Extra Space Storage(EXR) - 2021 Q3 - Quarterly Report

STATEMENT ON FORWARD-LOOKING INFORMATION Forward-looking statements are based on current expectations and assumptions, with no assurance of achievement, and the company disclaims any duty to update - Forward-looking statements are based on current expectations and assumptions, with no assurance that these expectations will be achieved[9] - Key risks and uncertainties include adverse changes in economic conditions, competition, regulatory environment, credit and financial markets, COVID-19 impacts, and increased interest rates[10] - The company disclaims any duty or obligation to update or revise any forward-looking statements[12] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (unaudited) This section presents unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, Comprehensive Income, Noncontrolling Interests and Equity, and Cash Flows, with detailed notes on key financial aspects Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (YoY) | | :---------------------------------- | :-------------------------------- | :--------------------------------- | :----------- | | Total Assets | $9,708,359 | $9,395,848 | +3.33% | | Total Liabilities | $6,325,484 | $6,459,724 | -2.08% | | Total Extra Space Storage Inc. stockholders' equity | $2,991,762 | $2,547,779 | +17.43% | | Real estate assets, net | $8,272,671 | $7,893,802 | +4.80% | Condensed Consolidated Statements of Operations Three Months Ended September 30 (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :---------------------------------- | :------------------ | :------------------ | :----------- | | Total Revenues | $412,492 | $343,024 | +20.26% | | Income from operations | $226,278 | $163,207 | +38.65% | | Net income | $199,820 | $123,854 | +61.35% | | Diluted EPS | $1.40 | $0.88 | +59.09% | | Cash dividends paid per common share | $1.25 | $0.90 | +38.89% | Nine Months Ended September 30 (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :---------------------------------- | :------------------ | :------------------ | :----------- | | Total Revenues | $1,149,979 | $1,002,722 | +14.69% | | Income from operations | $664,180 | $470,391 | +41.20% | | Net income | $593,900 | $351,273 | +69.07% | | Diluted EPS | $4.19 | $2.50 | +67.60% | | Cash dividends paid per common share | $3.25 | $2.70 | +20.37% | Condensed Consolidated Statements of Comprehensive Income Comprehensive Income (in thousands) | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | | :----------------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net income | $199,820 | $123,854 | $593,900 | $351,273 | | Change in fair value of interest rate swaps | $8,055 | $11,181 | $36,685 | $(83,791) | | Total comprehensive income | $207,875 | $135,035 | $630,585 | $267,482 | | Comprehensive income attributable to common stockholders | $195,951 | $125,181 | $594,160 | $245,981 | Condensed Consolidated Statement of Noncontrolling Interests and Equity Total Noncontrolling Interests and Equity (in thousands) | Date | Amount (in thousands) | | :---------------- | :-------------------- | | December 31, 2020 | $2,936,124 | | September 30, 2021 | $3,382,875 | - Issuance of common stock, net of offering costs, contributed $273,720 thousand to equity during the nine months ended September 30, 2021[26] - Dividends paid on common stock totaled $433,591 thousand for the nine months ended September 30, 2021[26][29] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Nine Months Ended September 30, in thousands) | Activity | 2021 (in thousands) | 2020 (in thousands) | | :----------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $729,268 | $583,267 | | Net cash used in investing activities | $(417,792) | $(363,845) | | Net cash used in financing activities | $(358,204) | $(209,581) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(46,728) | $9,841 | - Significant investing activities in 9M 2021 included $632.1 million for real estate acquisitions and development, offset by $196.2 million from real estate sales and $116.8 million from notes receivable sales[32] - Major financing activities in 9M 2021 included $3.323 billion from notes payable and revolving lines of credit, $1.040 billion from public bond issuance, and $273.4 million from common stock sales, offset by $4.527 billion in principal payments and $433.6 million in common stock dividends[32] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION - Extra Space Storage Inc. is a self-administered and self-managed REIT focused on owning, operating, managing, acquiring, developing, and redeveloping self-storage properties[37] - As of September 30, 2021, the company had direct and indirect equity interests in 1,227 stores and managed an additional 827 stores for third parties, totaling 2,054 stores across 41 states and Washington, D.C[38] - The company also offers tenant reinsurance at its owned and managed stores[38] 2. BASIS OF PRESENTATION - The unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. GAAP for interim financial information[39] - The company is currently assessing the impact of recently issued accounting standards ASU 2020-04 (Reference Rate Reform) and ASU 2020-06 (Convertible Instruments) on its financial statements[40][41] 3. FAIR VALUE DISCLOSURES - The company uses interest rate swaps to manage interest rate risk, with valuations determined using discounted cash flow analysis and classified as Level 2 in the fair value hierarchy[43][45] - As of September 30, 2021, the company had 16 operating stores classified as held for sale[50] Fair Value of Financial Instruments (September 30, 2021, in thousands) | Instrument | Fair Value (in thousands) | Carrying Value (in thousands) | | :---------------------------------------------------------------------- | :------------------------ | :---------------------------- | | Notes receivable from Preferred and Common Operating Partnership unit holders | $100,815 | $101,900 | | Fixed rate notes receivable | $107,176 | $104,251 | | Fixed rate notes payable | $4,575,824 | $4,512,030 | 4. EARNINGS PER COMMON SHARE - Basic and diluted earnings per common share are computed using the two-class method, considering participating securities and potential common shares[57] Earnings Per Common Share | Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :---------- | :------ | :------ | :------ | :------ | | Basic EPS | $1.41 | $0.89 | $4.19 | $2.52 | | Diluted EPS | $1.40 | $0.88 | $4.19 | $2.50 | - Certain Preferred Operating Partnership units and Common OP Units were anti-dilutive and excluded from EPS calculations for the periods presented[60] 5. STORE ACQUISITIONS AND DISPOSITIONS Store Acquisitions (in thousands) | Period | Number of Stores | Total Consideration (in thousands) | | :------- | :--------------- | :------------------------------- | | 9M 2021 | 36 | $532,356 | | 9M 2020 | 10 | $121,130 | - In March 2021, the company sold 16 stores to a newly established unconsolidated joint venture, receiving $132,759 thousand in cash and a 55% interest valued at $33,878 thousand, recognizing a gain of $64,804 thousand[69] 6. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES - The company holds equity interests in 257 unconsolidated real estate entities, primarily joint ventures and preferred stock in SmartStop Self Storage REIT, Inc[73] - The investment in SmartStop preferred stock totals $200,000 thousand, with a 6.25% annual dividend rate[73][74] - During the nine months ended September 30, 2021, the company contributed $20,834 thousand cash to its joint ventures and recognized gains of $5,739 thousand and $525 thousand from the sale of joint venture properties and interests, respectively[74][75][77] 7. INVESTMENTS IN DEBT SECURITIES AND NOTES RECEIVABLE - Investments include $300,000 thousand in NexPoint Series A and B Preferred Stock (JCAP), with initial dividend rates of 10.0% and 12.0% respectively[78] - The company provides bridge loan financing to third-party self-storage operators, consisting of primary mortgage and mezzanine loans[80] - For the nine months ended September 30, 2021, the company sold $117,336 thousand of mortgage bridge loans and closed on $143,270 thousand in new bridge loans[80] 8. NOTES PAYABLE, NET - In May 2021, the Operating Partnership issued $450,000 thousand of 2.550% Senior Notes due 2031[82] - In September 2021, the Operating Partnership issued $600,000 thousand of 2.350% Senior Notes due 2032[83] - Both series of notes are unsecured and fully and unconditionally guaranteed by the Company and its business trusts[84] 9. DERIVATIVES - The company uses interest rate swaps as cash flow hedges to manage interest rate risk and stabilize interest expense[86] - As of September 30, 2021, the company held 20 derivative financial instruments with a total combined notional amount of $1,986,266 thousand[88] Effect of Derivative Instruments on Statements of Operations (in thousands) | Type | Gain (loss) recognized in OCI (9M 2021, in thousands) | Gain (loss) reclassified from OCI into income (9M 2021, in thousands) | | :---------- | :------------------------------------------------ | :-------------------------------------------------------------------- | | Swap Agreements | $10,316 | $(26,386) | 10. EXCHANGEABLE SENIOR NOTES - The Operating Partnership's $575,000 thousand 3.125% Exchangeable Senior Notes due 2035 were fully exchanged or redeemed for cash and common stock in October and November 2020[97][99] - As of September 30, 2021, there were no exchangeable senior notes issued or outstanding, eliminating related non-cash interest expense[60][99] 11. STOCKHOLDERS' EQUITY - From January 1, 2021, through August 8, 2021, the company sold 585,685 shares of common stock under its 'at the market' equity program, generating net proceeds of $66,786 thousand[100] - In March 2021, the company sold 1,600,000 shares of common stock in a registered offering for net proceeds of $206,573 thousand[101] - No shares were repurchased under the $400,000 thousand share repurchase program during the nine months ended September 30, 2021[101] 12. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS - Noncontrolling interests represented by Preferred OP Units are classified as permanent equity[104] Preferred OP Units (in thousands) | Unit Type | September 30, 2021 (in thousands) | | :---------- | :-------------------------------- | | Series A Units | $14,818 | | Series B Units | $38,068 | | Series D Units | $117,362 | | Total | $170,248 | - Series A Units have a fixed priority return of 2.3% and are redeemable at the holder's option, potentially in cash or common stock, net of a $100,000 thousand loan[106][107] - Series B Units receive 6.0% annual cumulative distributions; 113,360 units were redeemed for common stock on August 31, 2021[110][111] 13. NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS - As of September 30, 2021, the company held a 94.7% ownership interest in the Operating Partnership, with the remaining 5.3% held by noncontrolling interests (OP Units)[118] - OP Units are redeemable at the holder's option for cash or common stock; the cash redemption value for all outstanding OP Units was $1,003,247 thousand as of September 30, 2021[119] - Other noncontrolling interests represent third-party ownership in two consolidated joint ventures[122] 14. SEGMENT INFORMATION - The company operates in two reportable segments: self-storage operations and tenant reinsurance[126] Segment Revenues and Net Operating Income (Q3 2021 vs Q3 2020, in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :------------------------- | :------------------ | :------------------ | :----------- | | Self-Storage Revenues | $351,355 | $290,423 | +21.0% | | Tenant Reinsurance Revenues | $44,258 | $39,294 | +12.6% | | Self-Storage NOI | $258,561 | $198,101 | +30.5% | | Tenant Reinsurance NOI | $36,749 | $32,105 | +14.5% | Segment Revenues and Net Operating Income (9M 2021 vs 9M 2020, in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :------------------------- | :------------------ | :------------------ | :----------- | | Self-Storage Revenues | $976,448 | $856,438 | +14.0% | | Tenant Reinsurance Revenues | $126,211 | $107,985 | +16.9% | | Self-Storage NOI | $702,132 | $584,779 | +20.1% | | Tenant Reinsurance NOI | $104,806 | $87,260 | +20.1% | 15. COMMITMENTS AND CONTINGENCIES - The company is involved in various legal proceedings, with outcomes inherently unpredictable; liabilities are accrued when probable and reasonably estimable[131] - As of September 30, 2021, the company was under agreement to acquire 15 stores for $221,850 thousand and 11 stores with joint venture partners for $23,775 thousand[132] - The company is not aware of any material environmental liability that could have a material adverse effect on its financial condition or results of operations[133] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis highlights the company's strong financial performance, driven by increased occupancy and rental rates in its self-storage operations and growth in tenant reinsurance, detailing revenue and expense trends, acquisitions, non-GAAP measures, cash flows, liquidity, capital resources, and COVID-19 impacts OVERVIEW - The company is a REIT that primarily derives revenues from self-storage operations (rents) and tenant reinsurance[138] - It utilizes proprietary revenue management systems to actively manage unit rental rates and maximize cash flows in competitive markets[139] - The self-storage business experiences seasonal fluctuations, with higher occupancy levels generally in the summer months[140] COVID-19 UPDATE - The COVID-19 pandemic has created instability, but the company implemented protective measures like contactless rentals and work-from-home policies[142] - Despite potential impacts on tenants' ability to pay rent, the company has seen record occupancy in its stores with the lifting of many governmental restrictions[142] PROPERTIES - As of September 30, 2021, the company owned or had ownership interests in 1,227 operating stores and managed an additional 827, totaling 2,054 stores across 41 states and Washington, D.C[143] - The average length of stay for tenants at stabilized stores was approximately 15.3 months as of September 30, 2021[144] Average Annual Rent per Square Foot (Stabilized Stores, net of discounts and bad debt) | Period | Existing Customers | New Leases | | :-------------------------------------- | :----------------- | :--------- | | Three months ended September 30, 2021 | $18.44 | $20.93 | | Three months ended September 30, 2020 | $15.74 | $14.98 | RESULTS OF OPERATIONS Total Revenues (in thousands) | Period | 2021 (in thousands) | 2020 (in thousands) | $ Change (in thousands) | % Change | | :--------------------------- | :------------------ | :------------------ | :---------------------- | :--------- | | Three months ended Sep 30 | $412,492 | $343,024 | $69,468 | 20.3% | | Nine months ended Sep 30 | $1,149,979 | $1,002,722 | $147,257 | 14.7% | - Property rental revenues increased due to higher occupancy and increased rental rates at stabilized stores, and contributions from store acquisitions[153] Total Expenses (in thousands) | Period | 2021 (in thousands) | 2020 (in thousands) | $ Change (in thousands) | % Change | | :--------------------------- | :------------------ | :------------------ | :---------------------- | :--------- | | Three months ended Sep 30 | $186,214 | $179,817 | $6,397 | 3.6% | | Nine months ended Sep 30 | $549,682 | $532,331 | $17,351 | 3.3% | - Interest income significantly increased by 468.3% for the nine months ended September 30, 2021, primarily due to earnings from bridge loans, notes receivable, and the JCAP preferred stock investment[162][165] - The company recognized a $64,804 thousand gain on real estate transactions for the nine months ended September 30, 2021, primarily from selling 16 stores to a joint venture[162] FUNDS FROM OPERATIONS - Funds from operations (FFO) is a non-GAAP measure used to assess operating performance, reflecting real estate asset values more accurately than net income[169] Funds from Operations Attributable to Common Stockholders and Unit Holders (in thousands) | Period | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :--------------------------- | :------------------ | :------------------ | :----------- | | Three months ended Sep 30 | $261,738 | $179,717 | +45.63% | | Nine months ended Sep 30 | $704,110 | $517,828 | +35.97% | SAME-STORE RESULTS - The same-store pool consists of 860 wholly-owned and operated stores stabilized for at least three years or with 80% occupancy for one calendar year[171] Same-Store Operating Data (Q3 2021 vs Q3 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :----------------------------------------- | :------------------ | :------------------ | :--------- | | Same-store rental revenues | $318,448 | $268,889 | 18.4% | | Same-store operating expenses | $75,909 | $79,090 | (4.0)% | | Same-store net operating income | $242,539 | $189,799 | 27.8% | | Same-store square foot occupancy (quarter end) | 96.7% | 95.8% | +0.9 pp | Same-Store Operating Data (9M 2021 vs 9M 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :----------------------------------------- | :------------------ | :------------------ | :--------- | | Same-store rental revenues | $892,100 | $795,207 | 12.2% | | Same-store operating expenses | $228,691 | $233,699 | (2.1)% | | Same-store net operating income | $663,409 | $561,508 | 18.1% | | Same-store square foot occupancy (quarter end) | 96.7% | 95.8% | +0.9 pp | - Same-store revenue growth was driven by higher average occupancy, increased rates for new and existing customers, higher late fees, and lower bad debt[174] CASH FLOWS Cash Flow Summary (Nine Months Ended September 30, in thousands) | Activity | 2021 (in thousands) | 2020 (in thousands) | | :----------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $729,268 | $583,267 | | Net cash used in investing activities | $(417,792) | $(363,845) | | Net cash used in financing activities | $(358,204) | $(209,581) | - Operating cash flows, existing cash, and available credit lines are expected to be sufficient to meet anticipated cash needs for the next 12 months, including operating expenses, debt service, capital expenditures, and dividends[179] LIQUIDITY AND CAPITAL RESOURCES - As of September 30, 2021, the company had $65,565 thousand in cash and cash equivalents[181] - Total face value of debt was $5,614,222 thousand, with a debt to total enterprise value ratio of 19.1% and a weighted average interest rate of 2.8% as of September 30, 2021[182][186] - The company maintains credit ratings of BBB/Stable from S&P and Baa2 from Moody's Investors Service[185] Debt Maturity Schedule (September 30, 2021, in thousands) | Year | Unsecured (in thousands) | Secured (in thousands) | Total (in thousands) | Weighted Average Rate | | :--- | :----------------------- | :--------------------- | :------------------- | :-------------------- | | 2022 | $0 | $293,648 | $293,648 | 2.9% | | 2023 | $0 | $134,666 | $134,666 | 0.5% | | 2024 | $425,000 | $218,722 | $643,722 | 2.5% | | 2025 | $245,000 | $677,459 | $922,459 | 2.3% | | 2026 | $645,000 | $125,000 | $770,000 | 4.3% | | 2027 | $700,000 | $13,058 | $713,058 | 3.3% | | 2028 | $300,000 | $53,418 | $353,418 | 4.0% | | 2029 | $300,000 | $0 | $300,000 | 3.5% | | 2030 | $425,000 | $8,251 | $433,251 | 3.5% | | 2031 | $450,000 | $0 | $450,000 | 2.6% | | 2032 | $600,000 | $0 | $600,000 | 2.4% | | Total | $4,090,000 | $1,524,222 | $5,614,222 | 2.8% | OFF-BALANCE SHEET ARRANGEMENTS - The company does not have any material off-balance sheet arrangements with unconsolidated entities or financial partnerships, nor has it guaranteed any obligations of such entities[191] SEASONALITY - The self-storage business is subject to seasonal fluctuations, with a greater portion of revenues and profits realized from May through September[192] - Historically, the highest occupancy levels occur at the end of July, while the lowest are in late February and early March[192] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk, primarily interest rate risk, due to its variable-rate debt, where a hypothetical 100 basis point change in LIBOR would result in an approximate $11.0 million annual impact on interest expense, earnings, and cash flows - The company's future income, cash flows, and fair values of financial instruments are dependent upon prevailing market interest rates[193] - As of September 30, 2021, approximately $1.1 billion of the total $5.6 billion debt was subject to variable interest rates[194] - A 100 basis point increase or decrease in LIBOR would increase or decrease future earnings and cash flows by approximately $11.0 million annually[194] ITEM 4. CONTROLS AND PROCEDURES Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021, with no material changes in internal control over financial reporting during the most recent quarter - Disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of September 30, 2021[198] - No material changes in internal control over financial reporting occurred during the most recent quarter[199] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings and claims arising in the ordinary course of business; while outcomes are inherently unpredictable, management accrues liabilities for probable and reasonably estimable loss contingencies, acknowledging potential exposure to losses in excess of accrued amounts - The company is involved in various legal proceedings and claims arising in the ordinary course of business[201] - The outcome of these matters cannot presently be determined with certainty due to the unpredictable nature of litigation[201] - Management accrues liabilities for loss contingencies that are both probable and reasonably estimable, but there may be exposure to losses exceeding accrued amounts[201] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020, and investors are advised to carefully consider these factors, along with other potential unknown risks, when making investment decisions - There have been no material changes to the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2020[202] - Investors should carefully consider the previously discussed risks and additional unknown risks before making investment decisions[202] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item reports that there were no unregistered sales of equity securities or use of proceeds during the period - None[203] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item reports that there were no defaults upon senior securities during the period - None[204] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Not Applicable[205] ITEM 5. OTHER INFORMATION This item reports that there is no other information to disclose - None[206] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including indentures, supplemental indentures, certifications of the CEO and CFO, and XBRL formatted financial statements - Key exhibits include Indentures and Supplemental Indentures related to public bond issuances, Certifications of the Chief Executive Officer and Chief Financial Officer (pursuant to Sarbanes-Oxley Act), and XBRL formatted financial statements[208] SIGNATURES The report was signed on November 3, 2021, by the Chief Executive Officer and Chief Financial Officer - The report was signed on November 3, 2021, by Joseph D. Margolis, Chief Executive Officer, and P. Scott Stubbs, Executive Vice President and Chief Financial Officer[211]