Extra Space Storage Inc. — Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, acquiring, developing, and managing self-storage properties. The report covers the three months ended March 31, 2021, with comparative results for the three months ended March 31, 2020.
- Owned or held interests in 1,206 stores and managed 763 additional stores, for 1,969 total stores across 40 states, Washington, D.C., and Puerto Rico.
- Approximately 1.18 million tenants leased units at owned and managed stores.
- At March 31, 2021, the Company held a 94.4% interest in Extra Space Storage LP.
Financial Results and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $358.9 million | $332.5 million | 7.9% |
| Property rental revenue | $303.6 million | $286.7 million | 5.9% |
| Tenant reinsurance revenue | $39.6 million | $33.6 million | 17.9% |
| Management fees and other income | $15.6 million | $12.1 million | 28.9% |
| Income from operations | $241.1 million | $157.2 million | 53.4% |
| Net income | $215.5 million | $116.2 million | 85.5% |
| Net income attributable to common stockholders | $203.0 million | $108.2 million | 87.6% |
| Basic/diluted EPS | $1.54/$1.53 | $0.84/$0.83 | Increase |
| FFO attributable to common stockholders and unit holders | $210.1 million | $171.3 million | 22.6% |
| Cash dividends per common share | $1.00 | $0.90 | 11.1% |
Net income margin was approximately 60.0% in Q1 2021 versus 34.9% in Q1 2020; the comparison was materially affected by a $63.9 million gain on real estate transactions in 2021. Same-store net operating income increased 6.5% to $201.0 million, driven by higher occupancy and rental rates. Same-store square-foot occupancy was 95.7%, compared with 90.9% in the prior-year quarter.
- Average annual rent per square foot for existing customers increased to $16.35 from $16.11.
- Average annual rent per square foot for new leases increased to $16.57 from $14.65.
- Same-store rental revenue increased 4.6%, while same-store operating expenses declined 0.2%.
- Net cash provided by operating activities was $203.9 million, compared with $189.3 million.
- Net cash provided by investing activities was $42.6 million, compared with $60.6 million of cash used in the prior-year period.
- Net cash used in financing activities was $311.7 million, compared with $101.5 million.
- Cash, cash equivalents, and restricted cash totaled $62.8 million at March 31, 2021, compared with $97.9 million at March 31, 2020.
Debt, Liquidity, and Capital Resources
- Face value of debt was $5.32 billion, with a weighted-average interest rate of 2.7%.
- Debt consisted of $1.04 billion secured fixed-rate debt, $890.9 million secured variable-rate debt, $2.53 billion unsecured fixed-rate debt, and $867.0 million unsecured variable-rate debt.
- Debt to total enterprise value was 22.1%; fixed-rate debt and instruments represented 67.0% of total debt.
- Cash and cash equivalents were $60.3 million, and the Company stated that operating cash flow, cash on hand, revolving credit availability, and capital-market access should meet reasonably anticipated needs for the next 12 months.
- The Company was in compliance with all financial covenants and reported BBB/Stable and Baa2 credit ratings from S&P and Moody’s, respectively.
- The Company issued common stock for net proceeds of $273.7 million and paid $132.5 million of common dividends during the quarter.
- Interest-rate swaps had a combined notional amount of approximately $2.09 billion. A 100-basis-point change in rates was estimated to affect annual interest expense and cash flows by approximately $17.6 million, assuming no mitigating actions.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher stabilized-store occupancy, increased rental rates, acquisitions, a larger managed-store base, and higher tenant reinsurance activity.
- Results benefited from the sale of 16 stores to a newly formed unconsolidated joint venture. The transaction generated cash proceeds of approximately $132.8 million, a $33.9 million joint-venture interest, and a recognized gain of approximately $64.4 million.
- The Company acquired nine wholly owned stores for approximately $151.9 million during Q1 2021, compared with two stores for approximately $19.4 million in Q1 2020.
- Interest expense declined 8.3%, primarily because of lower average variable interest rates. The 2015 exchangeable senior notes had been fully redeemed in late 2020, eliminating related interest and amortization expense.
- Interest income increased to $12.3 million from $1.7 million, primarily due to bridge loans, the senior mezzanine loan, and preferred-stock investments acquired in 2020.
- Comprehensive income increased to $238.5 million from $26.9 million, including a $23.0 million gain in the fair value of interest-rate swaps versus an $89.2 million loss in the prior-year quarter.
Outlook, Commentary, Risks, and Unusual Items
- Management expects positive operating cash flow in 2021 and believes available liquidity is sufficient for operating expenses, debt service, recurring capital expenditures, acquisitions, distributions, and dividends.
- Self-storage results are seasonal, with a greater portion of revenue and profit generally realized from May through September.
- COVID-19 continued to create economic uncertainty. The Company maintained work-from-home and contactless-rental practices and warned that unemployment, reduced ability to pay, lower demand, occupancy declines, and rental-rate pressure could adversely affect results.
- Key risks include competition, higher interest rates, disruptions in credit markets, acquisition and development execution, asset valuation declines, environmental and litigation exposure, regulatory changes, loss of REIT status, and limited decision-making authority over joint ventures.
- The Company was party to ordinary-course legal proceedings whose outcomes could not be determined with certainty. No material change to previously disclosed risk factors was reported.
- The Company was committed to acquire six stores for $66.3 million and three stores with joint-venture partners for a total investment of $4.2 million, with closings expected in 2021.
- The Company had no operating stores classified as held for sale at March 31, 2021.
Investor Verification Items
- Separate recurring operating performance from the $63.9 million real-estate transaction gain when evaluating earnings growth and margins.
- Reconcile reported net income with FFO and assess whether same-store occupancy and rental-rate gains remain sustainable after seasonal effects.
- Review debt maturities, including approximately $193.4 million due in 2021 and $1.56 billion due in 2024, and monitor refinancing conditions.
- Verify revolving-credit availability, covenant compliance, and the sensitivity of variable-rate debt to higher interest rates.
- Monitor the effect of COVID-19, competition, tenant payment trends, and potential changes in occupancy or rental rates.
- Assess the execution and funding of pending acquisitions and the Company’s planned new at-the-market equity program.