Extra Space Storage Inc. — Q1 2018 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, redeveloping and managing self-storage properties. The filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017.
- Owned or held interests in 1,067 operating stores and managed 456 additional stores for third parties, totaling 1,523 stores across 39 states, Washington, D.C. and Puerto Rico.
- The portfolio included 851 wholly owned stores, two stores in consolidated joint ventures and 214 stores in unconsolidated joint ventures.
- Approximately 855,000 tenants leased units at owned and managed stores.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $285.5 million | $263.0 million | +8.5% |
| Income from operations | $133.9 million | $124.2 million | +7.8% |
| Net income | $95.4 million | $89.7 million | +6.3% |
| Net income attributable to common stockholders | $88.3 million | $82.3 million | +7.3% |
| Basic EPS | $0.70 | $0.65 | +7.7% |
| Diluted EPS | $0.70 | $0.64 | +9.4% |
| Funds from operations attributable to common stockholders and unit holders | $146.2 million | $137.9 million | +6.1% |
| Net cash provided by operating activities | $171.6 million | $113.1 million | +51.7% |
- Property rental revenue increased 7.1% to $247.9 million, tenant reinsurance revenue increased 18.3% to $27.0 million, and management fees and other income increased 22.0% to $10.6 million.
- Income from operations represented approximately 46.9% of total revenue; net income represented approximately 33.4% of total revenue.
- Same-store revenue increased 5.2%, same-store net operating income increased 4.5%, and same-store occupancy was 92.1% at quarter-end versus 92.0% in the prior-year period.
- Average annual rent per square foot for existing customers increased to $15.93 from $15.23, while rent for new leases increased to $16.95 from $15.85.
- Cash dividends were $0.78 per common share, unchanged from Q1 2017.
Liquidity, debt and cash flow
- Cash and cash equivalents were $35.5 million at March 31, 2018; cash, cash equivalents and restricted cash totaled $54.1 million.
- Total face-value debt, including revolving lines of credit, was $4.56 billion. Debt represented 27.9% of total enterprise value, and the weighted-average interest rate was 3.4%.
- Approximately 74.4% of total debt and related instruments was fixed-rate or hedged, including $2.27 billion subject to interest-rate swaps.
- The Company was in compliance with all financial covenants at quarter-end and expected to fund short-term liquidity needs through operating cash flow, cash on hand, revolving credit capacity and additional financing sources as needed.
- Operating cash flow increased primarily because of higher net income and favorable changes in accounts payable and accrued expenses and other liabilities.
- Investing activities used $30.9 million, including $76.1 million for acquisitions and $11.1 million for development and redevelopment, partially offset by a $47.9 million return of investment from an unconsolidated venture.
- Financing activities used $172.7 million, including $98.3 million of common dividends and $58.5 million to repurchase exchangeable senior notes.
Material changes versus the prior comparable period
- The Company acquired five stores for total consideration of $70.8 million, compared with two stores for $25.6 million in Q1 2017.
- Property rental growth reflected $11.2 million from higher occupancy and rental rates at stabilized stores and $10.6 million from acquisitions, partly offset by $6.7 million from property sales.
- Total expenses increased 9.2% to $151.6 million. Tenant reinsurance expense increased 43.0%, general and administrative expense increased 14.1%, and property operations expense increased 9.2%.
- Interest expense increased 13.9% to $41.0 million, reflecting higher average interest rates and higher debt. The average interest rate increased to 3.4% from 3.1%.
- The Company repurchased $37.7 million principal amount of 2013 exchangeable senior notes for $58.5 million in cash. The 2013 Notes had a remaining principal amount of $11.6 million at quarter-end.
- Accumulated other comprehensive income increased substantially because of a $23.1 million change in the fair value of interest-rate swaps.
- The 2017 Tax Legislation reduced the effective tax rate and contributed to lower income tax expense of $1.3 million versus $3.1 million.
- The Company adopted revenue recognition guidance under Topic 606, restricted-cash guidance and new hedge-accounting guidance. Management reported no material effect on the financial statements from these adoptions.
Outlook, commentary, risks and unusual items
- The filing does not provide a specific quantitative earnings, revenue or same-store operating guidance forecast.
- Management expects seasonal strength from May through September, with occupancy historically highest in late July and lowest in late February or early March.
- As of March 31, 2018, the Company was committed to acquire 26 stores for $355.8 million and an additional 15 stores with joint venture partners representing total investment of $77.8 million.
- Subsequent to quarter-end, the Company purchased one Virginia store for $16.3 million and acquired its joint venture partner’s interest in 14 stores for approximately $204.0 million.
- Interest-rate sensitivity was material: a 100-basis-point increase or decrease in LIBOR was estimated to change annual interest expense, earnings and cash flows by approximately $11.7 million, assuming no changes to the capital structure.
- Key risks include competition, declining rents or occupancy, economic and real estate market deterioration, higher interest rates, capital-market disruptions, acquisition execution, impairment charges, uninsured losses, environmental liabilities, joint-venture decision-making, regulatory and tax changes, and maintaining REIT status.
- Legal proceedings and ordinary-course claims were pending, but their outcomes could not be determined with certainty. Management stated that no material environmental liability was currently known.
Most important facts for investors to verify
- Whether acquisition commitments and post-quarter-end purchases close on the expected terms and timing.
- Whether same-store rent growth and occupancy remain sustainable as competition and seasonal conditions change.
- The effect of higher interest rates on interest expense, cash flow and debt refinancing requirements.
- Available borrowing capacity under revolving facilities and compliance with debt covenants.
- The maturity, repurchase and exchange provisions for the 2013 and 2015 exchangeable senior notes.
- Whether operating cash flow continues to cover dividends, recurring capital expenditures, acquisitions and debt obligations.
- The potential financial impact of litigation, environmental claims, impairment indicators and joint-venture obligations.