Extra Space Storage Inc. — Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a self-administered, self-managed REIT focused on owning, operating, managing, acquiring, developing and redeveloping self-storage properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2018.
- Owned or held interests in 1,082 stores and managed 486 additional stores, for 1,568 total stores across 39 states, Washington, D.C. and Puerto Rico.
- The owned portfolio included 868 wholly owned stores, three consolidated joint-venture stores and 211 unconsolidated-joint-venture stores.
- Approximately 905,000 tenants occupied the owned and managed properties.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Total revenue | $296.8 million | $276.0 million | 7.5% |
| Income from operations | $144.7 million | $136.4 million | 6.1% |
| Net income | $102.7 million | $94.1 million | 9.2% |
| Net income attributable to common stockholders | $95.2 million | $87.0 million | 9.4% |
| Basic and diluted EPS | $0.75 | $0.69 | 8.7% |
| FFO attributable to common stockholders and unit holders | $153.8 million | $146.1 million | 5.3% |
| Cash dividends per common share | $0.86 | $0.78 | 10.3% |
| Six-month metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $582.3 million | $539.0 million | 8.0% |
| Net income attributable to common stockholders | $183.4 million | $169.3 million | 8.3% |
| Basic EPS | $1.45 | $1.34 | 8.2% |
| Diluted EPS | $1.45 | $1.33 | 9.0% |
| FFO attributable to common stockholders and unit holders | $300.1 million | $284.0 million | 5.7% |
| Net cash provided by operating activities | $339.7 million | $289.0 million | 17.5% |
Q2 operating margin was approximately 48.8%, compared with 49.4% in the prior-year quarter. Net income attributable to common stockholders represented approximately 32.1% of revenue, compared with 31.5% in Q2 2017.
- Q2 property rental revenue increased 7.2%, primarily from higher rental rates and recently acquired stores.
- Tenant reinsurance revenue increased 17.3%, mainly due to the larger store base.
- Same-store rental revenue increased 4.1% and same-store NOI increased 3.8% in Q2. Same-store occupancy was 94.2%, versus 94.3% in Q2 2017.
- Average annual rent per square foot for existing customers increased to $16.02 from $15.41; new-lease rent increased to $18.31 from $16.87.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $49.2 million at June 30, 2018; cash, cash equivalents and restricted cash totaled $69.1 million.
- Total face-value debt, including credit lines, was $4.81 billion. Debt to total enterprise value was 26.4%, and the weighted-average interest rate was 3.4%.
- Approximately 72.8% of total debt and related instruments were fixed-rate, including debt economically fixed through interest-rate swaps.
- Debt balances included $3.83 billion of notes payable, $570.4 million of exchangeable senior notes, $117.5 million of notes payable to trusts and $250.0 million drawn on revolving lines of credit.
- Operating cash flow was $339.7 million for the six months, while investing activities used $229.1 million, primarily for $238.2 million of acquisitions and $27.9 million of development and redevelopment.
- Financing activities used $127.6 million, including $206.8 million of common dividends and $58.5 million to repurchase exchangeable senior notes.
- The company reported compliance with all financial covenants at June 30, 2018 and expects to fund short-term liquidity needs through operating cash flow, cash on hand and revolving credit availability.
Material Changes Versus the Prior Comparable Period
- The company acquired 22 stores during the first six months of 2018, compared with five in the first six months of 2017. Acquisition spending increased to $238.2 million from $72.7 million.
- Property operations expense increased 8.6% in Q2, while tenant reinsurance expense increased 43.8%; total expenses grew faster than revenue in the quarter.
- Interest expense increased 15.7% in Q2 and 14.8% for the first six months, reflecting higher debt levels and interest rates. Total face-value debt was $4.81 billion at June 30, 2018, compared with $4.34 billion at June 30, 2017.
- No real estate impairment loss was recorded in 2018, compared with a $6.0 million impairment loss in Q2 and the first six months of 2017.
- The company increased its interest in Storage Portfolio I LLC from 25% to 34% and its excess-profit participation from 40% to 49%. It also received a $47.9 million financing distribution from the venture.
- The company adopted new revenue-recognition, restricted-cash and hedge-accounting standards. Management reported no material impact from the adoption.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative earnings or FFO guidance range.
- Management expects seasonal strength from May through September, with occupancy historically highest near the end of July; quarterly results may not indicate full-year performance.
- Interest-rate sensitivity is material: a 100-basis-point increase or decrease in variable rates would affect annual interest expense and cash flows by approximately $13.1 million, assuming no structural changes.
- The company had 15 stores under agreement for acquisition for $194.5 million and agreements to acquire 23 stores with joint-venture partners for a total investment of $77.6 million.
- On July 5, 2018, the company redeemed the remaining $11.6 million principal amount of its 2013 exchangeable senior notes for $21.8 million in cash.
- After quarter end, the company acquired three stores for $47.1 million and sold 343,251 shares through its at-the-market program for net proceeds of $33.9 million.
- Risks include competition affecting rents and occupancy, higher interest rates, access to capital, acquisition execution, real estate valuation declines, regulatory and REIT-status requirements, uninsured losses, environmental liabilities, litigation and economic disruption from natural disasters or other events.
- Management reported various ordinary-course legal proceedings but stated that their outcomes could not be determined with certainty. No material changes were reported to the risk factors in the 2017 Form 10-K.
Investor Verification Checklist
- Verify the company’s FFO, same-store NOI, occupancy and rental-rate trends against subsequent quarters.
- Review acquisition closings and funding requirements for the announced pipeline and joint-venture investments.
- Monitor debt maturities, revolving-credit utilization, covenant compliance and exposure to variable interest rates.
- Assess whether expense growth, particularly property operations and tenant reinsurance costs, is outpacing same-store revenue growth.
- Confirm the effect of the July 2018 exchangeable-note redemption and post-quarter-end equity issuance on leverage and diluted share count.
- Review litigation, environmental matters and the company’s ability to maintain REIT qualification.