Extra Space Storage Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a fully integrated, self-administered and self-managed REIT that owns, operates, manages, acquires, develops and redevelops self-storage properties. The filing covers the three and six months ended June 30, 2019, with prior-period comparisons to June 30, 2018.
- At June 30, 2019, the company owned or held interests in 1,157 stores and managed 595 additional third-party stores, for 1,752 total owned and managed stores across 40 states, Washington, D.C. and Puerto Rico.
- The portfolio served approximately 995,000 tenants. Same-store occupancy was 93.6%, compared with 94.2% in the prior-year comparable period.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $323.6 million | $296.8 million | +9.0% |
| Income from operations | $159.2 million | $144.7 million | +10.0% |
| Operating margin | 49.2% | 48.8% | +40 bps |
| Net income | $112.7 million | $102.7 million | +9.7% |
| Net income attributable to common stockholders | $104.8 million | $95.2 million | +10.2% |
| Diluted EPS | $0.81 | $0.75 | +$0.06 |
| FFO attributable to common stockholders and unit holders | $165.8 million | $153.8 million | +7.8% |
| Cash dividends per common share | $0.90 | $0.86 | +4.7% |
For the six months ended June 30, 2019, revenue was $635.1 million, up 9.1%; net income attributable to common stockholders was $199.6 million, up 8.8%; diluted EPS was $1.55, compared with $1.45; and FFO was $322.3 million, up 7.4%.
- Q2 property rental revenue increased 8.3%, primarily from acquisitions and higher rental rates at stabilized stores. Tenant reinsurance revenue increased 11.1%, while management fees and other income increased 21.2%.
- Same-store rental revenue increased 3.9% and same-store NOI increased 3.9% in Q2. Same-store operating expenses increased 3.8%, limiting margin expansion.
- Average annual rent per square foot for existing customers at stabilized stores increased to $16.39 from $15.73; new-lease rent increased to $19.50 from $18.79.
Cash flow, debt and liquidity
| Six months ended June 30 | 2019 | 2018 |
|---|---|---|
| Net cash provided by operating activities | $363.4 million | $339.7 million |
| Net cash used in investing activities | $(440.4) million | $(229.1) million |
| Net cash provided by/(used in) financing activities | $60.0 million | $(127.6) million |
| Cash, cash equivalents and restricted cash at period end | $55.6 million | $69.1 million |
- Investing outflows included $248.8 million for real estate acquisitions, $20.9 million for development and redevelopment, $31.3 million for investments in unconsolidated ventures and $152.6 million of notes receivable issuance.
- At June 30, 2019, face-value debt was approximately $5.1 billion, including $4.1 billion of notes payable, $565.9 million of exchangeable senior notes and $382.0 million drawn on revolving credit lines.
- Debt to total enterprise value was 25.7%; 75.5% of debt and related instruments were fixed-rate or hedged; the weighted-average interest rate was 3.5%. The company stated that it was in compliance with all debt covenants.
- Management believes operating cash flow, cash on hand, revolving credit availability and access to capital markets will meet reasonably anticipated needs for the next 12 months.
Material changes versus the prior comparable period
- The company expanded its operating footprint to 1,157 owned or equity-invested stores from 1,082 in the prior-year comparable period and managed 1,752 total stores versus 1,568.
- Operating cash flow increased $23.7 million for the six-month period, while investing outflows increased substantially because of acquisitions, new investments and $152.6 million of notes receivable issuance.
- Interest expense increased 9.5% in Q2 and 12.4% year to date, reflecting higher debt balances and interest rates. Total face-value debt was $5.1 billion at June 30, 2019, compared with $4.8 billion at June 30, 2018.
- Comprehensive income declined because the fair value of interest-rate swaps produced a $41.3 million Q2 loss, compared with an $8.0 million gain in Q2 2018.
- The company adopted ASC 842 lease accounting on January 1, 2019. At June 30, 2019, it reported $221.5 million of operating lease right-of-use assets and $230.8 million of operating lease liabilities.
Guidance, outlook, risks and unusual items
- Management expects positive operating cash flow in 2019 and expects cash flow, cash balances and financing sources to support operations, debt service, recurring capital expenditures, acquisitions, distributions and REIT-related dividends. The filing does not provide formal earnings or revenue guidance.
- On July 1, 2019, the company increased available commitments under its credit agreement by $500.0 million through an accordion option.
- At June 30, 2019, the company was committed to acquire five stores for $58.6 million and eight stores with joint venture partners for a total investment of $25.6 million, subject to closing conditions.
- Interest-rate sensitivity was significant: a hypothetical 100-basis-point increase or decrease in rates would change annual interest expense, earnings and cash flows by approximately $12.5 million on variable-rate debt.
- Key risks include competition and potential declines in rents or occupancy, economic and real estate market conditions, higher interest rates, capital-market disruptions, acquisition and development execution, impairment charges, environmental liabilities, litigation, regulatory and tax changes, maintenance of REIT status, and natural disasters or other disruptions.
- The company had various ordinary-course legal proceedings, but the outcomes could not be determined with certainty. Management stated that no material changes occurred to the risk factors disclosed in the 2018 Form 10-K.
- Unusual items included a $1.2 million gain on the sale of one property, a $41.3 million Q2 loss in other comprehensive income from interest-rate swap valuation changes, and the issuance of $98.8 million of common stock through the at-the-market equity program.
Important facts for investors to verify
- Reconcile reported GAAP net income and EPS with FFO, and review the company’s non-GAAP definition against other REITs.
- Assess whether same-store occupancy, rental-rate growth and NOI remain resilient despite occupancy declining to 93.6%.
- Review acquisition, development and joint-venture commitments, including the associated debt, preferred units and notes receivable.
- Monitor interest-rate exposure, swap valuations, debt maturities, revolving-credit usage and covenant compliance.
- Evaluate the effect of ASC 842 lease liabilities and the 22 new triple-net store leases entered into during June 2019.
- Review pending acquisitions, litigation, environmental matters and the company’s ability to maintain liquidity while funding acquisitions and dividends.