Extra Space Storage Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered, self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage facilities. This filing covers the fiscal year ended December 31, 2011; the source provides annual results and fourth-quarter supplementary data rather than a standalone quarterly filing.
- At year-end, the Company owned interests in 697 properties, including 356 wholly owned and 341 held through joint ventures, and managed an additional 185 third-party or franchise properties.
- The portfolio covered approximately 64 million rentable square feet, 585,000 units and more than 448,000 tenants across 34 states and Washington, D.C.
- The Company operates through property management, acquisition and development; rental operations; and tenant reinsurance. Development activities were being wound down, with one project remaining and expected to be completed by the end of the first quarter of 2012.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenues | $329.8 million | $281.5 million | 17.2% |
| Property rental revenue | $268.7 million | $232.4 million | 15.6% |
| Management and franchise fees | $29.9 million | $23.1 million | 29.4% |
| Tenant reinsurance revenue | $31.2 million | $25.9 million | 20.3% |
| Income from operations | $115.5 million | $90.8 million | 27.2% |
| Operating margin | 35.0% | 32.3% | Up 270 basis points |
| Net income | $58.4 million | $33.4 million | 75.0% |
| Net income attributable to common stockholders | $50.4 million | $26.3 million | 91.5% |
| Diluted earnings per share | $0.54 | $0.30 | 80.0% |
| Funds from operations | $115.8 million | $83.7 million | 38.3% |
| Net cash provided by operating activities | $144.2 million | $104.8 million | 37.5% |
- Same-store stabilized revenue increased 4.9%, same-store net operating income increased 7.6%, and year-end same-store occupancy rose to 87.8% from 84.7%.
- Year-end stabilized portfolio occupancy was 84.9%, compared with 82.3% on a pro forma basis in 2010. Average annual rent per square foot at stabilized properties increased to $13.67 from $13.49.
- Total assets were $2.516 billion, including $2.264 billion of net real estate assets, compared with $2.250 billion and $1.972 billion, respectively, in 2010.
- Cash and cash equivalents were $26.5 million at year-end, compared with $46.8 million in 2010.
- Cash used in investing activities was $251.9 million, principally reflecting $195.0 million of property acquisitions. The Company acquired 55 wholly owned properties and completed five wholly owned developments during 2011.
- Cash provided by financing activities was $87.5 million, including $112.3 million of net common-stock offering proceeds.
Debt, liquidity and capitalization
- Debt was approximately $1.36 billion on the contractual-obligation basis, and total liabilities were $1.442 billion. Debt to total capitalization was 36.2%.
- The weighted-average interest rate on total debt was 4.7%; approximately 75.5% of debt was fixed-rate or effectively fixed through interest-rate swaps.
- Approximately $332.9 million of debt was subject to variable rates, excluding debt with swaps. A 100-basis-point increase in applicable market rates was estimated to increase annual interest expense by approximately $2.6 million.
- Credit lines had $215.0 million drawn against $336.0 million of total capacity. The earliest listed credit-line maturity was October 31, 2012, for a $100.0 million facility.
- Contractual obligations totaled $1.786 billion, including $1.359 billion of principal and $364.4 million of interest. Payments due within one year totaled $293.0 million.
- The Company stated that it was in compliance with all financial covenants at December 31, 2011, but expected operating cash flow alone to be insufficient for all liquidity needs. Refinancing, additional debt, joint ventures and equity or debt offerings were expected to remain important funding sources.
Material changes versus the prior comparable period
- Revenue growth was driven by acquisitions, higher occupancy and rental rates at stabilized properties, lease-up activity, expanded management operations and increased tenant-reinsurance participation.
- Management and franchise properties increased to 185 from 160, while total operated properties increased to 882 from 820.
- Total expenses increased 12.4%, below the 17.2% revenue increase. Property operations increased 10.8%, while depreciation and amortization increased 15.2% due to acquisitions and development.
- Interest expense increased 5.0% because of higher average debt and loan-prepayment costs.
- 2011 included $2.1 million of severance costs related to the former CFO’s departure and $1.8 million of litigation expense. The prior year included a $2.0 million loss on a sublease following a tenant bankruptcy.
- The Company recorded $4.425 million of previously unrecorded asset-management fees relating to 2006–2010 in 2011, plus $812,000 for 2011. Management concluded the amounts were not material enough to require prior-period restatement. A related receivable of $5.327 million was expected to be collected by the end of 2012.
- No impairment losses were recorded in 2011 or 2010, compared with substantial development-related impairment activity in 2009.
Guidance, outlook, commentary and risks
- Management intended to focus on proactive revenue and expense management, acquisitions from strategic partners and third parties, and expansion of the management platform. No specific quantitative earnings or FFO guidance was provided in the filing text.
- The Company expected to complete its remaining development project by the end of the first quarter of 2012 and planned to finance future acquisitions through cash, credit lines, secured mortgages, joint ventures and additional equity offerings.
- Key risks include competition and oversupply, occupancy and rental-rate declines, month-to-month tenant turnover, seasonal demand, higher operating costs, interest-rate increases, debt refinancing risk, restricted credit-market access, property-value declines and impairment charges.
- Additional risks include uninsured or underinsured property losses, environmental and Americans with Disabilities Act compliance costs, regulatory changes affecting REIT status, joint-venture partner performance, and dilution from future equity issuance.
- The Company guaranteed approximately $13.5 million of loans for certain unconsolidated joint ventures and reported a maximum exposure to loss of approximately $18.0 million for two variable-interest joint ventures. No liability was recorded because management considered a material loss unlikely.
- The filing reports no material litigation expected to have a material adverse effect, although $1.8 million was accrued for routine litigation matters.
- Ernst & Young LLP issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile annual results with the fourth-quarter supplementary data, including the cumulative asset-management-fee adjustment included in fourth-quarter revenue.
- Review the maturity and refinancing plan for the $226.0 million of principal obligations due within one year, including the October 2012 credit-line maturity and exchangeable-note repurchase provisions.
- Assess whether occupancy, rental-rate growth and same-store NOI trends remain sustainable after the reported 2011 improvement.
- Evaluate acquisition returns and leverage effects from the 55-property acquisition program and the increase in debt and real estate assets.
- Monitor variable-rate debt exposure, interest-rate swaps and the estimated $2.6 million annual sensitivity to a 100-basis-point rate change.
- Review the collection and related-party nature of the $5.327 million asset-management-fee receivable and the Company’s joint-venture guarantees.
- Confirm continued REIT qualification and the ability to fund required distributions while meeting debt-service and capital requirements.