Extra Space Storage Inc. quarterly report, Q1 FY2014

Extra Space Storage Inc. — 2014 Q1 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, redeveloping and managing self-storage facilities. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.

At March 31, 2014, the company had direct or indirect equity interests in 800 operating storage facilities and managed 252 properties for third parties, totaling 1,052 properties across 35 states, Washington, D.C. and Puerto Rico.
The portfolio contained approximately 78.0 million rentable square feet and approximately 700,000 units.
The company operates through rental operations, tenant reinsurance, and property management, acquisition and development.

Financial performance and key metrics

Metric	Q1 2014	Q1 2013	Change
Total revenues	$152.2 million	$119.3 million	27.5%
Income from operations	$60.4 million	$46.7 million	29.2%
Net income	$41.2 million	$33.9 million	21.4%
Net income attributable to common stockholders	$37.3 million	$31.4 million	18.8%
Basic and diluted EPS	$0.32	$0.28	14.3%
Funds from operations	$67.8 million	$53.2 million	27.5%
Net cash provided by operating activities	$64.6 million	$51.1 million	26.3%

Revenue growth was driven by acquisitions, higher occupancy and rental rates at stabilized properties, increased tenant reinsurance participation, and growth in managed properties.
Operating margin was approximately 39.7% in Q1 2014, compared with 39.2% in Q1 2013. Net margin attributable to common stockholders was approximately 24.5%, compared with 26.3%, reflecting higher interest, acquisition, tax and other expenses.
Property rental revenue increased 28.3% to $132.0 million; tenant reinsurance revenue increased 31.7% to $13.5 million; and management fee revenue increased 8.7% to $6.7 million.
Same-store rental and tenant reinsurance revenue increased 7.9%, same-store net operating income increased 9.4%, and same-store quarter-end occupancy increased to 90.4% from 88.4%.
Average annual rent per square foot for existing customers at stabilized properties rose to $14.09 from $13.50. New-lease rent increased to $14.18 from $14.03, while average discounts declined to 4.0% from 4.8%.

Cash flow, debt and liquidity

Operating cash flow was $64.6 million. Investing cash flow was negative $256.6 million, primarily due to $256.8 million spent on acquisitions, development and redevelopment.
Financing activities provided $112.3 million, including proceeds from notes payable and lines of credit, partially offset by principal repayments, common dividends of $46.3 million and distributions to noncontrolling interests of $4.3 million.
Cash and cash equivalents declined to $47.0 million at March 31, 2014 from $126.7 million at December 31, 2013.
Face value of total debt, including lines of credit, was $2.12 billion. Debt-to-total-market-capitalization was 26.4%, and the weighted-average interest rate was 3.6%.
Approximately 74.2% of total debt and related instruments was fixed-rate or hedged. Approximately $546.4 million of debt was subject to variable rates excluding debt with interest-rate swaps; a 100-basis-point LIBOR change was estimated to affect annual earnings and cash flow by approximately $5.1 million.
Lines of credit totaled $290.0 million of capacity, of which $87.0 million was drawn at March 31, 2014. The company was in compliance with all financial covenants.
Management expects to fund operating expenses, recurring capital expenditures, dividends, distributions and interest through operating cash flow, cash on hand and borrowings. It expects additional borrowing, joint ventures, and debt or equity offerings may be required for acquisitions and other liquidity needs.

Material changes versus the prior comparable period

The company acquired 21 properties in Q1 2014 compared with two in Q1 2013, contributing to a $238.0 million increase in acquisition-related investing cash outflows.
Property acquisitions and other activity increased the number of owned or managed properties to 1,052 from 965 a year earlier. Consolidated and unconsolidated operating properties included in the quarter increased to 800 from 729.
Total expenses increased 26.4% to $91.8 million. Acquisition-related costs increased to $2.1 million from $0.5 million, and general and administrative expense included a one-time $0.9 million point-of-sale system expense.
Interest expense increased 12.9% to $19.6 million due to higher debt. The company also recorded $0.7 million of non-cash interest expense related to the exchangeable senior notes issued in June 2013.
Tenant reinsurance expense increased partly because of claims related to a flood at one property and increased customer participation.
Q1 2013 included $2.6 million of non-cash gains from purchases of joint venture partners’ interests; no comparable gain was recorded in Q1 2014.
The common dividend increased to $0.40 per share from $0.25 per share.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide specific full-year earnings, revenue or FFO guidance.
Management intends to continue maximizing property performance, pursuing acquisitions selectively, and expanding the third-party management business. It noted that acquisition prices were increasing but stated that it remained a disciplined buyer.
Self-storage results are seasonal, with a greater portion of revenue and profit generally realized from May through September. First-quarter results may not be indicative of full-year performance.
Key risks include competition and potential declines in rents or occupancy, acquisition execution and integration, access to capital, rising interest rates and operating costs, asset impairment, regulatory and REIT-status requirements, uninsured losses, environmental liabilities, joint venture performance and broader economic conditions.
The company acquired 21 properties for aggregate consideration of approximately $250.7 million during the quarter, including a property acquired from the chief executive officer and executive chairman in related transactions for approximately $7.0 million.
Subsequent to quarter-end, the company announced acquisitions in Georgia, Florida, California and Washington involving cash, assumed debt and Series B or Series C operating partnership units.
Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2014.

Important facts for investors to verify

Reconcile acquisition-driven growth with same-store performance and assess whether occupancy and rental-rate gains can continue.
Review debt maturities, secured borrowing capacity, credit-line extensions and the company’s ability to finance planned acquisitions while maintaining dividend distributions.
Evaluate exposure to variable interest rates, interest-rate swaps and related counterparty or covenant-trigger provisions.
Assess the impact of the one-time point-of-sale expense, flood-related reinsurance claims and the absence of Q1 2013 joint-venture gains on year-over-year comparability.
Review related-party acquisition terms and the rights, distributions and potential dilution associated with Series A, Series B, Series C and other operating partnership units.
Confirm that the company continues to satisfy REIT distribution and qualification requirements and remains compliant with debt covenants.