Extra Space Storage Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a fully integrated, self-administered and self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage facilities. The filing covers the three and nine months ended September 30, 2014, with comparative periods in 2013.
- At September 30, 2014, the company had direct or indirect ownership interests in 810 operating storage facilities and managed 271 additional properties, for 1,081 total properties across 35 states, Washington, D.C. and Puerto Rico.
- The portfolio contained approximately 80 million rentable square feet and 720,000 units; stabilized properties had 90.4% overall square-foot occupancy versus 88.7% on a pro forma basis in the prior year.
- The company operates through rental operations, tenant reinsurance, and property management, acquisition and development.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | Change |
|---|
| Total revenue | $167.4 million | $133.1 million | 25.7% |
| Income from operations | $77.5 million | $56.1 million | 38.2% |
| Net income | $59.2 million | $32.4 million | 83.0% |
| Net income attributable to common stockholders | $54.2 million | $29.2 million | 85.4% |
| Basic and diluted EPS | $0.47 | $0.26 | 80.8% |
| Funds from operations | $88.8 million | $54.7 million | 62.4% |
| Cash dividends per common share | $0.47 | $0.40 | 17.5% |
- Q3 operating margin was approximately 46.3%, compared with 42.1% in Q3 2013. Net margin was approximately 35.4%, compared with 24.3%.
- Property rental revenue increased 27.0%; tenant reinsurance revenue increased 25.1%; management fee revenue increased 5.4%.
- Same-store rental and tenant reinsurance revenue increased 7.2%, same-store net operating income increased 9.3%, and same-store occupancy increased to 91.7% from 90.7%.
- Average annual rent per square foot for existing customers rose to $14.62 from $13.97; rent for new leases rose to $14.65 from $14.34.
Nine-month financial and liquidity overview
| Metric | Nine months 2014 | Nine months 2013 | Change |
|---|
| Total revenue | $479.8 million | $378.7 million | 26.7% |
| Income from operations | $208.6 million | $156.2 million | 33.6% |
| Net income | $146.4 million | $103.4 million | 41.6% |
| Net income attributable to common stockholders | $133.2 million | $95.1 million | 40.0% |
| Funds from operations | $233.4 million | $165.9 million | 40.7% |
| Net cash provided by operating activities | $256.6 million | $198.6 million | 29.2% |
| Net cash used in investing activities | $(356.9) million | $(100.3) million | Higher investment outflow |
- Cash and cash equivalents were $49.2 million at September 30, 2014, down from $126.7 million at December 31, 2013.
- Real estate assets, net increased to $4.0 billion from $3.6 billion at year-end 2013; total assets increased to $4.23 billion from $3.98 billion.
- Face-value debt, including lines of credit, was $2.19 billion. Debt to total enterprise value was 25.7%; the weighted-average interest rate was 3.5%, and 70.6% of debt and related instruments were fixed-rate or hedged.
- Debt consisted principally of $1.78 billion of notes payable, $250.0 million of exchangeable senior notes, $119.6 million of notes payable to trusts and $40.0 million drawn on lines of credit.
- Credit facilities had total capacity of $215.0 million, of which $40.0 million was drawn. Management stated that all financial covenants were satisfied.
- Operating cash flow, cash on hand and credit facilities are expected to fund short-term needs, but management expects additional secured or unsecured borrowings, joint ventures, and equity or debt offerings may be needed for acquisitions and other liquidity requirements.
Material changes versus the prior comparable period
- The company acquired 32 properties during the first nine months of 2014 for total consideration of approximately $376.0 million, including $312.2 million of cash, $38.3 million of assumed debt and $22.1 million of OP units.
- Property count included in the operating results increased to 810 from 754, while the number of consolidated properties increased to 557 from 476.
- Revenue growth was driven by acquisitions, higher occupancy and rental rates, and increased tenant reinsurance participation. Customer participation in tenant reinsurance rose to 70.7% from 68.8%.
- Operating expenses increased 21.9% for the nine-month period, below the 26.7% revenue increase, although depreciation and amortization increased 24.1% due to acquired properties.
- Interest expense increased 17.2% for the nine-month period because of higher debt levels. Dividends paid increased to $155.4 million from $116.7 million.
- Investing outflows increased substantially because 2014 acquisitions were funded primarily with cash, whereas the prior-year acquisitions used more OP units and assumed debt.
- Equity in earnings from unconsolidated ventures declined 12.8% because several joint venture interests were acquired and became wholly owned.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear quantitative earnings or FFO guidance figure. Management indicated that it continues to pursue acquisitions, expand its management platform and improve property performance while remaining disciplined as acquisition prices rise.
- Reported results included a $10.3 million nine-month loss related to acquisition earnouts, including a $7.8 million payment on a 2012 portfolio and a $2.5 million estimated payment on a 2011 acquisition.
- Results also included $3.8 million of gains from purchases of joint venture partners’ interests and a $9.2 million prior-year loss on extinguishment of debt.
- A joint venture mortgage loan was in default at September 30, 2014. The company reported maximum exposure to loss of $9.5 million and stated that a material loss was unlikely; no liability was recorded.
- Interest-rate sensitivity was material: a 100-basis-point change in LIBOR was estimated to affect annual interest expense and cash flow by approximately $6.0 million, excluding certain debt with floors.
- Key risks include competition, economic and real estate market conditions, acquisition execution and integration, access to capital, higher interest rates and operating costs, property impairments, joint venture counterparty performance, regulatory requirements and maintaining REIT status.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect and that there were no material changes to the risk factors disclosed in the 2013 Form 10-K.
- Subsequent to quarter-end, the company acquired properties in Georgia for $11.0 million and Colorado for $6.25 million.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth can continue without excessive leverage or equity dilution.
- Same-store occupancy, rental-rate growth, discounts and net operating income trends, particularly as seasonal demand moderates after the summer period.
- Debt maturities, refinancing requirements, available credit capacity and exposure to variable interest rates.
- The cash funding needs associated with the acquisition pipeline, dividends, capital expenditures and REIT distribution requirements.
- The resolution and recoverability of the defaulted joint venture mortgage exposure.
- The amount and timing of future earnout payments and other acquisition-related contingencies.
- The effect of preferred and common OP units, exchangeable senior notes and other potential securities on common-stock dilution and distributions.
