Extra Space Storage Inc. — Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a self-administered and self-managed REIT that owns, operates, acquires, develops, redevelops and manages self-storage facilities. The filing covers the three and six months ended June 30, 2013, with unaudited financial statements.
- At June 30, 2013, the company had direct or indirect interests in 732 operating properties and managed 242 additional properties, totaling 974 properties across 35 states, Washington, D.C. and Puerto Rico.
- The portfolio represented approximately 71.0 million square feet and 649,000 units. Stabilized properties were 88.9% occupied, compared with 87.3% on a pro forma basis at June 30, 2012.
- The company operates through rental operations, tenant reinsurance, and property management, acquisition and development.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $126.2 million, up 33.0% | $245.6 million, up 32.1% |
| Income from operations | $53.4 million | $100.1 million |
| Operating margin | 42.3% | 40.8% |
| Net income | $37.1 million | $71.0 million |
| Net income attributable to common stockholders | $34.5 million | $65.9 million |
| Net margin attributable to common stockholders | 27.3% | 26.8% |
| Basic and diluted EPS | $0.31 | $0.59 |
| Funds from operations | $58.1 million | $111.3 million |
| Cash dividends per common share | $0.40 | $0.65 |
- Property rental revenue increased 35.4% in the quarter and 35.5% year to date. Tenant reinsurance revenue increased 34.4% and 27.1%, respectively. Management fees increased 2.1% in the quarter but declined 2.0% year to date.
- Same-store rental and tenant reinsurance revenue increased 7.8% in the quarter and 7.6% year to date. Same-store net operating income increased 10.4% and 10.6%, respectively, while same-store occupancy increased to 90.8% from 89.0%.
- Average annual rent per square foot for existing customers at stabilized properties increased to $13.75 from $13.24. New-lease rent increased to $14.42 from $14.04, while average discounts declined to 5.1% from 5.8% of rental revenue.
- Net cash provided by operating activities was $126.6 million, compared with $92.6 million in the prior-year period.
- Cash used in investing activities was $67.1 million, including $62.0 million for acquisition, development and redevelopment of real estate assets.
- Cash provided by financing activities was $116.7 million. Cash and cash equivalents increased to $206.9 million from $30.8 million at December 31, 2012.
Debt, Liquidity and Capital Structure
- Face value of total debt was $1.780 billion at June 30, 2013, compared with $1.308 billion at June 30, 2012. Debt to total market capitalization was 26.9%.
- The weighted-average interest rate was 3.8%, and 84.7% of total debt and other instruments was fixed-rate or hedged. Approximately $271.6 million of debt was exposed to variable rates, excluding debt covered by swaps.
- The company had $248.9 million of available capacity under four secured lines of credit, with no amounts drawn at June 30, 2013.
- The company was in compliance with all financial covenants and expected to fund near-term requirements through operating cash flow, cash on hand and available credit.
- On June 21, 2013, the Operating Partnership issued $250.0 million of 2.375% exchangeable senior notes due 2033. Net proceeds were approximately $246.3 million; the notes are fully guaranteed by the company.
- Contractual obligations totaled $2.242 billion, including $1.780 billion of principal and $396.4 million of interest obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the 91 properties acquired in 2012, six acquisitions completed during the first six months of 2013, higher occupancy and rental rates, and increased tenant reinsurance participation.
- Operating expenses increased 27.7% in the quarter and 26.2% year to date, primarily from property growth, higher depreciation and amortization, and increased management costs.
- Interest expense increased 15.8% in the quarter and 5.3% year to date because of higher debt, partially offset by a lower average interest rate.
- The company recognized a $2.6 million non-cash gain in the first six months from acquiring partners’ interests in two joint ventures. This compares with a $5.4 million gain in the prior-year period from a joint venture property sale.
- Share count increased, with weighted-average basic shares rising to 111.1 million from 102.1 million in the quarter and to 111.0 million from 98.5 million year to date.
- Common dividends increased to $0.40 per share in the quarter and $0.65 per share year to date, compared with $0.20 and $0.40, respectively, in the prior-year periods.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no specific earnings, revenue or FFO guidance.
- Management intends to continue maximizing property performance, pursuing disciplined acquisitions, and expanding its third-party management business. It noted increasing acquisition prices and emphasized disciplined underwriting.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September.
- Key risks include economic and real estate market conditions, competition, acquisition execution and integration, access to credit, interest-rate increases, asset valuation declines, regulatory and REIT qualification requirements, joint venture performance, uninsured losses and environmental liabilities.
- The company guaranteed a $4.3 million loan of an unconsolidated joint venture maturing in April 2014. No liability was recorded because management considered the risk of material loss remote.
- The company reported no material litigation and no material changes to the risk factors disclosed in its 2012 Form 10-K.
- A July 25, 2013 subsequent event involved the acquisition of two Arizona properties for approximately $9.3 million.
Most Important Facts to Verify
- Reconcile the reported $1.780 billion face value of debt with the balance-sheet presentation, including the exchangeable-note discount and notes payable to trusts.
- Assess sustainability of same-store NOI growth, occupancy gains and rent increases, particularly as seasonal demand moderates.
- Review acquisition underwriting, lease-up performance and the effect of rising acquisition prices on future returns.
- Evaluate refinancing and maturity exposure, including credit lines maturing or becoming eligible for extension in 2013–2014.
- Monitor variable-rate exposure, interest-rate swaps and the potential effect of a 100-basis-point LIBOR increase, estimated by management at approximately $2.3 million of annual expense.
- Confirm the company’s continuing compliance with REIT distribution and qualification requirements, debt covenants and the joint venture loan guarantee.