Extra Space Storage Inc. — 2012 Q2 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 and manages self-storage properties. The filing covers the three and six months ended June 30, 2012. At quarter-end, the company had interests in 703 operating properties, managed 179 additional properties, and owned or managed approximately 64 million square feet and 585,000 units across 34 states and Washington, D.C.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenue | $95.0 million | $78.0 million | $185.9 million | $152.5 million |
| Income from operations | $37.9 million | $25.9 million | $70.6 million | $49.9 million |
| Net income | $24.7 million | $12.5 million | $47.3 million | $22.7 million |
| Net income attributable to common stockholders | $22.4 million | $10.6 million | $42.6 million | $18.9 million |
| Diluted EPS | $0.22 | $0.12 | $0.43 | $0.21 |
| Funds from operations | $41.0 million | $25.9 million | $74.1 million | $49.4 million |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $92.6 million | $65.2 million |
Income from operations represented approximately 39.9% of Q2 revenue versus 33.1% in the prior-year quarter. Net income attributable to common stockholders represented approximately 23.6% of revenue versus 13.6% previously. The filing does not present a company-defined net margin or adjusted margin measure.
- Same-store revenue increased 6.7% in Q2 and 6.5% for the six-month period; same-store net operating income increased 10.2% and 10.5%, respectively.
- Stabilized property occupancy increased to 89.3% from 86.5% on a pro forma comparable basis. Same-store occupancy was 90.4% versus 87.7%.
- Average annual rent per square foot for existing customers increased to $13.49 from $13.16; new-lease rent increased to $14.37 from $13.88.
- Cash dividends were $0.20 per common share in Q2 and $0.40 per share for the first six months, versus $0.14 and $0.28, respectively, in the prior-year periods.
Balance Sheet, Debt and Liquidity
| Metric | June 30, 2012 | December 31, 2011 |
|---|---|---|
| Total assets | $2.708 billion | $2.516 billion |
| Cash and cash equivalents | $185.5 million | $26.5 million |
| Total debt, including notes payable to trusts and lines of credit | $1.308 billion | Comparable total not clearly provided |
| Stockholders’ equity | $1.256 billion | $1.019 billion |
| Debt to total capitalization | 28.3% | Not provided |
- Total debt had a weighted-average interest rate of 4.5%; 82.0% was fixed-rate debt or treated as fixed-rate through interest-rate swaps.
- Available line-of-credit capacity was $339.0 million, of which $100.0 million was drawn. The $100.0 million drawn facility matured October 31, 2012 and had extension provisions.
- Management stated that all financial covenants were satisfied at June 30, 2012.
- Six-month financing cash flow was $132.3 million, including $226.7 million of net common-stock offering proceeds. Cash increased by $159.0 million to $185.5 million.
- Contractual obligations totaled $1.731 billion, including $1.308 billion of debt principal and $358.8 million of estimated interest.
Material Changes Versus the Prior Comparable Period
- Revenue increased 21.7% in Q2 and 21.9% for the six months, driven primarily by acquisitions, higher occupancy and rental rates, and increased tenant-reinsurance participation.
- Property rental revenue increased 23.3% in both periods. Management and franchise fees increased 8.4% in Q2 and 9.4% year to date; tenant-reinsurance revenue increased 18.6% and 20.1%.
- Total expenses increased 9.4% in Q2 and 12.3% year to date, below revenue growth. Depreciation and amortization increased 18.0% and 19.8%, reflecting property acquisitions and development.
- FFO increased 58.4% in Q2 and 50.1% for the six months. The six-month result included a $5.429 million gain from the sale of a joint-venture property.
- The company issued 8.05 million common shares for net proceeds of $226.7 million and settled $87.7 million of exchangeable senior notes in April 2012, paying cash for principal and issuing 684,685 common shares for the excess exchange value.
- The company completed six property acquisitions during the first six months of 2012, compared with 24 in the comparable 2011 period. It had completed 55 acquisitions during 2011.
Outlook, Commentary, Risks and Unusual Items
Management emphasized revenue management, disciplined acquisitions, expansion of the third-party management platform, and the use of operating cash flow, cash on hand, credit facilities, additional debt, joint ventures and equity offerings to fund liquidity needs. The filing does not provide explicit earnings, revenue, occupancy or FFO guidance.
- Self-storage results are seasonal, with a greater portion of revenue and profit generally realized from May through September.
- Management cited increasing acquisition prices and stated that it remained a disciplined buyer. It also noted continuing tight credit conditions and economic uncertainty.
- Interest-rate sensitivity: approximately $235.6 million of debt was variable-rate, excluding debt with swaps. A 100-basis-point LIBOR change was estimated to affect annual interest expense, earnings and cash flow by approximately $2.1 million.
- The company guaranteed certain unconsolidated joint-venture loans. Maximum exposure to loss for disclosed VIE-related arrangements was approximately $26.0 million, and additional guaranteed loans totaled approximately $13.4 million; no guarantee liability was recorded because management considered material loss unlikely.
- Routine litigation liability was $1.8 million. Management reported no material litigation expected to materially affect financial condition or results.
- Interest-rate swaps had a fair-value liability of $12.0 million and generated a $3.7 million decrease in other comprehensive income during the first six months.
- Subsequent to quarter-end, the company acquired PREI’s 94.9% interest in a joint venture for approximately $300 million, including approximately $162 million of cash and assumption of a $145 million loan. It also acquired nine additional properties and land interests for aggregate disclosed consideration of approximately $75.5 million.
Investor Verification Items
- Verify the effect of the PREI transaction and subsequent property acquisitions on third-quarter debt, leverage, earnings and FFO.
- Assess refinancing or extension plans for the $100 million line of credit maturing October 31, 2012 and other debt maturities.
- Reconcile reported FFO with GAAP net income and isolate the impact of the $5.429 million joint-venture sale gain.
- Monitor same-store occupancy, rental-rate growth, discounts and operating expenses as acquisition-related growth becomes a smaller portion of comparisons.
- Review exposure from joint-venture guarantees, VIE arrangements, interest-rate swaps and the $100 million note receivable from Preferred Operating Partnership unit holders.
- Confirm continued REIT qualification and the company’s ability to fund required distributions, acquisitions, debt service and capital expenditures.