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 six months ended June 30, 2017; financial statements are unaudited and prepared under U.S. GAAP.
- At June 30, 2017, the company had direct or indirect interests in 1,023 stores and managed 447 additional third-party stores, for 1,470 stores across 38 states, Washington, D.C. and Puerto Rico.
- The company operated 840 wholly owned stores, held interests in 183 joint-venture stores and managed 447 third-party stores.
- Stabilized stores represented 1,335 locations with 94.2% square-foot occupancy, compared with 93.3% on a pro forma basis at June 30, 2016.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenue | $276.0 million | $244.3 million | 13.0% |
| Income from operations | $136.4 million | $110.3 million | 23.7% |
| Net income | $94.1 million | $90.0 million | 4.5% |
| Net income attributable to common stockholders | $87.0 million | $83.0 million | 4.8% |
| Basic/diluted EPS | $0.69/$0.69 | $0.66/$0.66 | Higher |
| FFO attributable to common stockholders and unit holders | $146.1 million | $120.9 million | 20.9% |
- Q2 operating margin was approximately 49.4%; net income attributable to common stockholders represented approximately 31.5% of revenue.
- Property rental revenue increased 13.7% to $240.8 million, supported by acquisitions, higher occupancy and increased rental rates.
- Tenant reinsurance revenue increased 12.3% to $24.3 million. Management fees and other income were essentially flat at $10.9 million.
- Same-store rental revenue increased 5.2%, same-store operating expenses decreased 1.1% and same-store net operating income increased 7.7% in the quarter. Same-store occupancy rose to 94.4% from 93.7%.
- Average annual rent per square foot for existing customers increased to $15.46 from $14.80; rent for new leases increased to $16.89 from $16.09.
Six-Month Results and Cash Flow
| Metric | Six months ended June 30, 2017 | Six months ended June 30, 2016 | Change |
|---|---|---|---|
| Total revenue | $539.0 million | $473.7 million | 13.8% |
| Income from operations | $260.6 million | $203.9 million | 27.8% |
| Net income attributable to common stockholders | $169.3 million | $165.6 million | 2.2% |
| Basic/diluted EPS | $1.34/$1.33 | $1.33/$1.32 | Higher |
| FFO attributable to common stockholders and unit holders | $284.0 million | $225.8 million | 25.8% |
| Net cash provided by operating activities | $289.0 million | $239.7 million | 20.6% |
| Net cash used in investing activities | $49.0 million | $406.0 million | Lower use |
| Net cash provided by/(used in) financing activities | $(252.2) million | $131.6 million | Shift to use |
Cash and cash equivalents were $31.6 million at June 30, 2017, compared with $43.9 million at December 31, 2016. The company paid $196.5 million in common dividends during the first six months, or $1.56 per share.
Debt, Liquidity and Capital Structure
- Total liabilities were $4.46 billion and total assets were $7.04 billion at June 30, 2017.
- Debt included $3.43 billion of notes payable, $614.2 million of exchangeable senior notes, $117.4 million of notes payable to trusts and $128.0 million drawn on revolving credit facilities.
- Total face value of debt was $4.34 billion. Debt to total enterprise value was 29.3%, and fixed-rate debt and instruments represented 76.1% of total debt. The weighted-average interest rate was 3.2%.
- Revolving facilities had $600 million of total capacity and $128 million drawn, leaving approximately $472 million of stated capacity before other borrowing limitations.
- The company was in compliance with all financial covenants at June 30, 2017.
- On June 29, 2017, the Operating Partnership agreed to privately place $300 million of 4.0% senior notes due in 10 years. The notes were expected to be issued August 24, 2017, subject to customary closing conditions, with proceeds intended for refinancing and general corporate purposes.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by acquisitions, same-store occupancy and rental-rate increases, and expansion of the managed-store portfolio from 1,412 to 1,470 stores.
- The company acquired five operating stores for total consideration of $60.2 million during the first six months of 2017, compared with 45 stores acquired during the same period in 2016.
- Acquisition-related costs fell to zero from $7.2 million for the six-month period because the company adopted ASU 2017-01 and began capitalizing qualifying acquisition costs as part of asset acquisitions.
- Interest expense increased 14.4% for the six-month period, primarily because of higher debt balances.
- Results benefited from the absence of the $26.9 million gain recognized in 2016 from acquiring a joint-venture partner’s interest, but were reduced by a $6.0 million impairment loss on land in 2017.
- Financing cash flow changed from a $131.6 million source in 2016 to a $252.2 million use in 2017, reflecting higher debt repayments, lower equity issuance proceeds and increased dividends.
- The quarterly common dividend remained $0.78 per share; the six-month dividend increased to $1.56 per share from $1.37.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide explicit earnings, revenue or same-store operating guidance.
- Management expects to fund short-term liquidity requirements with operating cash flow, cash on hand and revolver borrowings, while pursuing additional debt, equity and joint-venture financing for acquisitions and other needs.
- The company was committed to acquiring three operating stores and 12 stores upon completion of construction for an aggregate purchase price of $166.6 million. It also had agreements to acquire 24 stores with joint-venture partners for $134.4 million.
- Key risks include competition and potential declines in rents or occupancy, interest-rate and credit-market volatility, acquisition and development execution, asset impairments, regulatory and REIT-status risks, environmental liabilities, litigation and reliance on joint-venture partners.
- A 100-basis-point change in LIBOR would affect annual interest expense and cash flow by approximately $10.4 million based on the company’s variable-rate exposure.
- The company held 32 interest-rate derivatives with a combined notional amount of $2.34 billion. It estimated that $3.3 million of accumulated derivative losses would be reclassified into interest expense over the following 12 months.
- There were 36 operating stores and three parcels of undeveloped land classified as held for sale; a $6.1 million impairment was recorded on land.
- Litigation matters arise in the ordinary course of business. The company settled one legal proceeding during the quarter, but the filing states that future litigation outcomes cannot be determined with certainty.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally generated from May through September.
Important Facts for Investors to Verify
- Whether the planned $300 million senior-note issuance closed on the expected August 24, 2017 date and how proceeds affected maturities and leverage.
- Execution and funding of the $301.0 million of disclosed acquisition commitments, including the timing of store closings and construction completions.
- Sustained same-store occupancy, rental-rate growth and expense trends as seasonal conditions change.
- Liquidity after dividends, debt maturities, acquisition spending and required capital expenditures.
- Exposure to higher interest rates, including the impact of variable-rate debt and derivative-covenant provisions.
- Potential dilution or cash requirements associated with redeemable preferred Operating Partnership units, common OP units and exchangeable senior notes.
- Developments in litigation, environmental matters, land impairments and stores classified as held for sale.