Extra Space Storage(EXR) - 2023 Q4 - Annual Report

Part I Business Extra Space Storage Inc. is the largest self-storage operator in the United States, structured as a self-administered REIT - The company is a fully integrated, self-administered and self-managed real estate investment trust (REIT) and conducts substantially all of its business through an umbrella partnership REIT (UPREIT) structure[16][17] Portfolio Overview as of December 31, 2023 | Metric | Value | | :--- | :--- | | Total Stores Owned/Operated | 3,714 | | States of Operation | 42 states and Washington, D.C. | | Net Rentable Space | ~283 million sq. ft. | | Total Units | ~2.6 million | | Managed Stores for Third Parties | 1,337 | - The company operates two distinct segments: self-storage operations (rental of wholly-owned stores) and tenant reinsurance (reinsurance of risks for tenants' stored goods)[26] - Key growth strategies include maximizing store performance via technology, acquiring multi-store portfolios and single stores, and utilizing a diverse capital optimization strategy for financing[27][29][31] - As of December 31, 2023, the company had 7,618 employees. The workforce is approximately 49% female and 44% self-identified as people of color[49][53] Risk Factors The company faces various risks including Life Storage merger integration, competition, cybersecurity, and substantial debt - The company faces risks from the integration of the Life Storage business, including difficulties in combining operations, retaining key employees, and achieving anticipated cost savings[64][65] - Significant competition from existing and new self-storage facilities could negatively impact occupancy levels and rental rates[66] - The company relies heavily on information technology and is vulnerable to cybersecurity incidents, which could harm business operations and financial condition. Compliance with evolving data privacy laws also presents a risk[68][72] - As of December 31, 2023, the company had approximately $11.3 billion of outstanding indebtedness. This high level of debt could leave insufficient cash for operations or distributions and exposes the company to default risk[88] - Failure to maintain qualification as a REIT would result in significant adverse tax consequences, including being subject to U.S. federal corporate income tax and being unable to deduct distributions to stockholders[99] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[105] Cybersecurity The company's cybersecurity program, based on CIS V8, is managed by a dedicated team and overseen by the Audit Committee - The cybersecurity program is designed and assessed based on the Center for Internet Security Critical Security Controls Version 8 (CIS V8)[108] - Management, including the Senior Vice President of Information Systems and Vice President of Information Security and Compliance, is responsible for assessing and managing cybersecurity threats[109] - The Board of Directors' Audit Committee has been delegated oversight of cybersecurity and other information technology risks, and it reports to the full Board on its activities[115][116] Properties As of December 31, 2023, Extra Space Storage owned or managed 3,714 stores across 42 states and D.C. Property Portfolio Breakdown (as of Dec 31, 2023) | Ownership Type | Number of Stores | | :--- | :--- | | Wholly-Owned | 1,903 | | Unconsolidated Joint Ventures | 472 | | Managed for Third Parties | 1,337 | | Total | 3,714 | Stabilized Store Rental Metrics | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Avg. Annual Rent per sq. ft. (Existing Customers) | $21.25 | $20.50 | | Avg. Annual Rent per sq. ft. (New Leases) | $16.19 | $18.32 | - The company's largest presence by total store count is in Florida (465), Texas (434), and California (394)[122] Legal Proceedings The company is involved in various legal proceedings but does not expect them to materially affect its financial condition or results of operations - The company is involved in various legal proceedings arising in the ordinary course of business, but management does not expect them to have a material adverse effect on financial results[123] Mine Safety Disclosures This item is not applicable to the company - Not applicable[124] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, and a $500 million share repurchase program was authorized in November 2023 - The company's common stock trades on the NYSE under the symbol "EXR"[126] - A three-year, $500.0 million share repurchase program was authorized in November 2023. No shares were repurchased in 2023, leaving the full authorization available[129] Selected Financial Data This item is not required for the current reporting period - Not required[131] Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the company's financial performance, significantly impacted by the Life Storage merger, showing revenue and FFO growth Results of Operations (2023 vs. 2022) For the year ended December 31, 2023, total revenues increased by 33.1% to $2.56 billion, while total expenses rose 56.5% due to the Life Storage merger and related costs Revenues Comparison (in thousands) | Revenue Category | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Property rental | $2,222,578 | $1,654,735 | $567,843 | 34.3% | | Tenant reinsurance | $235,680 | $185,531 | $50,149 | 27.0% | | Management fees and other | $101,986 | $83,904 | $18,082 | 21.6% | | Total revenues | $2,560,244 | $1,924,170 | $636,074 | 33.1% | Expenses Comparison (in thousands) | Expense Category | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Property operations | $612,036 | $435,342 | $176,694 | 40.6% | | Life Storage Merger transition costs | $66,732 | $0 | $66,732 | —% | | Depreciation and amortization | $506,053 | $288,316 | $217,737 | 75.5% | | Total expenses | $1,390,103 | $888,017 | $502,086 | 56.5% | - Interest expense increased significantly due to higher total debt ($11.3B in 2023 vs. $7.4B in 2022) and a higher average interest rate (4.6% in 2023 vs. 4.1% in 2022)[159] Funds From Operations (FFO) Funds from Operations (FFO) attributable to common stockholders and unit holders increased in 2023, reflecting expanded operations post-acquisitions FFO Attributable to Common Stockholders and Unit Holders (in thousands) | Year | FFO | | :--- | :--- | | 2023 | $1,352,138 | | 2022 | $1,198,809 | | 2021 | $973,966 | Same-Store Results Same-store net operating income increased by 2.8% in 2023, driven by higher rental revenues despite increased expenses and lower occupancy Same-Store Operating Results (913 properties) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Same-store rental revenues | $1,562,286 | $1,515,365 | 3.1% | | Same-store operating expenses | $376,166 | $361,570 | 4.0% | | Same-store net operating income | $1,186,120 | $1,153,795 | 2.8% | | Same-store square foot occupancy (year-end) | 93.0% | 94.1% | (1.1)% | Liquidity and Capital Resources The company maintains a flexible financing strategy with $11.3 billion in total debt and investment-grade credit ratings, sufficient for near-term liquidity needs Debt Profile Comparison | Metric | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Debt (face value) | $11,346,105 | $7,364,424 | | Debt to Total Enterprise Value | 24.2% | 25.8% | | Weighted Average Interest Rate | 4.6% | 4.1% | - The company holds investment-grade credit ratings: Baa2 from Moody's and BBB+/Stable from S&P, which was upgraded in July 2023 in connection with the Life Storage Merger[182] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with approximately $3.0 billion of variable-rate debt, impacting annual earnings by $30.2 million per 100-basis-point change - As of December 31, 2023, approximately $3.0 billion of the company's $11.3 billion total debt was subject to variable interest rates[190] - A hypothetical 100 basis point (1%) increase or decrease in interest rates would change annual interest expense by approximately $30.2 million[190] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal years ended December 31, 2023, 2022, and 2021, reflecting the significant impact of the Life Storage merger Consolidated Balance Sheets Total assets increased to $27.5 billion and liabilities to $12.0 billion as of December 31, 2023, primarily due to the Life Storage merger Key Balance Sheet Data (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Real estate assets, net | $24,555,873 | $9,997,978 | | Total assets | $27,456,262 | $12,167,458 | | Total liabilities | $12,042,313 | $8,089,184 | | Total stockholders' equity | $14,390,921 | $3,259,597 | Consolidated Statements of Operations For the year ended December 31, 2023, total revenues increased to $2.56 billion, but net income and diluted EPS decreased due to merger-related costs and higher expenses Key Income Statement Data (in thousands, except per share data) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total revenues | $2,560,244 | $1,924,170 | | Income from operations | $1,170,141 | $1,050,402 | | Net income attributable to common stockholders | $803,198 | $860,688 | | Diluted EPS | $4.74 | $6.41 | Note 5. Property Acquisitions and Dispositions This note details the $12.85 billion Life Storage merger on July 20, 2023, accounted for as an asset acquisition, and other significant acquisitions - On July 20, 2023, the company closed its merger with Life Storage for total consideration of $12.85 billion, acquiring 757 wholly-owned stores and one consolidated joint venture store[285][286] Life Storage Merger - Fair Value of Net Assets Acquired (in thousands) | Account | Value | | :--- | :--- | | Real estate assets | $14,587,735 | | Equity investment in joint venture partnerships | $325,250 | | Unsecured senior notes (assumed) | ($2,106,866) | | Fair value of net assets acquired | $12,850,127 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[406] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified auditor's report - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2023[409] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[410] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[413] Other Information This section discloses the termination of CEO Joseph D. Margolis's Rule 10b5-1 trading arrangement on December 18, 2023 - On December 18, 2023, CEO Joseph D. Margolis terminated a Rule 10b5-1 trading plan[422] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[423] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[425] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[428] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[429] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and director independence is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[430] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's definitive Proxy Statement[431] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with or incorporated by reference into the Annual Report on Form 10-K - This section contains a list of all financial statements, schedules, and exhibits filed with or incorporated by reference into the Annual Report on Form 10-K[434] Form 10-K Summary The company indicates that there is no Form 10-K summary provided - None[438]