Extra Space Storage Inc. — Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a fully integrated, self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties. The report covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016. At quarter-end, the Company owned or held interests in 1,020 stores and managed 421 additional stores, for 1,441 stores across 38 states, Washington, D.C. and Puerto Rico.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $263.0 million | $229.4 million | 14.6% |
| Property rental revenue | $231.5 million | $199.5 million | 16.0% |
| Income from operations | $124.2 million | $93.6 million | 32.6% |
| Operating margin | 47.2% | 40.8% | Up 6.4 percentage points |
| Net income | $89.7 million | $89.4 million | 0.4% |
| Net income attributable to common stockholders | $82.3 million | $82.6 million | (0.4%) |
| Basic diluted EPS | $0.65 / $0.64 | $0.66 / $0.66 | Declined |
| FFO attributable to common stockholders and unit holders | $137.9 million | $104.9 million | 31.4% |
| Net cash provided by operating activities | $113.1 million | $95.5 million | 18.5% |
| Cash and cash equivalents at period-end | $29.3 million | $49.8 million | Down from $43.9 million at Dec. 31, 2016 |
Revenue growth reflected acquisitions, higher occupancy and rental rates, and increased tenant reinsurance revenue. Same-store rental revenue increased 5.8%, same-store operating expenses declined 2.0%, and same-store NOI increased 9.2% to $148.9 million. Total stabilized-store occupancy was 92.1%, compared with 91.2% on a pro forma basis in the prior-year comparison.
Debt, Liquidity and Capital Resources
- Face value of total debt was $4.345 billion at March 31, 2017, with debt-to-total-enterprise-value of 30.3%.
- Debt consisted primarily of $3.199 billion of notes payable, $612.2 million of exchangeable senior notes, $117.4 million of notes payable to trusts and $363.0 million drawn on revolving credit facilities.
- Revolving credit capacity was $600.0 million, leaving $237.0 million undrawn.
- Weighted-average interest rate on total debt was 3.1%; 69.0% of total debt and related instruments was fixed-rate, including debt hedged with interest-rate swaps.
- The Company reported compliance with all financial covenants at quarter-end and had $29.3 million of cash and cash equivalents.
- Operating cash flow was $113.1 million, while financing activities used $127.6 million, principally reflecting $98.2 million of common dividends and $187.9 million of debt principal payments.
- Cash investing activity was approximately neutral because $39.1 million was spent on acquisitions and $44.9 million of principal payments were received on notes receivable.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $33.6 million, primarily from acquisitions and improved same-store performance.
- Operating income rose $30.6 million, helped by revenue growth, the absence of $4.1 million of acquisition-related expenses, and a $4.6 million decrease in general and administrative expense. The prior year included a $4.0 million legal-action accrual.
- Interest expense increased $4.6 million because of higher debt balances. Face-value debt increased from $3.742 billion at March 31, 2016 to $4.345 billion at March 31, 2017.
- Q1 2016 included a $26.9 million gain from a step acquisition of joint-venture properties; no comparable gain occurred in Q1 2017. This largely explains why net income and common-stockholder EPS were essentially flat despite stronger operating performance.
- Acquisition spending declined sharply to $39.1 million from $234.8 million. The Company acquired two stores in Q1 2017 versus 23 stores in Q1 2016.
- Common dividends paid increased to $0.78 per share from $0.59 per share.
- The Company adopted ASU 2017-01, resulting in qualifying store acquisitions being treated as asset acquisitions and related transaction costs being capitalized rather than expensed.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that it intends to maximize store performance, pursue disciplined acquisitions, expand its management platform and fund liquidity needs through operating cash flow, cash on hand, revolving borrowings, additional debt, joint ventures and potential equity or debt offerings.
- The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September.
- Key risks include competition, declining rents or occupancy, acquisition and development execution, higher interest rates and operating costs, constrained capital-market access, asset impairment, joint-venture counterparty risk, regulatory changes and maintaining REIT qualification.
- A legal proceeding involving alleged wrongful foreclosure and consumer-protection violations resulted in a $5.6 million liability accrued at March 31, 2017. Additional loss beyond accrued amounts remains possible.
- The Company had commitments to acquire stores totaling $165.6 million and additional joint-venture acquisition commitments totaling $141.9 million.
- Interest-rate sensitivity was material: a 100-basis-point change in applicable rates was estimated to change annual interest expense and cash flows by approximately $13.5 million.
- One parcel of undeveloped land and 36 operating stores were held for sale; management reported estimated fair value less selling costs above carrying value, with no impairment recorded.
- The 2013 exchangeable senior notes became exchangeable during the quarter ending June 30, 2017 because the stock-price trigger was met.
Most Important Facts for Investors to Verify
- Whether same-store occupancy, rental-rate growth and NOI trends continue through the seasonally stronger summer months.
- Debt maturities, refinancing requirements, variable-rate exposure and the availability of the revolving credit facilities.
- The pace and economics of committed acquisitions, development and lease-up stores, including the $307.5 million of stated acquisition commitments.
- The potential ultimate cost and timing of the disclosed litigation and any additional legal contingencies.
- The effect of higher dividends and debt repayments on liquidity, external capital needs and potential equity dilution.
- The treatment and comparability of FFO, including the significant effect of depreciation, noncontrolling interests and prior-period unusual gains.