Extra Space Storage Inc. — 2022 Q2 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, managing, acquiring, developing and redeveloping self-storage properties. The filing covers the three and six months ended June 30, 2022, with comparisons to the same periods in 2021.
At June 30, 2022, the company owned or held interests in 1,313 stores and managed 864 additional stores, for 2,177 owned and/or managed stores across 41 states and Washington, D.C. The company reported approximately 1.335 million tenants and held a 93.8% ownership interest in its operating partnership.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $475.0 million | $378.6 million | +25.4% |
| Property rental revenue | $408.0 million | $321.5 million | +26.9% |
| Net income attributable to common stockholders | $232.1 million | $167.9 million | +38.2% |
| Diluted EPS | $1.73 | $1.25 | +38.4% |
| Funds from operations attributable to common stockholders and unit holders | $303.6 million | $232.3 million | +30.7% |
| Cash dividends per common share | $1.50 | $1.00 | +50.0% |
Q2 net income attributable to common stockholders represented an approximately 48.9% margin on total revenue, compared with approximately 44.3% in the prior-year quarter. Consolidated net income was $247.8 million, or approximately 52.2% of revenue.
Segment net operating income increased to $342.7 million from $267.9 million. Same-store rental revenue rose 21.7%, same-store net operating income rose 26.0%, and same-store square-foot occupancy was 95.9%, down from 96.9% in the prior-year quarter. Existing-customer annual rent per square foot increased to $21.01 from $16.90, while new-lease rent per square foot was unchanged at $20.47.
For the six months ended June 30, 2022, revenue was $918.6 million, net income attributable to common stockholders was $435.7 million, diluted EPS was $3.24, and FFO was $590.0 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was $640.4 million, compared with $463.7 million in 2021.
- Investing activities used $570.0 million, including $438.3 million for real estate acquisitions, $157.3 million for the Bargold business combination, $29.3 million for development and redevelopment, and $76.3 million invested in unconsolidated real estate entities.
- Financing activities used $76.4 million, including $403.6 million of common dividends and $63.0 million of share repurchases, partly offset by debt issuance and borrowing activity.
- Cash, cash equivalents and restricted cash totaled $70.2 million at June 30, 2022, including $58.7 million of unrestricted cash and cash equivalents.
- Total debt had a face value of $6.417 billion. The weighted-average interest rate was 3.1%, 74.8% of debt and related instruments were fixed-rate or hedged, and debt represented 20.9% of total enterprise value.
- Debt carrying value, net of issuance costs, was $5.789 billion. Revolving lines of credit had $599.0 million drawn against $1.390 billion of total capacity.
- The company was in compliance with all financial covenants at quarter-end and held investment-grade ratings of BBB/Stable from S&P and Baa2 from Moody’s.
Material changes and unusual items
- The company acquired 29 wholly owned stores during the first six months of 2022, compared with 74 stores acquired during 2021.
- On June 1, 2022, the company acquired Bargold Storage Systems for approximately $179.3 million, consisting of $157.3 million in cash, $16.0 million of Series D operating partnership units and $6.0 million of operating partnership units. Bargold contributed $1.3 million of revenue and $0.3 million of operating income after acquisition. The transaction generated $170.8 million of preliminary goodwill and $1.5 million of transaction costs.
- The company sold two stores in Q2 for approximately $38.7 million and recognized a $14.2 million gain. The prior-year six-month period included a substantially larger $63.9 million gain on real estate transactions, creating a significant year-over-year comparison effect.
- The company repurchased 381,786 common shares during the six months for $63.0 million, with $337.0 million remaining under the authorization at June 30, 2022.
- Interest expense increased 18.0% in Q2 and 11.2% for the six-month period, primarily due to higher debt balances and weighted-average interest rates.
- Interest-rate swaps generated a $71.8 million increase in other comprehensive income during the first six months. The company held 18 swaps with a combined notional amount of $1.875 billion.
Outlook, risks and contingencies
The filing does not provide a specific quantitative earnings or FFO outlook. Management expects positive operating cash flow in 2022 and believes operating cash flow, cash on hand, revolving credit availability and access to capital markets will meet anticipated needs for operations, debt service, capital expenditures, acquisitions, distributions and REIT dividends over the next 12 months.
Subsequent to quarter-end, on July 29, 2022, the company added $600.0 million of unsecured credit facility capacity through two new tranches maturing in 2028 and 2029.
Key risks include higher interest rates, disruptions in credit and capital markets, competition affecting rents and occupancy, economic weakness, acquisition and development execution, declining asset values and impairment charges, COVID-19 or other infectious diseases, cybersecurity threats, regulatory and REIT qualification requirements, environmental liabilities, natural disasters, war and terrorism.
A 100-basis-point change in rates was estimated to change annual interest expense, earnings and cash flows by approximately $16.2 million, assuming no changes in capital structure. The company had agreements to acquire 18 stores for $296.2 million and to invest $43.7 million in 15 stores with joint venture partners. Litigation matters existed in the ordinary course, but their outcomes were not determinable.
Facts investors should verify
- Whether same-store occupancy and rental-rate growth remain durable as market conditions and competition change.
- The contribution, integration and final purchase-price allocation of the Bargold acquisition, including the substantial goodwill balance.
- The effect of higher interest rates on variable-rate debt, refinancing costs and acquisition funding.
- Execution and funding of the announced store acquisitions and joint venture investments.
- Whether cash flow remains sufficient to support dividends, distributions, capital expenditures, share repurchases and debt maturities.
- The company’s continued compliance with debt covenants and maintenance of its investment-grade credit ratings.