Extra Space Storage Inc. — 1Q 2020 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties, with tenant reinsurance operations. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
- At March 31, 2020, the company owned or had interests in 1,176 operating stores and managed 676 additional stores, for 1,852 total stores in 40 states, Washington, D.C. and Puerto Rico.
- The company served approximately 1.03 million tenants and held a 93.8% ownership interest in its Operating Partnership.
Financial performance and key metrics
| Metric | 1Q 2020 | 1Q 2019 | Change |
|---|---|---|---|
| Total revenue | $332.5 million | $311.5 million | 6.7% |
| Income from operations | $157.2 million | $148.5 million | 5.9% |
| Net income | $116.2 million | $102.2 million | 13.7% |
| Net income attributable to common stockholders | $108.2 million | $94.8 million | 14.1% |
| diluted EPS | $0.83 | $0.74 | 12.2% |
| Funds from operations attributable to common stockholders and unit holders | $171.3 million | $156.5 million | 9.4% |
| Net cash provided by operating activities | $189.3 million | $169.3 million | 11.8% |
- Revenue comprised property rental of $286.7 million, tenant reinsurance of $33.6 million and management fees and other income of $12.1 million.
- Operating income margin was approximately 47.3%, compared with 47.7% in the prior-year quarter. Net income attributable to common stockholders represented approximately 32.5% of revenue, compared with 30.4%.
- Same-store rental revenue increased 1.9%, same-store operating expenses increased 3.8%, and same-store NOI increased 1.2%. Same-store square-foot occupancy was 91.3%, compared with 91.4%.
- Average annual rent per square foot for existing customers at stabilized stores increased to $16.42 from $16.22; rent for new leases increased to $18.66 from $17.66.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $97.9 million at March 31, 2020, including $93.3 million of cash and cash equivalents, compared with $70.7 million at December 31, 2019.
- Operating cash flow was $189.3 million. Investing cash flow used $60.6 million, including $30.2 million for real estate acquisitions, $15.4 million for development and redevelopment, and $6.4 million invested in unconsolidated real estate entities.
- Financing cash flow used $101.5 million, including $117.2 million of common dividends and $52.2 million for share repurchases, partly offset by net debt proceeds.
- Face value of debt was $5.152 billion. Total debt included $4.310 billion of notes payable, $571.3 million of exchangeable senior notes and $244.0 million drawn on revolving lines of credit.
- Debt-to-total-enterprise-value was 27.9%; 78.3% of total debt and other instruments was fixed-rate or hedged. The weighted-average interest rate was 3.1%.
- The company reported compliance with all financial covenants and stated that operating cash flow, cash on hand, revolving credit availability and capital-market access were expected to fund reasonably anticipated needs for the next 12 months.
- The company held 25 interest-rate derivatives with a combined notional amount of $2.397 billion. Their fair value was a net liability of $114.0 million at March 31, 2020, and a 100-basis-point change in rates was estimated to affect annual interest expense and cash flow by approximately $11.2 million.
Material changes versus the prior comparable period
- Property rental revenue increased $15.7 million, primarily from acquired stores and higher rental rates at stabilized stores. Tenant reinsurance revenue increased 12.8%, and management fees and other income increased 12.9%.
- Property operating expenses increased 14.6%, exceeding same-store revenue growth and contributing to the slight decline in operating margin. Higher expenses reflected acquisitions, property taxes, payroll, benefits and marketing.
- Interest expense declined 6.3% because the average interest rate decreased to 3.1% from 3.5%.
- Equity in earnings and dividend income from unconsolidated real estate entities increased 91.7% to $5.0 million, primarily reflecting dividends from the SmartStop preferred-stock investment made in October 2019.
- The company acquired two stores in 1Q 2020 for approximately $19.4 million, compared with 14 stores acquired for approximately $223.7 million in 1Q 2019.
- The company repurchased 653,597 shares in March 2020 for $52.2 million, leaving $347.8 million of authorization.
- Other comprehensive income included an $89.2 million loss from changes in the fair value of interest-rate swaps, substantially reducing comprehensive income attributable to common stockholders to $23.3 million.
Outlook, commentary, risks and unusual items
- Management stated that self-storage operations had experienced a decrease in new rentals following the COVID-19 outbreak but had not seen significant vacates from existing tenants as of the filing. The company implemented work-from-home, contactless rental, online and telephone processes, and employee protective measures.
- Management expected positive operating cash flow for 2020 but provided no specific revenue, earnings or FFO guidance in the filing.
- COVID-19 created material uncertainty regarding demand, occupancy, rental rates, collections, staffing, access to properties, tenant reinsurance revenue, construction activity and access to debt and equity capital. The filing states that the ultimate impact could be significant and could not be predicted.
- The company had agreements to acquire three stores for $20.6 million and five stores with joint venture partners requiring a total investment of $25.8 million, with closings scheduled during 2020 and 2021.
- Holders of the $575.0 million exchangeable senior notes could require repurchase at par on October 1, 2020, unless the notes were called for redemption. The notes were not exchangeable during the quarter based on the applicable stock-price condition.
- Legal proceedings and ordinary-course claims were pending, but the filing did not identify a specific material loss amount. The company also disclosed potential environmental liabilities and risks from competition, interest rates, asset valuations, financing markets and REIT qualification.
Important facts for investors to verify
- Subsequent-quarter trends in new rentals, tenant move-outs, occupancy, collections, rental-rate increases and bad debt following COVID-19-related restrictions.
- Liquidity, revolver availability and funding plans surrounding the October 2020 exchangeable-note repurchase date and other debt maturities.
- Whether the stated expectation of sufficient liquidity and positive 2020 operating cash flow remained valid as the pandemic developed.
- Changes in interest-rate swap valuations, debt covenants and the potential cash requirement associated with derivative termination provisions.
- Completion, timing and funding of the pending acquisitions and joint venture investments.
- Reconciliation and comparability of company-defined FFO with other REITs' measures; FFO is not a GAAP measure or a substitute for operating cash flow.