Extra Space Storage Inc. quarterly report, Q3 FY2021

Extra Space Storage Inc. — Q3 2021 Form 10-Q Summary

Business context and reporting period

Extra Space Storage Inc. is a fully integrated, self-managed REIT that owns, operates, acquires, develops, redevelops and manages self-storage properties. The filing covers the unaudited three and nine months ended September 30, 2021, compared primarily with the corresponding 2020 periods.

At September 30, 2021, the Company owned or held interests in 1,227 operating stores and managed an additional 827 stores, for 2,054 stores across 41 states and Washington, D.C. The Company reported approximately 1.255 million tenants and held a 94.7% ownership interest in its Operating Partnership.

Financial performance and key metrics

Metric	Q3 2021	Q3 2020	Year-to-date 2021	Year-to-date 2020
Total revenue	$412.5 million	$343.0 million	$1,150.0 million	$1,002.7 million
Net income	$199.8 million	$123.9 million	$593.9 million	$351.3 million
Net income attributable to common stockholders	$188.3 million	$114.6 million	$559.2 million	$325.7 million
Diluted EPS	$1.40	$0.88	$4.19	$2.50
Net cash provided by operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$729.3 million	$583.3 million
FFO attributable to common stockholders and unit holders	$261.7 million	$179.7 million	$704.1 million	$517.8 million

Q3 operating income was $226.3 million, producing an approximate operating margin of 54.9%. Net income attributable to common stockholders produced an approximate margin of 45.6%. For the nine-month period, operating income was $664.2 million and net income attributable to common stockholders was $559.2 million, representing approximate margins of 57.8% and 48.6%, respectively.

Q3 property rental revenue increased 21.0% to $351.4 million; tenant reinsurance revenue increased 12.6% to $44.3 million; and management fees and other income increased 26.8% to $16.9 million.
Q3 same-store rental revenue increased 18.4% and same-store NOI increased 27.8%. Same-store square-foot occupancy was 96.7%, compared with 95.8% in the prior-year quarter.
Average annual rent per square foot at stabilized stores increased to $18.44 for existing customers and $20.93 for new leases, compared with $15.74 and $14.98, respectively, in Q3 2020.
Q3 property operations expense increased only 0.5%, while total expenses increased 3.6%, including a 9.0% increase in depreciation and amortization.
Cash, cash equivalents and restricted cash totaled $81.3 million at September 30, 2021, including $65.6 million of unrestricted cash and cash equivalents.

Debt, liquidity and capital resources

Face-value debt was $5.614 billion, with a weighted-average interest rate of 2.8%. Debt to total enterprise value was 19.1%.
Fixed-rate debt and instruments represented 80.4% of total debt. Approximately $1.1 billion of debt was variable-rate debt excluding debt with interest-rate swaps.
Notes payable, net, totaled $5.410 billion and revolving lines of credit totaled $174.0 million at quarter-end.
The Company issued $450.0 million of 2.550% senior notes due 2031 in May 2021 and $600.0 million of 2.350% senior notes due 2032 in September 2021.
During the first nine months, operating activities generated $729.3 million, investing activities used $417.8 million and financing activities used $358.2 million. Net cash, cash equivalents and restricted cash decreased by $46.7 million.
The Company stated that operating cash flow, cash on hand, revolving credit availability and access to capital markets are expected to be sufficient for reasonably anticipated needs over the next 12 months. Management also expects positive operating cash flow for 2021.
The Company was in compliance with all financial covenants at September 30, 2021 and maintained credit ratings of BBB/Stable from S&P and Baa2 from Moody’s.

Material changes versus the prior comparable period

Total revenue increased 20.3% in Q3 and 14.7% for the first nine months, driven primarily by higher occupancy, rental rates, store acquisitions and growth in managed stores.
Net income attributable to common stockholders increased 64.3% in Q3 and 71.7% year to date. Diluted EPS increased to $1.40 from $0.88 in Q3 and to $4.19 from $2.50 year to date.
FFO increased 45.6% in Q3 and 36.0% year to date.
Higher operating results reflected strong same-store performance and a larger store portfolio. The Company owned or held interests in 1,227 stores at quarter-end versus 1,188 stores in the prior-year period and operated 2,054 stores versus 1,906.
The Company acquired 36 wholly owned stores during the first nine months for total consideration of $532.4 million and sold 16 stores to a newly formed unconsolidated joint venture in March 2021.
The Company recognized a $63.9 million gain on real estate transactions during the first nine months, including a $64.8 million gain on the sale of the 16 stores, partially offset by other losses.
Interest expense declined 5.5% year to date, while interest income increased substantially because of bridge loans, the senior mezzanine note and preferred stock investments acquired or funded in 2020.
The Company issued $273.4 million of common stock, net of offering costs, during the first nine months. It did not repurchase common stock during the period.

Outlook, commentary, risks and unusual items

Management reported record occupancy following the lifting of many COVID-19-related restrictions, but cautioned that the pandemic, unemployment, renewed restrictions or reduced tenant ability to pay could adversely affect occupancy, rental rates and ancillary revenues. The self-storage business is seasonal, with higher revenues and profits generally occurring from May through September.

Interest-rate risk remains material: a hypothetical 100-basis-point increase or decrease in LIBOR was estimated to change annual interest expense, earnings and cash flows by approximately $11.0 million.
The Company held 20 interest-rate derivatives with aggregate notional amounts of $1.986 billion. Derivative liabilities were $61.4 million at quarter-end, and a breach of certain debt or derivative provisions could have required cash settlement of approximately $63.3 million.
As of September 30, 2021, the Company was under agreement to acquire 15 stores for $221.9 million and 11 stores with joint venture partners for a total investment of $23.8 million.
Ordinary-course litigation and claims remain unresolved; management stated that outcomes cannot presently be determined with certainty and that losses could exceed accrued amounts.
Other risks include competition, acquisition and development execution, changes in interest rates, capital-market disruptions, asset impairments, environmental liabilities, regulatory and REIT tax requirements, joint-venture decision-making and natural disasters, war or terrorism.
Management reported no material changes to the risk factors disclosed in the 2020 Form 10-K and concluded that disclosure controls and procedures were effective.

Most important facts for investors to verify

Whether the exceptional same-store occupancy, rental-rate growth and NOI growth are sustainable after seasonal effects and normalization of post-pandemic demand.
The effect of acquisitions, pending acquisitions, dispositions and joint-venture activity on future revenue, NOI, leverage and dilution.
Debt maturities, refinancing requirements and sensitivity to higher interest rates, particularly the variable-rate debt exposure.
Whether operating cash flow and revolving credit capacity remain sufficient to fund dividends, acquisitions, capital expenditures and debt service.
The recurring operating contribution of the $63.9 million year-to-date real estate gain and the extent to which reported earnings and FFO benefit from other unusual items.
Potential exposure from litigation, environmental matters, derivative covenants and the Company’s stated acquisition commitments.