues and net income (loss).
The following table provides a reconciliation of net income (loss) to net operating income for
the periods presented (in thousands of dollars):
Year Ended December 31,
2021 2020 2019
Net income $ 146,935 $ 79,478 $ 66,013
(Subtract) add:
Management fees and other revenue (24,374) (23,038) (20,735)
General and administrative expenses 51,001 43,640 44,030
Other 2,853 808 1,551
Depreciation and amortization 158,312 117,174 105,119
Interest expense 72,062 62,595 56,464
Equity in (earnings) losses of unconsolidated real
estate ventures (5,294) (265) 4,970
Acquisition costs 1,941 2,424 1,317
Income tax expense 1,690 1,671 1,351
Gain on sale of self storage properties - - (2,814)
Non-operating expense (income) 906 1,211 (452)
Net operating income $ 406,032 $ 285,698 $ 256,814
Our consolidated NOI shown in the table above does not include our proportionate
share of NOI for our unconsolidated real estate ventures. For additional
information about our 2018 Joint Venture and 2016 Joint Venture see Note 5 to
the consolidated financial statements in Item 8.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss), as determined under GAAP, plus interest expense, loss on early extinguishment of debt, income taxes, depreciation and amortization expense and the Company's share of unconsolidated real estate venture depreciation and amortization. We define Adjusted EBITDA as EBITDA plus acquisition costs, organizational and offering expenses, equity-based compensation expense, losses on sale of properties and impairment of long-lived assets, minus gains on sale of properties and debt forgiveness, and after adjustments for unconsolidated partnerships and joint ventures. These further adjustments eliminate the impact of items that we do not consider indicative of our core operating performance. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We present EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. EBITDA and Adjusted EBITDA have limitations as an analytical tool. Some of these limitations are:
• EBITDA and Adjusted EBITDA do not reflect our cash expenses, nor our future expenses
requirements, for investments, contractual commitments or works
capital requirements;
•EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
• although depreciation and amortization are non-monetary expenses, the assets being
depreciated and amortized will often need to be replaced in the future, and
EBITDA and Adjusted EBITDA do not reflect any cash requirement for these
substitutes;
•Adjusted EBITDA excludes equity-based compensation expense, which is and will
remain a key element of our overall long-term incentive compensation package,
although we exclude it as an expense when evaluating our ongoing operating
performance for a particular period;
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Table of C ontents
•EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of our ongoing
operations; and
• other companies in our industry can calculate EBITDA and Adjusted EBITDA
differently than us, which limits their usefulness as comparative measures.
We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income (loss). EBITDA and Adjusted EBITDA should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues and net income (loss).
The following table provides a reconciliation of net loss to EBITDA and
EBITDA for the periods presented (in thousands of dollars):
Year Ended December 31,
2021 2020 2019
Net income $ 146,935 $ 79,478 $ 66,013
Add:
Depreciation and amortization 158,312 117,174 105,119
Company's share of unconsolidated real estate
venture depreciation and amortization 15,408 15,297 19,889
Income tax expense 1,690 1,671 1,351
Interest expense 72,062 62,595 56,464
EBITDA 394,407 276,215 248,836
Add:
Acquisition costs 1,941 2,424 1,317
Gain on sale of self storage properties - - (2,814)
Company's share of unconsolidated real estate
venture loss on sale of properties - - 202
Equity-based compensation expense 5,462 4,278 4,527
Adjusted EBITDA $ 401,810 $ 282,917 $ 252,068
Cash and capital resources
Liquidity overview
Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flow from our operations. Additional sources are proceeds from equity and debt offerings, debt financings including additional borrowing capacity under the credit facility, and expansion options available under the 2023 Term Loan Facility, the 2028 Term Loan Facility, and our credit facility. Our short-term liquidity requirements consist primarily of property operating expenses, property acquisitions, capital expenditures, general and administrative expenses and principal and interest on our outstanding indebtedness. A further short-term liquidity requirement relates to distributions to our common and preferred shareholders and holders of preferred units, OP units, subordinated performance units, LTIP units, DownREIT OP units and DownREIT subordinated performance units. We expect to fund short-term liquidity requirements from our operating cash flow, cash on hand and borrowings under our credit facility. Our long-term liquidity needs consist primarily of the repayment of debt, property acquisitions, and capital expenditures. We acquire properties through the use of cash, preferred units, OP units and subordinated performance units in our operating partnership or DownREIT partnerships. We expect to meet our long-term liquidity requirements with operating cash flow, cash on hand, secured and unsecured indebtedness, and the issuance of equity and debt securities. The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels. Our ability to access capital on favorable terms as well as to use cash from operations 46 -------------------------------------------------------------------------------- Table of C ontents to continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic. We believe that, as a publicly-traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of debt and additional equity securities. However, we cannot assure you that this will be the case.
Cash flow
AtDecember 31, 2021 , we had$25.0 million in cash and cash equivalents and$2.9 million of restricted cash, an increase in cash and cash equivalents of$6.3 million and a decrease in restricted cash of$0.1 million fromDecember 31, 2020 . Restricted cash primarily consists of escrowed funds deposited with financial institutions for real estate taxes, insurance, and other reserves for capital improvements in accordance with our loan agreements. The following discussion relates to changes in cash due to operating, investing, and financing activities, which are presented in our consolidated statements of cash flows included in Item 8 of this report.
Operational activities
Cash provided by our operating activities was$331.3 million for the year endedDecember 31, 2021 compared to$220.7 million for the year endedDecember 31, 2020 , an increase of$110.6 million . Our operating cash flow increased primarily due to 77 self storage properties acquired during the year endedDecember 31, 2020 that generated cash flow for the entire year endedDecember 31, 2021 and 229 self storage properties that were acquired during the year endedDecember 31, 2021 . These increases were partially offset by higher cash payments for interest expense. Investing Activities Cash used in investing activities was$2.0 billion for the year endedDecember 31, 2021 compared to$509.7 million for the year endedDecember 31, 2020 . The primary uses of cash for the year endedDecember 31, 2021 were for our acquisition of 229 self storage properties for cash consideration of$2.0 billion , capital expenditures of$27.6 million and the acquisition of the interest in a reinsurance company and related cash flows of$2.9 million . Cash used in investing activities was$509.7 million for the year endedDecember 31, 2020 compared to$393.0 million for the year endedDecember 31, 2019 . The primary uses of cash for the year endedDecember 31, 2020 were for our acquisition of 77 self storage properties for cash consideration of$496.5 million , deposits for potential acquisitions of$1.1 million , capital expenditures of$16.4 million and contributions to unconsolidated real estate ventures of$4.4 million partially offset by$7.6 million of proceeds from the sale of equity securities and$1.5 million of distributions from unconsolidated real estate ventures.
Capital expenditures totaled
over the past years
typically fund post-acquisition capital additions from cash provided by
operating activities.
We classify our capital expenditures into three main categories:
•recurring capital expenditure, which represents the share of capital expenditure
expenses that are deemed to replace the consumed part of the acquired capital
assets and extend their useful life;
•value enhancing capital expenditures, which represent the portion of capital expenditures that are made to enhance the revenue and value of an asset from its original purchase condition; and
•acquisition investments, which represent the share of investments
expenses capitalized during the current period that have been identified and
subscribed before the acquisition of a property.
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Table of C ontents
The following table presents a summary of the capital expenditures for these
categories, along with a reconciliation of the total for these categories to the
capital expenditures reported in the accompanying consolidated statements of
cash flows for the periods presented (dollars in thousands):
Year Ended
2021 2020
2019
Recurring capital expenditures$ 9,500 $ 6,057 $ 8,708 Value enhancing capital expenditures 8,738 4,026
4,420
Acquisitions capital expenditures 11,185 6,064
8,305
Total capital expenditures 29,423 16,147
21,433
Change in accrued capital spending (1,846) 248
(839)
Capital expenditures according to the statement of cash flows
$ 20,594 Financing Activities Cash provided by our financing activities was$1.7 billion for the year endedDecember 31, 2021 compared to$286.5 million for the year endedDecember 31, 2020 . Our sources of financing cash flows for the year endedDecember 31, 2021 primarily consisted of$1.6 billion of borrowings under the Revolver,$901.0 million of proceeds from the issuance of common shares,$505.0 million of borrowings from the issuance of senior unsecured notes,$125.0 million of Term Loan borrowings under our credit facility and$88.0 million of borrowings under secured fixed-rate note agreements. Our primary uses of financing cash flows for the year endedDecember 31, 2021 were for principal payments on existing debt of$1.3 billion (which included$1.3 billion of principal repayments under the Revolver,$3.9 million in fixed rate mortgage repayments, and$3.8 million of scheduled fixed rate mortgage principal amortization), distributions to common shareholders of$131.7 million , distributions to noncontrolling interests of$102.2 million and distributions to preferred shareholders of$13.1 million . Our sources of financing cash flows for the year endedDecember 31, 2020 primarily consisted of$680.0 million of borrowings under the Revolver and$250.0 million of borrowings under our 2030 Notes and 2032 Notes and$82.9 million of proceeds from the issuance of common shares. Our primary uses of financing cash flows for the year endedDecember 31, 2020 were for principal payments on existing debt of$546.1 million (which included$505.5 million of principal repayments under the Revolver and$40.6 million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of$73.8 million , distributions to common shareholders of$90.1 million and distributions to preferred shareholders of$13.1 million .
Credit facility and term loan facilities
As ofDecember 31, 2021 , our credit facility provided for total borrowings of$1.550 billion , consisting of six components: (i) a Revolver which provides for a total borrowing commitment up to$650.0 million , whereby we may borrow, repay and re-borrow amounts under the Revolver, (ii) a$125.0 million Term Loan A, (iii) a$250.0 million Term Loan B, (iv) a$225.0 million Term Loan C, (v) a$175.0 million Term Loan D and (vi) a$125.0 million Term Loan E. The Revolver matures inJanuary 2024 ; provided that we may elect to extend the maturity toJuly 2024 by paying an extension fee of 0.075% of the total borrowing commitment thereunder at the time of extension and meeting other customary conditions with respect to compliance. The Term Loan A matures inJanuary 2023 , the Term Loan B matures inJuly 2024 , the Term Loan C matures inJanuary 2025 , the Term Loan D matures inJuly 2026 and the Term Loan E matures inMarch 2027 . The Revolver, Term Loan A, Term Loan B, Term Loan C, Term Loan D and Term Loan E are not subject to any scheduled reduction or amortization payments prior to maturity. As ofDecember 31, 2021 , we have an expansion option under the credit facility, which, if exercised in full, would provide for a total credit facility of$1.750 billion . As ofDecember 31, 2021 ,$125.0 million was outstanding under the Term Loan A with an effective interest rate of 3.69%,$250.0 million was outstanding under the Term Loan B with an effective interest rate of 2.86%,$225.0 million was outstanding under the Term Loan C with an effective interest rate of 2.86%,$175.0 million was outstanding under the Term Loan D with an effective interest rate of 3.07% and$125.0 million was outstanding under the Term Loan E with an effective interest rate of 1.25%. As ofDecember 31, 2021 , we would have had the capacity to borrow remaining Revolver commitments of$154.3 million while remaining in compliance with the credit facility's financial covenants. 48 -------------------------------------------------------------------------------- Table of C ontents We have a 2023 Term Loan Facility that matures inJune 2023 and is separate from the credit facility in an aggregate amount of$175.0 million . As ofDecember 31, 2021 the entire amount was outstanding under the 2023 Term Loan Facility with an effective interest rate of 2.83%. We have an expansion option under the 2023 Term Loan Facility, which, if exercised in full, would provide for total borrowings in an aggregate amount of$400.0 million . We have a 2028 Term Loan Facility that matures inDecember 2028 and is separate from the credit facility and 2023 Term Loan Facility in an aggregate amount of$75.0 million . As ofDecember 31, 2021 the entire amount was outstanding under the 2028 Term Loan Facility with an effective interest rate of 4.62%. We have an expansion option under the 2028 Term Loan Facility, which, if exercised in full, would provide for total borrowings in an aggregate amount up to$125.0 million . We have a 2029 Term Loan Facility that matures inApril 2029 and is separate from the credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility in an aggregate amount of$100.0 million . As ofDecember 31, 2021 the entire amount was outstanding under the 2029 Term Loan Facility with an effective interest rate of 4.27%. For a summary of our financial covenants and additional detail regarding our credit facility, 2023 Term Loan Facility, 2028 Term Loan Facility and 2029 Term Loan Facility, please see Note 8 to the consolidated financial statements in Item 8.
2029 and
OnAugust 30, 2019 , our operating partnership issued$100.0 million of 3.98% senior unsecured notes dueAugust 30, 2029 and$50.0 million of 4.08% senior unsecured notes dueAugust 30, 2031 in a private placement to certain institutional investors.
OnOctober 22, 2020 , our operating partnership issued$150.0 million of 2.99% senior unsecured notes dueAugust 5, 2030 and$100.0 million of 3.09% senior unsecured notes dueAugust 5, 2032 in a private placement to certain institutional investors.
2026,
OnMay 26, 2021 , our operating partnership issued$55.0 million of 3.10% senior unsecured notes dueMay 4, 2033 . OnJuly 26, 2021 , our operating partnership issued$35.0 million of 2.16% senior unsecured notes dueMay 4, 2026 and$90.0 million of 3.00% senior unsecured notes dueMay 4, 2031 .
OnDecember 14, 2021 , our operating partnership issued$75.0 million of 2.72% senior unsecured notes dueNovember 30, 2030 ,$175.0 million of 2.81% senior unsecured notes dueNovember 30, 2031 and$75.0 million of 3.06% senior unsecured notes dueNovember 30, 2036 .
Sources of liquidity and capital resources
From
compared to
operations result primarily from the ownership and management of self-storage
facilities as described in Part I, Section 1, “Company”.
Our material cash requirements from contractual and other obligations primarily
relate to our debt obligations. Expected timing of those payments are as
follows. The information in this section should be read in conjunctionwith Note
8 and other information included in the accompanying consolidated financial
statements included in Item 8.
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Table of C ontents (in thousands) Next 12 Months Beyond 12 Months Total Senior Unsecured Notes (1) $ - $ 905,000$ 905,000 Revolving line of credit - 490,000 490,000 Term loan facilities (2) - 1,250,000 1,250,000 Fixed rate mortgage notes payable - 303,944 303,944 Total $ -$ 2,948,944 $ 2,948,944
(1) We believe we have access to additional financing and refinancing, if
necessary.
(2) We have an expansion option related to our term loan facilities which
provide a supplement
We anticipate our current cash balances, cash flows from operations and available sources of liquidity will be sufficient to fund operations and meet our short-term and long-term cash requirements, including our scheduled debt repayments, payments for contractual obligations, acquisitions, capital expenditures, working capital needs, dividends, and other prudent uses of our capital, as needed. However, we will continue to assess our liquidity needs. In the event of certain market conditions, we may require additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. Equity Transactions
Issuance of Common Shares and Series A Preferred Shares
OnJuly 23, 2021 , we closed a follow-on public offering of 10,120,000 of common shares, which included 1,320,000 common shares sold upon the exercise in full by the underwriters of their option to purchase additional common shares, at a public offering price of$51.25 per share. We received aggregate net proceeds from the offering of approximately$497.4 million after deducting the underwriting discount and additional expenses associated with the offering. During the year endedDecember 31, 2021 , we sold 6,026,726 of our common shares through at the market offerings. The common shares were sold at an average offering price of$51.37 per share, resulting in net proceeds to us of approximately$306.7 million after deducting compensation payable by us to the agents and offering expenses. DuringSeptember 2020 , we completed an underwritten public offering of 4,500,000 common shares under forward sale agreements at a public offering price of$33.15 per share. The underwriters were granted a 30-day option to purchase up to an additional 675,000 common shares at the same price, which they partially exercised for an additional 400,000 common shares onOctober 6, 2020 . OnDecember 30, 2020 , the Company settled a portion of the forward offering by physically delivering 1,850,510 common shares to the forward purchasers for net proceeds of approximately$60.0 million . OnMarch 22, 2021 the Company settled the remaining portion of the forward offering by physically delivering 3,049,490 common shares to the forward purchasers for net proceeds of approximately$97.3 million . During the year endedDecember 31, 2021 , after receiving notices of redemption from certain OP unitholders, we elected to issue 700,326 common shares to such holders in exchange for 700,326 OP units in satisfaction of the operating partnership's redemption obligations.
OP Equity issue
As part of the 229 properties acquired during the year ended
Series A-1 perpetual preferred shares, 2,674,928 OP shares and 756,351
subordinate performance units).
As discussed in Note 3 to the consolidated financial statements in Item 8, during the year endedDecember 31, 2021 , the Company issued 63,033 OP units upon the conversion of 32,741 subordinated performance units and 142,405 OP units upon the conversion of an equivalent number of LTIP units. 50 -------------------------------------------------------------------------------- Table of C ontents Dividends and Distributions
During the year ended
distributions to ordinary shareholders,
preferred and distributed shareholders
interests.
OnFebruary 24, 2022 , our board of trustees declared a cash dividend and distribution, respectively, of$0.50 per common share and OP unit to shareholders and OP unitholders of record as ofMarch 15, 2022 . OnFebruary 24, 2022 , our board of trustees also declared cash distributions of$0.375 per Series A Preferred Share and Series A-1 preferred unit to shareholders and unitholders of record as ofMarch 15, 2021 . In addition, we expect to declare a cash distribution in the first quarter of 2022 to our subordinated performance unitholders of record as ofMarch 15, 2022 . Such dividends and distributions are expected to be paid onMarch 31, 2022 .
Cash distributions from our
Under the LP Agreement of our operating partnership, to the extent that we, as the general partner of our operating partnership, determine to make distributions to the partners of our operating partnership out of the operating cash flow or capital transaction proceeds generated by a real property portfolio managed by one of our PROs, the holders of the series of subordinated performance units that relate to such portfolio are entitled to share in such distributions. Under the LP Agreement of our operating partnership, operating cash flow with respect to a portfolio of properties managed by one of our PROs is generally an amount determined by us, as general partner of our operating partnership, equal to the excess of property revenues over property related expenses from that portfolio. In general, property revenue from the portfolio includes:
(i) all receipts, including rents and other operating income;
(ii) any inducement, funding, breakup and other fees paid to us by third parties
parties;
(iii) amounts released from previously constituted reserves; and
(iv) any other amounts we receive, which we attribute to the individual
portfolio of properties.
In general, property-related expenses include all direct expenses related to the operation of the properties in that portfolio, including real property taxes, insurance, property-level general and administrative expenses, employee costs, utilities, property marketing expense, property maintenance and property reserves and other expenses incurred at the property level. In addition, other expenses incurred by our operating partnership will also be allocated by us, as general partner, to the property portfolio and will be included in the property-related expenses of that portfolio. Examples of such other expenses include:
(i) corporate general and administrative expenses;
(ii) the disbursements, expenses and fees of our operating partnership, whether
or not in uppercase;
(iii) the costs and expenses of organizing and operating our
Partnership;
(iv) amounts paid or due under any loan or other indebtedness of our
operating company during this period;
(v) extraordinary expenses of our operating partnership that were not previously or
otherwise deducted under item (ii) above;
(vi) all third party costs and expenses associated with the identification, analysis,
and present a proposed property to us and/or our operating partnership; and
(vii) reserves to meet anticipated operating expenses, debt service or other
responsibilities, as determined by us.
To the extent that we, as the general partner of our operating partnership, determine to make distributions to the partners of our operating partnership out of the operating cash flow of a real property portfolio managed by one of our PROs, operating cash flow from a property portfolio is required to be allocated to OP unitholders and to the holders of series of subordinated performance units that relate to such property portfolio as follows:
First, an amount is allocated to PO unitholders to provide the PO
unitholders (as well as any previous allocations of capital
product) with a cumulative preferential allocation on the non-returned capital
the contributions attributed to the shares of the PO in respect of this real estate portfolio.
The preferred allocation for all of our existing portfolios is 6%. From
million
51 -------------------------------------------------------------------------------- Table of C ontents of unreturned capital contributions with respect to common shareholders and OP unitholders, with respect to the various property portfolios. Second, an amount is allocated to the holders of the series of subordinated performance units relating to such property portfolio in order to provide such holders with an allocation (together with prior distributions of capital transaction proceeds) on their unreturned capital contributions. Although the subordinated allocation for the subordinated performance units is non-cumulative from period to period, if the operating cash flow from a property portfolio related to a series of subordinated performance units is sufficient, in the judgment of the general partner (with the approval of a majority of our independent trustees), to fund distributions to the holders of such series of subordinated performance units, but we, as the general partner of our operating partnership, decline to make distributions to such holders, the amount available but not paid as distributions will be added to the subordinated allocation corresponding to such series of subordinated performance units. The subordinated allocation for the outstanding subordinated performance units is 6%. As ofDecember 31, 2021 , an aggregate of$168.4 million of unreturned capital contributions has been allocated to the various series of subordinated performance units.
Subsequently, any additional operating cash is allocated to holders of OP units
and the applicable series of equally subordinated performance units.
Following the allocation described above, we as the general partner of our operating partnership, will generally cause our operating partnership to distribute the amounts allocated to the relevant series of subordinated performance units to the holders of such series of subordinated performance units. We, as the general partner, may cause our operating partnership to distribute the amounts allocated to OP unitholders or may cause our operating partnership to retain such amounts to be used by our operating partnership for any purpose. Any operating cash flow that is attributable to amounts retained by our operating partnership pursuant to the preceding sentence will generally be available to be allocated as an additional capital contribution to the various property portfolios. The foregoing description of the allocation of operating cash flow between the OP unitholders and subordinated performance unitholders is used for purposes of determining distributions to holders of subordinated performance units but does not necessarily represent the operating cash flow that will be distributed to OP unitholders (or paid as dividends to holders of our common shares). Any distribution of operating cash flow allocated to the OP unitholders will be made at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of trustees). Under the LP Agreement of our operating partnership, capital transactions are transactions that are outside the ordinary course of our operating partnership's business, involve the sale, exchange, other disposition, or refinancing of any property, and are designated as capital transactions by us, as the general partner. To the extent the general partner determines to distribute capital transaction proceeds, the proceeds from capital transactions involving a particular property portfolio are required to be allocated to OP unitholders and to the series of subordinated performance units that relate to such property portfolio as follows:
First, an amount determined by us, as general partner, of this capital
the proceeds of the transaction are allocated to OP unitholders in order to provide OP
unitholders (as well as prior operating cash flow allocations) with a
Cumulative preferential allocation on unreturned capital contributions
allocated to holders of OP units for the real estate portfolio which
relate to this capital transaction plus an additional amount equal to this
unreturned capital contributions.
Second, an amount determined by us, as the general partner, is allocated to the holders of the series of subordinated performance units relating to such property portfolio in order to provide such holders with a non-cumulative subordinated allocation on the unreturned capital contributions made by such holders in respect of such property portfolio that relate to such capital transaction plus an additional amount equal to such unreturned capital contributions. The preferred allocation and subordinated allocation with respect to capital transaction proceeds for each portfolio is equal to the preferred allocation and subordinated allocation for distributions of operating cash flow with respect to that portfolio.
Thereafter, any additional capital transaction proceeds are allocated to OP
unitholders and the applicable series of equally subordinated performance units.
Following the award described above, we, as general partner of our
operating partnership, will generally result in our operating partnership to
distribute the amounts allocated to the series of subordinated bonds concerned
52 -------------------------------------------------------------------------------- Table of C ontents performance units to the holders of such series of subordinated performance units. We, as general partner of our operating partnership, may cause our operating partnership to distribute the amounts allocated to the OP unitholders or may cause our operating partnership to retain such amounts to be used by our operating partnership for any purpose. Any capital transaction proceeds that are attributable to amounts retained by our operating partnership pursuant to the preceding sentence will generally be available to be allocated as an additional capital contribution to the various property portfolios. The foregoing allocation of capital transaction proceeds between the OP unitholders and subordinated performance unitholders is used for purposes of determining distributions to holders of subordinated performance units but does not necessarily represent the capital transaction proceeds that will be distributed to OP unitholders (or paid as dividends to holders of our common shares). Any distribution of capital transaction proceeds allocated to the OP unitholders will be made at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of trustees). Our OP units are redeemable for cash or, at our option exchangeable on a one-for-one basis into common shares after an agreed period of time and certain other conditions. Our subordinated performance units are only convertible into OP units following a two year lock-out period and then (i) at the holder's election only upon the achievement of certain performance thresholds relating to the properties to which such subordinated performance units relate or (ii) at our election upon a retirement event of a PRO that holds such subordinated performance units or upon certain qualifying terminations. Notwithstanding the two-year lock out period on conversions of subordinated performance units into OP units, if such subordinated performance units were convertible into OP units as ofDecember 31, 2021 , each subordinated performance unit would on average hypothetically convert into 1.61 OP units, or into an aggregate of approximately 22.7 million OP units. These amounts are based on historical financial information for the trailing twelve months endedDecember 31, 2021 . The hypothetical conversion is calculated by dividing the average cash available for distribution, or CAD, per subordinated performance unit by 110% of the CAD per OP unit over the same period. We anticipate that as our CAD grows over time, the conversion ratio will also grow, including to levels that may exceed this amount. The actual number of OP units into which such subordinated performance units will become convertible may vary significantly and will depend upon the applicable conversion penalty and the actual CAD to the OP units and the actual CAD to the converted subordinated performance units in the one-year period ending prior to conversion. We have also granted registration rights to those persons who will be eligible to receive common shares issuable upon exchange of OP units issued in our formation transactions and certain contribution transactions.
Allocation of capital contributions
We, as the general partner of our operating partnership, in our discretion, have the right to increase or decrease, as appropriate, the amount of capital contributions allocated to our operating partnership in general and to each series of subordinated performance units to reflect capital expenditures made by our operating partnership in respect of each portfolio, the sale or refinancing of all or a portion of the properties comprising the portfolio, the distribution of capital transaction proceeds by our operating partnership, the retention by our operating partnership of cash for working capital purposes and other events impacting the amount of capital contributions allocated to the holders. In addition, to avoid conflicts of interests, any decision by us to increase or decrease allocations of capital contributions must also be approved by a majority of our independent trustees.
Segment
We manage our business as one reportable segment consisting of investments in self storage properties located inthe United States . Although we operate in several markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets.
Seasonality
The self storage business is subject to minor seasonal fluctuations. A greater
portion of revenues and profits are realized from May through September.
Historically, our highest level of occupancy has typically been in July, while
our lowest level of occupancy has typically been in February. Results for any
quarter may not be indicative of the results that may be achieved for the full
fiscal year.
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