Extra Space Storage Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties. This Form 10-K covers the fiscal year ended December 31, 2012, with quarterly data for the three months ended December 31, 2012.
- At year-end, the Company owned or held interests in 729 operating properties and managed 181 additional third-party properties, totaling 910 properties across 34 states, Washington, D.C. and Puerto Rico.
- The portfolio represented approximately 67.0 million rentable square feet, 610,000 units and more than 490,000 tenants.
- The Company operated through rental operations, property management/acquisition/development and tenant reinsurance activities, using an UPREIT structure.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $409.4 million | $329.8 million | 24.1% |
| Property rental revenue | $346.9 million | $268.7 million | 29.1% |
| Tenant reinsurance revenue | $36.8 million | $31.2 million | 18.1% |
| Management fee revenue | $25.7 million | $29.9 million | (14.1%) |
| Income from operations | $157.2 million | $115.5 million | 36.2% |
| Net income | $127.7 million | $58.4 million | 118.6% |
| Net income attributable to common stockholders | $117.3 million | $50.4 million | 132.5% |
| Diluted EPS | $1.14 | $0.54 | 111.1% |
| Funds from operations | $169.4 million | $115.8 million | 46.2% |
| Net cash from operating activities | $215.9 million | $144.2 million | 49.8% |
Reported operating margin was approximately 38.4%, net margin attributable to common stockholders was approximately 28.7%, and FFO as a percentage of revenue was approximately 41.4%. These margins benefited from operating growth and significant gains recognized through joint venture transactions.
- Same-store rental and tenant reinsurance revenue increased 6.6% for the year, while same-store net operating income increased 10.2%.
- Same-store stabilized occupancy increased to 88.6% at December 31, 2012, from 86.9% at December 31, 2011.
- Average annual rent per square foot at stabilized properties increased to approximately $13.88 from $13.50.
- The Company paid common dividends of $0.85 per share for 2012, including $0.25 per share in the fourth quarter.
Cash flow, debt and liquidity
- Cash provided by operating activities was $215.9 million. Cash used in investing activities was $606.9 million, principally reflecting $601.7 million of property acquisitions. Cash provided by financing activities was $395.4 million.
- Year-end cash and cash equivalents were $30.8 million, compared with $26.5 million at December 31, 2011.
- Total debt was approximately $1.574 billion, producing a debt-to-total-capitalization ratio of 27.5%. The weighted-average interest rate was 4.2%.
- Approximately $298.7 million, or 19.0% of debt excluding debt with swaps, was subject to variable interest rates. A 100-basis-point change in applicable rates was estimated to affect annual earnings and cash flow by approximately $2.6 million.
- Credit lines totaled $240.0 million of capacity, with $85.0 million drawn at year-end. The Company was in compliance with all financial covenants.
- Contractual obligations totaled $2.008 billion, including $1.574 billion of principal and $364.8 million of estimated interest. Principal due within one year was $110.5 million.
Material changes versus the prior comparable period
- The Company acquired 91 wholly owned properties in 2012, compared with 55 in 2011, and completed one wholly owned development.
- Real estate assets, net, increased to $2.992 billion from $2.264 billion, and total assets increased to $3.223 billion from $2.518 billion.
- Property rental growth was driven by acquisitions, higher occupancy and rental rates, and improved lease-up performance. New-tenant rental rates increased approximately 4.1% year over year; existing-customer increases generally targeted 7% to 10% annually.
- Equity in earnings of real estate ventures increased to $10.9 million from $7.3 million.
- Net income included $30.6 million of gains related to joint venture property sales and the acquisition of joint venture partners’ interests, including $23.7 million of non-cash remeasurement gains.
- Interest expense increased because of higher debt balances, partially offset by lower average interest rates. Year-end face-value debt increased to $1.574 billion from $1.359 billion, while the average interest rate declined to 4.2% from 4.7%.
- Management fee revenue declined because 2011 included a $4.425 million prior-period asset-management-fee adjustment relating to 2006–2010.
- Tenant reinsurance expense increased by $1.7 million, including approximately $1.0 million of claims related to Superstorm Sandy.
Fourth-quarter information, outlook and risks
For the quarter ended December 31, 2012, revenue was $113.7 million, net income was $38.9 million, net income attributable to common stockholders was $36.1 million, and basic and diluted EPS were each $0.33. The filing does not provide a clear quantitative earnings or revenue forecast for 2013.
- Management expected to fund operating expenses, recurring capital expenditures, dividends and interest from operating cash flow, cash on hand and credit-line borrowings, while using additional debt, joint ventures and equity or debt offerings for acquisitions and other liquidity needs.
- Management continued to pursue acquisitions, disciplined pricing, development and expansion of the management business, but noted increasing acquisition prices and competition.
- The self-storage business is seasonal, with generally higher occupancy and profitability from May through September.
- Key risks include competition and oversupply, changes in occupancy and rental rates, acquisition and integration execution, refinancing and interest-rate exposure, property valuation declines, uninsured losses, environmental and ADA compliance costs, tenant reinsurance regulation, joint venture partner performance and maintenance of REIT status.
- The Company had guarantees associated with certain unconsolidated joint ventures. Maximum exposure to loss for two VIE joint ventures was $17.9 million, and additional guaranteed loans included $5.1 million, $4.3 million and $4.0 million maturities associated with specified joint ventures. Management considered material loss risk remote and recorded no related liability.
- On February 12, 2013, the Company acquired two properties in Illinois and Maryland for approximately $12.9 million in cash through the purchase of a joint venture partner’s interest.
Most important facts for an investor to verify
- Reconcile reported net income and EPS with recurring operating performance, excluding the $30.6 million of joint venture-related gains.
- Assess whether same-store occupancy, rental-rate growth and NOI growth can continue after the significant acquisition program.
- Review the $110.5 million of principal maturities due within one year and the Company’s refinancing and credit-line extension plans.
- Evaluate leverage, variable-rate exposure, interest-rate swaps and the estimated $2.6 million annual cash-flow sensitivity to a 100-basis-point rate change.
- Review acquisition underwriting, including the $601.7 million of acquisition cash outflows and the effect of increased acquisition prices on future returns.
- Confirm the sustainability of dividends and FFO relative to required REIT distributions, recurring capital expenditures and debt service.
- Examine joint venture guarantees, partner dependencies, related-party transactions and the Company’s ongoing compliance with REIT and insurance regulations.