Extra Space Storage Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Extra Space Storage Inc. is a self-administered, self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage properties. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. At quarter-end, the Company had direct or indirect interests in 999 stores and managed an additional 422 third-party stores, for 1,421 stores across 38 states, Washington, D.C. and Puerto Rico.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $257.2 million | $197.5 million | $730.9 million | $556.5 million |
| Income from operations | $122.7 million | $97.3 million | $326.7 million | $254.3 million |
| Net income | $127.2 million | $78.2 million | $306.7 million | $197.8 million |
| Net income attributable to common stockholders | $118.1 million | $71.7 million | $283.7 million | $180.8 million |
| Diluted EPS | $0.93 | $0.58 | $2.24 | $1.51 |
| FFO attributable to common stockholders and unit holders | $134.5 million | $106.1 million | $360.3 million | $280.7 million |
| Cash dividends per common share | $0.78 | $0.59 | $2.15 | $1.65 |
- Q3 revenue increased 30.2%; nine-month revenue increased 31.3%.
- Q3 net income attributable to common stockholders increased 64.6%; nine-month growth was 56.9%.
- Q3 diluted EPS increased from $0.58 to $0.93; nine-month diluted EPS increased from $1.51 to $2.24.
- FFO increased 26.7% in Q3 and 28.4% for the nine-month period.
- Income from operations margin was approximately 47.7% in Q3 and 44.7% for the first nine months, compared with approximately 49.3% and 45.7%, respectively, in the prior-year periods.
- Same-store net operating income increased 7.8% in Q3 and 9.7% for nine months. Same-store revenue increased 6.1% and 7.5%, respectively, while same-store occupancy at quarter-end was 93.0%, down from 93.4%.
- Average annual rent per square foot at stabilized stores increased to $16.00 for existing customers and $16.67 for new leases, from $15.11 and $15.67, respectively.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $386.2 million for the first nine months of 2016, compared with $286.3 million in 2015.
- Investing activities used $704.3 million, principally reflecting $763.2 million of real estate acquisitions, $18.5 million of development and redevelopment spending, and $25.7 million invested in unconsolidated ventures.
- Financing activities provided $261.0 million. The Company raised $123.4 million from common stock issuance and received $1.027 billion from notes payable and lines of credit, partially offset by $565.5 million of debt repayments, $269.6 million of common dividends and $22.2 million used to repurchase exchangeable notes.
- Cash and cash equivalents declined to $18.7 million at September 30, 2016, from $75.8 million at December 31, 2015. Restricted cash was $16.4 million.
- Total debt at face value was $4.047 billion, with a debt-to-total-enterprise-value ratio of 27.5%. Fixed-rate debt and debt hedged with swaps represented 76.1% of total debt, and the weighted-average interest rate was 3.1%.
- Debt consisted principally of $3.100 billion of notes payable, $608.4 million of exchangeable senior notes, $117.3 million of notes payable to trusts and $166.0 million drawn under credit lines with aggregate capacity of $360.0 million.
- The Company was in compliance with all financial covenants at September 30, 2016. A 100-basis-point change in applicable variable rates was estimated to affect annual interest expense and cash flow by approximately $8.8 million.
Material changes and unusual items
- The Company acquired 72 operating stores during the first nine months for total consideration of approximately $766.1 million, including the acquisition of 23 stores from the PRISA II joint venture and six stores from the VRS joint venture.
- Step acquisitions and the sale of the Company’s remaining PRISA II interest generated $64.4 million of gains recognized through equity in earnings of unconsolidated ventures, including a $30.8 million gain on the PRISA II interest sale and gains of $26.9 million and $6.7 million from remeasurement of interests in acquired joint-venture properties.
- Seven stores were sold for $17.6 million in cash and a gain of $11.3 million; additional store dispositions generated $4.4 million in cash and a $0.1 million gain.
- Interest expense increased 50.1% for the first nine months, primarily because of higher debt balances. Depreciation and amortization increased 43.9%, reflecting acquisitions.
- Acquisition-related costs increased to $9.1 million for the first nine months, including an $0.8 million write-down of a note receivable. General and administrative expense included a $4.0 million accrual related to a potential legal settlement.
- A $4.8 million liability was recorded for pending litigation involving alleged wrongful foreclosure, self-storage statute violations and consumer fraud claims. The filing states that potential exposure could exceed recorded amounts.
- The 2013 exchangeable senior notes became eligible for holder exchange during the fourth quarter of 2016. The 2015 exchangeable notes did not meet the applicable exchange threshold during the quarter.
Outlook, management commentary and risks
Management expects to fund operating expenses, recurring capital expenditures, dividends, distributions and interest obligations through operating cash flow, cash on hand and credit-line borrowings. Management also expects to use additional secured or unsecured debt, joint ventures and equity or debt offerings to fund acquisitions and other liquidity needs, noting that financing may not be available on favorable terms and that equity issuance could dilute existing stockholders.
Management emphasizes revenue-management technology, rate adjustments, expense control, acquisitions and expansion of the third-party management platform. The self-storage business is seasonal, with a greater portion of revenue and profit generally realized from May through September. No specific earnings or operating guidance is provided in the filing.
- Key risks include competition, declining rents or occupancy, acquisition and integration risks, higher interest rates and operating costs, restricted access to capital, asset impairments, joint-venture partner performance, environmental and litigation exposure, regulatory changes and the ability to maintain REIT status.
- As of September 30, 2016, the Company had commitments to acquire operating and to-be-constructed stores with an aggregate purchase price of approximately $392.6 million, plus additional joint-venture acquisition commitments of $55.8 million.
- Subsequent to quarter-end, the Company acquired eight stores for $73.9 million and obtained $1.15 billion of unsecured financing, including a $500.0 million revolving facility and a $300.0 million draw on a five-year term loan. Three of four existing credit lines were repaid and terminated.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth continues after separating same-store operating performance from newly acquired properties.
- The sustainability of same-store occupancy, rental-rate increases and the 7.8% Q3 same-store NOI growth despite occupancy declining to 93.0%.
- Leverage, refinancing requirements, credit-line maturities and sensitivity to higher interest rates.
- Liquidity after the quarter-end unsecured financing, including acquisition commitments, dividends and required debt repayments.
- The ultimate outcome and potential additional exposure from the pending litigation beyond the $4.8 million accrued liability.
- The effect of unusual gains from joint-venture step acquisitions and asset sales on reported net income, EPS and FFO comparability.