Extra Space Storage Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a fully integrated, self-administered and self-managed REIT that owns, operates, acquires, develops and manages self-storage facilities. The filing covers the unaudited quarter and six months ended June 30, 2014, with comparisons to the comparable 2013 periods. At quarter-end, the company had direct or indirect interests in 807 operating facilities and owned or managed 1,071 properties across 35 states, Washington, D.C. and Puerto Rico.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $160.2 million, up 26.9% | $312.4 million, up 27.2% |
| Income from operations | $70.7 million, up 32.4% | $131.1 million, up 30.9% |
| Operating margin | 44.1%, versus 42.3% | 41.9%, versus 40.8% |
| Net income | $46.0 million, up 24.0% | $87.2 million, up 22.8% |
| Net income attributable to common stockholders | $41.7 million, up 20.9% | $79.0 million, up 19.9% |
| Diluted EPS | $0.36, versus $0.31 | $0.68, versus $0.59 |
| Funds from operations | $76.8 million, up 32.3% | $144.7 million, up 30.0% |
| Cash dividends per common share | $0.47, versus $0.40 | $0.87, versus $0.65 |
Revenue growth was led by property rental revenue, which increased 29.3% in the quarter and 28.8% year to date. Same-store rental and tenant-reinsurance revenue increased 7.9% in both periods, while same-store net operating income increased 9.9% in the quarter and 9.6% year to date. Same-store quarter-end occupancy was 92.4%, compared with 90.8% in the prior-year period. Wholly owned stabilized occupancy was 91.6%, compared with 90.1%.
Average annual rent per square foot for existing customers at stabilized properties increased to $14.26 from $13.67. Average rent for new leases increased to $15.02 from $14.39, while average discounts declined to 3.9% from 4.9%. Tenant-reinsurance participation increased to 70.2% from 69.1%.
Cash flow, balance sheet, debt and liquidity
- Six-month cash flow from operating activities was $167.8 million, compared with $126.6 million in 2013.
- Investing activities used $313.4 million, primarily reflecting $296.9 million of real-estate acquisitions. The company acquired 29 properties during the six months, compared with six in the prior-year period.
- Financing activities provided $72.9 million. The company raised $422.0 million through notes payable and lines of credit and repaid $238.3 million of principal.
- Cash and cash equivalents declined to $53.9 million at June 30, 2014, from $126.7 million at December 31, 2013.
- Total assets were $4.21 billion, including $3.94 billion of net real estate assets. Total liabilities were $2.28 billion.
- Face-value debt, including lines of credit, was $2.174 billion. Debt to total enterprise value was 24.8%, the weighted-average debt interest rate was 3.6%, and 73.7% of debt and related instruments was fixed rate or hedged.
- Credit facilities had $215.0 million of total capacity, of which $10.0 million was drawn. The company was in compliance with all financial covenants.
- Management expects short-term liquidity needs to be funded through operating cash flow, cash on hand and credit facilities, but stated that additional borrowings, joint ventures and equity or debt offerings will likely be required for broader liquidity needs and acquisitions.
Material changes, outlook and unusual items
- Revenue and operating income benefited substantially from acquisitions completed in 2013 and 2014, as well as higher occupancy and rental rates at stabilized properties.
- The company completed 29 acquisitions during the first six months, including a 17-property Virginia portfolio and additional properties in several states. Consideration totaled approximately $349.2 million, including cash, assumed debt and Operating Partnership units.
- A $7.8 million loss was recorded for an earnout payment related to a 2012 acquisition. The 2013 comparison included an $0.8 million gain from an eminent-domain condemnation.
- A $3.4 million non-cash gain resulted from acquiring a joint venture partner’s interest and obtaining full ownership of a California property.
- Interest expense increased 12.7% year to date because of higher debt balances. The company had $250.0 million of 2.375% exchangeable senior notes due 2033, with a first redemption date in 2018.
- Other comprehensive income declined because interest-rate swap fair values produced an $8.4 million year-to-date loss, compared with a $20.0 million gain in 2013.
- Management continues to emphasize revenue management, disciplined acquisitions, expansion of third-party management and use of the UPREIT structure. No specific earnings or same-store operating guidance is provided in the filing.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally generated from May through September.
Risks, contingencies and controls
- Key risks include economic and real-estate market deterioration, competition affecting rents and occupancy, acquisition execution and integration, financing availability and interest-rate increases, asset-value declines, regulatory changes affecting REIT status, joint-venture partner performance, uninsured losses and environmental liabilities.
- A 100-basis-point change in LIBOR would affect annual interest expense and cash flow by approximately $5.3 million, based on the company’s disclosed variable-rate exposure.
- Derivative agreements could require settlement of approximately $3.5 million upon specified defaults; no collateral had been posted at quarter-end.
- The company disclosed no material litigation and no material changes to the risk factors in its 2013 Form 10-K.
- The company’s disclosure controls and procedures were deemed effective, and no material changes to internal control over financial reporting were reported.
- A property acquisition for $11.2 million was completed in Georgia on August 6, 2014, after quarter-end.
Important facts for investors to verify
- Reconcile acquisition-driven growth with same-store performance and assess whether occupancy and rental-rate gains are sustainable.
- Review debt maturities, secured collateral, credit-facility availability, exchangeable-note terms and sensitivity to higher interest rates.
- Assess liquidity after acquisitions and dividends, particularly given the decline in cash and management’s expectation of additional external capital.
- Evaluate the effect of the $7.8 million earnout loss and other non-cash gains on recurring earnings and FFO.
- Verify the company’s ability to maintain REIT qualification while funding growth and meeting required distributions.
- Review joint-venture, preferred Operating Partnership unit and redemption obligations, including the $231.7 million potential cash redemption value of outstanding OP Units at June 30, 2014.