Extra Space Storage Inc. — 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a fully integrated, self-managed and self-administered self-storage REIT. The filing covers the three and six months ended June 30, 2015. At quarter-end, the company had direct or indirect equity interests in 866 stores and owned or managed 1,147 stores across 35 states, Washington, D.C. and Puerto Rico, comprising approximately 85.1 million rentable square feet and 770,000 units.
The company operates through rental operations, tenant reinsurance, and property management, acquisition and development. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $185.9 million, up 15.6% | $359.0 million, up 14.6% |
| Income from operations | $81.6 million, up 15.5% | $157.0 million, up 19.8% |
| Net income | $61.0 million, up 32.5% | $119.6 million, up 37.1% |
| Net income attributable to common stockholders | $55.3 million, up 32.8% | $109.1 million, up 38.1% |
| Basic/diluted EPS | $0.47/$0.47, versus $0.36/$0.36 | $0.93/$0.92, versus $0.68/$0.68 |
| Funds from operations attributable to common stockholders | $90.1 million, up 17.3% | $174.6 million, up 20.7% |
| Cash dividends per common share | $0.59, versus $0.47 | $1.06, versus $0.87 |
Operating margin was approximately 43.9% in the quarter and 43.7% for the six-month period, compared with approximately 44.0% and 41.8%, respectively, in the prior-year periods. Net income attributable to common stockholders represented approximately 29.8% of quarterly revenue and 30.4% of six-month revenue.
- Same-store rental and tenant reinsurance revenue increased 9.4% in the quarter and 8.9% year to date; same-store net operating income increased 12.1% and 11.8%, respectively.
- Same-store square-foot occupancy was 94.5% at June 30, 2015, compared with 92.1% on a comparable basis in 2014.
- Wholly owned stabilized-store occupancy was 94.0%, compared with 91.2% a year earlier; joint-venture stabilized-store occupancy was 94.2%, compared with 92.9%.
- Average annual rent per square foot for existing customers was $14.63, compared with $13.83; new-lease rent was $15.71, compared with $14.62.
Cash Flow, Debt and Liquidity
- Six-month cash flow from operating activities was $183.3 million, compared with $167.8 million in 2014.
- Cash used in investing activities was $252.8 million, including $240.9 million for acquisitions and $9.9 million for development and redevelopment.
- Cash provided by financing activities was $197.7 million, including $416.6 million of net common-stock offering proceeds.
- Cash and cash equivalents increased to $175.9 million from $47.7 million at December 31, 2014.
- Face-value debt was $2.298 billion, including no borrowings under $265.0 million of credit-line capacity. Debt represented 22.3% of total enterprise value, and the weighted-average interest rate was 3.2%.
- Approximately 68.0% of debt and related instruments were fixed-rate, including $997.4 million covered by interest-rate swaps. Variable-rate debt excluding swapped debt was $736.4 million; management estimated that a 100-basis-point LIBOR change would affect annual interest expense and cash flow by approximately $7.1 million.
- The company was in compliance with all financial covenants at June 30, 2015. Management expects short-term liquidity needs to be funded through operating cash flow, cash on hand and credit facilities, supplemented by additional secured or unsecured borrowings, joint ventures and equity or debt offerings.
Material Changes Versus the Prior Comparable Period
- The company acquired 39 operating stores during the first six months of 2015, compared with 29 in the first six months of 2014. Acquisition consideration totaled $349.5 million, including $225.9 million of cash and $106.5 million of Operating Partnership units.
- Real estate assets, net, increased to $4.452 billion from $4.136 billion at December 31, 2014; total assets increased to $4.834 billion from $4.402 billion.
- On June 22, 2015, the company issued 6.325 million common shares at $68.15 per share, generating $416.6 million of net proceeds.
- Lines of credit were fully undrawn at June 30, 2015, compared with $138.0 million drawn at December 31, 2014.
- Interest expense increased 9.9% for the six-month period due to higher debt balances. Acquisition-related costs increased 57.2%, including a $2.4 million write-off of a nonrefundable deposit for a property not acquired because of environmental issues.
- Prior-year results included a $7.8 million loss on an acquisition earnout; 2015 included a $0.4 million gain from updating another earnout obligation. This contributed to the year-over-year increase in net income.
- A California store damaged by fire in October 2014 reduced 2015 property rental revenue by approximately $0.5 million for the quarter and $1.1 million year to date.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings or revenue guidance. Management emphasized continued acquisition activity, disciplined pricing, revenue management, expense control and expansion of the third-party management platform. Self-storage demand is seasonal, with higher occupancy and profitability generally occurring from May through September.
On June 15, 2015, the company announced a definitive agreement to acquire SmartStop Self Storage, Inc. for approximately $1.4 billion, including approximately $1.29 billion to be funded by Extra Space and $110 million from SmartStop asset sales. The proposed transaction would add 122 SmartStop stores and management of 42 third-party stores. Closing remained subject to shareholder approval and customary conditions; the filing does not establish that the transaction had closed by June 30.
- Key risks include competition, declining rents or occupancy, acquisition integration and lease-up execution, increased interest rates and operating costs, credit-market disruption, asset impairment, uninsured losses, environmental liabilities, joint-venture obligations, regulatory requirements and maintenance of REIT status.
- The company was under contract to acquire 20 additional stores for $204.9 million, with closings expected across 2015 through 2018.
- Ordinary-course litigation and claims were not expected by management to have a material adverse effect.
- The company had 22 interest-rate derivatives with a combined notional amount of $945.6 million. Certain counterparty agreements could require settlement of approximately $4.1 million upon specified defaults.
Investor Verification Checklist
- Verify completion, financing, integration costs and expected benefits of the SmartStop acquisition.
- Reconcile reported earnings growth with the prior-year earnout loss, 2015 earnout gain and other unusual items.
- Monitor same-store occupancy, rental-rate growth, discounts, bad debt and expense trends as acquisition growth moderates.
- Assess leverage, debt maturities, refinancing requirements, fixed-versus-variable-rate exposure and covenant compliance.
- Evaluate the funding requirement for contracted acquisitions, development spending and the company’s REIT distribution obligation.
- Review environmental and fire-related contingencies, including the property deposit write-off and the California store reconstruction.