Extra Space Storage Inc. annual report, FY2019

Extra Space Storage Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. The filing is an annual report rather than a quarterly filing, although fourth-quarter unaudited data are included. Extra Space Storage is a self-managed, self-administered REIT operating self-storage and tenant-reinsurance businesses. At year-end, it owned or managed 1,817 stores across 40 states, Washington, D.C., and Puerto Rico, totaling approximately 140.0 million rentable square feet and 1.3 million units.

Financial performance and operating metrics

Metric	2019	2018	Change
Total revenue	$1.308 billion	$1.197 billion	Up 9.3%
Income from operations	$635.0 million	$619.7 million	Up 2.5%
Net income	$451.1 million	$447.1 million	Up 0.9%
Net income attributable to common stockholders	$420.0 million	$415.3 million	Up 1.1%
Diluted EPS	$3.24	$3.27	Down 0.9%
FFO attributable to common stockholders and unit holders	$667.9 million	$623.0 million	Up 7.2%
Operating cash flow	$707.7 million	$677.8 million	Up 4.4%
Common dividends paid per share	$3.56	$3.36	Up 6.0%

Revenue was driven by an 8.7% increase in property rental revenue, an 11.2% increase in tenant-reinsurance revenue, and a 19.5% increase in management fees and other income.
Income from operations represented approximately 48.5% of total revenue. Net income attributable to common stockholders represented approximately 32.1% of total revenue.
Same-store rental revenue increased 3.5%, same-store operating expenses increased 4.9%, and same-store NOI increased 2.9% to $742.8 million. Same-store occupancy was 92.4% at year-end versus 91.7% in 2018.
Average annual rent per square foot for existing customers rose to $16.43 from $15.92; average rent for new leases rose to $18.12 from $17.57. Average discounts declined to 3.5% of rental revenue from 4.2%.
Acquisitions totaled $404.7 million, including $300.4 million of wholly owned acquisitions and $104.3 million invested through joint ventures. The Company acquired 21 stores and added 27 leased properties during 2019.

Balance sheet, debt and liquidity

Total assets were $8.532 billion, including $7.697 billion of net real estate assets and $338.1 million of investments in unconsolidated real estate entities.
Debt-related liabilities totaled approximately $5.05 billion at year-end, compared with $4.81 billion in 2018. Face-value debt was $5.077 billion, equal to a reported 25.9% debt-to-total-enterprise-value ratio.
Debt consisted primarily of $2.2 billion of secured notes, $2.7 billion of unsecured notes and exchangeable senior notes, and $158.0 million drawn on revolving lines of credit.
Revolving credit capacity was $790.0 million, of which $632.0 million was undrawn. Cash and cash equivalents were $65.7 million, with restricted cash of $5.0 million.
Approximately 78.7% of debt and other instruments were fixed-rate or hedged. Approximately $1.1 billion, or 21.3% of debt, was exposed to variable rates, with a weighted average rate of approximately 3.1%.
A 100-basis-point change in variable interest rates would affect annual interest expense and cash flow by approximately $10.8 million, before any mitigating actions.
Management reported compliance with all financial covenants and stated that operating cash flow, cash on hand, revolving credit availability, and capital-market access should meet reasonably anticipated needs for the next twelve months.
Contractual obligations totaled $6.186 billion, including $5.077 billion of debt principal and $742.2 million of related interest. Debt principal due within one year was $1.143 billion.

Material changes versus the prior comparable period

Portfolio scale expanded: owned or managed stores increased to 1,817 from 1,647, while consolidated operating stores increased to 1,171 from 1,111.
Property rental revenue benefited from acquisitions and higher rates at stabilized stores. However, total expenses grew 11.0%, faster than revenue, primarily because of property operations, taxes, marketing, additional stores, and tenant-reinsurance claims.
Interest expense increased 4.5% to $186.5 million due primarily to a higher average debt balance.
Gain on real estate transactions declined to $1.2 million from $30.8 million because 2019 included the sale of one New York store, while 2018 included a larger gain from a California store sale.
Equity in earnings of unconsolidated ventures declined 22.0% to $11.3 million, partly because 12 properties were purchased from joint ventures in January 2019.
The Company issued 1.779 million shares through its ATM program for net proceeds of approximately $198.8 million, compared with 0.934 million shares and $90.2 million in 2018.
The Company adopted the new lease accounting standard, recognizing $264.6 million of operating-lease right-of-use assets and $274.8 million of operating-lease liabilities at year-end. Prior periods were not restated.
In October 2019, the Company invested $150.0 million in convertible preferred stock of SmartStop Self Storage REIT, with a stated dividend rate of 6.25% per year and an additional commitment of up to $50.0 million.

Outlook, management commentary, risks and unusual items

Management expects positive operating cash flow in 2020 and intends to continue acquisitions, development, redevelopment, management expansion, and bridge lending. Management expects certificate-of-occupancy acquisitions to continue and noted that these properties can dilute earnings during their two-to-four-year lease-up period.
The Company expects to use operating cash flow, credit facilities, secured and unsecured debt, equity issuance, joint ventures, and asset sales to fund growth and debt maturities.
The self-storage business is seasonal, with a greater proportion of revenue and profit generated from May through September and historically lowest occupancy in late February and early March.
Key risks include competition and new supply, month-to-month leases and potential rent or occupancy declines, acquisition execution and integration, credit-market disruptions, refinancing risk, variable interest rates, LIBOR transition, impairment or valuation declines, environmental and uninsured losses, technology and cybersecurity failures, litigation, regulatory changes, and joint-venture decision-making limitations.
Maintaining REIT status is material. Failure to qualify could result in corporate income taxes, penalties, reduced distributions, and restrictions on re-electing REIT status for four subsequent taxable years.
The Company reported no material real-estate impairments in 2019. Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect, although outcomes remain inherently uncertain.
Auditor Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter involved the accounting treatment and consolidation analysis of investments in real estate ventures.

Most important facts for investors to verify

Whether same-store rent growth and occupancy can offset rising property taxes, marketing costs, insurance claims, and other operating expenses.
The schedule and refinancing plan for $1.143 billion of debt principal due within one year and additional maturities in 2023 and 2024.
Exposure to variable rates, the effectiveness of interest-rate swaps, and the financial impact of the transition away from LIBOR.
Whether acquisition, development, certificate-of-occupancy, and joint-venture investments generate targeted returns without excessive earnings dilution.
The effect of ATM equity issuance and Operating Partnership interests on per-share earnings, FFO, leverage, and ownership dilution.
The performance, redemption terms, and concentration risk associated with the $150.0 million SmartStop preferred-stock investment and other unconsolidated ventures.
Continued REIT qualification, compliance with debt covenants, and the adequacy of liquidity for dividends, distributions, capital expenditures, and debt service.