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 that owns, operates, acquires, develops and manages self-storage facilities. For the quarter ended June 30, 2010, the company had interests in 649 operating facilities across 33 states and Washington, D.C., managed an additional 140 properties, and operated approximately 55 million square feet serving more than 400,000 customers. The filing presents unaudited results for the three and six months ended June 30, 2010, compared with the same periods in 2009.
Key financial metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenue | $68.8 million | $69.1 million | $136.4 million | $138.3 million |
| Income from operations | $22.8 million | $2.4 million | $43.7 million | $24.3 million |
| Operating margin | 33.2% | 3.4% | 32.0% | 17.6% |
| Net income attributable to common stockholders | $6.2 million | $(7.5) million | $9.7 million | $20.1 million |
| Basic and diluted EPS | $0.07 | $(0.09) | $0.11 | $0.23 |
| Funds from operations | $20.3 million | $6.0 million | $37.7 million | $48.9 million |
| Cash dividends per common share | $0.10 | — | $0.20 | $0.25 |
Revenue declined modestly because property rental revenue decreased 3.3% in the quarter and 4.4% year to date. Management and franchise fees increased 7.2% in the quarter and 6.8% year to date, while tenant reinsurance revenue increased 24.6% and 26.0%, respectively.
Net income and operating income benefited substantially from the absence of the $18.8 million of development impairment charges and $1.4 million of severance costs recorded in the first half of 2009. The 2009 six-month results also included a $27.6 million gain from repurchasing exchangeable senior notes; consequently, 2010 six-month net income and FFO were lower despite stronger operating income.
Same-store stabilized rental and tenant reinsurance revenue increased 2.3% in the quarter and 0.7% year to date. Same-store net operating income increased 2.8% and 1.3%, respectively. Same-store square-foot occupancy was 86.2%, compared with 84.0% on a pro forma basis in the prior-year period. Stabilized properties represented 84.8% occupancy overall, while lease-up properties were 47.1% occupied.
Cash flow, debt and liquidity
- Six-month operating cash flow was $46.1 million, compared with $49.1 million in 2009.
- Investing activities used $23.7 million, compared with $66.5 million in 2009, reflecting lower development and acquisition spending and $15.8 million received from contributing 19 properties to a Harrison Street joint venture.
- Financing activities used $126.0 million, compared with $85.0 million provided in 2009, primarily because of $210.6 million of debt principal repayments and lower borrowing proceeds.
- Cash and cash equivalents declined to $28.4 million from $132.0 million at December 31, 2009.
- Total debt was $1.184 billion, equal to 48.1% of total capitalization. The weighted-average interest rate was 5.0%, and 70.6% of debt and other instruments were fixed rate, including debt hedged with swaps.
- Debt consisted principally of $837.2 million of notes payable, $119.6 million of notes payable to trusts, $87.7 million of exchangeable senior notes before discount, and $140.0 million drawn on credit lines.
- The company had $100.0 million outstanding on its principal credit line, $40.0 million on the secondary line, and no borrowings on a new $45.0 million third credit line. The filing states that capacity on the third line was $19.2 million based on the collateralizing assets.
- Management expected to fund operating expenses, recurring capital expenditures, dividends, distributions and interest from operating cash flow, cash on hand and credit-line borrowings, while pursuing additional secured term loans and other capital sources.
Material changes, outlook and unusual items
- Effective January 1, 2010, amended ASC 810 consolidation guidance resulted in the deconsolidation of five joint ventures. Their assets and liabilities were removed from the balance sheet and the investments were accounted for under the equity method.
- In January 2010, the company contributed 19 wholly owned properties to a 50%-owned Harrison Street joint venture. It received $15.8 million in cash, retained management rights and recognized no gain because of the transaction’s cost-recovery limitations.
- The company acquired one New York property and three Georgia properties during the first six months for total consideration of approximately $17.3 million, including assumed debt.
- The company had announced a wind-down of development activities in 2009. Seven development projects remained in process at June 30, 2010, with completion expected by the end of the second quarter of 2011.
- No formal earnings or operating guidance is provided in the filing. Management emphasized revenue management, selective acquisitions, expansion of the management business and reliance on technology and scale to respond to market conditions.
- Management identified risks from economic weakness, competition, credit-market disruptions, refinancing costs, interest-rate increases, asset impairments, development delays, joint-venture obligations, regulatory requirements and maintaining REIT status.
- The company guaranteed $21.1 million of mortgage loans for unconsolidated joint ventures and disclosed maximum exposure to loss of $30.6 million for certain VIE joint ventures, including guaranteed loans, receivables and investment balances. No guarantee liability was recorded because management considered the loss risk unlikely and the fair value immaterial.
- The company was in compliance with its debt covenants and reported no material litigation. A 100-basis-point change in LIBOR was estimated to affect annual interest expense and cash flow by approximately $2.1 million, excluding variable-rate debt with interest-rate floors.
Most important facts for investors to verify
- Whether same-store occupancy and rental-rate gains can offset lower property rental revenue and the impact of property contributions and deconsolidation.
- The timing and funding of debt maturities, including $117.4 million of principal due within one year and the October 2010 maturity of the principal credit line, including available extensions or refinancing.
- Access to additional secured or unsecured financing given the company’s low cash balance and stated dependence on external capital.
- The effect of the ASC 810 deconsolidations and joint-venture accounting on reported revenue, debt, cash flow and operating metrics.
- Progress and remaining capital requirements for the seven development projects expected to be completed by the second quarter of 2011.
- Exposure under joint-venture loan guarantees, interest-rate swaps, exchangeable senior notes and other recourse or cross-collateralized debt.
- The sustainability of dividends and REIT qualification, including the requirement to distribute at least 90% of annual taxable income.