Extra Space Storage Inc. 2014 Form 10-K Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, managing, acquiring, developing and redeveloping self-storage properties. This Form 10-K covers the fiscal year ended December 31, 2014, with quarterly information for the three months ended December 31, 2014.
- At year-end, the Company owned interests in 828 stores, including 557 wholly owned and 271 held through joint ventures.
- It managed an additional 260 third-party stores, for a total of 1,088 owned or managed stores in 35 states, Washington, D.C. and Puerto Rico.
- The portfolio represented approximately 80.4 million rentable square feet, 725,000 units and 650,000 tenants.
- Operating segments were rental operations, tenant reinsurance, and property management, acquisition and development.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $647.2 million | $520.6 million | 24.3% |
| Property rental revenue | $559.9 million | $446.7 million | 25.3% |
| Tenant reinsurance revenue | $59.1 million | $47.3 million | 24.8% |
| Management fee revenue | $28.2 million | $26.6 million | 6.0% |
| Income from operations | $278.5 million | $213.5 million | 30.4% |
| Net income | $195.9 million | $185.6 million | 5.6% |
| Net income attributable to common stockholders | $178.4 million | $172.1 million | 3.6% |
| Basic diluted EPS | $1.54 / $1.53 | $1.54 / $1.53 | Flat |
| Funds from operations | $310.0 million | $228.8 million | 35.5% |
| Cash dividends paid per common share | $1.81 | $1.45 | 24.8% |
Total revenue growth was driven by acquisitions, higher occupancy and rental-rate increases. The reported operating margin was approximately 43.0%, compared with approximately 41.0% in 2013. Net income attributable to common stockholders represented approximately 27.6% of revenue.
- Same-store rental and tenant reinsurance revenue increased 7.5%, while same-store NOI increased 9.5% to $338.0 million.
- Same-store occupancy at quarter-end increased to 91.4% from 89.5%.
- Stabilized-store occupancy was 91.0% for wholly owned stores, 91.9% for joint-venture stores and 87.7% for managed stores.
- Average annual rent per square foot for existing customers increased to $14.41 from $13.81; new-lease rent increased to $14.53 from $14.18.
- Quarterly fourth-quarter 2014 revenue was $167.4 million, net income attributable to common stockholders was $45.1 million and diluted EPS was $0.39.
Cash flow, debt and liquidity
| Metric | December 31, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $4.40 billion | $3.98 billion |
| Total debt and credit lines | $2.37 billion | $1.95 billion |
| Cash and cash equivalents | $47.7 million | $126.7 million |
| Net cash from operating activities | $337.6 million | $271.3 million |
| Net cash used in investing activities | $(564.9) million | $(367.0) million |
| Net cash from financing activities | $148.3 million | $191.7 million |
- Face-value debt was $2.38 billion, equal to a reported 24.8% debt-to-total-capitalization ratio.
- The weighted-average interest rate was 3.4%; approximately 35.5% of debt was variable-rate debt, excluding debt subject to interest-rate swaps.
- A 100-basis-point increase in applicable variable rates was estimated to increase annual interest expense by approximately $8.1 million.
- Credit lines totaled $265.0 million of capacity, of which $138.0 million was drawn, leaving approximately $127.0 million undrawn.
- Debt principal scheduled within one year was $251.5 million, and total contractual obligations were $2.79 billion, including interest and operating leases.
- The Company stated that it was in compliance with all financial covenants at year-end.
Material changes versus the prior comparable period
- The Company acquired 51 operating stores in 2014 versus 78 in 2013, while acquisition-related cash spending increased to $503.5 million from $350.0 million.
- Owned or managed stores increased to 1,088 from 1,029, and owned or controlled operating stores included in results increased to 828 from 779.
- Debt increased by approximately $423 million, primarily supporting acquisitions and growth, while cash declined by approximately $79 million.
- Interest expense increased 13.5% to $81.3 million due to higher debt balances, partially offset by a lower average interest rate.
- Net income growth was limited by lower gains from joint-venture transactions: equity-method gains related to real estate sales and partner-interest purchases declined to $4.0 million from $46.0 million.
- 2014 included a $7.8 million earnout payment related to a 2012 acquisition, a $2.5 million estimated additional earnout obligation, and a $1.7 million net casualty loss from a store fire.
- Common dividends increased to $0.47 per share in the fourth quarter from $0.40 in the first quarter of 2014; total dividends declared during 2014 were $1.81 per share.
Outlook, management commentary, risks and unusual items
Management described a strategy centered on maximizing same-store performance through revenue management, pursuing disciplined acquisitions and expanding the third-party management platform. The filing does not provide clear numerical earnings or same-store guidance for 2015.
- Management expects to fund operations, recurring capital expenditures, dividends and debt service through operating cash flow, cash on hand, credit lines and additional financing.
- The Company expects operating cash flow alone will not fund all liquidity needs and anticipates using additional secured or unsecured debt, joint ventures and equity or debt offerings.
- Acquisition pricing was described as increasing, although management stated it remained a disciplined buyer.
- Key risks include competition and oversupply, occupancy and rental-rate declines, acquisition integration and financing risk, variable interest rates, refinancing needs, joint-venture partner performance, uninsured losses, environmental and ADA compliance, tenant reinsurance regulation, technology and cybersecurity risk, and preservation of REIT status.
- The Company is required generally to distribute at least 90% of REIT taxable income to maintain REIT qualification, which may constrain retained cash.
- A credit facility with an existing partner permits up to $100 million of future loans and related purchase-option arrangements; no amounts had been drawn at year-end.
- Subsequent to year-end, the Company acquired three Texas stores for $41.9 million on January 13, 2015, and one Texas store for $13.6 million on February 24, 2015.
- Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported FFO of $310.0 million with GAAP net income and assess the impact of acquisition gains, earnouts and other unusual items.
- Review the $251.5 million of debt maturities due within one year and the Company’s refinancing capacity relative to $47.7 million of cash.
- Monitor variable-rate debt exposure, interest-rate swaps and the estimated $8.1 million annual sensitivity to a 100-basis-point rate increase.
- Evaluate whether occupancy, rental-rate growth and same-store NOI trends remain sustainable as competition and new supply increase.
- Assess acquisition underwriting, integration results and the effect of issuing OP Units and preferred units on common-stockholder dilution and distributions.
- Review joint-venture debt, partner rights and the disclosed maximum exposure to loss from the Sacramento joint venture.
- Confirm continued REIT qualification and the Company’s ability to fund required distributions while meeting acquisition and debt obligations.