Extra Space Storage Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended September 30, 2020. Extra Space Storage is a self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties, with a tenant-reinsurance business. At quarter-end, the company owned or held interests in 1,188 stores and managed 718 additional stores, totaling 1,906 stores across 40 states, Washington, D.C. and Puerto Rico.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $343.0 million | $337.5 million | $1,002.7 million | $972.7 million |
| Net income | $123.9 million | $116.0 million | $351.3 million | $330.8 million |
| Net income attributable to common stockholders | $114.6 million | $108.1 million | $325.7 million | $307.7 million |
| Basic/diluted EPS | $0.89/$0.88 | $0.84/$0.83 | $2.52/$2.50 | $2.40/$2.37 |
| FFO attributable to common stockholders and unit holders | $179.7 million | $170.6 million | $517.8 million | $492.9 million |
| Cash dividends per common share | $0.90 | $0.90 | $2.70 | $2.66 |
Q3 operating income was $163.2 million, representing an operating margin of approximately 47.6%, compared with approximately 48.2% in Q3 2019. Net income attributable to common stockholders produced a net margin of approximately 33.4%, compared with approximately 32.0% in the prior-year quarter.
Nine-month operating cash flow was $583.3 million, up from $544.5 million. Investing cash use was $363.8 million, including $151.2 million for real estate acquisitions, $46.1 million for development and redevelopment, and $149.8 million for the issuance and purchase of notes receivable. Financing cash use was $209.6 million, including $349.7 million of common dividends and $67.9 million of share repurchases.
At September 30, 2020, cash and cash equivalents were $74.8 million, with restricted cash of $5.8 million. Face-value debt was $5.303 billion, including $4.611 billion of notes payable, $575.0 million of exchangeable senior notes and $94.0 million drawn on revolving credit lines. Weighted-average debt interest was 3.0%; 77.7% of total debt and related instruments were fixed-rate or hedged. Management reported compliance with all financial covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 1.6%, while nine-month revenue increased 3.1%. Tenant-reinsurance revenue rose 17.0% in Q3 and 13.6% for the nine-month period.
- Property-rental revenue declined 0.2% in Q3 but increased 1.8% year to date. COVID-19-related lower rental rates and other fee income at stabilized stores reduced Q3 property-rental revenue by approximately $4.3 million, partly offset by acquisitions.
- Q3 property operations expense rose 4.1% and nine-month expense rose 9.4%, primarily due to acquired stores and higher property taxes, payroll, benefits and marketing.
- Interest expense declined 10.0% in both the quarter and nine-month period, mainly because average variable interest rates fell to 1.8% in Q3 2020 from 3.4% in Q3 2019.
- Equity in earnings and dividend income from unconsolidated real estate entities increased 107.3% in Q3 and 85.6% year to date, primarily reflecting dividends from the SmartStop preferred-stock investment.
- Same-store rental revenue declined 1.5% in Q3 and 0.9% year to date; same-store NOI declined 2.7% and 2.1%, respectively. Same-store quarter-end occupancy improved to 95.9% from 93.8%.
- FFO increased 5.3% in Q3 and 5.1% year to date. The company acquired 10 stores during the first nine months of 2020 versus 16 stores in the comparable 2019 period, although the prior-year figure included 12 stores previously held in joint ventures.
Guidance, outlook, risks and unusual items
Management did not provide a specific earnings or FFO forecast in the filing. It expects positive operating cash flow for 2020 and believes operating cash flow, cash on hand, revolving credit availability and capital-market access will satisfy reasonably anticipated needs for the next 12 months, including debt service, recurring capital expenditures, acquisitions, distributions and dividends.
COVID-19 reduced new rentals and vacates, achieved rates for new customers, rent increases, late-fee collections and auction activity, and increased receivables and bad debt. Conditions improved during August and September, with higher achieved rates, collections returning toward historical norms and record occupancy attributed partly to fewer vacates. Future effects remain highly uncertain.
Subsequent to quarter-end, holders exchanged or the company redeemed the entire $575.0 million principal amount of its 3.125% exchangeable senior notes. The company paid $574.9 million in cash for principal and issued approximately 1.324 million common shares for exchange value above principal. The company also invested an additional $50.0 million in SmartStop preferred stock on October 26, 2020.
As of September 30, 2020, 16 stores were held for sale; an additional 14 were classified as held for sale afterward. Sales of the 30 stores were expected to close in late 2020 or early 2021, with no impairment loss recorded because estimated fair values exceeded carrying values. The company was also committed to acquire 14 stores for $157.9 million and one additional joint-venture store requiring a $1.6 million investment.
Key risks include prolonged or renewed COVID-19 effects, lower demand, occupancy or rents, competition, interest-rate increases, capital-market disruption, refinancing and liquidity risk, impairment charges, legal proceedings, environmental liabilities, joint-venture decision-making limitations and maintaining REIT qualification. Interest-rate sensitivity indicated that a 100-basis-point change in variable rates would affect annual interest expense and cash flows by approximately $11.8 million.
Investor verification points
- Verify the sustainability of record occupancy against rental-rate trends, bad debt, concessions and same-store NOI.
- Assess post-quarter-end debt changes following the exchangeable-notes settlement and the resulting share issuance and dilution.
- Reconcile debt maturities, revolving-credit availability, fixed-rate coverage and interest-rate swap obligations.
- Review the effect of COVID-19 on collections, tenant churn, late fees, auctions and new-tenant pricing in subsequent quarters.
- Monitor the timing and pricing of the 30 planned store dispositions and the 15 stores under acquisition commitments.
- Compare FFO growth with GAAP net income and operating cash flow, recognizing that FFO is a non-GAAP measure and not a substitute for liquidity.