Extra Space Storage Inc. — 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with supplementary unaudited quarterly data for the three months ended December 31, 2015. Extra Space Storage is a self-administered, self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties. It operates through rental operations, tenant reinsurance, and property management, acquisition and development.
- At year-end, the Company owned interests in 999 operating stores, including 746 wholly owned and 253 held through joint ventures, and managed 348 additional third-party stores.
- The portfolio totaled approximately 1,347 stores, 101 million square feet, 896,000 units and approximately 800,000 tenants across 36 states, Washington, D.C. and Puerto Rico.
- The Company completed the approximately $1.4 billion SmartStop acquisition on October 1, 2015, adding 122 stores and management responsibility for 43 additional stores.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $782.3 million | $647.2 million | +20.9% |
| Property rental revenue | $676.1 million | $559.9 million | +20.8% |
| Tenant reinsurance revenue | $72.0 million | $59.1 million | +21.8% |
| Management fees and other income | $34.2 million | $28.2 million | +21.1% |
| Income from operations | $294.7 million | $278.5 million | +5.8% |
| Net income | $209.5 million | $195.9 million | +7.0% |
| Net income attributable to common stockholders | $189.5 million | $178.4 million | +6.2% |
| Diluted EPS | $1.56 | $1.53 | +2.0% |
| FFO attributable to common stockholders | $331.3 million | $310.0 million | +6.9% |
| Cash dividends paid per share | $2.24 | $1.81 | +23.8% |
Income from operations represented approximately 37.7% of revenue, while net income attributable to common stockholders represented approximately 24.2%. Same-store net operating income increased 11.9% for the year, supported by a 9.3% increase in same-store rental and tenant reinsurance revenue and only a 3.1% increase in same-store operating expenses.
- Stabilized-store occupancy was 91.1% at December 31, 2015, compared with 89.6% on a pro forma basis at the prior year-end.
- Average annual rent per square foot for existing customers rose to $14.83 from $14.02; new-lease rent rose to $15.41 from $14.35.
- Tenant reinsurance participation increased to approximately 72.8% from 70.7%.
- Net cash provided by operating activities was $367.3 million, compared with $337.6 million in 2014.
- Net cash used in investing activities was $1.626 billion, primarily reflecting $1.201 billion for SmartStop and $349.9 million for other real estate acquisitions.
- Net cash provided by financing activities was $1.286 billion, primarily from debt, exchangeable senior notes and equity issuance.
- Total assets were $6.071 billion and total stockholders’ equity was $2.089 billion at year-end.
Debt, liquidity and capital resources
- Face value of debt was approximately $3.598 billion; debt shown on the balance sheet, net of discounts and issuance costs, was approximately $3.536 billion.
- The weighted-average interest rate was approximately 3.1%, and the debt-to-total-capitalization ratio was 23.2%.
- Approximately $1.1 billion, or 31.4% of debt excluding debt with interest-rate swaps, was exposed to variable interest rates. A 100-basis-point increase in applicable rates was estimated to increase annual interest expense by approximately $7.3 million.
- Cash and cash equivalents totaled $75.8 million. Credit lines had total capacity of $360.0 million, of which $36.0 million was drawn.
- The Company was in compliance with all financial covenants at December 31, 2015, but stated that operating cash flow alone was not expected to fund all liquidity needs, including acquisitions, debt maturities and distributions.
- Contractual obligations totaled approximately $4.191 billion, including $3.598 billion of principal and $512.6 million of scheduled interest.
Material changes versus the prior comparable period
- Revenue growth reflected both the 171 operating stores acquired in 2015 and 2014 and improved occupancy and rental rates at stabilized stores.
- Operating results benefited from strong same-store performance, but total expenses increased 32.3%, including a 606.3% increase in acquisition-related costs.
- SmartStop-related acquisition costs totaled $63.1 million, including $38.4 million of debt defeasance and prepayment penalties, $8.1 million of professional fees and closing costs, and $7.7 million of severance and payroll-related costs.
- Interest expense increased 17.6% to $99.0 million because of higher debt balances, partially offset by lower average interest rates.
- The Company issued $575.0 million of 3.125% exchangeable senior notes due 2035 and repurchased $164.6 million principal amount of its 2013 exchangeable notes for $227.2 million.
- The Company issued 6.325 million common shares in a public offering and sold an additional 410,000 shares through its at-the-market program, generating aggregate 2015 net common-stock proceeds of approximately $446.9 million.
- Year-end common shares outstanding increased to 124.1 million from 116.4 million, contributing to comparatively modest EPS growth despite higher net income.
Fourth-quarter 2015 results
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Revenue | $225.8 million | $164.8 million |
| Net income | $11.7 million | $49.5 million |
| Net income attributable to common stockholders | $8.7 million | $45.1 million |
| Diluted EPS | $0.07 | $0.39 |
| Same-store NOI | $110.1 million | $98.7 million |
Fourth-quarter revenue and same-store operating performance improved, but reported net income and EPS were materially reduced by acquisition-related and other costs. The filing does not provide a clear standalone quarterly FFO value in the supplied text.
Guidance, outlook, commentary and risks
Management emphasized a strategy of maximizing store performance through revenue management, pursuing disciplined acquisitions, expanding the management platform and using the management business as a potential acquisition pipeline. No formal quantitative earnings or revenue guidance is provided in the supplied filing.
- Acquisition pricing was increasing, and management stated it would remain a disciplined buyer.
- Self-storage demand and profitability are seasonal, with greater revenue and profit generally realized from May through September.
- Seven stores were classified as held for sale; management reported that estimated fair value less selling costs exceeded carrying value, so no impairment loss was recorded.
- Subsequent to year-end, the Company purchased 16 stores for $144.6 million, sold 831,300 common shares for net proceeds of $73.8 million, and repurchased $19.6 million principal amount of 2013 exchangeable notes.
- Principal risks include economic and local real estate conditions, competition and oversupply, acquisition integration, financing and refinancing availability, interest-rate increases, asset impairments, uninsured losses, environmental and regulatory liabilities, tenant defaults, joint-venture partner performance, information-security incidents and continued qualification as a REIT.
- The Company is involved in ordinary-course litigation, including claims involving wrongful foreclosure, self-storage statutes and consumer-fraud laws. Outcomes are described as uncertain; an $850,000 liability was recorded in 2014.
- Management stated that the Company had no known material environmental liability expected to have a material adverse effect, while noting that future liabilities remain possible.
Important facts for investors to verify
- Whether SmartStop integration, lease-up activity and the acquired-store portfolio produce the expected operating efficiencies and returns.
- The sustainability of same-store occupancy, rental-rate increases and double-digit same-store NOI growth.
- Debt maturity and refinancing exposure, particularly the $167.5 million due within one year and $1.886 billion due within three to five years.
- Sensitivity of cash flow and distributions to higher interest rates, given variable-rate debt and derivative counterparties.
- The effect of share issuance and OP Unit issuance on per-share results and future dilution.
- Future acquisition prices, capital requirements and the Company’s ability to fund growth while maintaining REIT distributions.
- Potential outcomes of litigation, insurance claims, environmental matters and other contingencies not fully quantifiable in the filing.