Extra Space Storage Inc. — Q3 2012 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, 2012; financial statements are unaudited and prepared under U.S. GAAP.
- At September 30, 2012, the Company owned or held interests in 720 operating properties and managed 190 additional properties, for 910 properties across 34 states, Washington, D.C. and Puerto Rico.
- The portfolio comprised approximately 66.7 million square feet and 610,000 units. Stabilized square-foot occupancy was 87.5%, compared with 85.7% on a pro forma basis for the prior-year period.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Total revenues | $109.8 million | $84.1 million | +30.6% |
| Income from operations | $43.5 million | $31.2 million | +39.3% |
| Net income | $41.6 million | $17.4 million | +139.5% |
| Net income attributable to common stockholders | $38.6 million | $15.3 million | +152.9% |
| Diluted EPS | $0.37 | $0.16 | + $0.21 |
| Funds from operations | $47.2 million | $32.0 million | +47.4% |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Total revenues | $295.7 million | $236.6 million | +25.0% |
| Income from operations | $114.1 million | $81.1 million | +40.7% |
| Net income attributable to common stockholders | $81.2 million | $34.2 million | +137.7% |
| Diluted EPS | $0.80 | $0.37 | +$0.43 |
| Funds from operations | $121.3 million | $81.4 million | +49.0% |
| Cash flow from operations | $153.0 million | $100.7 million | +52.0% |
Q3 operating margin was approximately 39.6%, compared with 37.1% in the prior-year quarter. Net income margin was approximately 37.8%, compared with 20.6%, although reported net income benefited materially from transaction-related gains.
- Property rental revenue increased 35.4% in Q3 and 27.6% for the nine-month period, primarily from acquisitions, higher occupancy and increased rental rates.
- Same-store net operating income increased 11.4% in Q3 and 10.8% for the nine-month period. Same-store revenue increased 6.8% and 6.6%, respectively, while same-store expenses declined 2.8% and 1.6%.
- Average annual rent per square foot for existing customers rose to $13.81 from $13.50; new-lease rent rose to $14.43 from $13.94.
- Cash dividends were $0.20 per common share in Q3 and $0.60 per share for the first nine months, versus $0.14 and $0.42, respectively, in the comparable periods.
Liquidity, capital structure and cash flow
- Cash and cash equivalents were $43.6 million at September 30, 2012, versus $26.5 million at December 31, 2011.
- Operating cash flow of $153.0 million was more than offset by $375.1 million of investing outflows, including $365.6 million for real estate acquisitions. Financing activities provided $239.2 million.
- Face value of debt was $1.586 billion, with debt-to-total-capitalization of 30.6%, a weighted-average interest rate of 4.2%, and 74.2% of debt fixed-rate or hedged.
- Lines of credit totaled $340.0 million of capacity, of which $240.0 million was drawn at quarter-end. The Company reported compliance with all financial covenants.
- Approximately $408.8 million of debt was subject to variable interest rates, excluding debt with interest-rate swaps. A 100-basis-point change in LIBOR was estimated to affect annual interest expense and cash flow by approximately $3.7 million.
- On October 26, 2012, after quarter-end, the Company repaid a $100.0 million GE Capital line of credit that matured October 31, 2012.
Material changes versus the prior comparable period
- The Company acquired 59 properties in the first nine months of 2012, compared with 27 in the comparable 2011 period; 53 acquisitions occurred in Q3 2012 versus three in Q3 2011.
- On July 2, 2012, the Company acquired PREI’s 94.9% interest in the PRISA III joint venture, obtaining full ownership of 36 properties. The transaction contributed $8.7 million of Q3 revenue and $3.1 million of common-stockholder net income after acquisition.
- The PRISA III transaction generated a $13.5 million gain from remeasurement of the Company’s previously held interest. A separate joint-venture property sale generated a $5.5 million gain. These gains materially increased reported earnings.
- The Company issued 8.05 million common shares in April 2012 for net proceeds of $226.7 million, increasing shares outstanding to 104.3 million at September 30, 2012 from 94.8 million at year-end 2011.
- The $87.7 million principal amount of exchangeable senior notes was settled in April 2012: principal was paid in cash and 684,685 common shares were issued for the excess exchange value.
- Real estate assets, net, increased to $2.742 billion from $2.264 billion at December 31, 2011, while total assets increased to $3.013 billion from $2.516 billion.
Guidance, outlook, commentary and risks
- The filing does not provide a specific earnings, FFO or revenue guidance range.
- Management intends to maximize property performance through revenue management, pursue disciplined acquisitions, expand the management business and use its broader operating platform to achieve economies of scale.
- Management noted increasing acquisition prices and stated that it remained a disciplined buyer. Future liquidity needs are expected to be funded through operating cash flow, cash, secured or unsecured borrowings, joint ventures and potential equity or debt offerings.
- The business is seasonal, with a greater portion of revenue and profit generally realized from May through September; quarterly results may not represent full-year performance.
- Principal risks include economic weakness, competition affecting rents and occupancy, acquisition and integration execution, access to capital, rising interest rates and operating costs, asset-value declines, joint-venture performance, regulatory and REIT qualification requirements, uninsured losses and environmental liabilities.
- The Company guaranteed approximately $13.4 million of joint-venture loan balances and reported maximum exposure to loss of $26.1 million for specified VIE relationships, including guarantees, investments and payables. No related liability was recorded because management considered material loss unlikely.
- Routine litigation liabilities included $1.8 million accrued; management reported no material pending or threatened litigation.
Investor verification checklist
- Separate recurring operating growth from the $19.0 million of reported gains related to joint-venture property transactions and the PRISA III acquisition.
- Reconcile acquisition-driven revenue growth with same-store performance, including the 89.8% same-store occupancy rate and 11.4% Q3 same-store NOI growth.
- Review debt maturities, secured collateral, credit-line availability and the effect of the post-quarter-end $100.0 million line repayment.
- Assess dilution from the 8.05 million-share offering, exchangeable-note settlement and outstanding Operating Partnership units.
- Evaluate acquisition integration, lease-up occupancy, exposure to variable interest rates and the Company’s joint-venture guarantees.
- Confirm that FFO is interpreted as a supplemental non-GAAP measure rather than a substitute for GAAP net income or operating cash flow.