Extra Space Storage Inc. — Q3 2011 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 and nine months ended September 30, 2011. At quarter-end, the Company owned or held interests in 676 operating properties and managed 178 additional properties, totaling 854 properties across 34 states and Washington, D.C.
The Company operated approximately 62 million square feet and 570,000 units. Stabilized-property occupancy was 86.5%, compared with 83.3% on a pro forma basis at September 30, 2010; same-store occupancy was 89.1%, up from 85.7%.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $84.1 million | $72.0 million | $236.6 million | $208.3 million |
| Income from operations | $31.2 million | $23.6 million | $81.1 million | $67.2 million |
| Net income | $17.4 million | $9.5 million | $40.0 million | $22.6 million |
| Net income attributable to common stockholders | $15.3 million | $7.7 million | $34.2 million | $17.4 million |
| Diluted EPS | $0.16 | $0.09 | $0.37 | $0.20 |
| Funds from operations | $32.0 million | $22.1 million | $81.4 million | $59.8 million |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $100.7 million | $74.7 million |
Q3 operating margin was approximately 37.1%, compared with 32.7% in the prior-year quarter. Net income attributable to common stockholders represented approximately 18.1% of revenue, versus 10.7% in Q3 2010. Nine-month operating margin was approximately 34.3%, compared with 32.3% in the prior-year period.
At September 30, 2011, total assets were $2.37 billion, including $2.06 billion of net real estate assets. Cash and cash equivalents were $33.9 million, compared with $46.8 million at December 31, 2010. Total debt was $1.24 billion, or 40.4% of total capitalization, with a weighted-average interest rate of 4.8%. Approximately 77.3% of total debt and other instruments was fixed-rate or economically fixed-rate through interest-rate swaps. The Company reported compliance with all financial covenants.
Available borrowing capacity under lines of credit was $149.0 million, based on $166.0 million drawn against $315.0 million of total capacity. Contractual debt principal totaled $1.24 billion, including $241.7 million due within one year. The Company paid common dividends of $0.14 per share in Q3 and $0.42 per share during the first nine months.
Material changes versus the prior comparable period
- Q3 revenue increased 16.8%; nine-month revenue increased 13.6%. Property rental revenue rose 17.1% in Q3 and 13.4% for nine months, driven by acquisitions, higher occupancy and rental rates, and lease-up activity.
- Management and franchise fees increased 8.6% in Q3 and 8.3% for nine months, supported by growth in managed properties from 157 to 178.
- Tenant reinsurance revenue increased 21.7% in Q3 and 20.3% for nine months, partly reflecting customer participation rising from 59.0% to 64.1%.
- Income from operations increased 32.5% in Q3 and 20.6% for nine months. Net income attributable to common stockholders approximately doubled in both periods.
- Results benefited from the absence of the $2.0 million sublease-loss charge recorded in Q3 2010. This benefit was partly offset by higher general and administrative, depreciation, property operating and interest expenses.
- Same-store revenue increased 4.9% in Q3 and 4.6% for nine months, while same-store operating expenses were essentially unchanged. Same-store NOI increased 7.3% and 7.0%, respectively.
- FFO increased 44.7% in Q3 and 36.0% for nine months. The filing does not present adjusted FFO.
- The Company acquired 27 properties during the first nine months of 2011, compared with seven in the prior-year period, and issued 5.34 million common shares in May 2011 for net proceeds of $112.4 million.
- Investing cash outflows increased to $169.2 million from $34.5 million, primarily because of higher property acquisitions and the $51.0 million purchase of an affiliated joint-venture note receivable.
- Operating cash flow rose to $100.7 million from $74.7 million, while financing activities provided $55.7 million compared with a $150.4 million use in the prior-year period.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or same-store guidance. Management stated that it intends to maximize property performance, pursue acquisitions, expand its management business and use managed properties as a potential acquisition pipeline. Development activity was being wound down; one development project remained in process and was expected to be completed by the end of 2011.
Management expected to fund operating expenses, recurring capital expenditures, dividends, distributions and interest through operating cash flow, cash on hand and credit facilities. The Company stated that operating cash flow and existing cash would not be sufficient for all liquidity needs and anticipated using additional secured or unsecured debt, joint ventures and equity or debt offerings. Additional financing may be unavailable or available only on unfavorable terms, and future equity issuance could dilute stockholders.
Material risks include competition and potential declines in rents or occupancy, economic and credit-market volatility, increased interest rates and operating costs, acquisition and integration risk, asset impairments, regulatory and REIT qualification requirements, uninsured losses, environmental liabilities and construction or development delays.
The Company guaranteed approximately $13.2 million of loans for unconsolidated joint ventures and reported maximum exposure to loss related to certain variable-interest joint ventures of $73.8 million, principally consisting of payables to the Company and guaranteed loans. No liability was recorded because management considered a material loss unlikely. No material litigation was reported.
Subsequent to quarter-end, the Company acquired one New Jersey property for $18.4 million, a 19-property California portfolio for $99.2 million while assuming $68.7 million of debt, and one Florida property for $5.7 million.
Important facts for investors to verify
- Confirm the refinancing or repayment plan for $241.7 million of debt principal due within one year, including the $100.0 million credit line maturing October 31, 2011.
- Assess whether acquisition-driven revenue and FFO growth can continue without excessive leverage or shareholder dilution.
- Monitor stabilized and same-store occupancy, rental-rate growth, concessions and operating expenses, particularly as seasonal occupancy typically peaks during the summer.
- Review the $51.0 million affiliated joint-venture note receivable due March 2012 and the related $55.8 million maximum exposure to loss for Storage Associates Holdco.
- Evaluate the effect of the subsequent $123.2 million of acquisitions and $68.7 million of assumed debt on leverage and liquidity.
- Verify the Company’s ability to maintain REIT status and satisfy its requirement to distribute at least 90% of annual taxable income.
- Reconcile non-GAAP FFO with GAAP net income and cash flow, recognizing that FFO is not a measure of liquidity or cash generated from operations.