Extra Space Storage Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a fully integrated, self-managed REIT that owns, operates, acquires, develops, redevelops and manages self-storage properties, and provides tenant reinsurance. The filing covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods.
- At June 30, 2021, the company owned or held interests in 1,205 operating stores and managed 768 additional stores, for 1,973 stores across 40 states and Washington, D.C.
- The portfolio included approximately 1,215,000 tenants. Same-store results covered 860 stabilized stores.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $378.6 million | $327.2 million | $737.5 million | $659.7 million |
| Net income | $178.6 million | $111.3 million | $394.1 million | $227.4 million |
| Net income attributable to common stockholders | $167.9 million | $102.9 million | $370.9 million | $211.1 million |
| Basic and diluted EPS | $1.25 | $0.80 | $2.79 | $1.63 |
| Funds from operations attributable to common stockholders and unit holders | $232.3 million | $166.8 million | $442.4 million | $338.1 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $463.7 million | $392.1 million |
- Q2 revenue increased 15.7%; property rental revenue rose 15.1%, tenant reinsurance revenue rose 20.7%, and management fees and other income rose 15.1%.
- Six-month revenue increased 11.8%, while net income attributable to common stockholders increased 75.8%.
- Q2 income from operations was $196.8 million, representing an operating margin of approximately 52.0%. Six-month income from operations was $437.9 million, including a $63.9 million gain on real estate transactions.
- Q2 same-store rental revenue increased 13.6%, same-store NOI increased 20.2%, and quarter-end same-store occupancy increased to 97.0% from 94.2%.
- Average annual rent per square foot at stabilized stores increased to $17.09 for existing customers and $20.65 for new leases, compared with $15.69 and $12.81, respectively, in Q2 2020.
- Cash dividends paid were $1.00 per common share in Q2 and $2.00 per share for the first six months, compared with $0.90 and $1.80 in the respective 2020 periods.
Cash flow, debt and liquidity
- Operating cash flow for the first six months was $463.7 million. Investing cash flow used $145.3 million and financing cash flow used $386.6 million, resulting in a $68.3 million decrease in cash, cash equivalents and restricted cash.
- At June 30, 2021, cash and cash equivalents were $56.0 million; cash, cash equivalents and restricted cash totaled $59.7 million.
- Face-value debt was approximately $5.397 billion, with a weighted average interest rate of 2.8%. Approximately 72.7% of total debt and related instruments was fixed-rate or hedged.
- Notes payable, net, were $5.110 billion, and revolving lines of credit were $261.0 million. The company reported compliance with all financial covenants.
- Debt maturities, including available extensions, totaled $493.4 million in 2022, $730.7 million in 2024, $930.1 million in 2025 and $854.0 million in 2026. The filing does not provide a clear value for unused revolving credit capacity.
- In May 2021, the operating partnership issued $450.0 million of 2.550% unsecured senior notes due 2031, generating $446.4 million of net proceeds.
- The company held BBB/Stable and Baa2 credit ratings from S&P and Moody’s, respectively. Management stated that operating cash flow, cash on hand, revolving credit availability and capital-market access should fund reasonably anticipated needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth reflected higher occupancy and rental rates at stabilized stores, acquisitions, increased store management activity and higher tenant reinsurance revenue.
- Same-store occupancy rose materially, while same-store operating expenses declined 2.3% in Q2 and 1.2% for the first six months.
- The company acquired 24 wholly owned stores during the first six months of 2021 and acquired 15 stores in Q2. It sold 16 stores to a newly formed unconsolidated joint venture and recognized a $64.8 million gain.
- Interest expense declined 5.2% for the first six months, primarily because of a lower weighted average interest rate and changes in the mix of fixed- and variable-rate debt. The 2015 exchangeable senior notes were fully redeemed in late 2020, eliminating related non-cash interest expense in 2021.
- The company raised $273.5 million net from common-stock issuances during the first six months, including a $206.6 million bought-deal offering and $66.9 million through its prior ATM program. No shares were repurchased during the period.
- Interest income increased substantially because of bridge loans, a senior mezzanine note purchased in 2020 and $300 million of preferred-stock investments in JCAP.
Outlook, commentary, risks and unusual items
- Management expects positive operating cash flow in 2021 and believes current liquidity sources are sufficient for anticipated operating expenses, debt service, recurring capital expenditures, acquisitions, redevelopments, distributions and dividends.
- Management reported record occupancy as governmental COVID-19 restrictions were lifted but cautioned that renewed restrictions, unemployment and tenants’ ability to pay rent or renew leases could adversely affect results.
- The business is seasonal, with a greater portion of revenue and profit generally realized from May through September and the highest historical occupancy typically occurring in late July.
- Key risks include competition, declining rents or occupancy, higher interest rates, capital-market disruptions, acquisition and development execution, asset impairments, environmental and uninsured losses, regulatory and tax changes, maintenance of REIT status, joint-venture decision-making and litigation.
- The company had 17 operating stores classified as held for sale at June 30, 2021 and was under agreements to acquire three stores for $28.9 million and seven stores with joint-venture partners for a total investment of $9.9 million.
- The company had 20 interest-rate derivatives with a combined notional amount of approximately $1.990 billion. A 100-basis-point change in LIBOR was estimated to affect annual interest expense and cash flow by approximately $14.7 million, before considering potential mitigating actions.
- Derivative agreements could require cash settlement of approximately $71.7 million if specified default or covenant conditions were breached; no collateral had been posted as of June 30, 2021.
- Pending legal matters arose in the ordinary course of business; outcomes were not presently determinable, and potential losses could exceed accrued amounts.
Important facts for investors to verify
- Whether record occupancy and elevated new-lease rents are sustainable after seasonal demand and post-pandemic normalization.
- The recurring operating performance excluding the $64.8 million real estate gain and other joint-venture transaction gains.
- Actual availability under revolving credit facilities and the company’s ability to refinance upcoming debt maturities while preserving investment-grade ratings.
- Exposure to variable interest rates, derivative covenant provisions and the planned transition away from LIBOR.
- Execution and funding of announced acquisitions, developments and joint-venture investments.
- Potential effects of COVID-19 developments, competition, litigation, environmental matters and changes in REIT or tax regulations.