Extra Space Storage Inc. — Form 10-Q Summary
Business Context and Reporting Period
Extra Space Storage Inc. is a self-managed REIT that owns, operates, acquires, develops, redevelops and manages self-storage properties. The filing covers the three months ended March 31, 2019, with unaudited results compared with the three months ended March 31, 2018.
- Owned or had equity interests in 1,119 operating stores and managed 577 additional stores for third parties as of March 31, 2019.
- Total portfolio: 1,696 stores across 40 states, Washington, D.C. and Puerto Rico, serving approximately 930,000 tenants.
- The company reported 821 stabilized same-store properties for the comparable-period analysis.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $311.5 million | $285.5 million | 9.1% |
| Income from operations | $148.5 million | $133.9 million | 10.9% |
| Net income | $102.2 million | $95.4 million | 7.1% |
| Net income attributable to common stockholders | $94.8 million | $88.3 million | 7.4% |
| Diluted EPS | $0.74 | $0.70 | 5.7% |
| Funds from operations attributable to common stockholders and unit holders | $156.5 million | $146.2 million | 7.0% |
| Net cash provided by operating activities | $169.3 million | $171.6 million | (1.3%) |
| Common dividends paid per share | $0.86 | $0.78 | 10.3% |
Reported operating margin was approximately 47.7%, and net income attributable to common stockholders represented approximately 30.4% of revenue. Same-store rental revenue increased 4.2%, same-store NOI increased 4.8%, and same-store occupancy was 91.6% at quarter-end versus 91.8% in the prior-year quarter.
Revenue and Operating Performance
- Property rental revenue rose 9.3% to $271.0 million, primarily from acquisitions and higher rental rates for new and existing customers.
- Tenant reinsurance revenue increased 10.2% to $29.8 million, primarily because of the larger store base.
- Management fees and other income increased 1.7% to $10.7 million.
- Property operations expense increased 8.3% to $78.8 million; tenant reinsurance expense increased 24.3% to $7.0 million.
- Interest expense increased 15.6% to $47.4 million as debt balances and interest rates increased.
- Average annual rent per square foot at stabilized stores increased to $16.31 for existing customers from $15.65 and to $18.50 for new leases from $17.48.
- FFO per diluted share is not clearly provided in the filing text; aggregate FFO increased 7.0%.
Cash Flow, Debt and Liquidity
- Operating cash flow was $169.3 million. Investing cash outflows were $247.0 million, including $212.6 million for acquisitions, $15.8 million for development and redevelopment, and $17.4 million invested in unconsolidated ventures.
- Financing activities provided $51.8 million, including net debt proceeds, partially offset by $109.5 million of common dividends and $8.4 million of distributions to noncontrolling interests.
- Cash, cash equivalents and restricted cash declined to $46.8 million at March 31, 2019, from $72.7 million at December 31, 2018. Cash and cash equivalents alone were $39.0 million.
- Face value of debt, including revolving credit lines, was $5.04 billion. Debt to total enterprise value was 26.7%, and the weighted-average interest rate was 3.5%.
- Approximately 72.0% of debt and other instruments were fixed-rate or effectively fixed-rate through interest-rate swaps. The company stated that it was in compliance with all financial covenants.
- Management expects operating cash flow, cash on hand, revolving credit availability and access to capital markets to fund anticipated operating costs, debt service, capital expenditures, acquisitions, distributions and REIT dividends for the next 12 months.
Material Changes and Unusual Items
- The company acquired 14 stores in Q1 2019 for total consideration of $223.7 million, compared with five stores for $70.8 million in Q1 2018. Twelve acquired stores had previously been held in joint ventures.
- The company issued $23.4 million of Series D preferred Operating Partnership units in connection with acquisitions.
- Interest-rate swaps generated a $24.0 million decrease in other comprehensive income, compared with a $23.1 million increase in Q1 2018. The swaps had a combined notional amount of $2.29 billion.
- The company adopted the new lease standard, ASC 842, on January 1, 2019. It recognized operating lease liabilities of $104.9 million and related right-of-use assets of $95.5 million. Prior periods were not restated.
- The remaining $30.9 million of notes payable to trusts was repaid during the quarter.
- Subsequent to quarter-end, the company sold one store for $11.8 million and recognized an approximately $1.2 million gain. All remaining Series C Units were converted into 270,710 Operating Partnership units on April 25, 2019.
Outlook, Risks and Contingencies
Management expects positive operating cash flow in 2019 but noted that a significant deterioration in cash flows could increase reliance on revolving credit, require capital expenditure reductions or necessitate additional financing. No specific earnings or revenue guidance is provided in the filing text.
- Self-storage demand and profitability are seasonal, with stronger occupancy and profits generally from May through September.
- Key risks include economic and real estate market changes, competition, declining rents or occupancy, higher interest rates, credit-market disruption, acquisition and development execution, asset impairments, environmental liabilities, regulatory and REIT tax requirements, joint venture decision-making and natural disasters, war or terrorism.
- A 100-basis-point change in interest rates was estimated to affect annual interest expense, earnings and cash flows by approximately $14.1 million on variable-rate debt.
- The company was involved in ordinary-course litigation and claims; outcomes were not determinable, and losses could exceed accrued amounts.
- The company had commitments to acquire six stores for $67.0 million and six additional stores with joint venture partners for a total investment of $25.3 million.
Important Facts for Investors to Verify
- Reconcile FFO, same-store NOI and any company-specific non-GAAP measures to GAAP net income and operating cash flow.
- Review debt maturities, revolving credit availability, covenant headroom and the sensitivity of cash flow to higher interest rates.
- Assess whether acquisition-driven revenue growth can continue while same-store occupancy remains slightly below the prior-year level.
- Evaluate dividend coverage using recurring operating cash flow and FFO, particularly given dividends paid exceeded quarterly net income attributable to common stockholders.
- Review the effect of ASC 842 lease liabilities and the future commencement of the New Jersey and California store leases.
- Monitor pending acquisitions, joint venture funding obligations, litigation, environmental exposure and the conversion or redemption terms of Operating Partnership units.