Extra Space Storage Inc. — FY2020 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2020; it is not a quarterly Form 10-Q, although the requested period is identified as 2020 Q4. Extra Space Storage is a self-managed REIT operating self-storage properties and a tenant-reinsurance business. At year-end, it owned and/or operated 1,921 stores in 40 states, Washington, D.C., and Puerto Rico, totaling approximately 149.2 million rentable square feet and 1.4 million units. The portfolio included 1,197 owned or joint-venture stores and 724 stores managed for third parties.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.356 billion | $1.308 billion | +3.6% |
| Net income | $517.6 million | $451.1 million | +14.7% |
| Net income attributable to common stockholders | $481.8 million | $420.0 million | +14.7% |
| Basic/diluted EPS | $3.71/$3.71 | $3.27/$3.24 | Increased |
| FFO attributable to common stockholders and unit holders | $722.5 million | $667.9 million | +8.2% |
| Net operating income | $917.0 million | $893.1 million | +2.7% |
| Cash flow from operations | $771.2 million | $707.7 million | +9.0% |
Property rental revenue rose 2.4% to $1.158 billion, tenant-reinsurance revenue rose 14.2% to $146.6 million, and management fees and other income rose 4.5% to $52.1 million. The reported net income margin was approximately 38.2%, and net income attributable to common stockholders represented approximately 35.5% of revenue. Segment NOI was approximately 70.3% of segment revenue.
Average occupancy at wholly-owned stores was 93.1% for 2020. The 859-store same-store pool produced rental revenue of $1.079 billion, down 0.1%; same-store NOI declined 0.7% to $769.9 million, while quarter-end occupancy increased to 94.8% from 92.4%. Existing-customer annual rent per square foot decreased to $16.33 from $16.39, and new-lease rent decreased to $14.81 from $14.88.
Year-end assets were $9.396 billion, including $7.894 billion of net real estate assets. Cash and cash equivalents were $109.1 million, or $128.0 million including restricted cash. Total face-value debt was $5.768 billion, with a weighted-average interest rate of 2.7%, compared with 3.3% in 2019. Approximately 36.9% of debt was variable-rate debt, excluding debt subject to interest-rate swaps. Debt-to-total-enterprise-value was 27.5%, compared with 25.9% in 2019.
Cash used in investing activities was $955.4 million, including $387.4 million for acquisitions, development and redevelopment, $64.8 million invested in unconsolidated real estate entities, $313.4 million of notes receivable funding, and $300.0 million invested in Jernigan Capital preferred stock. Financing activities provided $241.5 million. The company paid $467.8 million of common-stock dividends and repurchased $67.9 million of common stock.
Material changes versus the prior comparable period
- The company acquired 23 stores for a total purchase price of $296.7 million, compared with 21 stores acquired in 2019.
- Store count increased to 1,921 from 1,817, and managed stores for third parties and joint ventures increased to 977 from 892.
- Same-store rental revenue and NOI declined slightly despite higher occupancy, reflecting lower rental rates, reduced late-fee collections, and higher bad debt associated with the pandemic.
- Interest expense declined 9.6% to $168.6 million, primarily because of lower average interest rates.
- Gain on real estate transactions increased to $18.1 million, primarily from the sale of four Florida stores for $46.6 million, versus one New York store sold for $11.3 million in 2019.
- The company redeemed all remaining $575.0 million of 3.125% exchangeable senior notes in November 2020, paying the principal in cash and issuing common stock for the excess exchange value.
- Debt increased materially, while fixed-rate debt and debt subject to swaps declined as a percentage of total debt to 63.1% from 78.7%.
- The company invested $300.0 million in Jernigan Capital preferred stock and increased its bridge-loan receivables to $187.4 million from $43.6 million.
Outlook, management commentary, risks and unusual items
Management stated that operating cash flow, cash on hand, available credit lines, and access to capital markets should be sufficient for reasonably anticipated needs over the next twelve months, including operations, debt service, recurring capital expenditures, acquisitions, bridge loans, redevelopment, dividends, and required REIT distributions. No specific earnings or same-store operating guidance was provided.
Management expects continued acquisition of certificate-of-occupancy stores in 2021. Such stores may dilute earnings during their estimated two-to-four-year lease-up period. As of December 31, 2020, the company was committed to acquire ten stores for $165.5 million, scheduled to close in 2021, plus a $1.6 million joint-venture investment.
COVID-19 reduced new rentals and vacates, achieved rates, rent increases, late-fee collections, and auctions during 2020, particularly in the second quarter. Management reported improved rates, collections, auctions, and occupancy during the second half of the year, with record occupancy levels attributed partly to fewer vacates. Ongoing risks include renewed pandemic restrictions, tenant payment weakness, bad debt, competition, economic conditions, and regulatory changes.
Key financial risks include refinancing and liquidity risk, variable interest rates, LIBOR transition, secured and cross-collateralized debt, potential impairment or valuation declines, uninsured property losses, environmental liabilities, legal claims, reinsurance regulation, joint-venture decision-making limitations, cybersecurity, and maintaining REIT qualification. A 100-basis-point change in variable interest rates was estimated to affect annual interest expense and cash flow by approximately $21.3 million. The company was in compliance with all financial covenants at year-end.
The company recorded no material impairment in 2020. Tenant-reinsurance unpaid claims liability increased to $8.3 million from $8.1 million. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Facts investors should verify
- Reconcile reported FFO and NOI to GAAP net income and operating cash flow, and review the company’s non-GAAP definitions.
- Assess whether higher occupancy can offset lower rents, late-fee revenue, and bad debt in same-store results.
- Review the $5.8 billion debt structure, 2021–2025 maturities, variable-rate exposure, interest-rate swaps, and LIBOR transition provisions.
- Evaluate liquidity after the $467.8 million of dividends, acquisition commitments, bridge lending, and planned 2021 investments.
- Monitor COVID-19 effects on collections, tenant demand, auctions, staffing, rental rates, and occupancy.
- Review valuation and credit risks associated with the $300.0 million Jernigan Capital preferred-stock investment and $187.4 million of bridge loans.
- Confirm the timing, pricing, and financing of the ten contracted 2021 acquisitions and the expected lease-up dilution from certificate-of-occupancy stores.
- Verify REIT qualification, required distributions, taxable REIT subsidiary taxes, legal contingencies, and environmental exposures.