Extra Space Storage Inc. — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a fully integrated, self-administered and self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties. The report covers the three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015.
- At March 31, 2016, the Company had direct or indirect equity interests in 1,018 stores and managed an additional 353 third-party stores, for 1,371 owned and/or managed stores across 37 states, Washington, D.C. and Puerto Rico.
- The Company operated through rental operations, tenant reinsurance, and property management, acquisition and development segments.
- Stabilized stores represented 1,302 properties with 91.4% square-foot occupancy, compared with 90.6% on a pro forma basis in the prior-year period.
Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $229.4 million | $173.2 million | 32.5% |
| Property rental revenue | $199.5 million | $148.9 million | 34.0% |
| Tenant reinsurance revenue | $20.6 million | $16.5 million | 24.5% |
| Management fees and other income | $9.4 million | $7.8 million | 20.8% |
| Income from operations | $93.6 million | $75.4 million | 24.1% |
| Operating margin | 40.8% | 43.6% | Down from prior year |
| Net income | $89.4 million | $58.6 million | 52.5% |
| Net income attributable to common stockholders | $82.6 million | $53.7 million | 53.7% |
| Basic and diluted EPS | $0.66 | $0.46 | 43.5% |
| Funds from operations attributable to common stockholders | $104.9 million | $84.5 million | 24.2% |
| Cash flow from operations | $95.5 million | $87.4 million | 9.2% |
Net income benefited materially from a $26.9 million non-cash gain related to the step acquisition of six stores from the VRS joint venture. Excluding the gain and other real-estate-related adjustments, reported FFO increased to $104.9 million from $84.5 million.
- Same-store rental and tenant reinsurance revenue increased 9.1% to $170.5 million, while same-store net operating income increased 12.3% to $121.9 million.
- Same-store quarter-end square-foot occupancy increased to 92.8% from 92.1%.
- Average annual rent per square foot for existing customers increased to $14.98 from $13.99; new-lease rent increased to $15.72 from $14.51.
- Cash dividends paid per common share increased to $0.59 from $0.47.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $49.8 million at March 31, 2016, compared with $75.8 million at December 31, 2015.
- Operating cash flow was $95.5 million. Investing cash use was $258.7 million, including $234.8 million for real estate acquisitions and $6.5 million for development and redevelopment. Financing cash flow was $137.2 million.
- The Company acquired 23 operating stores during the quarter for total consideration of $225.5 million; cash paid was $225.2 million.
- Face value of debt, including lines of credit, was $3.742 billion. Balance-sheet debt included $2.842 billion of notes payable, $606.9 million of exchangeable senior notes, $117.2 million of notes payable to trusts and $116.0 million drawn on lines of credit.
- Total line-of-credit capacity was $360.0 million, of which $116.0 million was drawn, leaving approximately $244.0 million of stated capacity before other limitations.
- Weighted average interest rate on total debt was 3.2%; 77.8% of total debt and related instruments was fixed-rate or economically fixed-rate through swaps.
- The Company reported compliance with all financial covenants. Management expects to fund short-term requirements through operating cash flow, cash on hand and borrowings, but stated that additional borrowings, joint ventures and equity or debt offerings will likely be needed for broader liquidity needs and acquisitions.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected acquisitions, higher occupancy and rental rates, and expansion of the managed-store platform. Stores owned and/or managed increased to 1,371 from 1,106.
- Property rental revenue increased by $50.6 million, including $36.9 million from acquisitions and $13.1 million from stabilized-store occupancy and rental-rate increases.
- Total expenses rose 38.9%, faster than revenue, primarily because of portfolio growth, higher depreciation, general and administrative costs, acquisition costs and tenant reinsurance costs.
- Interest expense increased 46.3% to $31.4 million as debt increased; face-value debt was $3.742 billion versus $2.442 billion at March 31, 2015.
- The Company sold 831,300 common shares under its at-the-market program for net proceeds of $73.6 million.
- The Company repurchased $19.6 million principal amount of 2013 exchangeable senior notes and issued 130,909 common shares for the exchange value above principal.
- Accumulated other comprehensive loss increased to $35.9 million, primarily because of a $31.1 million decrease in the fair value of interest-rate swaps.
Outlook, Risks, Contingencies and Unusual Items
- No specific quantitative earnings or operating guidance was provided in the filing.
- Management expects seasonal strength in occupancy and profits from May through September, with historically lower occupancy in late February and early March.
- As of March 31, 2016, the Company was under contract to acquire 30 operating or development stores for $349.4 million and an additional 10 stores with joint venture partners for $302.8 million.
- A $26.9 million non-cash gain arose from remeasuring the Company’s existing VRS investment when it acquired the remaining interest in six stores.
- A $1.5 million loss was recorded for an earnout obligation related to a 2014 acquisition, and a $4.0 million liability was recorded for pending litigation involving alleged wrongful foreclosure and statutory and consumer-fraud violations. Further losses could exceed accrued amounts.
- Interest-rate risk remains material: a 100-basis-point change in LIBOR was estimated to affect annual earnings and cash flow by approximately $7.3 million on variable-rate debt without floors or caps.
- Derivative agreements contained default-related provisions. The net liability for affected derivatives was $34.7 million, and a breach could have required settlement at a termination value of approximately $37.2 million.
- Principal risks include competition, economic and real-estate-market conditions, acquisition execution and integration, financing availability, higher interest rates and operating costs, impairment charges, joint-venture performance, litigation, environmental liabilities and maintenance of REIT status.
- Subsequent to quarter-end, the Company purchased 10 stores for $88.0 million and sold seven held-for-sale stores for $18.0 million.
Investor Verification Checklist
- Verify the sustainability of same-store revenue and net operating income growth after separating acquisitions, occupancy gains, rental-rate increases and seasonal effects.
- Assess leverage, scheduled maturities, secured collateral, covenant headroom and the Company’s expected need for additional debt or equity capital.
- Reconcile reported net income and EPS with FFO and adjust for the non-recurring $26.9 million VRS gain and other unusual items.
- Monitor the $4.0 million litigation accrual, the earnout obligation and any potential exposure beyond recorded liabilities.
- Evaluate the lease-up performance of new and acquired stores, particularly the 69 lease-up properties with 60.5% aggregate occupancy.
- Confirm the status, funding requirements and closing risk of announced acquisition commitments totaling approximately $652.2 million, including joint-venture acquisitions.