Business Context and Reporting Period
Company: Extra Space Storage Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Extra Space Storage is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and managing self-storage facilities. As of March 31, 2010, the Company owned or held interests in 643 operating facilities across 33 states and D.C., and managed an additional 125 properties for third parties. The Company operates in three segments: property management/acquisition/development, rental operations, and tenant reinsurance.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $67,587 | $69,247 |
| Net Income (GAAP) | $5,179 | $30,762 |
| Net Income Attributable to Common Stockholders | $3,568 | $27,619 |
| Funds From Operations (FFO) | $17,354 | $42,921 |
| Net Cash Provided by Operating Activities | $16,015 | $18,618 |
| Total Assets | $2,237,462 | $2,407,556 |
| Total Debt (Notes Payable, Lines of Credit, Exchangeable Notes) | $1,243,721 | $1,407,256 |
| Cash and Cash Equivalents | $108,740 | $54,478 |
| Dividends Paid per Common Share | $0.10 | $0.25 |
Note: All amounts in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 2.4% to $67.6 million. Property rental revenue dropped 5.5% primarily due to the sale of 19 properties to a joint venture with Harrison Street in January 2010 and the deconsolidation of five properties following new accounting guidance (ASC 810). This was partially offset by a 27.6% increase in tenant reinsurance revenue due to higher customer participation.
- Significant Drop in Net Income: Net income attributable to common stockholders fell 87% to $3.6 million. The prior year period included a one-time gain of $22.5 million from the repurchase of exchangeable senior notes, which did not recur in Q1 2010.
- Debt Reduction: Total debt decreased by approximately $163 million, driven by the deconsolidation of debt associated with the Harrison Street joint venture and the deconsolidation of five other properties.
- Dividend Reduction: The quarterly dividend was reduced to $0.10 per share from $0.25 per share in the prior year.
- Investing Cash Flow: Shifted from a use of cash of $33.6 million in Q1 2009 to a source of cash of $11.8 million in Q1 2010, largely due to $15.8 million in proceeds from the sale of properties to the Harrison Street joint venture.
Guidance, Outlook, and Risks
Management Commentary:
- Development Wind-Down: The Company announced a wind-down of its development activities in June 2009. As of March 31, 2010, nine development projects remained in process, expected to be completed in 2010 and 2011.
- Same-Store Performance: Same-store stabilized property net operating income (NOI) decreased slightly by 0.3% to $35.0 million. Same-store occupancy increased to 82.7% from 80.9% in the prior year, though rental rates to incoming customers declined.
- Liquidity Strategy: The Company intends to use its cash balance of $108.7 million to repay debt maturing in 2010 and 2011. It maintains two credit lines: a $100 million line (fully drawn) and a $50 million secondary line (undrawn).
Risks and Contingencies:
- Market Conditions: Continued turbulence in credit and financial markets may adversely affect liquidity, the ability to raise capital, and the financial condition of customers.
- Competition: Competition from new facilities could cause rents and occupancy rates to decline.
- Accounting Changes: The adoption of ASC 810 resulted in the deconsolidation of five joint ventures, altering the presentation of assets, liabilities, and earnings.
- Guarantees: The Company guarantees loans for certain unconsolidated joint ventures with a total exposure of approximately $36 million, though no liability has been recorded as the risk of loss is deemed unlikely.
Investor Verification Checklist
- Dividend Sustainability: Verify the rationale and future outlook for the significant reduction in the quarterly dividend from $0.25 to $0.10.
- Debt Maturities: Review the schedule of debt maturities, specifically the $135.6 million due within one year, to assess refinancing risks in the current credit environment.
- Joint Venture Accounting: Confirm the impact of the ASC 810 adoption on future earnings, specifically regarding the deconsolidation of the Harrison Street joint venture and other VIEs.
- Same-Store Trends: Monitor the trend of declining rental rates in the same-store portfolio despite increased occupancy.
- Development Pipeline: Assess the status and capital requirements of the remaining nine development projects following the announced wind-down of development activities.