Extra Space Storage(EXR) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited financial statements, management's discussion and analysis, market risk disclosures, and internal controls information ITEM 1. FINANCIAL STATEMENTS (unaudited) This section presents the unaudited condensed consolidated financial statements for Extra Space Storage Inc. as of March 31, 2023, and for the three months then ended, including Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statement of Noncontrolling Interests and Equity, and Statements of Cash Flows, along with detailed notes explaining the basis of presentation and significant accounting policies Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and equity, as of March 31, 2023, and December 31, 2022 Condensed Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $12,132,669 | $12,167,458 | | Real estate assets, net | $9,991,446 | $9,997,978 | | Cash and cash equivalents | $47,951 | $92,868 | | Total Liabilities | $8,099,968 | $8,089,184 | | Unsecured term loans, net | $2,672,668 | $2,340,116 | | Unsecured senior notes, net | $3,258,329 | $2,757,791 | | Revolving lines of credit | $94,500 | $945,000 | | Total Equity | $4,032,701 | $4,078,274 | - Total assets slightly decreased from $12.17 billion at year-end 2022 to $12.13 billion at the end of Q1 2023, while total liabilities remained relatively stable at approximately $8.1 billion[15] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net income, for the three months ended March 31, 2023 and 2022 Condensed Consolidated Statement of Operations Summary (in thousands) | Account | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Total Revenues | $503,050 | $443,562 | | Property rental | $433,962 | $379,808 | | Total Expenses | $239,508 | $208,252 | | Interest expense | $80,099 | $42,538 | | Net Income | $208,878 | $217,717 | | Net Income Attributable to Common Stockholders | $196,304 | $203,579 | Earnings Per Share (EPS) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Basic EPS | $1.46 | $1.52 | | Diluted EPS | $1.46 | $1.51 | - Total revenues increased by 13.4% YoY, driven by a 14.3% rise in property rental income, but net income attributable to common stockholders decreased by 3.6% YoY, largely due to a significant 88.3% increase in interest expense[17] Condensed Consolidated Statements of Cash Flows This section details the company's cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022 Condensed Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Category | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $281,649 | $287,465 | | Net cash used in investing activities | ($86,339) | ($121,372) | | Net cash used in financing activities | ($242,603) | ($169,621) | | Net decrease in cash | ($47,293) | ($3,528) | - Cash from operations remained strong but slightly decreased compared to the prior year, while investing activities used less cash, primarily due to lower acquisition spending ($47.3 million in Q1 2023 vs. $195.8 million in Q1 2022), and financing activities used more cash, driven by higher net debt repayments and increased dividend payments[24] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements - As of March 31, 2023, the company owned and/or managed a total of 2,388 self-storage stores across 41 states and Washington, D.C., including 1,457 stores with direct or indirect equity interests and 931 stores managed for third parties[29] - In March 2023, the Operating Partnership issued $500.0 million of 5.700% Senior Notes due in 2028[76] - On April 3, 2023, the company entered into a definitive merger agreement with Life Storage, Inc. in an all-stock transaction valued at approximately $12.7 billion, expected to close in the second half of 2023[133] - On May 1, 2023, the company invested $150.0 million in convertible preferred stock of Strategic Storage Trust VI, Inc., an affiliate of SmartStop Self Storage REIT, Inc., with a dividend rate of 8.35% per annum[134] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance for Q1 2023, highlighting revenue growth driven by higher rental rates and acquisitions, covering property portfolio details, operational results, same-store performance, FFO, cash flows, and liquidity, with a key subsequent event being the announced merger with Life Storage, Inc. expected to close in the second half of 2023 Properties This section provides an overview of the company's self-storage property portfolio and key customer performance metrics - As of March 31, 2023, the company owned or had interests in 1,457 operating stores and managed an additional 931 stores for third parties, totaling 2,388 stores across 41 states and Washington, D.C.[144] Key Customer Metrics (Stabilized Stores) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Avg. Annual Rent per sq. ft. (Existing Customers) | $21.05 | $19.47 | | Avg. Annual Rent per sq. ft. (New Leases) | $17.00 | $19.23 | | Avg. Length of Stay | 16.6 months | Not specified | Results of Operations This section analyzes the company's revenue and expense trends, highlighting key drivers of financial performance Revenue Comparison (in thousands) | Revenue Source | Q1 2023 | Q1 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Property rental | $433,962 | $379,808 | $54,154 | 14.3% | | Tenant reinsurance | $47,704 | $43,797 | $3,907 | 8.9% | | Management fees and other | $21,384 | $19,957 | $1,427 | 7.2% | | Total revenues | $503,050 | $443,562 | $59,488 | 13.4% | - The 14.3% increase in property rental revenue was driven by a $26.7 million increase from stabilized stores (due to higher rates) and a $21.1 million increase from acquisitions completed in 2022 and 2023[151] - Interest expense increased by 88.3% YoY, primarily due to a higher weighted average interest rate and a larger debt balance compared to the same period in the prior year[159] Funds From Operations (FFO) This section details the calculation and analysis of Funds From Operations (FFO), a key performance metric for REITs FFO Calculation (in thousands) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net income attributable to common stockholders | $196,304 | $203,579 | | Adjustments (Depreciation, Amortization, etc.) | $92,772 | $82,877 | | FFO attributable to common stockholders and unit holders | $289,076 | $286,456 | - FFO attributable to common stockholders and unit holders increased slightly to $289.1 million in Q1 2023 from $286.5 million in Q1 2022, representing modest year-over-year growth[165] Same-Store Results This section analyzes the operating performance of the company's same-store portfolio, focusing on revenue, expenses, and net operating income Same-Store Operating Performance (914 stores) | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Total same-store rental revenues | $384,092 | $357,623 | 7.4% | | Total same-store operating expenses | $93,241 | $90,116 | 3.5% | | Same-store net operating income (NOI) | $290,851 | $267,507 | 8.7% | | Same-store square foot occupancy (quarter end) | 93.5% | 94.3% | -0.8% | - Same-store revenue growth of 7.4% was driven by higher average rates for existing customers, which offset a slight decline in occupancy, while operating expenses grew at a slower pace of 3.5%, leading to strong NOI growth of 8.7%[167][168] Liquidity and Capital Resources This section assesses the company's financial flexibility, including cash position, debt structure, and credit ratings - As of March 31, 2023, the company had $48.0 million in cash and cash equivalents[174] - Total debt was $7.37 billion, with a debt-to-total enterprise value ratio of 23.9%, and the company maintained a fixed-rate debt percentage of 70.7% (including swaps), with a combined weighted average interest rate of 4.3%[175] - The company holds investment-grade credit ratings of BBB/Stable from S&P and Baa2 from Moody's[177] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with approximately $2.2 billion of its $7.4 billion total debt subject to variable interest rates as of March 31, 2023, where a hypothetical 100 basis point (1%) change in interest rates would impact annual earnings and cash flows by approximately $21.6 million - As of March 31, 2023, the company had approximately $7.4 billion in total debt, with $2.2 billion subject to variable interest rates (excluding debt with swaps)[183] - A 100 basis point (1.0%) change in the variable interest rate (LIBOR or SOFR) would result in an approximate $21.6 million annual change in interest expense, affecting future earnings and cash flows[183] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2023, with no material changes to the internal control over financial reporting during the quarter - Based on an evaluation as of the end of the reporting period, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[187] - No changes occurred during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[188] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, updated risk factors, and information regarding unregistered sales of equity securities Legal Proceedings The company is involved in various legal proceedings and claims arising in the ordinary course of business, with management establishing accrued liabilities for loss contingencies that are both probable and reasonably estimable, but noting that future outcomes could potentially have a material adverse effect on results - The company is involved in various legal proceedings and claims arising from the ordinary course of business, where outcomes are inherently unpredictable, but liabilities are accrued when losses are probable and estimable[190] Risk Factors This section updates risk factors, focusing primarily on risks related to the pending merger with Life Storage, Inc., including the fixed exchange ratio, reduced ownership and influence for existing stockholders post-merger, conditions to closing that may not be satisfied, potential termination fees, and challenges related to integrating the two companies' operations successfully - The primary new risk factors relate to the pending merger with Life Storage, Inc.[191][192] - The merger's exchange ratio is fixed at 0.895 of an Extra Space share for each Life Storage share and will not be adjusted for market price fluctuations, creating value uncertainty for shareholders[192] - Upon completion, existing Extra Space stockholders will own approximately 65% of the combined company, resulting in reduced ownership and voting influence[197] - If the merger agreement is terminated under certain circumstances, the company may be required to pay Life Storage a termination fee of $761 million and/or reimburse up to $20 million in expenses[200] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the reporting period - None[208]