The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-K entitled "Statements Regarding Forward-Looking Information." Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Form 10-K entitled "Risk Factors." Dollar amounts in thousands, except share and per share data. OVERVIEW We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT"), formed to own, operate, manage, acquire, develop and redevelop self-storage properties ("stores"). We derive substantially all of our revenues from our two segments: storage operations and tenant reinsurance. Primary sources of revenue for our storage operations 16 -------------------------------------------------------------------------------- segment include rents received from tenants under leases at each of our wholly-owned stores. Our operating results depend materially on our ability to lease available self-storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. Consequently, management spends a significant portion of their time maximizing cash flows from our diverse portfolio of stores. Revenue from our tenant reinsurance segment consists of insurance revenues from the reinsurance of risks relating to the loss of goods stored by tenants in our stores. Our stores are generally situated in highly visible locations clustered around large population centers. The clustering of our assets around these population centers enables us to reduce our operating costs through economies of scale. To maximize the performance of our stores, we employ industry-leading revenue management systems. Developed by our management team, these systems enable us to analyze, set and adjust rental rates in real time across our portfolio in order to respond to changing market conditions. We believe our systems and processes allow us to more pro-actively manage revenues. We operate in competitive markets, often where consumers have multiple stores from which to choose. Competition has impacted, and will continue to impact, our store results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. We believe that we are able to respond quickly and effectively to changes in local, regional and national economic conditions by adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems. We consider a store to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a store to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as ofJanuary 1 of the current year, or has been open for three years prior toJanuary 1 of the current year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial statements have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those that impact our most critical accounting policies. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. A summary of significant accounting policies is also provided in the notes to our consolidated financial statements (see Note 2 to our consolidated financial statements). Actual results may differ from these estimates. We believe the following are our most critical accounting policies and estimates: CONSOLIDATION: Arrangements that are not controlled through voting or similar rights are accounted for as variable interest entities ("VIEs"). An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Under certain circumstances when we enter into arrangements for the formation of joint ventures, a VIE may be created. The primary factors that require the most judgment in determining whether the joint venture is a VIE are whether the decisions that most significantly impact the entity's economic performance were controlled by the equity holders as a group, and whether the joint venture has sufficient equity to finance its activities without additional subordinated support. If the joint venture is determined to be a VIE, we perform a qualitative analysis, including considering which party, if any, has the power to direct the activities most significant to the economic performance of each VIE and whether that party has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If we are determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated within our financial statements. Otherwise, our investment is generally accounted for under the equity method. Our ability to correctly assess the influence or control over an entity affects the presentation of the investment in our consolidated financial statements. As ofDecember 31, 2019 , we had no consolidated VIEs. As ofDecember 31, 2018 , ourOperating Partnership had notes payable to one trust that was considered a VIE. Since theOperating Partnership was not the primary beneficiary of the trust, this VIE was not consolidated. REAL ESTATE ASSETS: We account for the acquisition of stores, including by merger and other acquisitions of real estate, in accordance with ASC 805-10, "Business Combinations." We use our judgment to determine if assets acquired meet the definition of a business or if the acquisition should be considered an asset acquisition subsequent to ourJanuary 1, 2017 adoption of ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business." We must make significant assumptions and estimates in determining the fair value of the tangible and intangible assets and liabilities acquired and consideration transferred. These assumptions and estimates require judgment, and therefore others could come to 17 -------------------------------------------------------------------------------- materially different conclusions as to the estimated fair values, which could result in differences in depreciation and amortization expense, gains and losses on the sale of real estate assets, and real estate and intangible asset values. EVALUATION OF ASSET IMPAIRMENT: Long lived assets held for use are evaluated for impairment when events or circumstances indicate that there may be impairment. We review each store at least annually to determine if any such events or circumstances have occurred or exist. We focus on stores where occupancy and/or rental income have decreased by a significant amount. For these stores, we determine whether the decrease is temporary or permanent and whether the store will likely recover the lost occupancy and/or revenue in the short term. In addition, we review stores in the lease-up stage and compare actual operating results to original projections. We may not have identified all material facts and circumstances that affect impairment of our stores. No material impairments were recorded in the year endedDecember 31, 2019 . DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: We hold a number of derivative instruments which we use to hedge our exposure to variability in expected future cash flows, mainly related to our interest rates on variable interest debt. We do not use derivatives for trading or speculative purposes. We assess our derivatives both at inception, and on an ongoing quarterly basis, for whether the derivatives used in hedging transactions are effective. The rules and interpretations relating to the accounting for derivatives are complex. Failure to apply this guidance correctly may require us to recognize all changes in fair value of the hedged derivative in earnings, which may materially impact our results. INCOME TAXES: We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, among other things, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income tax with respect to that portion of our income which meets certain criteria and is distributed annually to our stockholders. We plan to continue to operate so that we meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be subject to federal corporate income tax on all of our taxable income for at least that year and the ensuing four years. We could also be subject to penalties and interest, and our net income may be materially different from the amounts reported in our financial statements. We have elected to treat one of our corporate subsidiaries,Extra Space Management, Inc. , as a TRS. In general, our TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate related business. A TRS is subject to federal corporate income tax. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. If tax authorities determine that amounts paid by our TRS to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a penalty tax on the excess payments. RECENT ACCOUNTING PRONOUNCEMENTS: For a discussion of recent accounting pronouncements affecting our business, see Item 8, "Financial Statements and Supplementary Data-Recently Issued Accounting Standards." RESULTS OF OPERATIONS Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Overview Results for the year endedDecember 31, 2019 included the operations of 1,171 stores (925 wholly-owned, five in consolidated joint ventures, and 241 in joint ventures accounted for using the equity method) compared to the results for the year endedDecember 31, 2018 , which included the operations of 1,111 stores (878 wholly-owned, four in a consolidated joint venture, and 229 in joint ventures accounted for using the equity method). Material or unusual changes in the results of our operations are discussed below. 18 --------------------------------------------------------------------------------
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Revenues
The following table presents information on revenues earned for the years indicated: For the Year Ended December 31, 2019 2018 $ Change % Change Revenues: Property rental$ 1,130,177 $ 1,039,340 $ 90,837 8.7 % Tenant reinsurance 128,387 115,507 12,880 11.2 % Management fees and other income 49,890 41,757 8,133 19.5 % Total revenues$ 1,308,454 $ 1,196,604 $ 111,850 9.3 % Property Rental-The increase in property rental revenues for the year endedDecember 31, 2019 was primarily the result of an increase of$53,627 associated with acquisitions completed in 2019 and 2018. We acquired 21 stores and added 27 leased properties (as part of a new net lease agreement) during the year endedDecember 31, 2019 , and acquired 34 stores during the year endedDecember 31, 2018 . Property rental revenue also increased by$33,654 during the year endedDecember 31, 2019 as a result of increases in rental rates to new and existing customers at our stabilized stores. Tenant Reinsurance-The increase in tenant reinsurance revenues was due primarily to an increase in stores operated. We operated 1,817 stores atDecember 31, 2019 , compared to 1,647 stores atDecember 31, 2018 . Management Fees and Other Income-Management fees and other income represent the fee collected for our management of stores owned by third parties and unconsolidated joint ventures and other transaction fee income. The increase for the year endedDecember 31, 2019 was primarily due to an increase in the number of stores managed and transaction fees earned in 2019. As ofDecember 31, 2019 we managed 892 stores for third parties and joint ventures compared to 769 stores as ofDecember 31, 2018 . Expenses The following table presents information on expenses for the years indicated: For the Year Ended December 31, 2019 2018 $ Change % Change Expenses: Property operations$ 336,050 $ 291,695 $ 44,355 15.2 % Tenant reinsurance 29,376 25,707 3,669 14.3 % General and administrative 89,418 81,256 8,162 10.0 % Depreciation and amortization 219,857 209,050 10,807 5.2 % Total expenses$ 674,701 $ 607,708 $ 66,993 11.0 % 19
-------------------------------------------------------------------------------- Property Operations-The increase in property operations expense consists primarily of an increase of$28,463 related to acquisitions completed in 2019 and 2018. We acquired 21 stores and added 27 leased properties (as part of a new net lease agreement) during the year endedDecember 31, 2019 and acquired 34 stores during the year endedDecember 31, 2018 . There was also an increase of$14,458 related to increases in property taxes and marketing expenses at stabilized stores. Tenant Reinsurance-Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The change was due primarily to the increase in the number of stores we owned and/or managed and an increase in the overall average payout on claims. General and Administrative-General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, travel and professional fees. These expenses are recognized as incurred. We did not observe any material trends in specific payroll, travel or other expenses that contributed significantly to the increase in general and administrative expenses apart from the increase due to the management of additional stores. Depreciation and Amortization-Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired 21 stores and added 27 leased properties (as part of a new net lease agreement) during the year endedDecember 31, 2019 , and acquired 34 operating stores during the year endedDecember 31, 2018 . Other Income and Expenses The following table presents information on other revenues and expenses for the years indicated: For the Year Ended December 31, 2019 2018 $ Change % Change Gain on real estate transactions $ 1,205$ 30,807 $ (29,602 ) (96.1 )% Interest expense (186,526 ) (178,436 ) (8,090 ) 4.5 % Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes (4,742 ) (4,687 ) (55 ) 1.2 % Interest income 7,467 5,292 2,175 41.1 % Equity in earnings of unconsolidated real estate ventures 11,274 14,452 (3,178 ) (22.0 )% Income tax expense (11,308 ) (9,244 ) (2,064 ) 22.3 % Total other expense, net$ (182,630 ) $ (141,816 ) $ (40,814 ) 28.8 % Gain on Real Estate Transactions - The gain of$1,205 for the year endedDecember 31, 2019 was a result of the sale of one property inNew York for$11,272 . During the year endedDecember 31, 2018 , we recorded a$30,671 gain on the sale of one property inCalifornia . Interest Expense-The increase in interest expense during the year endedDecember 31, 2019 was primarily the result of a higher average debt balance when compared to the same period in the prior year. Information on the total face value of debt and the average interest rate for each quarter during the years endedDecember 31, 2019 andDecember 31, 2018 is set forth in the following table: For the Three Months For the Three Months For
the Three Months For the Three Months
Ended December 31, Ended September 30, Ended June 30, Ended March 31, 2019 2018 2019 2018 2019 2018 2019 2018 Total face value of debt$5,076,501 $4,854,077 $4,844,620 $4,803,360 $5,072,936 $4,809,483 $5,039,286 $4,557,414 Average interest rate 3.3% 3.5% 3.4% 3.5% 3.5% 3.4% 3.5% 3.4%
Non-cash Interest Expense Related to Amortization of Discount on Equity
Component of Exchangeable Senior Notes-Represents the amortization of the
discounts related to the equity components of the exchangeable senior notes
issued by our
20 -------------------------------------------------------------------------------- Interest Income-Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions and interest earned on notes receivable and income earned on notes receivable from preferred and commonOperating Partnership unit holders. In late 2018 we began to provide bridge financing on completed properties owned by third parties that we manage. The total principal balance of bridge loans receivable as ofDecember 31, 2019 was$43,586 , compared to$13,850 as ofDecember 31, 2018 . The increase in interest income during the year endedDecember 31, 2019 was primarily the result of interest earned on these bridge loans. Equity in Earnings of Unconsolidated Real Estate Ventures-Equity in earnings of unconsolidated real estate ventures represents the income earned through our ownership interests in unconsolidated joint ventures. In these joint ventures, we and our joint venture partners generally receive a preferred return on our invested capital. To the extent that cash or profits in excess of these preferred returns are generated, we receive a higher percentage of the excess cash or profits, as applicable. The decrease in earnings for the year endedDecember 31, 2019 related primarily to 12 properties that we purchased from joint ventures inJanuary 2019 . Income Tax Expense- For the year endedDecember 31, 2019 , the increase in income tax expense was the result of an increase in income earned by our taxable REIT subsidiary when compared to the same period in the prior year and a decrease in solar tax credits when compared to the year endedDecember 31, 2018 . Comparison of the Year EndedDecember 31, 2018 to the Year EndedDecember 31, 2017 The results of operations for the years endedDecember 31, 2018 compared toDecember 31, 2017 was included in our Annual Report on Form 10-K for the year endedDecember 31, 2018 on page 18, under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which was filed with theSEC onFebruary 26, 2019 . FUNDS FROM OPERATIONS Funds from operations ("FFO") provides relevant and meaningful information about our operating performance that is necessary, along with net income and cash flows, for an understanding of our operating results. We believe FFO is a meaningful disclosure as a supplement to net earnings. Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets. FFO is defined by theNational Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income computed in accordance withU.S. generally accepted accounting principles ("GAAP"), excluding gains or losses on sales of operating stores and impairment write-downs of depreciable real estate assets, plus real estate related 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 considered along with the reported net income and cash flows in accordance with GAAP, as presented in the consolidated financial statements. FFO should not be considered a replacement of net income computed in accordance with GAAP. The 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 as an indication of our performance, as an alternative to net cash flow from operating activities as a measure of our liquidity, or as an indicator of our ability to make cash distributions. 21 -------------------------------------------------------------------------------- The following table presents the calculation of FFO for the periods indicated: For the Year Ended December 31, 2019 2018 2017
Net income attributable to common stockholders
$ 479,013 Adjustments: Real estate depreciation 206,257 193,587 172,660 Amortization of intangibles 5,957 8,340 13,591 Gain on real estate transactions and impairment of real estate (1,205 ) (30,807 ) (112,789 ) Unconsolidated joint venture real estate depreciation and amortization 8,044 7,064
5,489
Distributions paid on Series A Preferred Operating Partnership units (2,288 ) (2,288 ) (3,119 ) Income allocated toOperating Partnership noncontrolling interests 31,156 31,791
35,306
Funds from operations attributable to common stockholders and unit holders$ 667,888 $ 622,976 $ 590,151 SAME-STORE RESULTS Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Our same-store pool for the periods presented consists of 821 stores that are wholly-owned and operated and that were stabilized by the first day of the earliest calendar year presented. We consider a store to be stabilized once it has been open for three years or has sustained average square foot occupancy of 80% or more for one calendar year. We believe that by providing same-store results from a stabilized pool of stores, with accompanying operating metrics including, but not limited to: occupancy, rental revenue growth, operating expense growth, net operating income growth, etc., stockholders and potential investors are able to evaluate operating performance without the effects of non-stabilized occupancy levels, rent levels, expense levels, acquisitions or completed developments. Same-store results should not be used as a basis for future same-store performance or for the performance of our stores as a whole. The following table presents operating data for our same-store portfolio: For the Year
Ended
2019 2018 Change Same-store rental revenues$ 1,032,821 $ 998,224 3.5% Same-store operating expenses 289,986 276,467 4.9% Same-store net operating income $ 742,835
Same-store square foot occupancy as of quarter end 92.4 % 91.7 % Properties included in same-store 821 821 Same-store revenues for the year endedDecember 31, 2019 increased due to higher rental rates for both new and existing customers. Expenses were higher for the year endedDecember 31, 2019 , primarily due to increases in marketing expenses and property taxes. 22
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The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:
For the Year Ended December 31, 2019 2018 Net Income$ 451,123 $ 447,080 Adjusted to exclude: (Gain) on real estate transactions (1,205 ) (30,807 ) Equity in earnings of unconsolidated joint ventures (11,274 ) (14,452 ) Interest expense 191,268 183,123 Depreciation and amortization 219,857 209,050 Income tax expense 11,308 9,244 General and administrative 89,418 81,256 Management fees, other income and interest income (57,357 ) (47,049 ) Net tenant insurance (99,011 ) (89,800 ) Non same-store rental revenues (97,356 ) (41,116 ) Non same-store operating expenses 46,064 15,228 Total same-store net operating income$ 742,835 $ 721,757
Comparison of the Year Ended
The same store results for the years endedDecember 31, 2018 compared toDecember 31, 2017 was included in our Annual Report on Form 10-K for the year endedDecember 31, 2018 on page 25, under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which was filed with theSEC onFebruary 26, 2019 . CASH FLOWS Cash flows from operating activities increased as expected from our continued growth in revenues through rates along with the increase in the number of properties we own and operate. Cash flows used in investing activities relate primarily to our acquisition, development, sales of stores, investments in unconsolidated real estate entities and bridge loans, and fluctuate depending on our actions in those areas. Cash flows from financing activities depend primarily on our debt and equity financing activities. A summary of cash flows along with significant components are as follows: 23 --------------------------------------------------------------------------------
For the Year Ended December 31, 2019 2018 2017
Net cash provided by operating activities
$ 597,375 Net cash used in investing activities$ (621,630 ) $ (443,898 ) $ (353,079 ) Net cash used in financing activities$ (88,013 ) $ (247,251 )
Significant components of net cash flow included: Net income$ 451,123 $ 447,080 $ 514,222 Depreciation and amortization$ 219,857 $ 209,050 $ 193,296 Acquisition and development of new stores$ (403,211 ) $ (487,065 ) $ (684,931 ) Gain on real estate transactions and impairment of real estate$ (1,205 ) $ (30,807 ) $ (112,789 ) Investment in unconsolidated real estate entities$ (197,759 ) $ (65,500 ) $ (17,944 ) Proceeds from the sale of common stock, net of offering costs$ 198,827 $ 90,231 $ - Net proceeds from our debt financing and repayment activities$ 205,267 $ 134,244 $ 217,028 Dividends paid on common stock$ (458,114 ) $ (424,907 )
We believe that cash flows generated by operations, along with our existing cash and cash equivalents, the availability of funds under our existing lines of credit, and our access to capital markets will be sufficient to meet all of our reasonably anticipated cash needs during the next twelve months. These cash needs include operating expenses, monthly debt service payments, recurring capital expenditures, acquisitions, building redevelopments and expansions, distributions to unit holders and dividends to stockholders necessary to maintain our REIT qualification. We expect to generate positive cash flow from operations in 2020, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our tenants. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds under our existing lines of credit, curtail planned capital expenditures, or seek other additional sources of financing. LIQUIDITY AND CAPITAL RESOURCES Financing Strategy We will continue to employ leverage in our capital structure in amounts reviewed from time to time by our board of directors. Although our board of directors has not adopted a policy which limits the total amount of indebtedness that we may incur, we will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or variable rate. In making financing decisions, we will consider factors including but not limited to:
• the interest rate of the proposed financing;
• the extent to which the financing impacts flexibility in managing our stores;
• prepayment penalties and restrictions on refinancing;
• the purchase price of stores acquired with debt financing;
• long-term objectives with respect to the financing;
• target investment returns;
• the ability of particular stores, and our company as a whole, to generate
cash flow sufficient to cover expected debt service payments;
• overall level of consolidated indebtedness;
• timing of debt maturities;
• provisions that require recourse and cross-collateralization; and
• corporate credit ratios including fixed charge coverage ratio and max secured/unsecured indebtedness. Our indebtedness may be recourse, non-recourse, cross-collateralized, cross-defaulted, secured or unsecured. In addition, we may invest in stores subject to existing loans collateralized by mortgages or similar liens, or may refinance stores acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to refinance investments, including the redevelopment of existing stores, for general working capital or to purchase additional interests in partnerships or joint ventures or for other purposes when we believe it is advisable. 24 -------------------------------------------------------------------------------- As ofDecember 31, 2019 , we had$65,746 available in cash and cash equivalents. Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. During 2019 and 2018, we experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets. As ofDecember 31, 2019 , we had$5,076,501 face value of debt, resulting in a debt to total enterprise value ratio of 25.9%. As ofDecember 31, 2018 , we had$4,854,077 face value of debt, resulting in a debt total enterprise value ratio of 28.4%. As ofDecember 31, 2019 , the ratio of total fixed-rate debt and other instruments to total debt was 78.7% (including$2,290,356 on which we have interest rate swaps that have been included as fixed-rate debt). As ofDecember 31, 2018 , the ratio of total fixed-rate debt and other instruments to total debt was 74.1% (including$2,192,550 on which we have interest rate swaps that have been included as fixed-rate debt). The weighted average interest rate of the total of fixed- and variable-rate debt atDecember 31, 2019 and 2018 was 3.3% and 3.5%, respectively. InJuly 2019 , we obtained a BBB/Stable rating from S&P and intend to manage our balance sheet to preserve such rating. Certain of our real estate assets are pledged as collateral for our debt. We are subject to certain restrictive covenants relating to our outstanding debt. We were in compliance with all financial covenants atDecember 31, 2019 . We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders ofOperating Partnership units and interest on our outstanding indebtedness, out of our operating cash flow, cash on hand and borrowings under our revolving lines of credit. In addition, we are pursuing additional sources of financing based on anticipated funding needs. Our liquidity needs consist primarily of operating expenses, monthly debt service payments, recurring capital expenditures, dividends to stockholders and distributions to unit holders necessary to maintain our REIT qualification. We may from time to time seek to repurchase our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds. We may also useOperating Partnership units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions. OFF-BALANCE SHEET ARRANGEMENTS Except as disclosed in the notes to our financial statements, we do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our financial statements, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. CONTRACTUAL OBLIGATIONS The following table presents information on future payments due by period as ofDecember 31, 2019 : Payments due by Period: Less Than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Operating leases$ 367,376 $ 28,369 $ 57,279 $ 57,905 $ 223,823 Notes payable, unsecured term loans, notes payable to trusts and revolving lines of credit Interest 742,201 158,086 246,233
178,503 159,379
Principal 5,076,501 1,143,431 440,848 1,600,378 1,891,844 Total contractual obligations$ 6,186,078 $ 1,329,886 $ 744,360 $ 1,836,786 $ 2,275,046 25
-------------------------------------------------------------------------------- The operating leases above include undiscounted lease payments on leases for 48 of our operating stores as well as leases of our corporate offices and division offices. Three ground leases include additional contingent rental payments based on the level of revenue achieved at the store. As ofDecember 31, 2019 , the weighted average interest rate for all fixed rate loans was 3.4%, and the weighted average interest rate on all variable rate loans was 3.1%. For more information on our contractual obligations related to real estate acquisitions, refer to our commitments and contingencies footnote in the notes to the consolidated financial statements in Item 8 of this Form 10-K. SEASONALITY The self-storage business is subject to seasonal fluctuations. A greater portion of revenues and profits are realized from May through September. Historically, our highest level of occupancy has been at the end of July, while our lowest level of occupancy has been in late February and early March. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows and fair values of financial instruments are dependent upon prevailing market interest rates. Interest Rate Risk Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. As ofDecember 31, 2019 , we had approximately$5.1 billion in total face value debt, of which approximately$1.1 billion was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable rate debt would increase or decrease future earnings and cash flows by approximately$10.8 million annually. Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take 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, these analyses assume no changes in our financial structure. Derivative Instruments We use derivative instruments to help manage interest rate risk using designated hedge relationships. Interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments between two parties based on a contractual underlying notional amount, but do not involve the exchange of the underlying notional amounts. See our Derivatives footnote in our Notes to consolidated financial statements in Item 8 for additional information about our use of derivative contracts. 26
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