Extra Space Storage Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered and self-managed REIT that owns, operates, manages, acquires, develops and redevelops self-storage properties. The filing covers the three and nine months ended September 30, 2018, with comparative periods ended September 30, 2017. At quarter-end, the Company owned or held interests in 1,099 stores and managed 507 additional stores, for 1,606 stores across 39 states, Washington, D.C. and Puerto Rico.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $307.0 million | $284.2 million | $889.3 million | $823.2 million |
| Income from operations | $153.6 million | $139.9 million | $432.2 million | $400.5 million |
| Net income | $139.7 million | $101.1 million | $337.8 million | $284.9 million |
| Net income attributable to common stockholders | $130.4 million | $93.8 million | $313.8 million | $263.1 million |
| Diluted EPS | $1.02 | $0.74 | $2.48 | $2.07 |
| Funds from operations attributable to common stockholders and unit holders | $160.6 million | $147.6 million | $460.7 million | $431.6 million |
| Cash dividends per common share | $0.86 | $0.78 | $2.50 | $2.34 |
Q3 operating margin was approximately 50.0%, compared with 49.2% in the prior-year quarter. Net margin attributable to common stockholders was approximately 42.5%, compared with 33.0%, benefiting substantially from a $30.7 million gain on the sale of a California store. Nine-month operating margin was approximately 48.6%, compared with 48.6% in the prior-year period.
- Q3 revenue increased 8.0%; property rental revenue rose 7.3%, tenant reinsurance revenue rose 16.3%, and management fees and other income rose 4.5%.
- Q3 total expenses increased 6.3%, including property operations up 4.6%, tenant reinsurance expense up 23.1%, and depreciation and amortization up 8.8%.
- Same-store rental revenue increased 3.2% in Q3 and 4.2% for nine months. Same-store NOI increased 3.3% in Q3 and 3.9% for nine months. Same-store occupancy was 93.9%, versus 93.7% in both comparable periods.
- Average annual rent per square foot for existing customers rose to $16.21 from $15.75; rent for new leases rose to $17.77 from $16.87. Average discounts increased to 4.5% from 3.8% at stabilized properties.
Cash flow, debt and liquidity
| Metric | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $45.4 million | $55.7 million |
| Total assets | $7.80 billion | $7.46 billion |
| Notes payable, net | $4.10 billion | $3.74 billion |
| Exchangeable senior notes, net | $560.6 million | $604.3 million |
| Revolving lines of credit | None outstanding | $94.0 million |
| Total liabilities | $5.03 billion | $4.74 billion |
- Cash provided by operating activities was $529.0 million for nine months, up from $449.6 million.
- Cash used in investing activities was $317.0 million, primarily reflecting $327.0 million of acquisitions, $45.4 million of development and redevelopment, and $52.8 million invested in unconsolidated ventures.
- Cash used in financing activities was $231.5 million, including $315.6 million of common dividends, $80.3 million to repurchase exchangeable senior notes, and net principal repayments.
- Cash, cash equivalents and restricted cash declined to $66.6 million from $86.0 million at the beginning of the year.
- Total face-value debt was $4.80 billion, equal to 29.1% of enterprise value. The weighted-average interest rate was 3.5%, versus 3.3% at September 30, 2017; 74.4% of debt and hedged instruments was fixed-rate. Management reported compliance with all financial covenants.
- Interest-rate sensitivity was material: a 100-basis-point increase or decrease in rates would affect annual interest expense, earnings and cash flows by approximately $12.3 million, based on the filing’s analysis.
Material changes versus the prior comparable period
- The portfolio expanded to 1,099 owned or partially owned stores from 1,028 in the prior-year comparable period. The Company acquired 28 stores during the first nine months of 2018, compared with nine during the first nine months of 2017.
- Revenue growth reflected acquisitions, higher rental rates and expanded tenant reinsurance coverage. Acquisitions contributed $17.1 million of Q3 property rental growth and $42.1 million of nine-month growth; property sales partially offset growth.
- Interest expense increased 15.5% in Q3 and 15.1% for nine months, driven by higher debt and interest rates.
- Net income benefited from a $30.7 million gain on the sale of a California store. The prior-year nine-month period included a $6.0 million impairment loss on land.
- The Company redeemed all remaining $49.3 million principal amount of its 2013 exchangeable senior notes in July 2018 for $80.3 million in cash. The remaining exchangeable debt was $575.0 million principal amount of 2015 notes due 2035.
- The Company sold 343,251 shares under its at-the-market equity program for net proceeds of $33.8 million and had $315.1 million remaining available under the program at quarter-end.
- The Company adopted revenue recognition, restricted cash and targeted hedge-accounting standards in 2018 without a material impact on reported financial statements.
Outlook, commentary, risks and unusual items
Management expects to fund operating expenses, recurring capital expenditures, dividends, distributions and interest from operating cash flow, cash on hand and revolving credit availability, while pursuing additional financing as needed. No specific earnings or revenue guidance was provided in the filing.
- Pending commitments included acquisitions of 13 stores for $161.4 million and investments in 18 stores with joint venture partners totaling $62.5 million. Subsequent to quarter-end, the Company purchased three stores for $31.9 million.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September. Quarterly results may not indicate full-year performance.
- Key risks include competition and potential declines in rents or occupancy, higher interest rates, disruptions in credit markets, acquisition and development execution risk, real estate valuation declines and impairment charges, uninsured losses, environmental liabilities, regulatory and REIT-status risk, joint venture decision-making limitations, and natural disasters or other economic disruptions.
- The Company was involved in ordinary-course legal proceedings and claims. Outcomes were not presently determinable, and potential losses could exceed accrued amounts.
- The Company held 29 interest-rate derivatives with a combined notional amount of $2.16 billion and reported $75.3 million of swap assets. Certain derivative agreements could require cash settlement upon specified debt or covenant defaults.
- Management stated that there were no material changes to the risk factors disclosed in the 2017 Form 10-K, and disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether same-store rent growth, occupancy and NOI remain durable as discounts, property taxes, insurance and other operating costs increase.
- The pace and pricing of pending acquisitions, development spending and joint venture investments, including the Company’s funding sources.
- Debt maturities, refinancing requirements, variable-rate exposure and compliance with financial covenants as interest rates change.
- The sustainability of dividends and distributions relative to operating cash flow, FFO and acquisition-related capital needs.
- The extent to which reported earnings growth depends on the nonrecurring $30.7 million property-sale gain and other acquisition-related effects.
- Potential litigation, environmental, insurance and derivative-contingency exposures that may not yet be quantifiable.