Extra Space Storage Inc. — Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a fully integrated, self-managed REIT focused on owning, operating, acquiring, developing, redeveloping and managing self-storage properties. The filing covers the three and nine months ended September 30, 2017, with unaudited interim financial statements.
At September 30, 2017, the Company had direct or indirect ownership interests in 1,028 stores and managed 485 third-party stores, for a total of 1,513 stores across 38 states, Washington, D.C. and Puerto Rico. The owned and joint-venture portfolio included 844 wholly owned stores, two stores in consolidated joint ventures and 182 stores in unconsolidated joint ventures.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $284.2 million | $257.2 million | $823.2 million | $730.9 million |
| Income from operations | $139.9 million | $122.7 million | $400.5 million | $326.7 million |
| Operating margin | 49.2% | 47.7% | 48.7% | 44.7% |
| Net income | $101.1 million | $127.2 million | $284.9 million | $306.7 million |
| Net income attributable to common stockholders | $93.8 million | $118.1 million | $263.1 million | $283.7 million |
| Diluted EPS | $0.74 | $0.93 | $2.07 | $2.24 |
| FFO attributable to common stockholders and unit holders | $147.6 million | $134.5 million | $431.6 million | $360.3 million |
| Cash dividends per common share | $0.78 | $0.78 | $2.34 | $2.15 |
Revenue increased 10.5% in the quarter and 12.6% year to date. Property rental revenue increased 10.8% in the quarter and 13.4% year to date, while tenant reinsurance revenue increased 13.9% and 12.5%, respectively. Management fees and other income declined 3.2% in both comparison periods.
Net income attributable to common stockholders declined 20.6% in the quarter and 7.3% year to date, primarily because the 2016 periods included significant gains from step acquisitions and sales of joint-venture interests. FFO increased 9.8% in the quarter and 19.8% year to date, reflecting stronger operating performance and the exclusion of real-estate depreciation and unusual transaction gains or losses.
Same-store rental revenue increased 4.8% in the quarter and 5.2% year to date. Same-store net operating income increased 5.5% and 7.4%, respectively. Same-store square-foot occupancy was 93.9% at September 30, 2017, compared with 92.5% on a comparable basis in the prior year.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $449.6 million for the nine months ended September 30, 2017, compared with $386.2 million in the prior-year period.
- Cash used in investing activities was $87.7 million, versus $704.3 million in 2016, primarily because the Company acquired nine stores in 2017 compared with 72 stores in the comparable period.
- Cash used in financing activities was $342.0 million, compared with $261.0 million of cash provided in 2016. The change reflected higher debt repayments, increased dividends and the absence of 2016 common-stock issuance proceeds.
- Cash and cash equivalents totaled $63.7 million at September 30, 2017, compared with $43.9 million at December 31, 2016. Restricted cash was $17.3 million.
- Total assets were $7.09 billion. Notes payable, exchangeable senior notes, notes payable to trusts and revolving credit borrowings totaled approximately $4.31 billion on the balance sheet.
- Total face-value debt, including revolving lines, was $4.36 billion. Debt to total enterprise value was 28.9%; 80.8% of total debt and related instruments was fixed-rate or hedged, and the weighted-average interest rate was 3.3%.
- The Company had $25.0 million drawn under $600.0 million of revolving credit capacity. Management stated that all financial covenants were satisfied at quarter end.
- On August 24, 2017, the Operating Partnership issued $300 million of 10-year senior notes bearing interest at 3.95%; proceeds were used to refinance existing indebtedness and for general corporate purposes.
Material changes versus the prior comparable period
- Revenue and operating income grew substantially, supported by acquisitions, higher occupancy and rental-rate increases.
- Wholly owned stabilized occupancy increased to 93.8% from 92.3%. New-tenant rental rates increased approximately 4.8% year over year.
- Property operations expense increased 13.0% in the quarter and 9.9% year to date. Tenant reinsurance expense increased 53.2% in the quarter and 13.4% year to date, partly because of hurricane-related claims.
- Interest expense increased 18.7% in the quarter and 15.9% year to date because of higher debt balances and a higher average interest rate. Face-value debt increased from $4.05 billion at September 30, 2016 to $4.36 billion at September 30, 2017.
- Acquisition-related costs declined to zero from $1.9 million in the quarter and $9.1 million year to date because the Company adopted ASU 2017-01 and began capitalizing qualifying acquisition costs.
- The Company recorded a $6.0 million real-estate impairment loss year to date, compared with a $9.8 million gain in the prior-year period. The prior-year period also included $64.4 million of gains from step acquisitions and the sale of a joint-venture interest.
- The Company acquired nine stores during the first nine months of 2017 for a total property value of $92.2 million, including cash, assumed debt, noncontrolling interests and Operating Partnership units.
- In July and August 2017, the Company repurchased $13.8 million principal amount of its 2013 exchangeable senior notes for total consideration of $19.9 million.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a specific quantitative earnings, revenue or FFO guidance range. Management describes a strategy centered on maximizing store performance through revenue management and expense control, pursuing disciplined acquisitions, and expanding the third-party management business.
Management expects short-term liquidity needs to be funded through operating cash flow, cash on hand and revolving credit availability. It also expects to pursue additional secured or unsecured debt, joint ventures and equity or debt offerings to fund acquisitions and other capital requirements. Additional financing may be unavailable or costly, and equity issuance could dilute existing stockholders.
- Hurricanes Harvey, Irma and Maria affected properties in Texas, Florida and Puerto Rico. Recorded losses included $2.1 million of property damage net of insurance recoveries and $2.25 million of tenant reinsurance claims.
- As of September 30, 2017, the Company was committed to acquire 35 stores for $462.1 million and 19 stores with joint-venture partners requiring total investment of $96.8 million.
- Subsequent to quarter end, the Company purchased seven stores for $83.1 million.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September.
- Key risks include competition and pressure on rents or occupancy, interest-rate and refinancing risk, access to capital, acquisition and integration execution, property impairments, natural disasters, uninsured losses, environmental liabilities, litigation, joint-venture performance, regulatory changes and maintaining REIT status.
- The Company held 30 interest-rate derivatives with a combined notional amount of $2.26 billion. A 100-basis-point change in variable rates would affect annual interest expense by approximately $8.4 million before mitigation.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the decline in GAAP net income and EPS with the increase in FFO by separating recurring operating results from 2016 transaction gains and 2017 impairment charges.
- Assess the sustainability of same-store NOI growth, occupancy gains and rental-rate increases, particularly as the portfolio expands and competition develops.
- Review debt maturities, refinancing requirements, floating-rate exposure, covenant headroom and the effect of higher interest rates on cash flow.
- Evaluate the funding plan for the $462.1 million of pending acquisitions and additional joint-venture commitments, including potential debt or equity issuance.
- Monitor hurricane-related costs, insurance recoveries, tenant reinsurance claims and any additional effects from natural disasters.
- Confirm the effect of lease-up properties, which represented 167 stores with 50.9% occupancy, on future operating results and capital needs.
- Review the Company’s ability to maintain REIT qualification and its obligation to distribute at least 90% of annual taxable income, excluding net capital gains.