Extra Space Storage Inc. — 2011 First-Quarter Form 10-Q
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, 2011; financial statements are unaudited. At quarter-end, the company owned or held interests in 662 operating properties and managed 167 additional properties, for 829 total operating properties across 34 states and Washington, D.C.
The company operates through rental operations, property management/acquisition and development, and tenant reinsurance. Management had announced a wind-down of development activities; two development projects remained and were expected to be completed by the end of the fourth quarter of 2011.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $74.5 million | $67.6 million | 10.2% |
| Income from operations | $24.0 million | $20.9 million | 15.2% |
| Net income | $10.1 million | $5.2 million | 95.8% |
| Net income attributable to common stockholders | $8.3 million | $3.6 million | 132.6% |
| Diluted EPS | $0.09 | $0.04 | $0.05 |
| Funds from operations | $23.5 million | $17.4 million | 35.4% |
| Cash flow from operations | $30.0 million | $16.0 million | 87.4% |
Operating margin was approximately 32.3% in Q1 2011 versus 30.9% in Q1 2010. Net income attributable to common stockholders represented approximately 11.1% of revenue versus 5.3% in the prior-year quarter. Same-store net operating income increased 5.8%, supported by a 2.9 percentage-point increase in quarter-end occupancy to 85.4%.
- Property rental revenue increased 9.5% to $61.5 million.
- Management and franchise fees increased 7.5% to $6.0 million.
- Tenant reinsurance revenue increased 19.2% to $7.0 million, partly reflecting customer participation of approximately 61% versus 57%.
- Total expenses increased 8.0% to $50.5 million, below the rate of revenue growth.
- Interest expense declined 5.0% to $16.4 million, primarily because trust notes moved from a fixed 6.9% rate to variable LIBOR plus 2.4%.
Balance sheet, debt and liquidity
| Metric | March 31, 2011 | December 31, 2010 |
|---|---|---|
| Total assets | $2.253 billion | $2.248 billion |
| Cash and cash equivalents | $42.6 million | $46.8 million |
| Total liabilities | $1.306 billion | $1.309 billion |
| Total debt | $1.248 billion | Not clearly provided in the filing excerpt |
| Debt to total capitalization | 39.6% | Not clearly provided in the filing excerpt |
| Weighted-average debt interest rate | 4.9% | Not clearly provided in the filing excerpt |
Credit lines had $125.0 million drawn and $235.0 million of total capacity at March 31, 2011. The company reported compliance with all financial covenants. Approximately 72.4% of total debt and other instruments was fixed-rate or hedged, while approximately $344.1 million of debt was subject to variable rates excluding debt with interest-rate swaps. A 100-basis-point change in applicable variable rates was estimated to affect annual earnings and cash flow by approximately $2.4 million.
Operating cash flow was $30.0 million. Investing activities used $20.7 million, including real estate acquisitions, development and investments in real estate ventures. Financing activities used $13.5 million, including $12.4 million of common dividends and net debt principal repayments. Ending cash declined to $42.6 million from $46.8 million at year-end.
Contractual obligations totaled $1.641 billion, including $1.248 billion of principal and $327.9 million of interest. Principal payments of $365.7 million were scheduled within one year. Management expected to fund near-term requirements through operating cash flow, cash on hand, credit-line borrowings and additional secured or unsecured financing.
Material changes versus the prior comparable period
- The operating portfolio increased to 662 properties from 643 properties included in the prior-year period; consolidated properties increased from 275 to 301.
- Stabilized same-store occupancy increased to 85.4% from 82.5%, while same-store net operating income increased 5.8%.
- Stabilized average annual rent per square foot declined to $13.25 from $13.39.
- Cash flow from operations nearly doubled, primarily because of higher net income and a favorable change in other assets.
- Investing cash flow shifted from $11.8 million provided in Q1 2010 to $20.7 million used in Q1 2011; the prior-year period included $15.8 million of property-sale proceeds.
- Common dividends increased to $0.14 per share from $0.10 per share.
- The company acquired a Pennsylvania property by purchasing its joint venture partners’ interests, paying $0.3 million in cash and assuming $4.8 million of debt.
- Income tax expense declined to $0.3 million from $1.0 million, partly because of a $1.4 million solar tax credit.
Outlook, commentary, risks and unusual items
No quantitative earnings or revenue guidance was provided in the filing. Management emphasized proactive revenue management, expense control, acquisitions, expansion of the management platform and potential acquisition opportunities from managed properties. The company expected seasonal strength in occupancy and profitability from May through September.
Subsequent to quarter-end, the company purchased four properties for $18.0 million and closed a $50.0 million, three-year revolving credit facility at LIBOR plus 275 basis points, secured by mortgages on certain real estate assets.
- Key risks include competition, economic weakness, lower occupancy or rents, rising operating costs and interest rates, impaired asset values, and difficulty obtaining financing on acceptable terms.
- Credit-market disruptions could limit acquisitions, development funding, property sales and access to debt or equity capital.
- The company guaranteed approximately $13.4 million of loans for unconsolidated joint ventures; no liability was recorded because management considered the guarantees’ fair value immaterial and the likelihood of loss unlikely.
- The company reported no material litigation and no material changes to the risk factors in its 2010 Form 10-K.
- Maintaining REIT status requires distributing at least 90% of annual taxable income, excluding net capital gains, to stockholders.
- The company’s exchangeable senior notes had a $23.45 exchange price at quarter-end and were not eligible for holder conversion during the second quarter based on the stated stock-price conditions.
Investor verification points
- Verify the timing and funding of the $365.7 million of principal obligations due within one year.
- Assess available borrowing capacity, credit-line maturities and the company’s ability to refinance in volatile credit markets.
- Reconcile FFO and same-store NOI with GAAP net income and operating cash flow; these non-GAAP measures are not substitutes for liquidity.
- Monitor occupancy, rental rates and the decline in average rent per square foot, particularly across lease-up properties.
- Evaluate exposure from joint-venture loan guarantees and the $18.0 million of post-quarter-end acquisitions.
- Confirm completion and capital requirements for the two remaining development projects expected to finish by Q4 2011.