Extra Space Storage Inc. quarterly report, Q1 FY2012

Extra Space Storage Inc. — 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, acquiring, developing, managing and redeveloping self-storage facilities. The filing covers the three months ended March 31, 2012, with comparative results for the three months ended March 31, 2011.

At March 31, 2012, the company owned or held interests in 699 operating properties and managed 183 additional properties, for 882 properties across 34 states and Washington, D.C.
The portfolio comprised approximately 64 million square feet and 585,000 units; stabilized properties represented 84.9% square-foot occupancy versus 82.2% on a pro forma basis a year earlier.
The company operates through rental operations, property management/acquisition/development, and tenant reinsurance.

Financial performance and key metrics

Metric	Q1 2012	Q1 2011	Change
Total revenue	$91.0 million	$74.5 million	22.2%
Income from operations	$32.8 million	$24.0 million	36.3%
Operating margin	36.0%	32.3%	Improved
Net income	$22.5 million	$10.1 million	122.0%
Net income attributable to common stockholders	$20.2 million	$8.3 million	143.5%
Net margin attributable to common stockholders	22.2%	11.1%	Improved
Diluted EPS	$0.21	$0.09	Increased
Funds from operations	$33.1 million, or $0.33 per share	$23.5 million, or $0.25 per share	40.9% total; 32.0% per share
Cash flow from operating activities	$40.8 million	$30.0 million	36.0%

Property rental revenue increased 23.3% to $75.8 million, management and franchise fees increased 10.4% to $6.6 million, and tenant reinsurance revenue increased 21.8% to $8.6 million.
Same-store rental and tenant reinsurance revenue increased 6.3%, while same-store net operating income increased 10.8%. Same-store quarter-end occupancy rose to 87.1% from 83.7%.
Existing-customer annual rent per square foot increased to $13.43 from $13.25; annual rent per square foot for new leases increased to $13.18 from $12.62.
Total expenses increased 15.4% to $58.2 million, primarily due to property additions, higher depreciation and amortization, and increased general and administrative expenses.

Balance sheet, debt and liquidity

Total assets were $2.52 billion at March 31, 2012, including $2.27 billion of net real estate assets.
Cash and cash equivalents were $37.6 million, compared with $26.5 million at December 31, 2011. Restricted cash was $24.3 million.
Total debt was approximately $1.37 billion, with a debt-to-total-capitalization ratio of 32.4%. Approximately 79.6% of total debt and related instruments was fixed-rate, including debt hedged with interest-rate swaps.
The weighted-average interest rate on total debt was 4.6%. Variable-rate debt excluding debt with swaps was approximately $279.4 million; a 100-basis-point change in applicable rates was estimated to affect annual earnings and cash flow by approximately $2.4 million.
Credit lines had aggregate capacity of $336.0 million, of which $135.0 million was drawn. The company was in compliance with all financial covenants.
Operating cash flow of $40.8 million funded part of $16.4 million of investing outflows and $13.3 million of net financing outflows. Dividends paid were $19.0 million, or $0.20 per common share.
Contractual obligations totaled $1.79 billion, including $1.37 billion of debt principal and $364.8 million of estimated debt interest.

Material changes versus the prior comparable period

The property base increased to 699 owned or joint-venture properties from 662 in the prior-year comparison, while consolidated properties increased from 301 to 360.
Revenue growth reflected 55 properties acquired in 2011, two acquisitions in 2012, higher stabilized occupancy and rental rates, increased managed properties, and higher tenant insurance participation.
Income benefited from a $5.4 million gain recognized through equity in earnings when a joint venture sold its only self-storage property. This unusual item contributed materially to the increase in net income.
Interest expense increased 10.1% to $18.1 million, partly because of higher average debt and accelerated recognition of deferred financing costs from loan prepayments.
Acquisition-related costs increased 144.6% to $0.6 million, while depreciation and amortization increased 21.6% to $16.5 million.
Cash used for real estate acquisitions increased to $17.5 million from $3.8 million, while development and construction spending declined to $0.9 million from $3.4 million.

Outlook, commentary, risks and unusual items

Management emphasized revenue management, expense control, acquisitions, expansion of the management platform and disciplined bidding as core strategies. The company reported increasing acquisition prices but stated that it remained a disciplined buyer.
Management expects seasonal strength from May through September; first-quarter results are therefore not necessarily indicative of full-year performance.
Short-term liquidity is expected to come from operating cash flow, cash on hand and credit-line borrowings. Management also expects to pursue secured term loans and may use additional debt, equity offerings, joint ventures or OP units to fund acquisitions and other needs.
On April 16, 2012, the company announced a planned approximately $298.0 million acquisition of Prudential Real Estate Investors’ 94.9% interest in a joint venture owning 36 properties. Closing was expected in July 2012.
On April 20, 2012, the company issued 8.05 million common shares for net proceeds of approximately $226.9 million, intended for acquisitions, debt repayment and general corporate purposes.
The $87.7 million of exchangeable senior notes were surrendered for exchange after quarter-end. On April 26, 2012, the company paid approximately $87.7 million in cash for principal and issued 684,685 common shares for the excess exchange value.
The company guaranteed approximately $13.4 million of loans for unconsolidated joint ventures and reported maximum exposure to loss of approximately $18.0 million for two variable-interest joint ventures. No guarantee liability was recorded because management considered the risk of material loss unlikely.
Routine litigation liabilities totaled $1.8 million. Management reported no material litigation and no material changes to the risk factors disclosed in the 2011 Form 10-K.
Principal risks include economic and credit-market conditions, competition, interest-rate increases, acquisition and integration execution, property valuation declines, uninsured losses, environmental liabilities, joint-venture partner performance, regulatory requirements and maintaining REIT status.

Important facts for investors to verify

Reconcile reported net income growth with the $5.4 million joint-venture property-sale gain and assess normalized operating earnings.
Verify the effect of the April 2012 share offering, exchangeable-note settlement and planned PREI joint-venture acquisition on leverage, share count and future FFO per share.
Review debt maturities, credit-line extensions, covenant requirements and refinancing needs, particularly the $192.3 million of principal due within one year.
Assess whether occupancy and rental-rate gains continue after the company’s seasonally weaker first quarter.
Evaluate exposure under joint-venture loan guarantees and the estimated $1.79 billion of contractual obligations.
Confirm that future acquisitions can be funded without excessive dilution or materially higher borrowing costs.