Extra Space Storage Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, with supplementary quarterly data for the fourth quarter. The filing was dated March 3, 2014. Extra Space Storage is a self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage facilities through an UPREIT structure.
Business context
- At year-end, the Company owned or held interests in 779 operating properties, including 506 wholly owned and 273 joint-venture properties, and managed 250 additional third-party properties.
- The portfolio covered approximately 75.7 million rentable square feet, approximately 680,000 units and approximately 600,000 tenants across 35 states, Washington, D.C. and Puerto Rico.
- Operating segments were rental operations, tenant reinsurance, and property management, acquisition and development.
- Total stabilized-property occupancy was 88.0% at December 31, 2013, compared with 86.3% on a pro forma basis at December 31, 2012. Same-store square-foot occupancy was 89.2%, compared with 87.9%.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $520.6 million | $409.4 million | 27.2% |
| Property rental revenue | $446.7 million | $346.9 million | 28.8% |
| Tenant reinsurance revenue | $47.3 million | $36.8 million | 28.5% |
| Management fee revenue | $26.6 million | $25.7 million | 3.5% |
| Income from operations | $213.5 million | $157.2 million | 35.8% |
| Net income | $185.6 million | $127.7 million | 45.3% |
| Net income attributable to common stockholders | $172.1 million | $117.3 million | 46.7% |
| Basic diluted EPS | $1.54 / $1.53 | $1.15 / $1.14 | Higher year over year |
| Funds from operations | $228.8 million | $169.4 million | 35.1% |
| Cash dividends per common share | $1.45 | $0.85 | Higher year over year |
Calculated margins were approximately 41.0% for income from operations and 33.1% for net income attributable to common stockholders. Same-store net operating income increased 10.0% to $241.4 million, while same-store rental and tenant reinsurance revenue increased 7.4%.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $271.3 million, up from $215.9 million in 2012.
- Net cash used in investing activities was $367.0 million, primarily reflecting $356.4 million of acquisition, development and redevelopment spending.
- Net cash provided by financing activities was $191.7 million. Financing included $206.0 million of net common-stock proceeds and $246.3 million of net proceeds from 2.375% exchangeable senior notes due 2033.
- Cash and cash equivalents were $126.7 million at year-end, compared with $30.8 million in 2012.
- Total face-value debt was approximately $1.958 billion, representing a reported debt-to-total-capitalization ratio of 27.5%. The average interest rate was approximately 3.8%, compared with 4.2% in 2012.
- Approximately $339.3 million, or 17.3% of debt excluding debt with interest-rate swaps, was variable-rate debt. Management estimated that a 100-basis-point change in applicable rates would affect annual earnings and cash flow by approximately $3.0 million.
- The Company had $280.0 million of unused secured credit-line capacity and was in compliance with all financial covenants at December 31, 2013.
- Contractual obligations totaled $2.430 billion, including $1.958 billion of principal, $401.9 million of stated interest and $69.9 million of operating lease obligations.
Material changes versus the prior comparable period
- The Company acquired 78 properties in 2013, compared with 91 in 2012. Acquisition-related revenue increased substantially, while acquisition, development and redevelopment cash spending declined from $605.5 million to $356.4 million.
- Revenue growth reflected acquisitions, higher occupancy and rental rates, lower discounts and increased tenant-reinsurance participation. Customer participation in tenant reinsurance increased to approximately 68.7% from 67.0%.
- Operating expenses increased 21.8% to $307.1 million, including higher property operations, acquisition-related costs, general and administrative expense, and depreciation and amortization.
- Interest expense was broadly stable despite higher debt because average borrowing rates declined.
- 2013 included $46.0 million of equity-method gains related primarily to the remeasurement of prior joint-venture interests acquired by the Company. These gains were largely non-cash and materially benefited reported net income.
- The Company issued 4.5 million common shares for net proceeds of $206.0 million and issued Series B and Series C preferred Operating Partnership units in connection with acquisitions.
- The Company issued $250.0 million of 2.375% exchangeable senior notes due 2033 and recognized a $9.2 million loss on extinguishment of debt related to an acquired portfolio.
Guidance, outlook, commentary and risks
- Management emphasized disciplined acquisition activity, proactive revenue management, continued expansion of the third-party management platform, and use of the management platform as a potential acquisition pipeline.
- The Company expects to fund future acquisitions and liquidity needs through operating cash flow, cash on hand, credit lines, secured mortgage financing, joint ventures, and additional equity or debt offerings.
- No specific earnings, revenue or same-store operating guidance is provided in the filing text.
- The business is seasonal, with a greater portion of revenue and profit typically generated from May through September and peak occupancy historically occurring in late July.
- Key risks include competition and acquisition pricing, changes in occupancy and rental rates, interest-rate increases, refinancing and capital-market access, operating-cost inflation, property impairment, uninsured losses, environmental and ADA compliance, tenant-reinsurance regulation, joint-venture partner performance, and maintaining REIT qualification.
- The Company guaranteed a $4.3 million loan for an unconsolidated joint venture maturing in April 2014. Management considered the risk of a material loss remote and recorded no liability for the guarantee.
- The filing reports no material litigation expected to adversely affect financial condition or results of operations. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether reported earnings growth remains supported by same-store revenue, occupancy and net operating income rather than primarily by acquisitions and non-cash joint-venture gains.
- The refinancing plan and available liquidity for the $29.0 million of debt principal due within one year, along with future maturities and required distributions.
- The sustainability of the 88.0% stabilized occupancy level and the effect of seasonal demand, competition and rent increases on tenant retention.
- The impact of variable-rate debt, interest-rate swaps and potential refinancing costs on cash flow and dividend capacity.
- The terms, redemption rights and potential dilution associated with the Series B Units, Series C Units, Operating Partnership units and exchangeable senior notes.
- Post-year-end acquisitions, including the January 2014 purchase of 17 Virginia properties for $199.7 million and the February 2014 Texas acquisition for $14.2 million.