Extra Space Storage(EXR) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for the period ended September 30, 2023, offering a snapshot of the company's financial position and performance Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total assets | $27.63 billion | $12.17 billion | | Real estate assets, net | $24.56 billion | $9.998 billion | | Cash and cash equivalents | $216.1 million | $92.87 million | | Total liabilities | $12.06 billion | $8.09 billion | | Unsecured senior notes, net | $5.81 billion | $2.76 billion | | Unsecured term loans, net | $3.25 billion | $2.34 billion | | Total Extra Space Storage Inc. stockholders' equity | $14.54 billion | $3.26 billion | | Total liabilities, noncontrolling interests and equity | $27.63 billion | $12.17 billion | Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $748.0 million | $498.9 million | $1.76 billion | $1.42 billion | | Property rental | $650.9 million | $428.8 million | $1.53 billion | $1.22 billion | | Total expenses | $448.2 million | $229.0 million | $925.8 million | $650.9 million | | Life Storage Merger transition costs | $54.2 million | $— | $54.2 million | $— | | Net income | $198.9 million | $236.1 million | $623.0 million | $701.7 million | | Net income attributable to common stockholders | $188.4 million | $220.7 million | $587.1 million | $656.4 million | | Diluted EPS | $0.96 | $1.65 | $3.78 | $4.89 | Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1.04 billion | $948.0 million | | Net cash used in investing activities | ($1.64 billion) | ($1.24 billion) | | Life Storage Merger, net of cash acquired | ($1.18 billion) | $— | | Acquisition of real estate assets and improvements | ($197.3 million) | ($1.12 billion) | | Net cash provided by financing activities | $723.5 million | $312.4 million | | Proceeds from notes payable and revolving lines of credit | $5.19 billion | $3.98 billion | | Principal payments on notes payable and revolving lines of credit | ($4.62 billion) | ($3.34 billion) | | Dividends paid on common stock | ($704.1 million) | ($604.4 million) | | Net increase in cash, cash equivalents, and restricted cash | $125.4 million | $18.2 million | Notes to Condensed Consolidated Financial Statements This section details accounting policies and methodologies, covering the Life Storage Merger, fair value measurements, debt, and segment reporting Organization Extra Space Storage Inc. operates as a self-managed REIT, owning and managing 3,651 self-storage properties across 42 states and Washington D.C. - The company is structured as an UPREIT, holding its properties through its operating partnership, Extra Space Storage LP[32] - As of September 30, 2023, the company had equity interests in 2,369 stores and managed an additional 1,282 stores for third parties[33] Acquisitions and Dispositions The company's portfolio significantly expanded through the $11.6 billion Life Storage Merger on July 20, 2023, and other acquisitions - On July 20, 2023, the company closed its merger with Life Storage, with Life Storage stockholders receiving 0.895 shares of EXR common stock for each share owned[52] Life Storage Merger Consideration (in thousands) | Consideration Type | July 20, 2023 | | :--- | :--- | | Common stock | $11.35 billion | | OP units | $249.5 million | | Cash for payoff of Life Storage credit facility and debt | $1.19 billion | | Transaction Costs | $55.3 million | | Total consideration | $12.85 billion | Fair Value of Net Assets Acquired from Life Storage (in thousands) | | July 20, 2023 | | :--- | :--- | | Real estate assets | $14.59 billion | | Equity investment in joint venture partnerships | $325.3 million | | Unsecured senior notes | ($2.11 billion) | | Accounts payable, accrued expenses and other liabilities | ($191.1 million) | | Fair value of net assets acquired | $12.85 billion | Debt Total term debt increased to $10.3 billion as of September 30, 2023, primarily due to the Life Storage Merger, with a combined weighted average interest rate of 4.4% Components of Term Debt (in thousands) | Term Debt | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Secured fixed-rate | $402.9 million | $521.8 million | | Secured variable-rate | $880.4 million | $772.6 million | | Unsecured fixed-rate | $7.54 billion | $4.24 billion | | Unsecured variable-rate | $1.85 billion | $884.6 million | | Total | $10.33 billion | $6.39 billion | - The percentage of fixed-rate debt to total debt was 70.3% as of September 30, 2023. The weighted average interest rates for fixed and variable-rate debt were 3.6% and 6.4%, respectively, with a combined weighted average rate of 4.4%[95] Segment Information The company operates two segments, Self-Storage Operations and Tenant Reinsurance, generating $465.7 million and $50.0 million in Q3 2023 NOI, respectively Segment Performance for Three Months Ended Sep 30 (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Self-Storage Operations | | | | Revenues | $650.9 million | $428.8 million | | Net Operating Income | $465.7 million | $314.2 million | | Tenant Reinsurance | | | | Revenues | $69.1 million | $47.9 million | | Net Operating Income | $50.0 million | $37.1 million | | Total Segment NOI | $515.7 million | $351.3 million | Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial performance, focusing on the Life Storage Merger's impact, same-store results, liquidity, and capital resources Overview The company, a self-managed REIT, significantly expanded its self-storage portfolio to over 3,500 locations and 264.0 million net rentable square feet through the July 20, 2023 Life Storage merger - On July 20, 2023, the company merged with Life Storage, Inc. in a transaction valued at $11.6 billion, expanding its portfolio to over 3,500 locations and 264.0 million net rentable square feet[146] Properties As of September 30, 2023, the company's portfolio included 3,651 owned and managed stores across 42 states and Washington D.C. - The portfolio includes 1,896 wholly-owned stores, 471 in unconsolidated joint ventures, and 1,282 managed for third parties[147] - The average annual rent per square foot for existing customers at stabilized stores was $21.43 for Q3 2023, up from $20.96 in Q3 2022. For new leases, the average rent was $16.01, down from $18.40 in the prior-year period[150] Results of Operations Q3 2023 saw total revenues increase 49.9% to $748.0 million, while total expenses rose 95.7% to $448.2 million, largely due to the Life Storage Merger Revenue Comparison (in thousands) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Property rental | $650.9 million | $428.8 million | 51.8% | | Tenant reinsurance | $69.1 million | $47.9 million | 44.4% | | Total revenues | $748.0 million | $498.9 million | 49.9% | Expense Comparison (in thousands) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Property operations | $185.2 million | $114.6 million | 61.6% | | Life Storage Merger transition costs | $54.2 million | $— | 100.0% | | Depreciation and amortization | $152.3 million | $71.4 million | 113.3% | | Total expenses | $448.2 million | $229.0 million | 95.7% | - Interest expense increased significantly due to higher debt balances to fund acquisitions and a rise in the weighted average interest rate to 4.4% at September 30, 2023, from 3.6% a year prior[166] Funds from Operations (FFO) Funds from Operations (FFO) for Q3 2023 increased to $348.5 million, reflecting a key performance metric for REITs after adjustments FFO Calculation (in thousands) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to common stockholders | $188.4 million | $220.7 million | $587.1 million | $656.4 million | | Adjustments (Depreciation, Amortization, etc.) | $160.1 million | $88.0 million | $346.5 million | $242.3 million | | FFO attributable to common stockholders and unit holders | $348.5 million | $308.7 million | $933.6 million | $898.7 million | Same-Store Results Same-store net operating income for Q3 2023 increased by 0.7%, driven by revenue growth offset by higher operating expenses and a slight occupancy decline Same-Store Operating Data (914 properties) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Total same-store rental revenues | $397.9 million | $390.6 million | 1.9% | | Total same-store operating expenses | $98.3 million | $93.0 million | 5.7% | | Same-store net operating income | $299.6 million | $297.6 million | 0.7% | | Same-store square foot occupancy as of quarter end | 94.1% | 95.1% | (1.0)% | Liquidity and Capital Resources The company maintained strong liquidity with $216.1 million in cash and an upgraded BBB+/Stable credit rating from S&P as of September 30, 2023 - The company holds a BBB+/Stable rating from S&P (upgraded in July 2023) and a Baa2 rating from Moody's[184] - As of September 30, 2023, the company had 1,664 unencumbered stores with a calculated unencumbered asset value of approximately $32.0 billion[184] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with a 100 basis point SOFR change impacting annual earnings by $33.5 million - A hypothetical 100 basis point increase or decrease in SOFR would change annual interest expense by approximately $33.5 million[190] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[194] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[195] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings arising in the ordinary course of business, with uncertain outcomes - The company is subject to various claims and complaints arising in the ordinary course of business, the outcomes of which cannot be determined with certainty[197] Risk Factors No material changes have occurred to the risk factors previously disclosed in the 2022 Form 10-K and subsequent 2023 Form 10-Qs - No material changes have been made to the risk factors disclosed in the 2022 Form 10-K and previous 2023 Form 10-Qs[198] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[199] Other Information No officers or directors adopted, modified, or terminated Rule 10b5-1 trading plans during Q3 2023 - No officers or directors adopted, modified, or terminated any Rule 10b5-1 trading plans during the three months ended September 30, 2023[202] Exhibits This section lists exhibits filed with the Form 10-Q, including supplemental indentures, officer certifications, and XBRL data files - Exhibits filed include supplemental indentures, CEO/CFO certifications (Sections 302 and 906), and XBRL interactive data files[203]