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 that owns, operates, acquires, develops, manages and redevelops self-storage facilities. The filing covers the three and nine months ended September 30, 2010; amounts are in thousands except per-share, property and share data.
- At September 30, 2010, the company owned or held interests in 652 operating properties and managed 157 additional properties, totaling 809 properties in 34 states and Washington, D.C.
- The portfolio included approximately 58 million square feet and more than 400,000 customers.
- The company operates through property management/acquisition/development, rental operations and tenant reinsurance segments.
- Management continued winding down development activities; six development projects remained in process and were expected to be completed by the end of the second quarter of 2011.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $71,979 | $71,113 | $208,343 | $209,425 |
| Income from operations | $23,561 | $23,217 | $67,230 | $47,514 |
| Net income | $9,482 | $7,574 | $22,586 | $31,655 |
| Net income attributable to common stockholders | $7,667 | $5,967 | $17,415 | $26,045 |
| Diluted EPS | $0.09 | $0.07 | $0.20 | $0.30 |
| Funds from operations | $22,130 | $20,918 | $59,832 | $69,823 |
| Cash dividends per common share | $0.10 | — | $0.30 | $0.25 |
Reported operating margins were approximately 32.7% in Q3 and 32.3% for the first nine months. Net income attributable to common stockholders represented approximately 10.7% of Q3 revenue and 8.4% of nine-month revenue.
- Net cash provided by operating activities was $74,730 for the first nine months, compared with $66,092 in the prior-year period.
- Investing activities used $34,495, including $24,648 for acquisitions and $28,523 for development and construction, partly offset by $15,750 received from a property contribution to a joint venture.
- Financing activities used $150,387, principally reflecting $248,032 of principal repayments, $26,206 of common dividends and $5,671 of distributions to noncontrolling interests.
- Cash and cash equivalents declined to $21,798 at September 30, 2010 from $131,950 at December 31, 2009.
- Total debt was $1,174,065, including notes payable, trust notes, exchangeable senior notes and credit lines. Debt to total capitalization was 44.3%, the weighted-average interest rate was 4.7%, and 65.2% of debt and related instruments was fixed rate or hedged.
- The company had $21,798 of cash and $115,000 drawn on credit lines. Management stated that it expected to fund short-term liquidity needs with operating cash flow, cash on hand and credit-line borrowings, while pursuing additional secured term loans.
- Stabilized same-store occupancy increased to 85.8% from 84.0%; same-store net operating income increased 7.8% in Q3 and 3.5% year to date.
Material changes versus the prior comparable period
- Q3 revenue increased 1.2%, while nine-month revenue decreased 0.5%. Property rental revenue declined 1.7% in Q3 and 3.5% year to date, primarily due to the sale of 19 properties to the Harrison Street joint venture and deconsolidation of five properties.
- Management and franchise fees increased 12.7% in Q3 and 8.7% year to date, supported by growth in managed third-party properties from 114 to 157.
- Tenant reinsurance revenue increased 22.6% in Q3 and 24.8% year to date, reflecting customer participation of approximately 59% versus 55%.
- Operating income increased 1.5% in Q3 and 41.5% year to date. The nine-month comparison benefited from the absence of $18,905 of development-related impairment and acquisition costs recorded in 2009 and $1,400 of 2009 severance costs.
- Common-stockholder net income increased 28.5% in Q3 but decreased 33.1% year to date. The 2009 nine-month period included a $27,576 gain from repurchasing exchangeable senior notes, which did not recur.
- FFO increased 5.8% in Q3 but declined 14.3% year to date, primarily because of the prior-year debt-repurchase gain and changes related to the development wind-down.
- The company adopted amended variable-interest-entity guidance effective January 1, 2010 and deconsolidated five joint ventures, recording the interests under the equity method.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings, revenue or FFO guidance. Management emphasized selective acquisitions, expansion of the management platform, revenue management and cost control. The company expected to complete its remaining development projects by the end of the second quarter of 2011.
- Liquidity and refinancing risk remain significant: $117,184 of principal payments were scheduled within one year, including the $100,000 credit line that matured October 31, 2010; the company subsequently exercised an extension through October 31, 2011.
- Variable-rate debt exposed the company to interest-rate risk. Management estimated that a 100-basis-point change in LIBOR would change annual interest expense and cash flows by approximately $2,700, excluding debt subject to interest-rate floors.
- The company guaranteed $18,887 of mortgage loans for unconsolidated joint ventures and estimated total maximum exposure to loss from four VIE joint ventures at $34,383. No related liability was recorded because management considered loss unlikely.
- A $2,000 loss on a Memphis office sublease was recorded after the subtenant entered bankruptcy.
- Self-storage results are seasonal, with stronger occupancy and revenue generally from May through September.
- Key risks include competition, economic weakness, credit-market disruptions, higher interest rates and operating costs, property impairments, acquisition and development execution, joint-venture obligations, uninsured losses, regulatory requirements and maintaining REIT status.
- Management reported no material litigation, no material changes to previously disclosed risk factors, compliance with debt covenants and effective disclosure controls.
Most important facts for investors to verify
- Reconcile the sharp year-to-date cash decline with debt repayments, dividends and scheduled maturities.
- Review the availability and extension status of credit lines and the $117,184 of principal due within one year.
- Assess whether same-store occupancy and NOI improvements offset weaker consolidated rental revenue and the impact of property deconsolidations.
- Evaluate exposure to variable interest rates, interest-rate swaps, debt covenant requirements and recourse debt.
- Review joint-venture guarantees and the reported $34,383 maximum exposure to loss.
- Separate recurring operating performance from unusual items, including the 2009 debt-repurchase gain, 2009 development impairments and the 2010 sublease loss.
- Confirm progress and remaining costs for the six development projects and the implications of the development-program wind-down.