Extra Space Storage Inc. quarterly report, Q1 FY2018

Extra Space Storage Inc. — Q1 2018 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, redeveloping and managing self-storage properties. The filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017.

Owned or held interests in 1,067 operating stores and managed 456 additional stores for third parties, totaling 1,523 stores across 39 states, Washington, D.C. and Puerto Rico.
The portfolio included 851 wholly owned stores, two stores in consolidated joint ventures and 214 stores in unconsolidated joint ventures.
Approximately 855,000 tenants leased units at owned and managed stores.

Financial performance and key metrics

Metric	Q1 2018	Q1 2017	Change
Total revenue	$285.5 million	$263.0 million	+8.5%
Income from operations	$133.9 million	$124.2 million	+7.8%
Net income	$95.4 million	$89.7 million	+6.3%
Net income attributable to common stockholders	$88.3 million	$82.3 million	+7.3%
Basic EPS	$0.70	$0.65	+7.7%
Diluted EPS	$0.70	$0.64	+9.4%
Funds from operations attributable to common stockholders and unit holders	$146.2 million	$137.9 million	+6.1%
Net cash provided by operating activities	$171.6 million	$113.1 million	+51.7%

Property rental revenue increased 7.1% to $247.9 million, tenant reinsurance revenue increased 18.3% to $27.0 million, and management fees and other income increased 22.0% to $10.6 million.
Income from operations represented approximately 46.9% of total revenue; net income represented approximately 33.4% of total revenue.
Same-store revenue increased 5.2%, same-store net operating income increased 4.5%, and same-store occupancy was 92.1% at quarter-end versus 92.0% in the prior-year period.
Average annual rent per square foot for existing customers increased to $15.93 from $15.23, while rent for new leases increased to $16.95 from $15.85.
Cash dividends were $0.78 per common share, unchanged from Q1 2017.

Liquidity, debt and cash flow

Cash and cash equivalents were $35.5 million at March 31, 2018; cash, cash equivalents and restricted cash totaled $54.1 million.
Total face-value debt, including revolving lines of credit, was $4.56 billion. Debt represented 27.9% of total enterprise value, and the weighted-average interest rate was 3.4%.
Approximately 74.4% of total debt and related instruments was fixed-rate or hedged, including $2.27 billion subject to interest-rate swaps.
The Company was in compliance with all financial covenants at quarter-end and expected to fund short-term liquidity needs through operating cash flow, cash on hand, revolving credit capacity and additional financing sources as needed.
Operating cash flow increased primarily because of higher net income and favorable changes in accounts payable and accrued expenses and other liabilities.
Investing activities used $30.9 million, including $76.1 million for acquisitions and $11.1 million for development and redevelopment, partially offset by a $47.9 million return of investment from an unconsolidated venture.
Financing activities used $172.7 million, including $98.3 million of common dividends and $58.5 million to repurchase exchangeable senior notes.

Material changes versus the prior comparable period

The Company acquired five stores for total consideration of $70.8 million, compared with two stores for $25.6 million in Q1 2017.
Property rental growth reflected $11.2 million from higher occupancy and rental rates at stabilized stores and $10.6 million from acquisitions, partly offset by $6.7 million from property sales.
Total expenses increased 9.2% to $151.6 million. Tenant reinsurance expense increased 43.0%, general and administrative expense increased 14.1%, and property operations expense increased 9.2%.
Interest expense increased 13.9% to $41.0 million, reflecting higher average interest rates and higher debt. The average interest rate increased to 3.4% from 3.1%.
The Company repurchased $37.7 million principal amount of 2013 exchangeable senior notes for $58.5 million in cash. The 2013 Notes had a remaining principal amount of $11.6 million at quarter-end.
Accumulated other comprehensive income increased substantially because of a $23.1 million change in the fair value of interest-rate swaps.
The 2017 Tax Legislation reduced the effective tax rate and contributed to lower income tax expense of $1.3 million versus $3.1 million.
The Company adopted revenue recognition guidance under Topic 606, restricted-cash guidance and new hedge-accounting guidance. Management reported no material effect on the financial statements from these adoptions.

Outlook, commentary, risks and unusual items

The filing does not provide a specific quantitative earnings, revenue or same-store operating guidance forecast.
Management expects seasonal strength from May through September, with occupancy historically highest in late July and lowest in late February or early March.
As of March 31, 2018, the Company was committed to acquire 26 stores for $355.8 million and an additional 15 stores with joint venture partners representing total investment of $77.8 million.
Subsequent to quarter-end, the Company purchased one Virginia store for $16.3 million and acquired its joint venture partner’s interest in 14 stores for approximately $204.0 million.
Interest-rate sensitivity was material: a 100-basis-point increase or decrease in LIBOR was estimated to change annual interest expense, earnings and cash flows by approximately $11.7 million, assuming no changes to the capital structure.
Key risks include competition, declining rents or occupancy, economic and real estate market deterioration, higher interest rates, capital-market disruptions, acquisition execution, impairment charges, uninsured losses, environmental liabilities, joint-venture decision-making, regulatory and tax changes, and maintaining REIT status.
Legal proceedings and ordinary-course claims were pending, but their outcomes could not be determined with certainty. Management stated that no material environmental liability was currently known.

Most important facts for investors to verify

Whether acquisition commitments and post-quarter-end purchases close on the expected terms and timing.
Whether same-store rent growth and occupancy remain sustainable as competition and seasonal conditions change.
The effect of higher interest rates on interest expense, cash flow and debt refinancing requirements.
Available borrowing capacity under revolving facilities and compliance with debt covenants.
The maturity, repurchase and exchange provisions for the 2013 and 2015 exchangeable senior notes.
Whether operating cash flow continues to cover dividends, recurring capital expenditures, acquisitions and debt obligations.
The potential financial impact of litigation, environmental claims, impairment indicators and joint-venture obligations.