Extra Space Storage Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a fully integrated, self-managed and self-administered self-storage REIT. The filing covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014. At quarter-end, the company owned or held interests in 835 stores and managed 271 additional stores, totaling 1,106 stores in 35 states, Washington, D.C. and Puerto Rico.
The company operates through rental operations, tenant reinsurance, and property management, acquisition and development. Its stabilized portfolio comprised 1,076 stores with 91.6% square-foot occupancy, compared with 88.6% on a pro forma basis in the prior-year period.
Financial Performance and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $173.2 million | $152.6 million | 13.5% |
| Property rental revenue | $148.9 million | $132.0 million | 12.8% |
| Tenant reinsurance revenue | $16.5 million | $13.5 million | 22.6% |
| Income from operations | $75.4 million | $60.4 million | 24.9% |
| Net income | $58.6 million | $41.2 million | 42.3% |
| Net income attributable to common stockholders | $53.7 million | $37.3 million | 43.9% |
| Basic and diluted EPS | $0.46 | $0.32 | 43.8% |
| Funds from operations | $84.5 million | $67.8 million | 24.5% |
| Cash flow from operating activities | $87.4 million | $64.6 million | 35.3% |
| Cash dividends per common share | $0.47 | $0.40 | 17.5% |
Income from operations represented approximately 43.6% of revenue, compared with approximately 39.6% in Q1 2014. Net income attributable to common stockholders represented approximately 31.0% of revenue, compared with approximately 24.5% in the prior-year period. FFO is a non-GAAP measure and should be considered together with GAAP net income and operating cash flow.
Balance Sheet, Debt and Liquidity
- Total assets were $4.46 billion at March 31, 2015, compared with $4.40 billion at December 31, 2014.
- Real estate assets, net, were $4.20 billion, up from $4.14 billion at year-end 2014.
- Cash and cash equivalents were $45.3 million; restricted cash was $35.4 million.
- Notes payable were $2.0 billion, exchangeable senior notes were $250.0 million, notes payable to trusts were $119.6 million, and lines of credit drawn were $99.0 million.
- Total face value of debt, including lines of credit, was $2.44 billion. Debt to total enterprise value was 23.7%, and the weighted-average interest rate was 3.4%.
- The company had $265.0 million of total line-of-credit capacity, of which $99.0 million was drawn. Management stated that all financial covenants were satisfied.
- Approximately 69.2% of total debt and related instruments was fixed-rate, including debt hedged with interest-rate swaps. A 100-basis-point change in LIBOR was estimated to affect annual earnings and cash flows by approximately $7.2 million.
- Contractual obligations totaled $2.87 billion, including $2.44 billion of debt principal and $359.9 million of related interest.
Cash Flow and Capital Allocation
- Operating cash flow increased to $87.4 million from $64.6 million, primarily reflecting higher net income and working-capital changes.
- Investing cash outflows were $91.5 million, including $77.1 million for real estate acquisitions, versus $256.6 million in Q1 2014.
- The company acquired eight operating stores during the quarter for total consideration of $86.4 million, including $75.2 million of cash paid.
- Financing cash flow was $1.7 million, compared with $112.3 million in Q1 2014, reflecting higher debt principal repayments and higher common-stock dividends.
- Management expects short-term liquidity needs to be funded through operating cash flow, cash on hand and line-of-credit borrowings, but stated that additional debt, joint ventures, or equity and debt offerings may be required to fund acquisitions and other liquidity needs.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected $7.5 million from acquisitions and $9.8 million from higher occupancy and rental rates at stabilized stores.
- Wholly-owned stabilized occupancy increased to 92.2% from 89.4%; same-store occupancy increased to 92.5% from 89.8%.
- Same-store net operating income increased 11.4%, as revenue rose 8.3% while same-store operating expenses increased 1.7%.
- Average annual rent per square foot for existing customers increased to $14.18 from $13.62, while rent for new leases increased to $14.56 from $13.82.
- Tenant reinsurance participation increased to 70.8% from 68.7%, contributing to higher reinsurance revenue.
- Interest expense increased 9.4% to $21.4 million, primarily because of higher debt. Acquisition-related costs declined 57.7% to $0.9 million.
- Results included $2.9 million of equity-method gains related to a joint-venture property sale and the acquisition of a joint-venture partner’s interest. These items were unusual and increased reported earnings and FFO.
- Other comprehensive loss was $6.6 million, primarily from changes in the fair value of interest-rate swaps.
Guidance, Outlook, Commentary and Risks
The filing does not provide explicit quantitative full-year earnings or FFO guidance. Management expects seasonal strength in the self-storage business from May through September, with occupancy historically lowest in late February and early March. Management intends to continue improving store performance, pursuing acquisitions selectively, and expanding its third-party management business, while noting that acquisition prices were increasing and that it remained a disciplined buyer.
- As of March 31, 2015, the company was under contract to acquire 42 stores for $374.3 million; 34 were scheduled to close in 2015 and the remainder upon completion of construction in 2016 or 2017.
- Subsequent to quarter-end, the company disclosed purchases of 26 additional stores for aggregate consideration of approximately $210.4 million.
- Key risks include competition, occupancy and rental-rate declines, acquisition execution and integration, financing and interest-rate risk, higher operating costs, asset impairments, dependence on joint-venture partners, uninsured losses and environmental liabilities, regulatory requirements, and maintaining REIT status.
- The company reported ordinary-course litigation and claims but did not expect them to have a material adverse effect. Management reported no material changes to the risk factors in the 2014 Form 10-K.
- Derivative agreements contained provisions that could require settlement of approximately $7.7 million upon certain defaults; no collateral had been posted as of March 31, 2015.
Important Facts for Investors to Verify
- Reconcile reported FFO growth with GAAP earnings and adjust for the $2.9 million of unusual joint-venture gains.
- Monitor acquisition commitments, subsequent acquisitions, funding sources, and the effect of additional leverage or equity issuance.
- Verify same-store occupancy, rental-rate growth, tenant retention, and whether expense growth remains below revenue growth.
- Review debt maturities, line-of-credit extensions, interest-rate swap exposure, and sensitivity to changes in LIBOR.
- Assess the sustainability of the $0.47 quarterly dividend against operating cash flow, required REIT distributions, debt service and acquisition needs.
- Confirm the effect of the California store damaged by fire and the performance of lease-up stores, which had 53.3% occupancy at quarter-end.