EXTRA SPACE STORAGE INC. Amounts in thousands, except store and share data
CAUTIONARY LANGUAGE
The following discussion and analysis should be read in conjunction with our unaudited "Condensed Consolidated Financial Statements" and the "Notes to Condensed Consolidated Financial Statements (unaudited)" appearing elsewhere in this report and the "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Form 10-K for the year endedDecember 31, 2021 . We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Statement on Forward-Looking Information."
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year endedDecember 31, 2021 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.
OVERVIEW
We are a fully integrated, self-administered and self-managed real estate
investment trust ("REIT"), formed to own, operate, manage, acquire, develop and
redevelop self-storage properties ("stores"). We derive substantially all of our
revenues from our two segments: storage operations and tenant reinsurance.
Primary sources of revenue for our storage operations segment include rents
received from tenants under leases at each of our wholly-owned stores. Our
operating results depend materially on our ability to lease available
self-storage units, to actively manage unit rental rates, and on the ability of
our tenants to make required rental payments. Consequently, management spends a
significant portion of their time maximizing cash flows from our diverse
portfolio of stores. Revenue from our tenant reinsurance segment consists of
insurance revenues from the reinsurance of risks relating to the loss of goods
stored by tenants in our stores.
Our stores are generally situated in highly visible locations clustered around
large population centers. These areas enjoy above average population growth and
income levels. The clustering of our assets around these population centers
enables us to reduce our operating costs through economies of scale. To maximize
the performance of our stores, we employ industry-leading revenue management
systems. Developed internally, these systems enable us to analyze, set and
adjust rental rates in real time across our portfolio in order to respond to
changing market conditions. We believe our systems and processes allow us to
more pro-actively manage revenues.
We operate in competitive markets, often where consumers have multiple stores
from which to choose. Competition has impacted, and will continue to impact, our
store results. We experience seasonal fluctuations in occupancy levels, with
occupancy levels generally higher in the summer months due to increased moving
activity. We believe that we are able to
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respond quickly and effectively to changes in local, regional and national
economic conditions by adjusting rental rates through the combination of our
revenue management team and our proprietary pricing systems. We consider a store
to be in the lease-up stage after it has been issued a certificate of occupancy,
but before it has achieved stabilization. We consider a store to be stabilized
once it has achieved either an 80% occupancy rate for a full year measured as of
January 1 of the current year, or has been open for three years prior to January
1 of the current year.
COVID-19 UPDATE
The United States and other countries around the world continue to be impacted
by the COVID-19 pandemic, which has created considerable instability and
disruption in the U.S. and world economies. Governmental authorities in impacted
regions have taken various actions in an effort to slow the spread of COVID-19,
including issuance of varying forms of states of emergency orders. In response
to these evolving orders and the COVID-19 pandemic, we have implemented a wide
range of practices to protect and support our employees and customers. Such
measures include instituting "work from home" measures at our corporate offices
and call center, instituting a contactless rental process that allows our
on-site employees to continue to rent storage units without physical
interaction, and providing personal protective equipment to on-site employees
providing essential functions so that hygiene and "social distancing" standards
can be effectively managed and applied. Although many governmental restrictions
have lifted and certain work practices return to normal, our customers may
continue to be impacted by the COVID-19 pandemic and related governmental
responses, including through unemployment, which may impact their ability to pay
rent or renew their leases. However, given the uncertainty resulting from the
pandemic, our business may be impacted by the COVID-19 pandemic including
additional governmental restrictions.
PROPERTIES
As ofMarch 31, 2022 , we owned or had ownership interests in 1,283 operating stores. Of these stores, 995 are wholly-owned, none of which are in consolidated joint ventures, and 288 are in unconsolidated joint ventures. In addition, we managed an additional 847 stores for third parties bringing the total number of stores which we own and/or manage to 2,130. These stores are located in 41 states andWashington, D.C. The majority of our stores are clustered around large population centers. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. Our acquisitions have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence. As ofMarch 31, 2022 , approximately 1,265,000 tenants were leasing storage units at the operating stores that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. Although leases are short-term in duration, the typical tenant tends to remain at our stores for an extended period of time. For stores that were stabilized as ofMarch 31, 2022 , the average length of stay was approximately 14.9 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$20.04 for the three months endedMarch 31, 2022 , compared to$16.21 for the three months endedMarch 31, 2021 . Average annual rent per square foot for new leases was$19.68 for the three months endedMarch 31, 2022 , compared to$16.54 for the three months endedMarch 31, 2021 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 2.9% and 2.9%, respectively. Our store portfolio is made up of different types of construction and building configurations. Most often sites are what we consider "hybrid" stores, a mix of drive-up and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of stores featuring ground-floor access only.
The following table presents additional information regarding net rentable square feet and the number of stores by state.
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March 31, 2022
REIT Owned Joint Venture Owned Managed Total
Net Rentable Square Net Rentable Square
Location Property Count(1) Feet Property Count Net Rentable Square Feet Property Count Feet Property Count Net Rentable Square Feet
Alabama 8 594,384 1 75,711 6 393,202 15 1,063,297
Arizona 23 1,624,381 9 673,854 21 1,797,997 53 4,096,232
California 175 13,438,621 49 3,594,254 82 7,696,360 306 24,729,235
Colorado 17 1,150,241 3 270,604 25 1,791,449 45 3,212,294
Connecticut 6 469,426 7 575,774 8 553,888 21 1,599,088
Delaware - - 1 76,645 2 138,474 3 215,119
Florida 110 8,389,054 37 3,057,198 111 8,840,510 258 20,286,762
Georgia 67 5,173,562 14 1,143,974 23 1,761,986 104 8,079,522
Hawaii 13 863,968 - - 3 159,393 16 1,023,361
Idaho - - - - 3 182,604 3 182,604
Illinois 38 2,888,984 10 741,733 31 2,192,133 79 5,822,850
Indiana 14 923,749 1 58,291 16 1,095,214 31 2,077,254
Kansas 1 50,209 2 108,920 6 466,374 9 625,503
Kentucky 10 827,900 1 51,569 9 754,134 20 1,633,603
Louisiana 5 387,234 - - 9 656,126 14 1,043,360
Maine - - - - 8 576,086 8 576,086
Maryland 34 2,848,067 7 552,898 39 2,801,287 80 6,202,252
Massachusetts 46 2,970,522 10 640,970 27 1,734,690 83 5,346,182
Michigan 8 641,490 4 302,526 6 459,823 18 1,403,839
Minnesota 7 584,859 4 305,376 15 1,130,324 26 2,020,559
Mississippi 3 233,645 - - - - 3 233,645
Missouri 4 260,700 2 119,275 15 1,131,941 21 1,511,916
Nebraska - - - - 3 278,191 3 278,191
Nevada 14 1,038,492 4 474,231 7 743,439 25 2,256,162
New Hampshire 2 134,564 2 84,165 5 359,388 9 578,117
New Jersey 62 4,927,802 16 1,144,467 34 2,655,238 112 8,727,507
New Mexico 11 700,007 10 683,870 12 901,849 33 2,285,726
New York 28 2,042,622 18 1,503,778 36 2,212,373 82 5,758,773
North Carolina 23 1,732,706 5 401,432 17 1,298,304 45 3,432,442
Ohio 16 1,242,902 5 325,163 8 614,157 29 2,182,222
Oklahoma - - - - 18 1,457,486 18 1,457,486
Oregon 8 548,408 1 65,245 10 738,238 19 1,351,891
Pennsylvania 22 1,603,390 9 679,824 34 2,471,474 65 4,754,688
Rhode Island 2 134,802 - - 5 422,173 7 556,975
South Carolina 23 1,713,672 11 709,744 24 2,078,681 58 4,502,097
Tennessee 22 1,849,138 12 810,696 8 564,284 42 3,224,118
Texas 102 8,371,945 23 1,843,882 78 6,769,854 203 16,985,681
Utah 10 697,407 - - 23 1,841,885 33 2,539,292
Virginia 51 4,128,223 9 702,941 31 2,222,081 91 7,053,245
Washington 9 683,913 - - 14 1,083,540 23 1,767,453
Washington, DC 1 100,039 1 103,707 6 539,501 8 743,247
Wisconsin - - - - 9 730,742 9 730,742
Totals 995 75,971,028 288 21,882,717 847 66,296,873 2,130 164,150,618
(1) Includes zero consolidated joint venture stores.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the three months ended
Overview
Results for the three months endedMarch 31, 2022 included the operations of 1,283 stores (995 wholly-owned, none in consolidated joint ventures, and 288 in joint ventures accounted for using the equity method) compared to the results for the three months endedMarch 31, 2021 , which included the operations of 1,206 stores (937 wholly-owned, six in consolidated joint ventures, and 263 in joint ventures accounted for using the equity method).
Revenues
The following table presents information on revenues earned for the periods
indicated:
For the Three Months Ended March
31,
2022 2021 $ Change % Change
Revenues:
Property rental $ 379,808 $ 303,593 $ 76,215 25.1 %
Tenant reinsurance 43,797 39,619 4,178 10.5 %
Management fees and other income 19,957 15,645 4,312 27.6 %
Total revenues $ 443,562 $ 358,857 $ 84,705 23.6 %
Property Rental-The increase in property rental revenues for the three months
ended March 31, 2022 was primarily the result of an increase of $62,695 at our
stabilized stores related to higher average rates to new and existing customers.
Property rental revenue also increased by $18,897 associated with acquisitions
completed in 2022 and 2021. We acquired 14 wholly-owned stores during the three
months ended March 31, 2022 and a total of 74 stores during the year ended
December 31, 2021 . Property rental revenue also increased by $1,245 during the
three months ended March 31, 2022 as a result of increase in occupancy at our
lease-up stores. These increases were offset by approximately $6,622 related to
the sale of 16 stores into a new joint venture and 16 stores to a third party
during 2021.
Tenant Reinsurance-The increase in our tenant reinsurance revenues was due
primarily to an increase in the number of stores operated. We operated 2,130
stores at
Management Fees and Other Income-Management fees and other income primarily represent the fees collected for our management of stores owned by third parties and unconsolidated joint ventures and other transaction fee income. The increase for the three months endedMarch 31, 2022 was primarily due to an increase in the number of stores managed and other transaction fee income. As ofMarch 31, 2022 , we managed 1,135 stores for joint ventures and third parties, compared to 1,032 stores as ofMarch 31, 2021 . 31 --------------------------------------------------------------------------------
Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended March
31,
2022 2021 $ Change % Change
Expenses:
Property operations $ 103,542 $ 92,367 $ 11,175 12.1 %
Tenant reinsurance 7,042 7,161 (119) (1.7) %
General and administrative 29,762 23,540 6,222 26.4 %
Depreciation and amortization 67,906 58,599 9,307 15.9 %
Total expenses $ 208,252 $ 181,667 $ 26,585 14.6 %
Property Operations-The increase in property operations expense during the three
months ended March 31, 2022 consists primarily of an increase of $7,053 related
to acquisitions completed in 2022 and 2021. We acquired 14 wholly-owned stores
during the three months ended March 31, 2022 and a total of 74 stores during the
year ended December 31, 2021 . There was also an increase of $5,912 at stabilized
stores, which was partially offset by a decrease in expense of $2,101 related to
property sales.
Tenant Reinsurance-Tenant reinsurance expense represents the costs that are
incurred to provide tenant reinsurance. We operated 2,130 stores at
General and Administrative-General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, office expense, office rent, travel and professional fees. Payroll has continued to increase as we have seen wages nationwide grow faster than inflation. We did not observe any material trends in specific travel or other expenses apart from the increase due to the management of additional stores. Depreciation and Amortization-Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired 14 wholly-owned stores during the three months endedMarch 31, 2022 and a total of 74 stores during the year endedDecember 31, 2021 .
Other Revenues and Expenses
The following table presents information about other revenues and expenses for
the periods indicated:
For the Three Months Ended March
31,
2022 2021 $ Change % Change
Gain on real estate transactions $ - $ 63,883 $ (63,883) - %
Interest expense (42,538) (40,695) (1,843) 4.5 %
Interest income 18,989 12,304 6,685 54.3 %
Equity in earnings and dividend income from 9,097 6,956 2,141 30.8 %
unconsolidated real estate entities
Income tax expense (3,141) (4,137) 996 (24.1) % Total other revenues & expenses, net$ (17,593) $ 38,311 $ (55,904) (145.9) % Gain on Real Estate Transactions- During the three months endedMarch 31, 2021 , we sold 16 stores to a newly established unconsolidated joint venture. We recognized a total gain of$64,424 related to this transaction. This gain was partially offset by losses related to the sale of notes receivable and solar assets. Interest Expense-The increase in interest expense during the three months endedMarch 31, 2022 was primarily the result of a higher weighted average interest rate and debt balance compared to the same period in the prior year. 32 -------------------------------------------------------------------------------- Interest Income-Interest income represents interest earned on bridge loans, notes receivable and debt securities and income earned on notes receivable fromCommon and Preferred Operating Partnership unit holders. The increase in interest income during the three months endedMarch 31, 2022 was primarily the result of interest earned on these loans as well as interest earned from the repayment of the senior mezzanine note receivable with a principal and interest amount of$103,315 , which was purchased inJuly 2020 and includes the recording and the remaining balance of unamortized discount into interest income. Equity in Earnings and Dividend Income fromUnconsolidated Real Estate Entities-Equity in earnings of unconsolidated real estate entities represents the income earned through our ownership interests in unconsolidated joint ventures. In these joint ventures, we and our joint venture partners generally receive a preferred return on our invested capital. To the extent that cash or profits in excess of these preferred returns are generated, we receive a higher percentage of the excess cash or profits. Dividend income represents dividends from our investment in preferred stock of SmartStop, which was purchased inOctober 2019 for$150,000 with another$50,000 invested inOctober 2020 .
Income Tax Expense-For the three months ended
FUNDS FROM OPERATIONS
Funds from operations ("FFO") provides relevant and meaningful information about
our operating performance that is necessary, along with net income and cash
flows, for an understanding of our operating results. We believe FFO is a
meaningful disclosure as a supplement to net earnings. Net earnings assume that
the values of real estate assets diminish predictably over time as reflected
through depreciation and amortization expenses. The values of real estate assets
fluctuate due to market conditions and we believe FFO more accurately reflects
the value of our real estate assets. FFO is defined by the National Association
of Real Estate Investment Trusts, Inc. ("NAREIT") as net income computed in
accordance with GAAP, excluding gains or losses on sales of operating stores and
impairment write downs of depreciable real estate assets, plus real estate
related depreciation and amortization and after adjustments to record
unconsolidated partnerships and joint ventures on the same basis. We believe
that to further understand our performance, FFO should be considered along with
the reported net income and cash flows in accordance with GAAP, as presented in
our condensed consolidated financial statements. FFO should not be considered a
replacement of net income computed in accordance with GAAP.
The computation of FFO may not be comparable to FFO reported by other REITs or
real estate companies that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition differently.
FFO does not represent cash generated from operating activities determined in
accordance with GAAP, and should not be considered as an alternative to net
income as an indication of our performance, as an alternative to net cash flow
from operating activities, as a measure of our liquidity, or as an indicator of
our ability to make cash distributions.
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--------------------------------------------------------------------------------The following table presents the calculation of FFO for the periods indicated:
For the Three Months Ended March
31,
2022 2021
Net income attributable to common stockholders $ 203,579 $ 202,998
Adjustments:
Real estate depreciation 62,692 55,815
Amortization of intangibles 2,766 693
Gain on real estate transactions - (63,883)
Unconsolidated joint venture real estate depreciation and amortization
3,853 2,505
Distributions paid on
(572) (572)
Income allocated to
14,138 12,503
Funds from operations attributable to common stockholders and unit holders
SAME-STORE RESULTS
Our same-store pool for the periods presented consists of 870 stores that are
wholly-owned and operated and that were stabilized by the first day of the
earliest calendar year presented. We consider a store to be stabilized once it
has been open for three years or has sustained average square foot occupancy of
80% or more for one calendar year. We believe that by providing same-store
results from a stabilized pool of stores, with accompanying operating metrics
including, but not limited to: occupancy, rental revenue growth, operating
expense growth, net operating income growth, etc., stockholders and potential
investors are able to evaluate operating performance without the effects of
non-stabilized occupancy levels, rent levels, expense levels, acquisitions or
completed developments. Same-store results should not be used as a basis for
future same-store performance or for the performance of our stores as a whole.
The following table presents operating data for our same-store portfolio.
For the Three Months Ended March
31, Percent
2022 2021 Change
Same-store rental revenues $ 341,888 $ 280,990 21.7 %
Same-store operating expenses 84,857 79,480 6.8 %
Same-store net operating income $ 257,031 $ 201,510 27.6 %
Same-store square foot occupancy as of quarter end 94.5% 95.3%
Properties included in same-store 870 870
Same-store revenues for the three months ended
Same-store expenses increased for the three months endedMarch 31, 2022 compared to the same period in 2021 due to increases in payroll, credit card processing fees, repairs and maintenance (snow removal) and insurance, partially offset by lower marketing expense. 34 --------------------------------------------------------------------------------
The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:
For the Three Months Ended March
31,
2022 2021
Net Income $ 217,717 $ 215,501
Adjusted to exclude:
Gain on real estate transactions - (63,883)
Equity in earnings and dividend income from unconsolidated real
estate entities (9,097) (6,956)
Interest expense 42,538 40,695
Depreciation and amortization 67,906 58,599
Income tax expense 3,141 4,137
General and administrative 29,762 23,540
Management fees, other income and interest income (38,946) (27,949)
Net tenant insurance (36,755) (32,458)
Non same-store rental revenue (37,920) (22,603)
Non same-store operating expense 18,685 12,887
Total same-store net operating income $
257,031
Same-store rental revenues$ 341,888 $ 280,990 Same-store operating expenses 84,857 79,480 Same-store net operating income$ 257,031 $ 201,510 CASH FLOWS Cash flows from operating activities for the three months endedMarch 31, 2022 increased when compared to the same period in the prior year as a result of our continued total revenue growth. Cash flows used in investing activities relates primarily to our acquisition and development of REIT and joint venture assets, as well as activity on our bridge loan program. Cash flows from financing activities depend primarily on our debt and equity financing activities. A summary of cash flows along with significant components are as follows: 35
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