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OFFON

LIFE STORAGE, INC.

(LSI)
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LIFE STORAGE, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/03/2021 | 04:19pm EST

The following discussion and analysis of the Company's consolidated financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS


When used in this discussion and elsewhere in this document, the words
"intends," "believes," "expects," "anticipates," and similar expressions are
intended to identify "forward-looking statements" within the meaning of that
term in Section 27A of the Securities Act of 1933 and in Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors, which may cause our actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Such factors
include, but are not limited to, the effect of competition from new self-storage
facilities, which would cause rents and occupancy rates to decline; risks
associated with the COVID-19 global health crisis or similar events, including
but not limited to (i) the impact to the health of our employees and/or
customers, (ii) the negative impacts to the economy and to self-storage
customers which could reduce the demand for self-storage or reduce our ability
to collect rent, (iii) reducing or eliminating our ability to increase rents
charged to our current or future customers, (iv) limiting our ability to collect
rent from or evict past due customers, (v) we could see an increase in move-outs
of longer-term customers due to the economic uncertainty and significant rise in
unemployment resulting from the COVID-19 global health crisis which could lead
to lower occupancies and reduced average rental rates as longer-term customers
are replaced with new customers at lower rates, and (vi) potential negative
impacts on the cost and availability of debt and equity which could have a
negative impact on our capital and growth plans; the Company's ability to
evaluate, finance and integrate acquired self-storage facilities into the
Company's existing business and operations; the Company's ability to effectively
compete in the industry in which it does business; the Company's existing
indebtedness may mature in an unfavorable credit environment, preventing
refinancing or forcing refinancing of the indebtedness on terms that are not as
favorable as the existing terms; interest rates may fluctuate, impacting costs
associated with the Company's outstanding floating rate debt; the Company's
ability to comply with debt covenants; any future ratings on the Company's debt
instruments; regional concentration of the Company's business may subject it to
economic downturns in the states of Florida and Texas; the Company's reliance on
its call center; the Company's cash flow may be insufficient to meet required
payments of operating expenses, principal, interest and dividends; and tax law
changes that may change the taxability of future income.

RESULTS OF OPERATIONS

FOR THE PERIOD JULY 1, 2021 THROUGH SEPTEMBER 30, 2021, COMPARED TO THE PERIOD JULY 1, 2020 THROUGH SEPTEMBER 30, 2020


We recorded rental revenues of $182.9 million for the three months ended
September 30, 2021, an increase of $46.9 million or 34.5% when compared to
rental revenues of $136.0 million for the same period in 2020. This increase in
rental revenue was driven by a $22.8 million, or 17.7%, increase in rental
revenues at the 531 core properties considered in same store sales (the Company
will include stores in its same store pool in the second year after the stores
achieve 80% sustained occupancy using market rates and incentives; therefore the
531 core properties considered in same store sales are those included in the
consolidated results of operations since January 1, 2020, excluding stores not
yet stabilized, four stores significantly impacted by flooding, and two stores
that the Company began to fully replace in 2017). The increase in same store
rental revenues was a result of a 220 basis point increase in average occupancy
along with an increase of 14.3% in rental income per square foot. Also affecting
the overall increase in rental revenues was an increase of $24.1 million in
rental revenues contributed by stores not included in the same store pool,
primarily those acquired in 2020 and 2021. Other operating income, which
includes merchandise sales, revenues related to tenant reinsurance, truck
rentals, management fees and acquisition fees, increased by $5.0 million for the
three months ended September 30, 2021 compared to the same period in 2020
primarily as a result of increased revenues related to the Company's tenant
insurance program and increased management fees as a result of an increase in
managed properties.

Property operations and maintenance expenses increased $6.4 million or 17.8% in
the three months ended September 30, 2021 compared to the same period in 2020.
Property operations and maintenance expenses related to the 531 core properties
considered in the same store pool increased by $0.6 million or 2.1% primarily as
the result of increased repairs and maintenance expenditures. The remainder of
the increase in property operations and maintenance expenses is primarily the
result of the net activity of the stores not included in the same store pool.
Real estate tax expense increased $3.7 million during the three months ended
September 30, 2021 as compared to the same period in 2020. The 531 core
properties considered in the same store pool experienced a 5.7% increase in real
estate taxes which is reflective of a net increase in property tax levies on
those properties. In addition to the same store real estate tax expense
increase, real estate taxes increased $2.7 million from stores not included in
the same store pool.

Net operating income increased $41.8 million or 40.9% resulting from a 24.3% increase in our same store net operating income coupled with an increase of $20.6 million related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool.

                                       30

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Net operating income, or "NOI," is a non-GAAP (generally accepted accounting
principles) financial measure that we define as total continuing revenues less
continuing property operating expenses. NOI also can be calculated by adding
back to net income: interest expense, impairment and casualty losses, operating
lease expense, depreciation and amortization expense, any losses on sale of real
estate, acquisition related costs, general and administrative expense, and
deducting from net income: income from discontinued operations, interest income,
any gains on sale of real estate, and equity in income of joint ventures. We
believe that NOI is a meaningful measure to investors in evaluating our
operating performance because we utilize NOI in making decisions with respect to
capital allocations, in determining current property values, and in comparing
period-to-period and market-to-market property operating results. Additionally,
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 on accounting methods and the book value of assets. 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,
operating income and net income. There are material limitations to using a
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. 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.

The following table reconciles our net income presented in the consolidated financial statements to NOI generated by our self-storage facilities for the three months ended September 30, 2021 and 2020.



                                                     Three Months ended September 30,
(dollars in thousands)                                  2021                   2020
Net income                                        $         71,051       $         37,288
General and administrative                                  16,141                 13,369
Depreciation and amortization                               37,158                 33,018
Interest expense                                            21,350                 20,544
Interest income                                                 (2 )                   (8 )
Equity in income of joint ventures                          (1,477 )               (1,829 )
Net operating income                              $        144,221$        102,382
Net operating income
Same store                                        $        108,436       $         87,210

Other stores, tenant reinsurance related income

  and management fee income                                 35,785                 15,172
Total net operating income                        $        144,221$        102,382




Our 2021 same store results consist of only those properties that have been
owned by the Company and included in our consolidated results since January 1,
2020, excluding stores not yet stabilized, four stores significantly impacted by
flooding, and two stores that the Company began to fully replace in 2017. We
believe that same store results are meaningful measures to investors in
evaluating our operating performance because, given the acquisitive nature of
the industry, same store results provide information about the overall business
after removing the results from those properties that were not consistent from
year-to-year. Additionally, same store results are widely used in the real
estate industry and the self-storage industry to measure performance. Same store
results should be considered in addition to, but not as a substitute for,
consolidated results in accordance with GAAP. The following table sets forth
operating data for our 531 same store properties. These results provide
information relating to property operating changes without the effects of
acquisitions.

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Same Store Summary



                                               Three Months ended September 30,          Percentage
(dollars in thousands)                            2021                   2020              Change
Same store rental income                    $        151,459$        128,692             17.7 %
Same store other operating income                      1,822                  1,849             (1.5 )%
Total same store operating income                    153,281                130,541             17.4 %
Payroll and benefits                                   9,456                  9,514             (0.6 )%
Real estate taxes                                     17,639                 16,688              5.7 %
Utilities                                              4,107                  4,192             (2.0 )%
Repairs and maintenance                                4,218                  3,679             14.7 %
Office and other operating expenses                    4,149                  3,841              8.0 %
Insurance                                              1,566                  1,500              4.4 %
Advertising                                               48                     64            (25.0 )%
Internet marketing                                     3,662                  3,853             (5.0 )%
Total same store operating expenses                   44,845                 43,331              3.5 %
Same store net operating income             $        108,436       $         87,210             24.3 %




                                                            Change

Quarterly same store move ins 49,439 57,114 (7,675 ) Quarterly same store move outs 53,151 52,483 668





We believe the decrease in same store move ins was due to lack of available
space at many of our stores as a result of extremely high occupancy rates during
the three months ended September 30, 2021. We believe the increase in same store
move outs was a result of the impacts of the COVID-19 global health crisis
during the three months ended September 30, 2020 as many jurisdictions
implemented stay-at-home orders for all or a portion of that period.

General and administrative expenses for the three months ended September 30,
2021 increased $2.8 million or 20.7% when compared with the three months ended
September 30, 2020. This increase was primarily driven by an increase in home
office personnel related costs to support the growth in stores.

Depreciation and amortization expense increased to $37.2 million in the three
months ended September 30, 2021 from $33.0 million in the same period in 2020 as
a result of depreciation and customer list amortization related to those
properties acquired in 2021 and 2020.

Total interest expense increased by $0.8 million during the three months ended September 30, 2021 as compared to the same period in 2020 as a result of an increase in the Company's outstanding debt balances for the majority of the quarter.

FOR THE PERIOD JANUARY 1, 2021 THROUGH SEPTEMBER 30, 2021, COMPARED TO THE PERIOD JANUARY 1, 2020 THROUGH SEPTEMBER 30, 2020


We recorded rental revenues of $496.3 million for the nine months ended
September 30, 2021, an increase of $102.6 million or 26.1% when compared to
rental revenues of $393.7 million for the same period in 2020. This increase in
rental revenue was driven by a $49.7 million, or 13.2%, increase in rental
revenues at the 531 core properties considered in same store sales (the Company
will include stores in its same store pool in the second year after the stores
achieve 80% sustained occupancy using market rates and incentives; therefore the
531 core properties considered in same store sales are those included in the
consolidated results of operations since January 1, 2020, excluding stores not
yet stabilized, four stores significantly impacted by flooding, and two stores
that the Company began to fully replace in 2017). The increase in same store
rental revenues was a result of a 350 basis point increase in average occupancy
along with an increase of 7.9% in rental income per square foot. Also affecting
the overall increase in rental revenues was an increase of $52.9 million in
rental revenues contributed by stores not included in the same store pool,
primarily those acquired in 2020 and 2021. Other operating income, which
includes merchandise sales, revenues related to tenant reinsurance, truck
rentals, management fees and acquisition fees, increased by $14.5 million for
the nine months ended September 30, 2021 compared to the same period in 2020
primarily as a result of increased acquisition fees, increased management fees
as a result of an increase in managed properties, increased revenues related to
the Company's tenant insurance program, and increased revenues from the
Company's Warehouse Anywhere third party logistics and warehousing solution.

Property operations and maintenance expenses increased $18.7 million or 18.4% in
the nine months ended September 30, 2021 compared to the same period in 2020.
Property operations and maintenance expenses related to the 531 core properties
considered in the same store pool increased by $2.4 million or 3.1% primarily as
the result of increased repairs and maintenance expenditures and office related
expenses. The remainder of the increase in property operations and maintenance
expenses is primarily the result of the net activity of the stores not included
in the same store pool. Real estate tax expense increased $9.0 million during
the nine months

                                       32
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ended September 30, 2021 as compared to the same period in 2020. The 531 core
properties considered in the same store pool experienced a 5.4% increase in real
estate taxes which is reflective of a net increase in property tax levies on
those properties. In addition to the same store real estate tax expense
increase, real estate taxes increased $6.3 million from stores not included in
the same store pool.

Net operating income increased $89.4 million or 30.2% resulting from a 17.8% increase in our same store net operating income coupled with an increase of $44.5 million related to the Company's tenant insurance program, increased management fees, and the properties not included in the same store pool.

The following table reconciles our net income presented in the consolidated financial statements to NOI generated by our self-storage facilities for the nine months ended September 30, 2021 and 2020.



                                                          Nine Months ended September 30,
(dollars in thousands)                                      2021                   2020
Net income                                            $        176,408$        110,560
General and administrative                                      45,407                 38,498
Depreciation and amortization                                  106,287                 90,335
Gain on sale of real estate                                          -                   (302 )
Interest expense                                                62,470                 61,056
Interest income                                                   (787 )                  (14 )
Equity in income of joint ventures                              (4,126 )               (3,915 )
Net operating income                                  $        385,659$        296,218
Net operating income
Same store                                            $        296,906$        251,968
Other stores, tenant reinsurance related income
  and management fee income                                     88,753                 44,250
Total net operating income                            $        385,659$        296,218




Our 2021 same store results consist of only those properties that have been
owned by the Company and included in our consolidated results since January 1,
2020, excluding stores not yet stabilized, four stores significantly impacted by
flooding, and two stores that the Company began to fully replace in 2017. We
believe that same store results are meaningful measures to investors in
evaluating our operating performance because, given the acquisitive nature of
the industry, same store results provide information about the overall business
after removing the results from those properties that were not consistent from
year-to-year. Additionally, same store results are widely used in the real
estate industry and the self-storage industry to measure performance. Same store
results should be considered in addition to, but not as a substitute for,
consolidated results in accordance with GAAP. The following table sets forth
operating data for our 531 same store properties. These results provide
information relating to property operating changes without the effects of
acquisitions.

Same Store Summary



                                         Nine Months ended
                                           September 30,           Percentage
(dollars in thousands)                  2021          2020           Change
Same store rental income              $ 424,871$ 375,186             13.2 %
Same store other operating income         5,193         4,806              8.1 %
Total same store operating income       430,064       379,992             13.2 %
Payroll and benefits                     28,902        28,775              0.4 %
Real estate taxes                        52,578        49,872              5.4 %
Utilities                                11,201        11,024              1.6 %
Repairs and maintenance                  13,066        11,173             16.9 %
Office and other operating expenses      11,976        11,123              7.7 %
Insurance                                 4,655         4,507              3.3 %
Advertising                                 143           191            (25.1 )%
Internet marketing                       10,637        11,359             (6.4 )%
Total same store operating expenses     133,158       128,024              4.0 %
Same store net operating income       $ 296,906$ 251,968             17.8 %




                                                                 Change

Year-to-date same store move ins 147,337 156,874 (9,537 ) Year-to-date same store move outs 139,977 139,968

            9




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We believe the decrease in same store move ins was due to lack of available
space at many of our stores as a result of extremely high occupancy rates during
the nine months ended September 30, 2021. Same store move outs remained
relatively consistent period-over-period as we believe the impact of customers
increasing their length of stay was offset by the impacts of the COVID-19 global
health crisis during the three months ended September 30, 2020 as many
jurisdictions implemented stay-at-home orders for all or a portion of that
period.

General and administrative expenses for the nine months ended September 30, 2021
increased $6.9 million or 17.9% when compared with the nine months ended
September 30, 2020. This increase was primarily driven by an increase in home
office personnel related costs to support the growth in stores and increased
investments in technology.

Depreciation and amortization expense increased to $106.3 million in the nine
months ended September 30, 2021 from $90.3 million in the same period in 2020 as
a result of depreciation and customer list amortization related to those
properties acquired in 2021 and 2020.

Total interest expense increased by $1.4 million during the nine months ended
September 30, 2021 as compared to the same period in 2020 as a result of an
increase in the Company's outstanding debt balances during the majority of the
nine months ended September 30, 2021.

Total interest and dividend income increased by $0.8 million during the nine
months ended September 30, 2021 as compared to the same period in 2020 as a
result of a preferred dividend received from one of the Company's unconsolidated
joint ventures during the nine months ended September 30, 2021.



FUNDS FROM OPERATIONS


We believe that Funds from Operations ("FFO") provides relevant and meaningful
information about our operating performance that is necessary, along with net
earnings and cash flows, for an understanding of our operating results. FFO adds
back historical cost depreciation, which assumes the value of real estate assets
diminishes predictably in the future. In fact, real estate asset values increase
or decrease with market conditions. Consequently, we believe FFO is a useful
supplemental measure in evaluating our operating performance by disregarding (or
adding back) historical cost depreciation.

FFO is defined by the National Association of Real Estate Investment Trusts,
Inc. ("NAREIT") as net income available to common shareholders computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains or losses on sales of properties, plus impairment of real estate assets,
plus depreciation and amortization and after adjustments to record
unconsolidated partnerships and joint ventures on the same basis. We believe
that to further understand our performance FFO should be compared with our
reported net income and cash flows in accordance with GAAP, as presented in our
consolidated financial statements.

Our computation of FFO may not be comparable to FFO reported by other REITs or
real estate companies that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition differently.
FFO does not represent cash generated from operating activities determined in
accordance with GAAP, and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of our performance,
as an alternative to net cash flows from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, or as an indicator of our
ability to make cash distributions.

                                       34

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Reconciliation of Net Income to Funds From Operations (unaudited)




                                    Three Months ended September 30,          Nine Months ended September 30,
(in thousands)
                                       2021                2020                 2021                   2020
Net income attributable to common
shareholders                        $    70,274$        37,095$        175,172$        109,984
Net income attributable to
noncontrolling interests
  in the Operating Partnership              301                   193                  760                    576
Depreciation of real estate and
amortization of
  intangible assets exclusive of
debt issuance costs                      36,615                32,417              104,691                 88,557
Depreciation and amortization
from unconsolidated
  joint ventures                          1,796                 1,024                4,239                  4,502
Funds from operations allocable
to noncontrolling
  interest in the Operating
Partnership                                (465 )                (367 )             (1,231 )               (1,060 )
Funds from operations available
to common
  shareholders                      $   108,521$        70,362$        283,631$        202,559

LIQUIDITY AND CAPITAL RESOURCES


The COVID-19 global health crisis impacted the cost of debt and equity for a
time during 2020 and may disrupt markets in the future. We expect to be able to
maintain adequate liquidity as we manage through the current environment. While
uncertainty exists as to the full impact of the COVID-19 global health crisis on
our liquidity and capital resources, as of the date of this report we believe
that the combination of our cash on hand, the cash generated by our operations,
and our line of credit will be adequate to fund our operations. We will continue
to actively monitor the potential impact of the COVID-19 global health crisis on
our liquidity and capital resources.

Our line of credit and term notes require us to meet certain financial covenants
measured on a quarterly basis, including prescribed leverage, fixed charge
coverage, minimum net worth, limitations on additional indebtedness, and
limitations on dividend payouts. At September 30, 2021, the Company was in
compliance with all debt covenants. In the event that the Company violates its
debt covenants in the future, the amounts due under the agreements could be
callable by the lenders and could adversely affect our credit rating requiring
us to pay higher interest and other debt-related costs. We believe that if
operating results remain consistent with historical levels and levels of other
debt and liabilities remain consistent with amounts outstanding at September 30,
2021, the entire availability under our line of credit could be drawn without
violating our debt covenants.

Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally-generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements.


Cash flows from operating activities were $308.1 million and $211.7 million for
the nine months ended September 30, 2021 and 2020, respectively. The increase in
operating cash flows in the 2021 period compared to the 2020 period was
primarily due to the increase in net income after adjusting for non-cash items.

Cash used in investing activities was $860.6 million and $449.5 million for the
nine months ended September 30, 2021 and 2020, respectively. The increase in
cash used in investing activities in the 2021 period compared to the 2020 period
was primarily due to the increased volume of acquisitions, along with an
increase in investments in unconsolidated joint ventures in 2021 as compared to
the same period in 2020.

Cash provided by financing activities was $635.1 million and $331.5 million for
the nine months ended September 30, 2021 and 2020, respectively. The increase is
primarily a result of the Company's issuances of 2,875,000 shares of common
stock through a public equity offering in September 2021 resulting in net
proceeds of $348.8 million and an increase in sales of shares of common stock
under the Company's continuous equity offering programs during the nine months
ended September 30, 2021 resulting in net proceeds of $458.2 million as compared
to the net proceeds of $155.8 million during the nine months ended September 30,
2020, partially offset by increased dividends paid. Also contributing to this
increase is a reduction in the net repayment of the Company's line of credit
during the nine months ended September 30, 2021 as compared to the nine months
ended September 30, 2020.

                                       35
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Note 6 and Note 7 to the consolidated financial statements include details
related to the Company's unsecured line of credit, term notes, mortgages, and
other indebtedness. Note 13 to the consolidated financial statements includes
details of our shareholders' equity and activity related thereto.

Our line of credit facility and term notes have an investment grade rating from Standard and Poor's (BBB) and Moody's (Baa2).


Future acquisitions, our expansion and enhancement program, and share
repurchases are expected to be funded with draws on our line of credit, issuance
of common and preferred stock, the issuance of unsecured term notes, sale of
properties, and private placement solicitation of joint venture equity. Should
the capital markets deteriorate, we may have to curtail acquisitions, our
expansion and enhancement program and/or share repurchases.

ACQUISITION AND DISPOSITION OF PROPERTIES


During the nine months ended September 30, 2021, the Company acquired 62
self-storage facilities comprising 4.3 million square feet in Alabama (7),
Arizona (4), California (1), Colorado (1), Florida (14), Georgia (7), Kentucky
(1), New Hampshire (4), New Jersey (5), New York (1), North Carolina (3), Ohio
(1), Oklahoma (2), South Carolina (3), Texas (6), and Washington (2) for a total
purchase price of $869.8 million, which is net of the Company's equity in the
profit from the sale of the New York store and three Georgia stores purchased
from unconsolidated joint ventures. Based on the trailing financial information
of the entities from which the self-storage facilities were acquired, the
weighted average capitalization rate for these acquisitions was 3.6%. As
discussed further in Note 5 and Note 10, the Company holds a 5% ownership
interest in the joint venture from which one of the self-storage facilities was
acquired and a 20% ownership interest in the joint venture from which three of
the self-storage facilities were acquired. Additionally, 19 of these facilities
were managed by the Company for third parties prior to acquisition.

In 2020, the Company acquired 40 self-storage facilities comprising 3.1 million
square feet in California (8), Florida (6), Georgia (1), Missouri (1), New
Jersey (7), New York (1), Ohio (6), Pennsylvania (4), South Carolina (1), and
Texas (5) for a total purchase price of $532.6 million. One of these acquired
self-storage facilities resulted from the Company acquiring the remaining 15% of
a joint venture. Additionally, one of these facilities was managed by the
Company for a third party prior to acquisition. Based on the trailing financial
information of the entities from which the self-storage facilities were
acquired, the weighted average capitalization rate for these acquisitions was
5.0%.

We may acquire additional stabilized or newly constructed properties in 2021,
however, there is no assurance that the Company will do so. Additionally, there
can be no assurance that if significant additional opportunities were to arise,
we would be able to raise capital at a reasonable cost to allow us to take
advantage of such opportunities. At September 30, 2021, the Company was under
contract to acquire 33 self-storage facilities for an aggregate purchase price
of $548.9 million. In addition to the 33 self-storage facilities under contract
at September 30, 2021, subsequent to September 30, 2021, the Company entered
into contracts to acquire an additional 20 self-storage facilities for an
aggregate purchase price of $322.4 million. The Company acquired 13 facilities
subsequent to September 30, 2021 for an aggregate purchase price of $234.5
million. The purchases of the remaining 40 self-storage facilities are subject
to customary conditions to closing, and there is no assurance that these
facilities will be acquired.

The Company did not sell or otherwise dispose of any properties during the three and nine months ended September 30, 2021 or during 2020.


As part of our ongoing strategy to improve overall operating efficiencies and
portfolio quality, we may seek to sell self-storage facilities to third-parties
or joint venture partners in 2021.

FUTURE ACQUISITION AND DEVELOPMENT PLANS


Our external growth strategy is to increase the number of facilities we own by
acquiring suitable facilities in markets in which we already have operations or
to expand into new markets by acquiring several facilities at once in those new
markets. We are actively pursuing acquisitions in 2021, including potential
acquisitions by unconsolidated joint ventures.

During the nine months ended September 30, 2021, we added 94,000 square feet to
existing properties for a total cost of approximately $10.2 million. We plan to
complete a total of $30 million to $35 million of additional expansions and
enhancements to our existing facilities in 2021, of which $21.8 million was paid
as of September 30, 2021.

We also expect to continue investing in capital expenditures on our properties.
This includes roofing, paving, and remodeling of store offices. For the nine
months ended September 30, 2021, we invested approximately $23.0 million in such
improvements and we expect to invest approximately $6 million to $10 million for
the remainder of 2021.

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REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS


As a REIT, we are not required to pay federal income tax on income that we
distribute to our shareholders, provided that we satisfy certain requirements,
including distributing at least 90% of our REIT taxable income for a taxable
year. These distributions must be made in the year to which they relate, or in
the following year if declared before we file our federal income tax return, and
if they are paid not later than the date of the first regular dividend of the
following year. As a REIT, we must derive at least 95% of our total gross income
from income related to real property, interest and dividends.

Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.

UMBRELLA PARTNERSHIP REIT


We are formed as an Umbrella Partnership Real Estate Investment Trust ("UPREIT")
and, as such, have the ability to issue Operating Partnership Units in exchange
for properties sold by independent owners. By utilizing such Units as currency
in facility acquisitions, we may obtain more favorable pricing or terms due to
the seller's ability to partially defer their income tax liability. As of
September 30, 2021, 344,531 common Units and 3,590,603 preferred Units are
outstanding. These Units had been issued in exchange for self-storage properties
at the request of the sellers.

INTEREST RATE RISK


The primary market risk to which we believe we are exposed is interest rate
risk, which may result from many factors, including government monetary and tax
policies, domestic and international economic and political considerations, and
other factors that are beyond our control.

We do not carry any unsecured floating rate debt at September 30, 2021.
Therefore, based on our outstanding debt balances at September 30, 2021, a 100
basis point increase in interest rates would not have an effect on our annual
interest expense. This analysis does not consider the effects of the reduced
level of overall economic activity that could exist in such an environment.
Further, in the event of a change of such magnitude, we would consider taking
actions to further mitigate our exposure to the change. However, due to the
uncertainty of the specific actions that would be taken and their possible
effects, the sensitivity analysis assumes no changes in our capital structure.

INFLATION


We do not believe that inflation has had or will have a direct effect on our
operations. Substantially all of the leases at our facilities are on a
month-to-month basis which provides us with the opportunity to increase rental
rates in a timely manner in response to any potential future inflationary
pressures.

SEASONALITY


Our revenues typically have been higher in the third and fourth quarters,
primarily because self-storage facilities tend to experience greater occupancy
during the late spring, summer and early fall months due to the greater
incidences of residential moves and college student activity during these
periods. However, we believe that our customer mix, diverse geographic
locations, rental structure and expense structure provide adequate protection
against undue fluctuations in cash flows and net revenues during off-peak
seasons. Thus, we do not expect seasonality to materially affect distributions
to shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 15 to the financial statements.

                                       37

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© Edgar Online, source Glimpses

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