Extra Space Storage Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered, self-managed REIT focused on owning, operating, acquiring, developing, and managing self-storage facilities. The filing covers the three months ended March 31, 2013, with comparative results for the three months ended March 31, 2012. At March 31, 2013, the company owned or held interests in 729 operating properties and managed 236 additional properties, totaling 965 properties across 35 states, Washington, D.C., and Puerto Rico.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $119.3 million | $91.0 million | 31.1% |
| Income from operations | $46.7 million | $32.8 million | 42.6% |
| Net income | $33.9 million | $22.5 million | 50.7% |
| Net income attributable to common stockholders | $31.4 million | $20.2 million | 55.5% |
| Diluted EPS | $0.28 | $0.21 | 33.3% |
| Funds from operations | $53.2 million | $33.1 million | 60.7% |
| Net cash provided by operating activities | $51.1 million | $40.8 million | 25.3% |
- Revenue growth was led by property rental revenue of $102.9 million, up 35.7%, and tenant reinsurance revenue of $10.2 million, up 19.4%. Management fees declined 6.2% to $6.2 million.
- Total expenses increased 24.7% to $72.6 million, including a 39.3% increase in depreciation and amortization to $23.0 million. Income from operations represented approximately 39.2% of revenue, compared with approximately 36.0% in the prior-year quarter.
- Same-store rental and tenant reinsurance revenue increased 7.5%, while same-store net operating income increased 10.8%. Same-store quarter-end occupancy rose to 88.6% from 85.7%.
- Stabilized portfolio occupancy increased to 86.3% from 83.8% on a pro forma basis. Average annual rent per square foot for existing customers increased to $13.67 from $13.60, while new-lease rent increased to $14.51 from $13.87.
- Cash and cash equivalents were $35.6 million at March 31, 2013, compared with $30.8 million at December 31, 2012. Restricted cash was $20.2 million.
- Cash used in investing activities was $23.3 million, including $18.8 million for acquisition, development, and redevelopment of real estate. Cash used in financing activities was $23.0 million, including $27.7 million of common dividends.
- Debt consisted of $1.36 billion of notes payable, $119.6 million of notes payable to trusts, and $100.0 million drawn on lines of credit. Face value of total debt was $1.58 billion, with debt equal to 26.0% of total market capitalization.
- Approximately 80.2% of total debt and related instruments was fixed-rate or hedged. The weighted-average interest rate was 4.1%, and the company reported compliance with all financial covenants.
Material changes versus the prior comparable period
- The portfolio expanded materially following 91 property acquisitions in 2012 and two acquisitions during Q1 2013. The two Q1 acquisitions had total consideration of $23.4 million and involved properties in Maryland and Illinois.
- Results for Q1 2013 included 729 owned or joint-venture properties, compared with 699 in Q1 2012. Consolidated properties increased to 451 from 360, while properties held in equity-method joint ventures declined to 278 from 339.
- Property rental revenue benefited by $21.0 million from acquisitions and by $5.2 million from higher occupancy and rental rates at stabilized properties.
- Interest expense decreased 3.9%, primarily because the combined weighted-average interest rate declined to 4.1% from 4.6%. The prior-year period included $0.4 million of non-cash amortization expense related to exchangeable senior notes that were surrendered in April 2012.
- Q1 2013 included a $2.6 million non-cash gain from acquiring joint-venture partners’ interests in two properties. Q1 2012 included a larger $5.4 million gain from a joint venture property sale, making the comparison of net income partly dependent on unusual items.
- Common dividends increased to $0.25 per share from $0.20 per share.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a specific quantitative earnings or FFO forecast. Management expects to continue pursuing acquisitions, management contracts, strategic relationships, and additional secured term loans backed by unencumbered properties.
- Management expects short-term liquidity needs to be funded through operating cash flow, cash on hand, and credit-line borrowings, but states that operating cash and existing balances are not expected to fund all liquidity requirements. Additional debt, equity, joint ventures, and OP units may be used.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September. First-quarter results may therefore not be indicative of full-year results.
- Principal risks include competition and potential declines in rents or occupancy, acquisition and integration execution, interest-rate and credit-market conditions, refinancing risk, operating-cost increases, asset impairments, uninsured losses, regulatory and REIT-status risks, joint-venture partner performance, and personnel retention.
- The company guaranteed a $4.3 million mortgage loan for an unconsolidated joint venture. Maximum exposure to loss for that arrangement was disclosed at $9.3 million after considering the investment and amounts payable to the company; management considered a material loss unlikely and recorded no liability.
- Interest-rate swaps had a fair-value liability of $13.7 million at March 31, 2013. A 100-basis-point change in LIBOR was estimated to affect annual interest expense and cash flow by approximately $2.8 million on exposed variable-rate debt.
- Subsequent to quarter-end, the company acquired two Hawaii properties for approximately $27.5 million on May 3, 2013, and one Texas property for approximately $7.1 million on May 8, 2013.
- Management reported no material litigation, no material changes to previously disclosed risk factors, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported FFO with GAAP net income and assess the impact of depreciation, noncontrolling interests, and the $2.6 million non-cash acquisition gain.
- Review acquisition volume, purchase prices, lease-up performance, and the sustainability of same-store occupancy and rental-rate increases.
- Assess debt maturities, including $200.3 million of principal due within one year, available credit capacity of $240.0 million, and refinancing requirements.
- Evaluate exposure to variable interest rates, swap obligations, collateral requirements, and restrictive debt covenants.
- Monitor liquidity after dividends, acquisitions, capital expenditures, and required distributions under REIT rules.
- Review the joint-venture loan guarantee and other noncontrolling-interest and unconsolidated-venture exposures.