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 navigate the
effects of the COVID-19 pandemic. 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 implemented a wide range
of practices to protect and support our employees and customers. Although most
governmental restrictions have lifted and many work practices have returned to
normal, our customers may continue to be impacted by the COVID-19 pandemic and
related governmental responses. Given the uncertainty resulting from the
pandemic, our business may be impacted by the effects of the COVID-19 pandemic.
PROPERTIES
As ofSeptember 30, 2022 , we owned or had ownership interests in 1,441 operating stores. Of these stores, 1,126 are wholly-owned, and 315 are in unconsolidated joint ventures. In addition, we managed an additional 886 stores for third parties bringing the total number of stores which we own and/or manage to 2,327. 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 ofSeptember 30, 2022 , approximately 1,365,000 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 ofSeptember 30, 2022 , the average length of stay was approximately 16.0 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$21.52 for the three months endedSeptember 30, 2022 , compared to$18.26 for the three months endedSeptember 30, 2021 . Average annual rent per square foot for new leases was$18.58 for the three months endedSeptember 30, 2022 , compared to$20.80 for the three months endedSeptember 30, 2021 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 3.1% and 3.6%, 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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September 30, 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 9 650,428 1 75,711 6 430,502 16 1,156,641
Arizona 25 1,779,761 10 768,046 20 1,711,092 55 4,258,899
California 177 13,599,018 49 3,593,676 98 8,761,358 324 25,954,052
Colorado 17 1,150,022 9 664,885 25 1,785,200 51 3,600,107
Connecticut 7 538,946 7 575,724 7 484,561 21 1,599,231
Delaware - - 2 143,615 1 71,704 3 215,319
Florida 111 8,550,154 43 3,554,367 113 8,924,206 267 21,028,727
Georgia 67 5,181,751 14 1,143,469 25 1,925,604 106 8,250,824
Hawaii 13 864,026 - - 3 159,393 16 1,023,419
Idaho - - - - 3 181,484 3 181,484
Illinois 60 3,693,456 10 741,135 29 2,037,732 99 6,472,323
Indiana 90 3,842,934 1 58,166 18 1,268,412 109 5,169,512
Kansas 1 50,209 2 108,920 6 452,863 9 611,992
Kentucky 13 958,290 1 51,663 9 783,503 23 1,793,456
Louisiana 5 387,184 - - 11 809,431 16 1,196,615
Maine - - - - 8 577,216 8 577,216
Maryland 34 2,853,783 11 899,002 38 2,701,514 83 6,454,299
Massachusetts 47 3,010,962 10 641,005 29 1,840,330 86 5,492,297
Michigan 8 668,298 4 305,876 8 567,122 20 1,541,296
Minnesota 7 584,720 4 305,010 16 1,171,986 27 2,061,716
Mississippi 3 234,365 - - - - 3 234,365
Missouri 6 431,696 2 119,750 14 1,060,064 22 1,611,510
Nebraska - - - - 3 278,106 3 278,106
Nevada 14 1,039,697 4 474,241 7 744,024 25 2,257,962
New Hampshire 2 134,564 2 84,693 5 359,232 9 578,489
New Jersey 63 4,996,852 17 1,228,131 36 2,774,531 116 8,999,514
New Mexico 11 699,807 10 683,470 12 900,155 33 2,283,432
New York 28 2,046,988 18 1,511,956 39 2,445,578 85 6,004,522
North Carolina 23 1,736,990 5 401,437 19 1,520,295 47 3,658,722
Ohio 24 1,464,363 5 325,163 8 609,579 37 2,399,105
Oklahoma 1 62,463 - - 20 1,608,192 21 1,670,655
Oregon 8 550,557 1 65,245 10 738,433 19 1,354,235
Pennsylvania 21 1,545,851 9 679,815 35 2,576,837 65 4,802,503
Rhode Island 2 134,802 - - 4 322,003 6 456,805
South Carolina 23 1,713,492 11 709,124 25 2,164,831 59 4,587,447
Tennessee 22 1,856,904 13 881,301 10 823,893 45 3,562,098
Texas 111 9,118,774 26 2,067,861 81 6,975,397 218 18,162,032
Utah 10 698,077 - - 24 1,908,427 34 2,606,504
Virginia 53 4,267,635 9 703,650 31 2,178,528 93 7,149,813
Washington 9 685,346 - - 14 1,147,294 23 1,832,640
Washington, DC 1 100,039 1 103,640 6 540,423 8 744,102
Wisconsin - - 4 370,693 10 814,461 14 1,185,154
Totals 1,126 81,883,204 315 24,040,440 886 69,135,496 2,327 175,059,140
(1) Excludes 17,000 units related to the Bargold transaction. See Note 7 in the Notes to the Condensed Consolidated Financial Statements.
35
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the three and nine months ended
Overview
Results for the three and nine months endedSeptember 30, 2022 included the operations of 1,441 stores (1,126 wholly-owned and 315 in joint ventures accounted for using the equity method) compared to the results for the three and nine months endedSeptember 30, 2021 , which included the operations of 1,227 stores (966 wholly-owned, four in consolidated joint ventures, and 257 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 For the Nine Months Ended September
September 30, 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenues:
Property rental $ 428,787 $ 351,355 $ 77,432 22.0 % $ 1,216,639 $ 976,448 $ 240,191 24.6 %
Tenant reinsurance 47,869 44,258 3,611 8.2 % 138,093 126,211 11,882 9.4 %
Management fees and other
income 22,246 16,879 5,367 31.8 % 62,720 47,320 15,400 32.5 %
Total revenues $ 498,902 $ 412,492 $ 86,410 20.9 % $ 1,417,452 $ 1,149,979 $ 267,473 23.3 %
Property Rental-The increase in property rental revenues for the three and nine
months ended September 30, 2022 was primarily the result of an increase of
$51,550 and $180,884 at our stabilized stores related primarily to higher
average rates to existing customers. Property rental revenue also increased by
$25,598 and $66,079 associated with acquisitions completed in 2022 and 2021. We
acquired 147 wholly-owned stores during the nine months ended September 30, 2022
and a total of 74 stores during the year ended December 31, 2021 .
Tenant Reinsurance-The increase in our tenant reinsurance revenues was due
primarily to an increase in the number of stores operated. We operated 2,327
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 and nine months endedSeptember 30, 2022 was due to both an increase in the number of stores managed and an increase in the overall revenue of stores under management when compared to the same period last year. As ofSeptember 30, 2022 , we managed 1,201 stores for joint ventures and third parties, compared to 1,088 stores as ofSeptember 30, 2021 . Additionally, for the three and nine months endedSeptember 30, 2022 , the Company earned an additional$1,359 and$3,306 of other transaction fee income. 36 --------------------------------------------------------------------------------
Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Expenses:
Property operations $ 114,577 $ 92,794 $ 21,783 23.5 % $ 322,371 $ 274,316 $ 48,055 17.5 %
Tenant reinsurance 10,770 7,509 3,261 43.4 % 25,349 21,405 3,944 18.4 %
Transaction related costs - - - - % 1,465 - 1,465 - %
General and administrative 32,275 24,395 7,880 32.3 % 93,288 74,276 19,012 25.6 %
Depreciation and amortization 71,423 61,516 9,907 16.1 % 208,396 179,685 28,711 16.0 %
Total expenses $ 229,045 $ 186,214 $ 42,831 23.0 % $ 650,869 $ 549,682 $ 101,187 18.4 %
Property Operations-The increase in property operations expense during the three
and nine months ended September 30, 2022 consists primarily of an increase of
$9,827 and $24,943 related to acquisitions completed in 2022 and 2021. We
acquired 147 wholly-owned stores during the nine months ended September 30, 2022
and a total of 36 stores during the nine months ended September 30, 2021 . These
amounts also include increases related to the acquisition of Bargold in June
2022 . Additionally, for the three and nine months ended September 30, 2022 there
was an increase of $10,357 and $24,427 at our stabilized stores. These increases
for the three months ended relate primarily to payroll due to wage increases and
increased hours and property taxes. For the nine months ended, increases relate
primarily to payroll due to wage increases and increased hours, credit card fees
due to increased revenue and property taxes. For both the three and nine months
ended, there was a $3,200 charge related to estimated losses for Hurricane Ian
(shown net of expected insurance recoveries).
Tenant Reinsurance-Tenant reinsurance expense represents the costs that are
incurred to provide tenant reinsurance. We operated 2,327 stores at
September 30, 2022 compared to 2,054 stores at September 30, 2021 . For the three
and nine months ended, tenant reinsurance expense included a $3,000 charge for
estimated tenant reinsurance claims to be paid by our captive for damages
incurred from Hurricane Ian.
Transaction related costs-The
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 a result of outsized inflation. We did not observe any material trends in specific travel or other expenses apart from inflationary pressures and from the increase due to the management of additional stores. Also, during the three and nine months endedSeptember 30, 2022 increases relate in part to the acquisition of Bargold inJune 2022 and various entities doing business as Storage Express inSeptember 2022 . Depreciation and Amortization-Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired 147 wholly-owned stores during the nine months endedSeptember 30, 2022 and a total of 36 stores during the nine months endedSeptember 30, 2021 . 37 --------------------------------------------------------------------------------
Other Revenues and Expenses
The following table presents information about other revenues and expenses for
the periods indicated:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % ChangeGain on real estate $ - $ - $ -
- % $ 14,249 $ 63,883 $ (49,634) (77.7) %
transactions
Interest expense (56,245) (39,670) (16,575) 41.8 % (146,249) (120,605) (25,644) 21.3 %
Interest income 18,125 11,729 6,396 54.5 % 52,174 36,871 15,303 41.5 %
Equity in earnings and 11,149 8,255 2,894 35.1 % 30,436 23,533 6,903 29.3 %
dividend income from
unconsolidated real estate
entities
Equity in earnings of
unconsolidated real estate
ventures - gain on sale of
real estate assets and
purchase of joint venture
partner's interest - - - - % - 6,251 (6,251) 100.0 %
Income tax expense (6,760) (6,772) 12 (0.2) % (15,516) (16,330) 814 (5.0) %
Total other revenues &
expenses, net $ (33,731) $ (26,458) $ (7,273) 27.5 % $ (64,906) $ (6,397) $ (58,509) 914.6 %
Gain on Real Estate Transactions-During the nine months ended September 30,
2022 , we sold two stores. We recognized a total gain of $14,249 related to the
sale of these assets. During the nine months ended September 30, 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 and nine
months ended September 30, 2022 was primarily the result of a higher weighted
average interest rate and debt balance compared to the same period in the prior
year.
Interest Income-Interest income represents interest earned on bridge loans,
notes receivable and debt securities and income earned on notes receivable from
Common and Preferred Operating Partnership unit holders. The increase in
interest income during the three and nine months ended September 30, 2022 was
primarily the result of an increase in the note receivable for the Company's
bridge loan program along with an increase in interest rates. The bridge loan
receivable balance increased to $298,108 as of September 30, 2022 compared to
$247,411 as of September 30, 2021 . The increase for the nine months ended
September 30, 2022 , also relates to interest earned from the repayment of the
senior mezzanine note receivable which was paid off in February 2022 and
included recording the remaining balance of unamortized discount into interest
income.
Equity in Earnings and Dividend Income from Unconsolidated 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 $200,000 investment in preferred stock of SmartStop.
Equity in Earnings of Unconsolidated Real Estate Ventures - Gain on Sale of Real
Estate Assets and Purchase of Joint Venture Partner's Interest - In June 2021 ,
the Company sold its interest in two unconsolidated joint ventures to its joint
venture partner. The Company received proceeds of $1,888 in cash, and recorded a
gain of $525 . Also in June 2021 , the WICNN JV LLC and GFN JV, LLC joint ventures
sold all 17 of the stores owned by the joint ventures to a third party.
Subsequent to the sales, these joint ventures were dissolved. As a result of
these transactions, the Company recorded a gain of $5,739 .
Income Tax Expense-For the three months ended
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--------------------------------------------------------------------------------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.
The following table presents the calculation of FFO for the periods indicated:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income attributable to common stockholders
$ 656,428 $ 559,222
Adjustments:
Real estate depreciation 65,483 58,177 191,940 170,462 Amortization of intangibles 3,279 1,262 8,741 2,963 Gain on real estate transactions - - (14,249) (63,883)
Unconsolidated joint venture real estate depreciation and amortization
4,381 3,051 12,349 8,635
Unconsolidated joint venture gain on sale of real
estate assets and purchase of partner's interest - - - (6,251)
Distributions paid on
(572) (572) (1,716) (1,716)
Income allocated to Operating Partnership
noncontrolling interests 15,407 11,544 45,249 34,678
Funds from operations attributable to common
stockholders and unit holders $ 308,697 $ 261,738 $ 898,742 $ 704,110 SAME-STORE RESULTS
Our same-store pool for the periods presented consists of 869 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
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portfolio.
For the Three Months Ended For the Nine Months Ended
September 30, Percent September 30, Percent
2022 2021 Change 2022 2021 Change
Same-store rental revenues $ 371,918 $ 322,111 15.5 % $ 1,075,412 $ 900,266 19.5 %
Same-store operating expenses 87,450 77,683 12.6 % 255,661 233,383 9.5 %
Same-store net operating income $ 284,468 $ 244,428 16.4 % $ 819,751 $ 666,883 22.9 %
Same-store square foot occupancy as of
quarter end 95.2% 96.7% 95.2% 96.7%
Properties included in same-store 869 869 869 869
Same-store revenues for the three and nine months ended September 30, 2022
increased compared to the same periods in 2021 due to higher average rates to
existing customers and higher other operating income partially offset by lower
occupancy.
Same-store expenses increased for the three and nine months ended September 30,
2022 compared to the same period in 2021 due to increases in payroll, credit
card processing fees, utilities, property taxes and insurance.
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 For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net Income $ 236,126 $ 199,820 $ 701,677 $ 593,900
Adjusted to exclude:
Gain on real estate transactions - - (14,249) (63,883)
Equity in earnings and dividend income from
unconsolidated real estate entities (11,149) (8,255) (30,436) (23,533)
Equity in earnings of unconsolidated real
estate ventures - gain on sale of real estate
assets and purchase of joint venture partner's
interest - - - (6,251)
Interest expense 56,245 39,670 146,249 120,605
Depreciation and amortization 71,423 61,516 208,396 179,685
Income tax expense 6,760 6,772 15,516 16,330
Transaction related costs - - 1,465 -
General and administrative 32,275 24,395 93,288 74,276
Management fees, other income and interest
income (40,371) (28,608) (114,894) (84,191)
Net tenant insurance (37,099) (36,749) (112,744) (104,806)
Non same-store rental revenue (56,869) (29,244) (141,227) (76,182)
Non same-store operating expense 27,127 15,111 66,710 40,933
Total same-store net operating income
$ 819,751 $ 666,883 Same-store rental revenues$ 371,918 $ 322,111 $ 1,075,412 $ 900,266 Same-store operating expenses 87,450 77,683 255,661 233,383 Same-store net operating income$ 284,468 $ 244,428 $ 819,751 $ 666,883 CASH FLOWS Cash flows from operating activities for the nine months endedSeptember 30, 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. 40
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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:
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