Extra Space Storage Inc. — Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered, self-managed REIT that owns, operates, acquires, develops, redevelops and manages self-storage properties. The filing covers the three and nine months ended September 30, 2015, with unaudited interim financial statements.
- At September 30, 2015, the Company had direct or indirect equity interests in 868 stores and owned or managed 1,170 stores across 36 states, Washington, D.C. and Puerto Rico.
- The portfolio included 617 wholly owned stores, 251 joint-venture stores and 302 third-party managed stores.
- The Company reported approximately 87.1 million rentable square feet and approximately 787,000 units.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Total revenues | $197.5 million | $169.1 million | $556.5 million | $482.0 million |
| Income from operations | $97.3 million | $77.5 million | $254.3 million | $208.6 million |
| Net income | $78.2 million | $59.2 million | $197.8 million | $146.4 million |
| Net income attributable to common stockholders | $71.7 million | $54.2 million | $180.8 million | $133.2 million |
| Basic EPS | $0.58 | $0.47 | $1.52 | $1.15 |
| Diluted EPS | $0.58 | $0.47 | $1.51 | $1.15 |
| Funds from operations attributable to common stockholders | $106.1 million | $88.8 million | $280.7 million | $233.4 million |
| Cash dividends per common share | $0.59 | $0.47 | $1.65 | $1.34 |
- Revenue increased 16.8% in the quarter and 15.5% year to date. Property rental revenue increased 17.9% and 15.7%, respectively; tenant reinsurance revenue increased 18.5% and 20.1%.
- Operating margin was approximately 49.3% in the quarter and 45.7% year to date, compared with approximately 45.8% and 43.3% in the comparable 2014 periods.
- Net income attributable to common stockholders increased 32.3% in the quarter and 35.7% year to date. FFO increased 19.8% in the quarter and 20.3% year to date.
- Same-store rental and tenant reinsurance revenue increased 9.9% in the quarter and 9.2% year to date, while same-store net operating income increased 12.6% and 12.1%, respectively.
- Same-store quarter-end occupancy increased to 93.6% from 91.6%. Wholly owned stabilized occupancy increased to 93.1% from 90.9%.
Cash flow, debt and liquidity
| Metric | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|
| Net cash provided by operating activities | $286.3 million | $256.6 million |
| Net cash used in investing activities | $(486.4) million | $(356.9) million |
| Net cash provided by financing activities | $1,268.0 million | $22.9 million |
| Net increase in cash | $1,067.9 million | $(77.5) million |
| Cash and cash equivalents at period end | $1,115.5 million | $49.2 million |
- Acquisition spending was $263.4 million, and development and redevelopment spending was $15.1 million. The Company acquired 40 operating stores during the first nine months.
- Cash included approximately $204.3 million deposited in connection with the SmartStop acquisition, which closed on October 1, 2015.
- Face value of debt, including lines of credit, was $3.493 billion. Notes payable were $2.528 billion, exchangeable senior notes were $660.4 million net of discount, and drawn lines of credit were $185.0 million.
- Debt to total enterprise value was 28.6%; 71.4% of total debt and related instruments were fixed-rate or economically fixed through interest-rate swaps. The weighted-average interest rate was 3.1%.
- Credit facilities had total capacity of $360.0 million, of which $185.0 million was drawn. The Company stated that it was in compliance with all financial covenants.
Material changes versus the prior comparable period
- Real estate assets increased to $4.452 billion from $4.140 billion at December 31, 2014, while total assets increased to $6.003 billion from $4.402 billion.
- Notes payable increased to $2.528 billion from $1.872 billion, and exchangeable senior notes increased to $660.4 million from $250.0 million, primarily reflecting acquisition financing and the September 2015 issuance of new exchangeable notes.
- The Operating Partnership issued $575.0 million of 3.125% exchangeable senior notes due 2035 and received net proceeds of $563.5 million. It used $227.2 million to repurchase $164.6 million principal amount of 2013 exchangeable notes.
- The Company issued 6.325 million common shares in June 2015 and sold 410,000 shares through its at-the-market program during the third quarter, generating aggregate net equity proceeds of $446.9 million year to date.
- Acquisition-related costs increased year to date, including a $2.4 million write-off of a nonrefundable deposit for a property not acquired because of environmental issues.
- Other comprehensive income was negatively affected by a $20.0 million third-quarter decline in the fair value of interest-rate swaps.
Guidance, outlook, risks and unusual items
The filing does not provide explicit quantitative earnings or revenue guidance. Management emphasized continued acquisition activity, expansion of the management business, revenue management and operating efficiencies, while noting that acquisition pricing was increasing and that the Company intended to remain disciplined.
- On October 1, 2015, the Company completed the approximately $1.4 billion SmartStop acquisition, acquiring 122 stores and assuming management of 43 third-party stores. The initial purchase accounting and pro forma financial information were not yet available.
- Also on October 1, 2015, the Company closed a $300.0 million loan secured by 47 stores, bearing interest at one-month LIBOR plus 1.60% and maturing September 30, 2022. An interest-rate cap covered 90% of the balance, with LIBOR capped at 3.9%.
- As of September 30, 2015, the Company was under contract to acquire seven operating stores and 14 stores to be acquired after construction, for an aggregate purchase price of $203.0 million.
- Legal proceedings include claims involving wrongful foreclosure, state self-storage statutes and consumer fraud laws. The Company had an $850,000 accrued liability recorded from 2014, but stated that potential losses could exceed accrued amounts.
- Principal risks include competition, changes in occupancy and rental rates, acquisition execution and integration, interest-rate and credit-market conditions, rising operating costs, asset impairments, environmental liabilities, joint-venture partner performance and maintaining REIT qualification.
- The self-storage business is seasonal, with greater revenue and profit generally realized from May through September.
Most important facts for investors to verify
- Actual post-closing operating performance, financing and purchase accounting for the SmartStop acquisition.
- Debt maturity schedule, refinancing requirements and the effect of higher interest rates on variable-rate debt; management estimated that a 100-basis-point LIBOR change would affect annual earnings and cash flow by approximately $9.7 million.
- Whether occupancy, rental-rate growth and same-store NOI gains are sustained after the seasonal summer period.
- Funding needs for the $203.0 million of contracted acquisitions, additional acquisitions, dividends and debt maturities.
- Potential dilution from common-stock issuance, exchangeable senior notes and Operating Partnership units.
- Resolution and ultimate exposure from pending litigation and environmental matters.