Public Storage: Form 10-Q for the period ended Jun 30, 2024

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to our 2024 outlook and all underlying assumptions, our expected acquisition, disposition, development, and redevelopment activity, supply and demand for our self-storage facilities, information relating to operating trends in our markets, expectations regarding operating expenses, including property tax changes, expectations regarding the impacts from inflation and changes in macroeconomic conditions, our strategic priorities, expectations with respect to financing activities, rental rates, cap rates, and yields, leasing expectations, our credit ratings, and all other statements other than statements of historical fact. Such statements are based on management’s beliefs and assumptions made based on information currently available to management and may be identified by the use of the words “outlook,” “guidance,” “expects,” “believes,” “anticipates,” “should,” “estimates,” and similar expressions.

These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Risks and uncertainties that may impact future results and performance include, but are not limited to those risks and uncertainties described in Part 1, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2024 and in our other filings with the SEC. These include changes in demand for our facilities, changes in macroeconomic conditions, changes in national self-storage facility development activity, impacts of natural disasters, adverse changes in laws and regulations including governing property tax, evictions, rental rates, minimum wage levels, and insurance, adverse economic effects from public health emergencies, international military conflicts, or similar events impacting public health and/or economic activity, increases in the costs of our primary customer acquisition channels, adverse impacts to us and our customers from high interest rates, inflation, unfavorable foreign currency rate fluctuations, or changes in federal or state tax laws related to the taxation of REITs, security breaches, including ransomware, or a failure of our networks, systems, or technology.

These forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this cautionary statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether because of new information, new estimates, or other factors, events or circumstances after the date of these forward-looking statements, except when expressly required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, neither as predictions of future events nor guarantees of future performance.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenues, and expenses that are not readily apparent from other sources.

During the six months ended June 30, 2024, there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

Overview

During the three and six months ended June 30, 2024, revenues generated by our Same Store Facilities (as defined below) decreased by 1.0% ($9.8 million) and 0.5% ($9.2 million), respectively, as compared to the same periods in 2023, while Same Store cost of operations increased by 0.9% ($1.9 million) and 2.9% ($12.8 million), respectively. Demand has continued to soften through 2023 and the first half of 2024, and we expect this trend to continue during the remainder of 2024.

We have grown and plan to continue to grow through the acquisition and development of new facilities and expansion of our existing self-storage facilities. Since the beginning of 2022, we acquired a total of 240 facilities with 17.0 million net rentable square feet for $3.4 billion. Additionally, within our non-same store portfolio, our Newly Developed and Expanded Facilities (as defined below) include a total of 126 self-storage facilities with 14.9 million net rentable square feet. For development and expansions completed by June 30, 2024, we incurred a total cost of $1.4 billion. During the three and six months ended June 30, 2024, combined net operating income generated by our Acquired Facilities (as defined below) and Newly Developed and Expanded Facilities increased 81.3% ($35.3 million) and 81.4% ($67.7 million), respectively, as compared to the same periods in 2023.

We have experienced recent inflationary impacts on our cost of operations including labor, utilities, and repairs and maintenance, and costs of development and expansion activities, and we expect to experience such impacts in the future. We have implemented various initiatives to manage the adverse impacts, such as enhancements in operational processes and investments in technology to reduce payroll hours, achievement of economies of scale from recent acquisitions with supervisory payroll and centralized management costs allocated over a broader number of self-storage facilities, and investments in solar power and LED lights to lower utility usage.

In order to enhance the competitive position of certain of our facilities relative to local competitors (including newly developed facilities), we have embarked on our multi-year Property of Tomorrow program to (i) rebrand our properties with more pronounced, attractive, and clearly identifiable color schemes and signage and (ii) upgrade the configuration and layout of the offices and other customer zones to improve the customer experience. We expect to complete the program in 2024. We spent approximately $63 million on the program in the six months ended June 30, 2024 and expect to spend approximately $150 million over 2024 on this effort. We have also embarked on a solar program under which we plan to install solar panels on over 1,000 of our self-storage facilities. We have completed the installations on 572 facilities through June 30, 2024. We spent approximately $26 million on the program in the six months ended June 30, 2024 and expect to spend $100 million over 2024 on this effort.

On April 11, 2024, PSOC issued €150 million of senior notes to institutional investors, bearing interest at a fixed rate of 4.080% and maturing on April 11, 2039. The senior notes are guaranteed by Public Storage. We received $162.5 million of net proceeds from the issuance after converting the Euros to U.S. Dollars. On April 11, 2024, we repaid PSOC’s outstanding €100 million aggregate principal amount 1.540% senior notes due April 12, 2024 to the same institutional investors for $108.4 million.

On April 16, 2024, PSOC completed a public offering of $1.0 billion aggregate principal amount of senior notes, including $700 million aggregate principal amount of floating rate senior notes bearing interest at a rate of Compounded SOFR + 0.70% (reset quarterly) maturing on April 16, 2027 and $300 million aggregate principal amount of senior notes bearing interest at a fixed annual rate of 5.350% maturing on August 1, 2053. The 2053 notes issued at a discount of $5.3 million constitute a further issuance of, and form a single series with, our outstanding 5.350% senior notes due 2053 issued on July 26, 2023 in the aggregate principal amount of $600 million. These senior notes are guaranteed by Public Storage. We received $988.5 million of net proceeds from the offering. On April 23, 2024, we repaid PSOC’s outstanding $700 million aggregate principal amount of floating rate senior notes at maturity due April 23, 2024.

During the second quarter of 2024, we repurchased 726,865 of our common shares under our previously announced share repurchase program on the open market for a total cost of $200.0 million, driven by our expected improvement in operating fundamentals and growth.

Results of Operations

Operating Results for the Three Months Ended June 30, 2024 and 2023

For the three months ended June 30, 2024, net income allocable to our common shareholders was $468.4 million or $2.66 per diluted common share, compared to $528.3 million or $3.00 per diluted common share for the same period in 2023, representing a decrease of $59.9 million or $0.34 per diluted common share. The decrease is due primarily to (i) a $61.2 million increase in depreciation and amortization expense and (ii) a $35.2 million increase in interest expense, partially offset by (iii) a $27.8 million increase in self-storage net operating income and (iv) a $13.5 million increase in foreign currency exchange gains primarily associated with our Euro denominated notes payable.

The $27.8 million increase in self-storage net operating income in the three months ended June 30, 2024 as compared to the same period in 2023 is a result of a $39.5 million increase attributable to our non-same store facilities, partially offset by an $11.7 million decrease attributable to our Same Store Facilities. Revenues for the Same Store Facilities decreased 1.0% or $9.8 million in the three months ended June 30, 2024 as compared to the same period in 2023, due primarily to lower realized annual rent per occupied square foot and a decline in occupancy. Cost of operations for the Same Store Facilities increased by 0.9% or $1.9 million in the three months ended June 30, 2024 as compared to the same period in 2023, due primarily to increased property tax expense partially offset by decreased on-site property manager payroll. The increase in net operating income of $39.5 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2023 and the fill-up of recently developed and expanded facilities.

Operating Results for the Six Months Ended June 30, 2024 and 2023

For the six months ended June 30, 2024, net income allocable to our common shareholders was $927.6 million or $5.26 per diluted common share, compared to $995.8 million or $5.65 per diluted common share for the same period in 2023, representing a decrease of $68.2 million or $0.39 per diluted common share. The decrease is due primarily to (i) a $124.8 million increase in depreciation and amortization expense and (ii) a $66.8 million increase in interest expense, partially offset by (iii) a $77.9 million increase in foreign currency exchange gains primarily associated with our Euro denominated notes payable and (iv) a $52.9 million increase in self-storage net operating income.

The $52.9 million increase in self-storage net operating income in the six months ended June 30, 2024 as compared to the same period in 2023 is a result of a $74.9 million increase attributable to our non-same store facilities, partially offset by a $22.0 million decrease attributable to our Same Store Facilities. Revenues for the Same Store Facilities decreased 0.5% or $9.2 million in the six months ended June 30, 2024 as compared to the same period in 2023, due primarily to a decline in occupancy. Cost of operations for the Same Store Facilities increased by 2.9% or $12.8 million in the six months ended June 30, 2024 as compared to the same period in 2023, due primarily to increased property tax expense and marketing expense partially offset by decreased on-site property manager payroll and utilities. The increase in net operating income of $74.9 million for the non-same store facilities is due primarily to the impact of facilities acquired in 2023 and the fill-up of recently developed and expanded facilities.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by Nareit. We believe that FFO and FFO per share are useful to REIT investors and analysts in measuring our performance because Nareit’s definition of FFO excludes items included in net income that do not relate to or are not indicative of our operating and financial performance. FFO represents net income before real estate-related depreciation and amortization, which is excluded because it is based upon historical costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our consolidated statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the three months ended June 30, 2024, FFO was $4.30 per diluted common share as compared to $4.29 for the same period in 2023, representing an increase of 0.2%, or $0.01 per diluted common share.

For the six months ended June 30, 2024, FFO was $8.54 per diluted common share as compared to $8.24 per diluted common share for the same period in 2023, representing an increase of 3.6%, or $0.30 per diluted common share.

We also present “Core FFO” and “Core FFO per share” non-GAAP measures that represent FFO and FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) charges related to the redemption of preferred securities, and (iii) certain other non-cash and/or nonrecurring income or expense items primarily representing, with respect to the periods presented below, the impact of loss contingencies and resolutions, due diligence costs incurred in pursuit of strategic transactions, unrealized gain on private equity investments, amortization of acquired non real estate-related intangibles, and our equity share of deferred tax benefits of a change in tax status and unrealized gain on derivatives from our equity investee. We review Core FFO and Core FFO per share to evaluate our ongoing operating performance and we believe they are used by investors and REIT analysts in a similar manner. However, Core FFO and Core FFO per share are not substitutes for net income and net income per share. Because other REITs may not compute Core FFO or Core FFO per share in the same manner as we do, may not use the same terminology or may not present such measures, Core FFO and Core FFO per share may not be comparable among REITs.

The following table reconciles net income to FFO and Core FFO and reconciles diluted earnings per share to FFO per share and Core FFO per share:

(Amounts in thousands, except per share data)

Analysis of Net Income — Self-Storage Operations

Our self-storage operations are analyzed in four groups: (i) the 2,507 facilities that we have owned and operated on a stabilized basis since January 1, 2022 (the “Same Store Facilities”), (ii) 240 facilities we acquired since January 1, 2022 (the “Acquired Facilities”), (iii) 126 facilities that have been newly developed or expanded, or that will commence expansion by December 31, 2024 (the “Newly Developed and Expanded Facilities”), and (iv) 176 other facilities, which are otherwise not stabilized with respect to occupancies or rental rates since January 1, 2022 (the “Other Non-same Store Facilities”). See Note 13 to our June 30, 2024 consolidated financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.

(Dollar amounts and square footage in thousands)

29

(a) Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, operating cash flow, or other related financial measures, in evaluating our operating results. See Note 13 to our June 30, 2024 consolidated financial statements for a reconciliation of NOI to our total net income for all periods presented.

Same Store Facilities

The Same Store Facilities consist of facilities we have owned and operated on a stabilized level of occupancy, revenues, and cost of operations since January 1, 2022. Our Same Store Facilities did not change from March 31, 2024. The composition of our Same Store Facilities allows us more effectively to evaluate the ongoing performance of our self-storage portfolio in 2022, 2023, and 2024 and exclude the impact of fill-up of unstabilized facilities, which can significantly affect operating trends. We believe investors and analysts use Same Store Facilities information in a similar manner. However, because other REITs may not compute Same Store Facilities in the same manner as we do, may not use the same terminology or may not present such a measure, Same Store Facilities may not be comparable among REITs.

The following table summarizes the historical operating results (for all periods presented) of these 2,507 facilities (170.0 million net rentable square feet) that represent approximately 78% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at June 30, 2024. It includes various measures and detail that we do not include in the analysis of the developed, acquired, and other non-same store facilities, due to the relative magnitude and importance of the Same Store Facilities relative to our other self-storage facilities.

Selected Operating Data for the Same Store Facilities (2,507 facilities)

(Dollar amounts in thousands, except for per square foot data)

31

(a) Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

(b) Direct net operating income (“Direct NOI”), a subtotal within NOI, is a non-GAAP financial measure that excludes the impact of supervisory payroll, centralized management costs, and share-based compensation in addition to depreciation and amortization expense. We utilize direct net operating income in evaluating property performance and in evaluating property operating trends as compared to our competitors.

(c) Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency, and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.

(d) Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in the lease agreement upon move-in, and we adjust them from time to time with notice. Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.

(e) Represents the absolute nominal change with respect to gross margin and square foot occupancy, and the percentage change with respect to all other items.

Analysis of Same Store Revenue

We believe a balanced occupancy and rate strategy maximizes our revenues over time. We regularly adjust rental rates and promotional discounts offered (generally, “$1.00 rent for the first month”), as well as our marketing efforts to maximize revenue from new tenants to replace tenants that vacate.

We typically increase rental rates to our long-term tenants (generally, those who have been with us for at least a year) every six to twelve months. As a result, the number of long-term tenants we have in our facilities is an important factor in our revenue growth. The level of rate increases to long-term tenants is based upon evaluating the additional revenue from the increase against the negative impact of incremental move-outs, by considering customers’ in-place rent and prevailing market rents, among other factors.

Revenues generated by our Same Store Facilities decreased 1.0% and 0.5% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023. The 1.0% decrease in the three months ended June 30, 2024 was due primarily to a 0.6% decrease in realized annual rent per occupied square foot and a 0.5% decrease in average occupancy, as compared to the same period in 2023. The 0.5% decrease in the six months ended June 30, 2024 was due primarily to a 0.6% decrease in average occupancy partially offset by a 0.1% increase in realized annual rent per occupied square foot, as compared to the same period in 2023.

The decrease in realized annual rent per occupied square foot in the three months ended June 30, 2024 as compared to the same period in 2023 was due to a decrease in average rates per square foot charged to new tenants moving in over the past twelve months, partially offset by cumulative rate increases to existing long-term tenants over the same period. At June 30, 2024, annual contract rent per occupied square foot was 1.4% lower as compared to June 30, 2023.

The weighted average square foot occupancy for our Same Store Facilities was 93.0% and 92.6% in the three and six months ended June 30, 2024, respectively, representing a decrease of 0.5% and 0.6% as compared to the same periods in 2023. Occupancy levels have gradually declined since the second half of 2022 as customer demand softened. During the three and six months ended June 30, 2024, we lowered move-in rental rates and increased advertising spending to stimulate move-in activity at our facilities.

Move-out activities from our tenants were lower in the three and six months ended June 30, 2024 as compared to the same periods in 2023. These lower move-out volumes contributed to stronger average length of stay for tenants and supported revenue growth.

Selected Key Move-in and Move-Out Statistical Data

The following table sets forth average annual contract rent per square foot and total square footage for tenants moving in and moving out during the three and six months ended June 30, 2024 and 2023. Contract rents gained from move-ins and contracts rents lost from move-outs included in the table assume move-in and move-out activities occur at the beginning of each period presented. The table also includes promotional discounts, which vary based upon the move-in contractual rates, move-in volume, and percentage of tenants moving in who receive the discount.

(Amounts in thousands, except for per square foot amounts)

Demand was weaker in the first half of 2024 compared to the same period in 2023 primarily from lower home-moving activities partially offset by increases in customers who sought storage space for other reasons. Demand fluctuates due to various local and regional factors, including the overall economy, as well as new supply of self-storage space and alternatives to self-storage.

We expect weaker industry-wide demand in the remainder of 2024 as compared to 2023, but with an improvement in the year-over-year decline in demand in the second half of 2024 as compared to the first half of 2024. We plan to mitigate the effect of lower industry-wide demand to our facilities by continuing to support new customer move-ins with increased marketing expense, lower rental rates to new customers, and increased promotional discounting. As a result, we expect a moderate decline in Same Store Facilities revenues in 2024 as compared to those earned in 2023.

Late Charges and Administrative Fees

Late charges and administrative fees remained flat for the three months ended June 30, 2024 and increased 1.3% for the six months ended June 30, 2024, as compared to the same periods in 2023. The year-over-year increase for the six months ended June 30, 2024 was due primarily to higher late charges and lien fees collected on delinquent accounts. Delinquency rates remained at similar levels for the three and six months ended June 30, 2024 as compared to the same periods in 2023.

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 0.9% and 2.9% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023. The increase during the three-month period is due primarily to increased property tax expense partially offset by decreased on-site property manager payroll, while the increase during the six-month period is due primarily to increased property tax expense and marketing expense partially offset by decreased on-site property manager payroll and utilities.

Property tax expense increased 3.9% and 5.6% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, as a result of higher assessed values. We expect property tax expense to grow 4% to 5% in 2024 due primarily to higher assessed values.

Marketing expense includes Internet advertising we utilize through our online paid search programs, television advertising and the operating costs of our telephone reservation center. Internet advertising expense, comprising keyword search fees assessed on a “per click” basis, varies based upon demand for self-storage space, the quantity of people inquiring about self-storage through online search, occupancy levels, the number and aggressiveness of bidding competitors, and other factors. These factors are volatile; accordingly, Internet advertising can increase or decrease significantly in the short-term. We increased marketing expense by 12.1% and 26.7% in the three and six months ended June 30, 2024, respectively, as compared to the same period in 2023, primarily by utilizing a higher volume of online paid search programs to attract new tenants. We plan to continue to use internet advertising and other advertising channels to support move-in volumes in the remainder of 2024.

On-site property manager payroll expense decreased 6.5% and 2.6% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, primarily due to reduction in labor hours driven by revisions in operational processes. We expect on-site property manager payroll expense to decrease moderately in 2024 as compared to 2023 as we continue to enhance operational processes.

Our utility expense consists primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense decreased 8.4% and 6.8% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, due primarily to decreases in utility rates and our investment in energy saving technology such as solar power and LED lights, which generate favorable returns on investment in the form of lower utility usage. We expect a decline in utility expense in 2024 as compared to 2023 as we continue our investment in solar power.

Analysis of Market Trends

The following tables set forth selected market trends in our Same Store Facilities:

Same Store Facilities Operating Trends by Market

(a) Represents the absolute nominal change with respect to square foot occupancy, and the percentage change with respect to all other items.

Same Store Facilities Operating Trends by Market (Continued)

36

Same Store Facilities Operating Trends by Market (Continued)

(a) Represents the absolute nominal change with respect to square foot occupancy, and the percentage change with respect to all other items.

Same Store Facilities Operating Trends by Market (Continued)

38

Acquired Facilities

The Acquired Facilities represent 240 facilities that we acquired in 2022, 2023, and 2024. As a result of the stabilization process and timing of when these facilities were acquired, year-over-year changes can be significant. The following table summarizes operating data with respect to the Acquired Facilities:

($ amounts in thousands, except for per square foot amounts)

39

ACQUIRED FACILITIES (Continued)

(a) Represents the percentage change with respect to annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.

(b) Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

We have been active in acquiring facilities in recent years. Since the beginning of 2022, we acquired a total of 240 facilities with 17.0 million net rentable square feet for $3.4 billion. During the three and six months ended June 30, 2024, these facilities contributed net operating income of $40.9 million and $78.1 million, respectively.

During 2023, we acquired BREIT Simply Storage LLC, a self-storage company that owned and operated 127 self-storage facilities (9.4 million square feet) and managed 25 self-storage facilities (1.8 million square feet) for third parties, for a purchase price of $2.2 billion in cash. Included in the Acquisition results in the table above are the Simply portfolio self-storage revenues of $76.0 million, NOI of $52.0 million (including Direct NOI of $54.6 million), and average square footage occupancy of 86.7% for the six months ended June 30, 2024.

We remain active in seeking to acquire additional self-storage facilities. Future acquisition volume is likely to be impacted by cost of capital and overall macro-economic uncertainties. Subsequent to June 30, 2024, we acquired or were under contract to acquire three self-storage facilities across three states with 0.2 million net rentable square feet, for $24.2 million.

Newly Developed and Expanded Facilities

The Newly Developed and Expanded Facilities include 42 facilities that were developed on new sites since January 1, 2019, and 84 facilities expanded to increase their net rentable square footage. Of these expansions, 64 were completed before 2023, 12 were completed in 2023 or 2024, and eight are currently in process at June 30, 2024. The following table summarizes operating data with respect to the Newly Developed and Expanded Facilities:

NEWLY DEVELOPED AND EXPANDED FACILITIES

($ amounts in thousands, except for per square foot amounts)

41

($ amounts in thousands, except for per square foot amounts)

42

(a) Represents the percentage change with respect to annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.

(b) Revenues and cost of operations do not include tenant reinsurance and merchandise sales generated at the facilities. See “Ancillary Operations” below for more information.

(c) These amounts only include the direct cost incurred to expand and renovate these facilities, and do not include (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.

Our Newly Developed and Expanded Facilities includes a total of 126 self-storage facilities of 14.9 million net rentable square feet. For development and expansions completed by June 30, 2024, we incurred a total cost of $1.4 billion. During the three and six months ended June 30, 2024, Newly Developed and Expanded Facilities contributed net operating income of $37.8 million and $72.7 million, respectively.

It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Physical occupancy can be achieved as early as two to three years following completion of the development or expansion through offering lower rental rates during fill-up. As a result, even after achieving high occupancy, there can still be a period of elevated revenue growth as the tenant base matures and higher rental rates are achieved.

We believe that our development and redevelopment activities generate favorable risk-adjusted returns over the long run. However, in the short run, our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, the related construction and development overhead expenses included in general and administrative expense, and the net operating loss from newly developed facilities undergoing fill-up.

We typically underwrite new developments to stabilize at approximately an 8.0% NOI yield on cost. Our developed facilities have thus far leased up as expected and are at various stages of their revenue stabilization periods. The actual annualized yields that we may achieve on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property and the level of new and existing supply.

The facilities under “expansions completed” represent those facilities where the expansions have been completed at June 30, 2024. We incurred a total of $762.2 million in direct cost to expand these facilities, demolished a total of 1.1 million net rentable square feet of storage space, and built a total of 6.4 million net rentable square feet of new storage space.

At June 30, 2024, we had 22 additional facilities in development, which will have a total of 2.2 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $419.5 million. We expect these facilities to open over the next 18 to 24 months.

The facilities under “expansion in process” represent those facilities where construction is in process at June 30, 2024, and together with additional future expansion activities primarily related to our Same Store Facilities at June 30, 2024, we expect to add a total of 1.6 million net rentable square feet of storage space by expanding existing self-storage facilities for an aggregate direct development cost of $319.2 million.

Other Non-Same Store Facilities

The “Other Non-Same Store Facilities” represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized since January 1, 2022, including facilities undergoing fill-up as well as facilities damaged in casualty events such as hurricanes, floods, and fires.

The Other Non-Same Store Facilities have an aggregate of 17.1 million net rentable square feet at June 30, 2024. During the three and six months ended June 30, 2024 and 2023, the average occupancy for these facilities totaled 82.1% and 80.8%, respectively, as compared to 81.7% and 81.1% for the same periods in 2023, and the realized rent per occupied square foot totaled $17.18 and $17.16, respectively, as compared to $16.16 and $16.07 for the same periods in 2023.

Depreciation and amortization expense

Depreciation and amortization expense for Self-Storage Operations increased $61.2 million and $124.8 million in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, primarily due to newly acquired facilities of $2.7 billion in 2023 and newly developed and expanded facilities in 2024. We expect continued increases in depreciation expense in the remainder of 2024 as a result of elevated levels of capital expenditures and new facilities that are acquired, developed or expanded over 2024.

Ancillary Operations

Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities, sale of merchandise at our self-storage facilities, and management of property owned by unrelated third parties. The following table sets forth our ancillary operations:

(Amounts in thousands)

Tenant reinsurance operations: Tenant reinsurance premium revenue increased $5.5 million or 11.0% for the three months ended June 30, 2024, and increased $10.4 million or 10.4% for the six months ended June 30, 2024, in each case as compared to the same period in 2023, as a result of an increase in our tenant base with respect to acquired, newly developed, and expanded facilities and the third party properties we manage, as well as the increase of average premiums charged per customer at our same store facilities. Tenant reinsurance premium revenue generated from tenants at our Same Store Facilities were $42.3 million and $83.9 million for the three and six months ended June 30, 2024, respectively, as compared to $40.8 million and $81.0 million for the same periods in 2023, representing an increase of 3.7% and 3.6%, respectively.

We expect future growth will come primarily from customers of newly acquired and developed facilities and the increase of tenant insurance participation at our Same Store Facilities.

Cost of operations primarily includes claims paid as well as claims adjustment expenses. Claims expenses vary based upon the number of insured tenants and the volume of events that drive covered customer losses, such as burglary, as well as catastrophic weather events affecting multiple properties such as hurricanes and floods. Tenant reinsurance cost of operations increased $1.0 million and $3.1 million for the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, primarily due to increased access fees we paid to the third-party owners of properties we manage driven by the growth of our third-party property management program.

Third-party property management: At June 30, 2024, in our third-party property management program, we managed 260 facilities for unrelated third parties, and were under contract to manage 115 additional facilities including 112 facilities that are currently under construction. During the six months ended June 30, 2024, we added 63 facilities to the program, acquired one facility from the program, and had eleven facilities exit the program. While we expect this business to increase in scope and size, we do not expect any significant changes in overall profitability of this business in the near term as we seek new properties to manage and are in the earlier stages of fill-up for newly managed properties.

Analysis of items not allocated to segments

Equity in earnings of unconsolidated real estate entity

We account for our equity investment in Shurgard using the equity method and record our pro-rata share of its net income. For the three and six months ended June 30, 2024, we recognized equity in earnings of Shurgard of $6.5 million and $12.6 million, respectively, as compared to $9.6 million and $15.6 million for the same periods in 2023. Included in our equity earnings from Shurgard were $9.8 million and $19.5 million of our share of depreciation and amortization expense for the three and six months ended June 30, 2024, respectively, as compared to $9.2 million and $17.7 million for the same periods in 2023.

For purposes of recording our equity in earnings from Shurgard, the Euro was translated at exchange rates of approximately 1.072 U.S. Dollars per Euro at June 30, 2024 (1.104 at December 31, 2023), and average exchange rates of 1.076 and 1.088 for the three months ended June 30, 2024 and 2023, respectively, and average exchange rates of 1.081 for each of the six months ended June 30, 2024 and 2023.

Real estate acquisition and development expense: In the three and six months ended June 30, 2024, we incurred a total of $2.9 million and $6.6 million, respectively, of internal and external expenses related to our acquisition and development of real estate facilities, as compared to $3.1 million and $8.6 million for the same periods in 2023. These amounts are net of $4.2 million and $8.7 million in the three and six months ended June 30, 2024, respectively, in development costs that were capitalized to newly developed and redeveloped self-storage facilities, as compared to $4.4 million and $8.9 million for the same periods in 2023.

General and administrative expense: The following table sets forth our general and administrative expense:

(Amounts in thousands)

45

General and administrative expense increased $6.8 million and $11.2 million in the three and six months ended June 30, 2024, respectively, as compared to the same period in 2023 due primarily to (i) an increase in loss contingencies related to corporate legal matters and (ii) an increase in license and data conversion costs related to our new IT applications.

Interest and other income: The following table sets forth our interest and other income:

(Amounts in thousands)

Interest earned on cash balances decreased $0.3 million and $3.5 million in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, due primarily to lower average cash balances partially offset by higher interest rates earned.

Interest expense: For the three and six months ended June 30, 2024, we incurred $76.1 million and $146.2 million, respectively, of interest on our outstanding notes payable, as compared to $40.1 million and $77.9 million for the same periods in 2023. In determining interest expense, these amounts were offset by capitalized interest of $2.8 million and $5.2 million during the three and six months ended June 30, 2024, respectively, associated with our development activities, as compared to $2.0 million and $3.8 million for the same periods in 2023. The increase of interest expense in the three and six months ended June 30, 2024 as compared to the same periods in 2023 is due to the issuance of $2.2 billion of notes payable in July 2023 and the increase of Compounded SOFR on our $700.0 million variable rate unsecured notes issued in April 2021, which we repaid in full in April 2024. At June 30, 2024, we had $9.4 billion of notes payable outstanding, with a weighted average interest rate of approximately 3.2%.

Foreign currency exchange gain (loss): For the three and six months ended June 30, 2024, we recorded foreign currency gains of $12.4 million and $50.0 million, respectively, representing primarily the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates. For the three and six months ended June 30, 2023, we recorded foreign currency losses of $1.1 million and $28.0 million, respectively. The Euro was translated at exchange rates of approximately 1.072 U.S. Dollars per Euro at June 30, 2024, 1.104 at December 31, 2023, 1.089 at June 30, 2023, and 1.070 at December 31, 2022. Future gains and losses on foreign currency will be dependent upon changes in the relative value of the Euro to the U.S. Dollar and the level of Euro-denominated notes payable outstanding.

Gain on sale of real estate: In the six months ended June 30, 2024, we sold a land parcel for $2.4 million in cash and recorded gains on sale of real estate of $0.9 million (none in the three months ended June 30, 2024 or in the three and six months ended June 30, 2023).

Income tax expense: We operate as a REIT for U.S. federal income tax purposes. As a REIT, we are generally not subject to U.S. federal income taxes on our taxable income distributed to stockholders. For the three and six months ended June 30, 2024, we recorded income tax expense totaling $2.1 million and $3.6 million, respectively, related to our taxable REIT subsidiaries and in the state and local jurisdictions in which we operate, as compared to $2.5 million and $5.6 million for the same periods in 2023. The year-over-year changes of income tax expense in the three and six months ended June 30, 2024 were primarily driven by changes in state income tax, due to fluctuations of taxable income in certain states where there are differences between federal and state tax laws.

Liquidity and Capital Resources

Overview and our Sources of Capital

While operating as a REIT allows us to minimize the payment of U.S. federal corporate income tax expense, we are required to distribute at least 90% of our taxable income to our shareholders. Notwithstanding this requirement, our annual operating retained cash flow was approximately $700 million in 2021, $1 billion in 2022 and $480 million for 2023 after a 50% increase in annual dividend in 2023. Retained operating cash flow represents our expected cash flow provided by operating activities (including property operating costs and interest payments described below), less shareholder distributions and capital expenditures. We expect retained cash flow of approximately $450 million for 2024.

Capital needs in excess of retained cash flow are met with: (i) medium and long-term debt, (ii) preferred equity, (iii) limited partnership interests, and (iv) common equity. We select among these sources of capital based upon relative cost, availability, the desire for leverage, and considering potential constraints caused by certain features of capital sources, such as debt covenants. We view our line of credit, as well as any short-term bank loans, as bridge financing.

Because raising capital is important to our growth, we endeavor to maintain a strong financial profile characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s. Our senior notes payable have an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile enables us to effectively access both the public and private capital markets to raise capital.

On June 12, 2023, we amended our revolving line of credit, increasing the borrowing limit from $500 million to $1.5 billion. We increased the size of the revolving line of credit and its associated lender base given our increased levels of debt maturities in coming years and to serve as temporary “bridge” financing until we are able to raise longer term capital. As of June 30, 2024, there were no borrowings outstanding on the revolving line of credit; however, we do have approximately $15.2 million of outstanding letters of credit, which limits our borrowing capacity to $1,484.8 million as of July 30, 2024. Our line of credit matures on June 12, 2027.

We believe that we have significant financial flexibility to adapt to changing conditions and opportunities, and we have significant access to sources of capital including debt and preferred equity. While the costs of financing have increased recently, based on our strong credit profile and our substantial current liquidity relative to our capital requirements noted below, we would not expect any potential capital market dislocations to have a material impact upon our expected capital and growth plans over the next 12 months. However, if capital market conditions deteriorate significantly for a long period of time, our access to or cost of debt and preferred equity capital could be negatively impacted and potentially affect future investment activities.

Our current and expected capital resources include: (i) $542.3 million of cash as of June 30, 2024 and (ii) approximately $450 million of expected retained operating cash flow over the next twelve months. Additionally, we have $1,484.8 million available borrowing capacity on our revolving line of credit, which can be used as temporary “bridge” financing until we are able to raise longer term capital. We believe that our cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing cash requirements for interest payments on debt, maintenance capital expenditures, and distributions to our shareholders for the foreseeable future.

As described below, our current committed cash requirements consist of (i) $358.0 million of remaining spending on our current development pipeline, which will be incurred primarily in the next 18 to 24 months and (ii) $24.2 million in property acquisitions currently under contract. Our cash requirements may increase over the next year as we add projects to our development pipeline and acquire additional properties. Additional potential cash requirements could result from various activities including the redemption of outstanding preferred securities, repurchases of common stock, or merger and acquisition activities, as and to the extent we determine to engage in such activities.

Over the long term, to the extent that our cash requirements exceed our capital resources, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, debt, and limited partnership interests, or entering into joint venture arrangements to acquire or develop facilities.

Cash Requirements

The following summarizes our expected material cash requirements, which comprise (i) contractually obligated expenditures, including payments of principal and interest, (ii) other essential expenditures, including property operating expenses, maintenance capital expenditures and dividends paid in accordance with REIT distribution requirements, and (iii) opportunistic expenditures, including acquisitions and developments and repurchases of our securities. We expect to satisfy these cash requirements through operating cash flow and opportunistic debt and equity financings.

Required Debt Repayments: As of June 30, 2024, the principal outstanding on our debt totaled approximately $9.5 billion, consisting of $7.8 billion of U.S. Dollar denominated unsecured notes payable, $1.7 billion of Euro-denominated unsecured notes payable, and $1.8 million of mortgage notes payable. Approximate principal maturities and interest payments (including $162.5 million in estimated interest on our $1.1 billion variable rate unsecured notes based on rates in effect at June 30, 2024) are as follows (amounts in thousands):

Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs, or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.

We spent $117 million of capital expenditures to maintain real estate facilities in the first half of 2024 and expect to spend approximately $180 million in 2024. In addition to standard capital repairs of building elements reaching the end of their useful lives, our capital expenditures in recent years have included incremental expenditures to enhance the competitive position of certain of our facilities relative to local competitors pursuant to a multi-year Property of Tomorrow program. Such investments include development of more pronounced, attractive, and clearly identifiable color schemes and signage and upgrades to the configuration and layout of the offices and other customer zones to improve the customer experience. We spent approximately $63 million in the first half of 2024 and expect to spend $150 million in 2024 on this effort. In addition, we have spent $26 million on the installation of solar panels in the first half of 2024 and we expect to spend $120 million in 2024.

The capital spent to install solar panels and LED lights will reduce electric utility usage resulting in lower property operating costs.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue Code. For each taxable year in which we qualify for taxation as a REIT, we will not be subject to U.S. federal corporate income tax on our “REIT taxable income” (generally, taxable income subject to specified adjustments, including a deduction for dividends paid and excluding our net capital gain) that is distributed to our shareholders. We believe we have met these requirements in all periods presented herein, and we expect to continue to qualify as a REIT.

Our consistent, long-term dividend policy has been to distribute our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities.

The annual distribution requirement with respect to our preferred shares outstanding at June 30, 2024 is approximately $194.7 million per year.

Real Estate Investment Activities: We continue to seek to acquire additional self-storage facilities from third parties. Subsequent to June 30, 2024, we acquired or were under contract to acquire three self-storage facilities for a total purchase price of $24.2 million.

We are actively seeking to acquire additional facilities. However, future acquisition volume will depend upon whether additional owners will be motivated to market their facilities, which will in turn depend upon factors such as economic conditions and the level of seller confidence.

As of June 30, 2024, we had development and expansion projects at a total cost of approximately $738.7 million. Costs incurred through June 30, 2024 were $380.7 million, with the remaining cost to complete of $358.0 million expected to be incurred primarily in the next 18 to 24 months. Some of these projects are subject to contingencies such as entitlement approval. We expect to continue to seek to add projects to maintain and increase our robust pipeline. Our ability to do so continues to be challenged by various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage facilities in certain municipalities.

Property Operating Expenses: The direct and indirect cost of our operations impose significant cash requirements. Direct operating costs include property taxes, on-site property manager payroll, repairs and maintenance, utilities, and marketing. Indirect operating costs include supervisory payroll and centralized management costs. The cash requirements from these operating costs will vary year to year based on, among other things, changes in the size of our portfolio and changes in property tax rates and assessed values, wage rates, and marketing costs in our markets.

Redemption of Preferred Securities: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of July 30, 2024, we have three series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice: our 5.150% Series F Preferred Shares ($280.0 million), 5.050% Series G Preferred Shares ($300.0 million), and 5.600% Series H Preferred Shares ($285.0 million). See Note 9 to our June 30, 2024 consolidated financial statements for the redemption dates of all of our series of preferred shares. Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities. None of our preferred securities are redeemable at the option of the holders.

Repurchases of Common Shares: Our Board has authorized a share repurchase program pursuant to which management may purchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three and six months ended June 30, 2024, we repurchased 726,865 of our common shares under the repurchase program on the open market for a total cost of $200.0 million. From the inception of the repurchase program through July 30, 2024, we have repurchased a total of 24,448,781 common shares at an aggregate cost of approximately $879.1 million. All the repurchased shares are constructively retired and returned to an authorized and unissued status. Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.

To limit our exposure to market risk, we are capitalized primarily with preferred and common equity. Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption option. Our debt, which totals approximately $9.4 billion at June 30, 2024, is the only market-risk sensitive portion of our capital structure.

The fair value of our debt at June 30, 2024 is approximately $8.7 billion. The table below summarizes the annual maturities of our debt, which had a weighted average effective rate of 3.2% at June 30, 2024. See Note 7 to our June 30, 2024 consolidated financial statements for further information regarding our debt (amounts in thousands).

We have foreign currency exposure at June 30, 2024 related to (i) our investment in Shurgard, with a book value of $374.2 million, and a fair value of $1.3 billion based upon the closing price of Shurgard’s stock on June 30, 2024, and (ii) €1.6 billion ($1.7 billion) of Euro-denominated unsecured notes payable, providing a natural hedge against the fair value of our investment in Shurgard.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. We also have investment in certain unconsolidated real estate entity and because we do not control the entity, our disclosure controls and procedures with respect to such entity are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level.

Internal Control Over Financial Reporting

During the second quarter of 2024, the Company completed the implementation of a new enterprise resource planning (“ERP”) system to replace its previous ERP system. The Company completed significant pre-implementation testing and post-implementation testing and monitoring to ensure the effectiveness of internal controls over financial reporting. As a result of this implementation, the Company modified certain existing internal controls over financial reporting and implemented new controls and procedures related to our implementation of the new ERP system. During the second quarter of 2024, no other changes occurred in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company will continue to evaluate and monitor the internal controls over financial reporting during this period of change and will continue to evaluate the operating effectiveness of related key controls.

In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K filed for the year ended December 31, 2023, in Part I, Item 1A, Risk Factors, and in our other filings with the SEC. These factors may materially affect our business, financial condition and operating results. There have been no material changes to the risk factors relating to the Company disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

In addition, in considering the forward-looking statements contained in this Quarterly Report on Form 10-Q and elsewhere, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward-Looking Statements at the beginning of Part I, Item 2 of this Quarterly Report on Form 10-Q.