Business Context and Reporting Period
Company: Extra Space Storage Inc.
Filing Type: Form 8-K (Current Report)
Report Date: December 31, 2012 (Filed February 19, 2013)
Context: The filing discloses the aggregate acquisition of 91 self-storage properties across 23 states during the year ended December 31, 2012, for approximately $701 million. While one acquisition (PRISA III LLC) was individually significant and previously reported, the remaining 90 properties were individually insignificant but significant in the aggregate. This report provides audited financial statements for a majority of these aggregate acquisitions (31 properties) and unaudited pro forma financial information reflecting the impact of these acquisitions.
Key Financial Metrics
Acquisition Activity:
- Total properties acquired in 2012: 91
- Total acquisition cost: Approximately $701 million
- Major portfolios included in financial statements: Storage Portfolio Bravo II, LLC (21 properties) and The Hampshire Companies, LLC (10 properties).
- Total Assets: $3,121,729,000 (Pro Forma Total)
- Real Estate Assets, Net: $2,906,495,000
- Total Liabilities: $1,781,406,000
- Lines of Credit: $336,905,000 (Pro Forma Total, reflecting draws to fund acquisitions)
- Stockholders' Equity: $1,284,687,000
- Total Revenues: $314,679,000
- Income from Operations: $119,446,000
- Net Income Attributable to Common Stockholders: $85,598,000
- Diluted EPS: $0.85
- Total Revenues: $356,810,000
- Income from Operations: $121,620,000
- Net Income Attributable to Common Stockholders: $55,444,000
- Diluted EPS: $0.60
- 2011 Revenues: $27,949,000
- 2011 Operating Expenses: $13,295,000
- 2011 Net Income Contribution (Pro Forma): $14,654,000
Material Changes vs. Prior Period
The filing highlights a significant expansion of the company's asset base through the $701 million acquisition program. The pro forma financial statements illustrate the impact of these acquisitions on the company's historical results:
- Revenue Growth: Pro forma revenues for the nine months ended September 30, 2012, increased by approximately $18.9 million compared to historical results due to the inclusion of the 31 audited properties.
- Asset Base: Real estate assets increased by $164.5 million in the pro forma balance sheet to reflect the acquisition of the SPB II portfolio.
- Liquidity Impact: The pro forma balance sheet reflects a reduction in cash and cash equivalents and an increase in lines of credit ($96.9 million draw) to fund the acquisitions.
- EPS Impact: Pro forma diluted EPS for the nine months ended September 30, 2012, improved from $0.80 (historical) to $0.85 (pro forma).
Guidance, Outlook, and Risks
Management Commentary:
The filing does not contain forward-looking guidance or specific outlook statements beyond the disclosure of the completed acquisitions. Management notes that the pro forma information is not necessarily indicative of actual future results.
Unusual Items and Adjustments:
- Management Fees: Pro forma adjustments eliminate management fee revenue previously earned by Extra Space for managing the SPB II properties, as these properties are now self-managed following the acquisition.
- Non-Cash Gain: A non-cash gain of $10,171,000 was recorded upon the acquisition of SPB II due to the revaluation and write-off of the prior joint venture investment.
- Depreciation/Amortization: Pro forma statements include additional depreciation and amortization expenses for the acquired properties as if they had been owned for the entire period.
- Acquisition Integration: The financial statements assume the successful integration of 91 properties across diverse geographies.
- Debt Financing: The pro forma balance sheet assumes the company would draw on its lines of credit to fund the acquisitions, increasing leverage.
- Legal: The acquired portfolios (Hampshire and SPB II) reported no material litigation or threatened litigation other than routine legal matters.
Investor Verification Checklist
- Acquisition Details: Verify the specific locations and performance metrics of the 91 properties acquired, particularly the 60 properties not included in the audited financial statements provided in this filing.
- Debt Covenants: Review the terms of the lines of credit and notes payable to ensure the increased leverage (pro forma lines of credit of $336.9 million) complies with debt covenants.
- Pro Forma Assumptions: Scrutinize the pro forma adjustments, specifically the elimination of management fees and the timing of depreciation, to understand the true incremental earnings power of the acquisitions.
- Historical Performance: Compare the historical performance of the acquired portfolios (Hampshire and SPB II) against the company's existing portfolio to assess integration risks and synergy realization.
- Cash Flow: Analyze the impact of the $701 million acquisition spend on the company's free cash flow and dividend sustainability, noting the $0.60 dividend per share paid in the nine-month period.