Extra Space Storage Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. The financial statements are unaudited and presented under U.S. GAAP. Extra Space Storage is a self-managed REIT focused on owning, operating, managing, acquiring, developing and redeveloping self-storage properties.
Business context
At June 30, 2020, the company had ownership interests in 1,178 stores and managed an additional 700 stores, for a total of 1,878 stores across 40 states, Washington, D.C. and Puerto Rico. The portfolio served approximately 1.095 million tenants. Revenue was generated primarily from property rentals, tenant reinsurance, management fees and other income.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenues | $327.2 million | $323.6 million | 1.1% |
| Property rental revenue | $279.3 million | $279.6 million | (0.1%) |
| Tenant reinsurance revenue | $35.1 million | $31.7 million | 10.7% |
| Income from operations | $150.0 million | $159.2 million | (5.8%) |
| Net income | $111.3 million | $112.7 million | (1.3%) |
| Net income attributable to common stockholders | $102.9 million | $104.8 million | (1.8%) |
| Basic and diluted EPS | $0.80 | $0.82 basic; $0.81 diluted | Declined |
| FFO attributable to common stockholders and unit holders | $166.8 million | $165.8 million | 0.6% |
| Cash dividends per common share | $0.90 | $0.90 | Flat |
Margins: Q2 operating margin was approximately 45.8%, compared with 49.2% in the prior-year quarter. Net income attributable to common stockholders represented approximately 31.4% of revenue, compared with 32.4% in Q2 2019.
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Total revenues | $659.7 million | $635.1 million | 3.9% |
| Income from operations | $307.2 million | $307.7 million | (0.2%) |
| Net income attributable to common stockholders | $211.1 million | $199.6 million | 5.8% |
| Basic and diluted EPS | $1.63 | $1.56 basic; $1.55 diluted | Increased |
| FFO attributable to common stockholders and unit holders | $338.1 million | $322.3 million | 4.9% |
Operating trends
- Q2 same-store rental revenue declined 3.1%, while same-store operating expenses increased 0.7%, resulting in a 4.6% decline in same-store NOI.
- Six-month same-store rental revenue declined 0.6%, same-store expenses increased 2.3%, and same-store NOI declined 1.8%.
- Quarter-end same-store square-foot occupancy improved to 94.5% from 93.5%.
- Average annual rent per square foot for existing customers declined to $15.97 from $16.27, while rent for new leases declined to $13.11 from $15.70.
- Property operations expense increased 10.1% in Q2, primarily because of acquired and leased stores, higher property taxes, payroll, benefits and marketing costs.
- Interest expense declined 13.5% in Q2 and 9.9% for the six-month period, primarily because of lower average variable interest rates.
Cash flow, debt and liquidity
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|
| Net cash provided by operating activities | $392.1 million | $363.4 million |
| Net cash used in investing activities | $111.9 million | $440.4 million |
| Net cash provided by/(used in) financing activities | $(289.2) million | $60.0 million |
| Acquisition and development spending | $75.2 million | $269.7 million |
| Dividends paid on common stock | $233.5 million | $225.1 million |
| Ending cash, cash equivalents and restricted cash | $61.8 million | $55.6 million |
- Cash and cash equivalents were $56.4 million at June 30, 2020; restricted cash was $5.4 million.
- Total debt at face value was $5.104 billion. Debt consisted primarily of $4.301 billion of notes payable, $573.2 million of exchangeable senior notes and $207.0 million drawn on revolving credit lines.
- Weighted-average interest rate on total debt was 3.0%; approximately 79.0% of total debt and related instruments was fixed rate, including debt hedged with interest-rate swaps.
- Debt-to-total-enterprise-value ratio was 30.0%. The company was in compliance with all financial covenants at June 30, 2020.
- Management stated that operating cash flow, cash on hand, revolving credit availability and access to capital markets were expected to fund reasonably anticipated needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue increased modestly in Q2, but higher property operating, general and administrative and depreciation expenses reduced operating income and common-stockholder earnings.
- Same-store performance weakened because of lower rental rates, lower late-fee collections and higher bad debt, although occupancy increased.
- Tenant reinsurance revenue grew 10.7% in Q2, while related expense declined 1.8% because of fewer claims and lower average claim payouts.
- The company acquired two wholly owned stores and added one leased property during the six months ended June 30, 2020; no store acquisitions occurred in Q2.
- The company repurchased 826,197 common shares for $67.8 million during the first six months, including 172,600 shares for $15.6 million in Q2. Remaining repurchase authorization was $332.2 million.
- General and administrative expense included an additional $1.8 million of compensation expense related to modifications of stock-based awards following an executive retirement.
- Interest-rate swap liabilities increased to $119.7 million from $31.4 million at December 31, 2019, and accumulated other comprehensive loss increased substantially because of changes in swap fair values.
Outlook, risks and unusual items
- The filing does not provide specific quantitative full-year earnings or revenue guidance. Management expected positive operating cash flow in 2020 and believed liquidity was sufficient for anticipated needs over the next 12 months.
- COVID-19 reduced new rentals and vacates, achieved rental rates for new customers, existing-customer rent increases and late-fee collections. It also impaired tenant auctions and contributed to higher accounts receivable and bad debt.
- Management warned that the duration and severity of the pandemic, government restrictions, unemployment, tenant payment performance and capital-market conditions could materially affect occupancy, rental rates, cash flows and financing access.
- The company had agreements to acquire ten stores for $105.3 million and three stores with joint venture partners requiring total investment of $11.4 million. Subsequent to quarter-end, it purchased one Texas store for $10.5 million and a $103.0 million senior mezzanine note receivable for $101.0 million.
- Derivative agreements could require cash settlement if debt or covenant defaults occurred. The net termination value of derivatives in a liability position was $123.3 million at June 30, 2020; no collateral had been posted.
- The company had ordinary-course litigation and claims for which outcomes could not be determined with certainty. Management disclosed potential exposure in excess of accrued amounts.
- The $575.0 million exchangeable senior notes were subject to holder repurchase rights on October 1, 2020, unless redeemed, and the operating partnership could redeem them beginning October 5, 2020.
Important facts for investors to verify
- Whether lower new-lease rates, bad debt and reduced fees persist after the initial COVID-19 period.
- Same-store NOI trends, occupancy and rent growth, particularly in markets affected by unemployment or local restrictions.
- Liquidity and refinancing plans surrounding the exchangeable senior notes’ October 2020 repurchase and redemption provisions.
- Availability and covenants under revolving credit facilities, along with exposure to variable interest rates.
- Progress, timing and funding requirements for the disclosed store acquisitions and joint venture investments.
- The sustainability of dividends and share repurchases relative to operating cash flow, capital expenditures and debt maturities.
- Potential cash requirements or covenant implications from derivative liabilities and other contingencies.