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, 2019 . 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, 2019 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.
CURRENT MATERIAL DEVELOPMENT - THE COVID-19 PANDEMIC
The United States and other countries around the world are experiencing a major health pandemic related to COVID-19, which has created considerable instability and disruption in theU.S. and world economies. Governmental authorities in impacted regions are taking increasingly dramatic action in an effort to slow the spread of COVID-19. Federal, state and local jurisdictions have issued varying forms of "stay-at-home" orders, halting public gatherings and restricting business functions outside of one's home to only those that are considered "essential." We are working to comply within the framework of local, county, state and federal laws as they evolve. In that regard, 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. We have transitioned many of our interactions between customers and leasing and support staff to on-line and telephonic communications. Due to the COVID-19 pandemic, our customers may be impacted, including through unemployment, which may impact their ability to pay rent or renew their leases.
While we have seen a decrease in new rentals as a result of the COVID-19 pandemic, we have not seen significant vacates from existing tenants, which continue to make up the majority of our occupancy.
Although the self-storage has historically been resilient to ordinary market downturns, the impact of the COVID-19 pandemic on theU.S. and world economies generally, and on our future results in particular, could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted. This includes new information which may emerge 28 -------------------------------------------------------------------------------- concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19 and reactions by consumers, companies, governmental entities and capital markets. 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 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 ofJanuary 1 of the current year, or has been open for three years prior toJanuary 1 of the current year.
PROPERTIES
As ofMarch 31, 2020 , we owned or had ownership interests in 1,176 operating stores. Of these stores, 927 are wholly-owned, five are in consolidated joint ventures, and 244 are in unconsolidated joint ventures. In addition, we managed an additional 676 stores for third parties bringing the total number of stores which we own and/or manage to 1,852. These stores are located in 40 states,Washington, D.C. andPuerto Rico . 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, 2020 , approximately 1,030,000 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, 2020 , the average length of stay was approximately 16.1 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$16.42 for the three months endedMarch 31, 2020 , compared to$16.22 for the three months endedMarch 31, 2019 . Average annual rent per square foot for new leases was$18.66 for the three months endedMarch 31, 2020 , compared to$17.66 for the three months endedMarch 31, 2019 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 3.2% and 3.4%, 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. 29 --------------------------------------------------------------------------------
The following table presents additional information regarding net rentable square feet and the number of stores by state.
March 31, 2020
REIT Owned Joint Venture Owned Managed Total
Property Net Rentable Square Net Rentable Square Net Rentable Square
Location Count(1) Feet Property Count Feet Property Count Feet Property Count Net Rentable Square Feet
Alabama 8 557,538 1 75,821 14 1,013,225 23 1,646,584
Arizona 23 1,623,422 7 468,275 17 1,388,188 47 3,479,885
California 166 12,681,551 41 3,010,523 66 6,152,489 273 21,844,563
Colorado 17 1,154,826 2 186,318 23 1,741,170 42 3,082,314
Connecticut 7 530,220 7 630,009 5 331,035 19 1,491,264
Delaware - - 1 76,945 2 137,618 3 214,563
Florida 91 6,990,368 31 2,583,489 93 7,232,854 215 16,806,711
Georgia 63 4,868,448 6 511,367 22 1,648,442 91 7,028,257
Hawaii 13 848,264 - - 4 211,634 17 1,059,898
Idaho - - - - 7 712,786 7 712,786
Illinois 37 2,808,931 7 566,908 29 2,125,520 73 5,501,359
Indiana 15 950,671 1 58,166 12 738,189 28 1,747,026
Kansas 1 83,011 2 108,770 2 147,242 5 339,023
Kentucky 11 930,478 1 51,128 4 339,523 16 1,321,129
Louisiana 2 142,525 - - 5 466,550 7 609,075
Maryland 31 2,655,908 8 618,458 30 2,110,571 69 5,384,937
Massachusetts 46 2,973,668 10 641,533 6 454,667 62 4,069,868
Michigan 7 560,657 4 313,176 3 249,901 14 1,123,734
Minnesota 5 382,961 2 150,870 9 628,202 16 1,162,033
Mississippi 3 220,182 - - 3 205,610 6 425,792
Missouri 5 333,480 2 119,275 8 539,518 15 992,273
Nebraska - - - - 2 194,970 2 194,970
Nevada 14 1,040,201 4 473,471 5 533,505 23 2,047,177
New Hampshire 2 136,135 2 83,925 1 61,490 5 281,550
New Jersey 59 4,665,875 17 1,246,378 14 1,099,279 90 7,011,532
New Mexico 11 721,690 6 349,860 12 890,990 29 1,962,540
New York 27 1,972,200 18 1,510,548 20 1,190,289 65 4,673,037
North Carolina 19 1,411,294 5 373,864 18 1,353,003 42 3,138,161
Ohio 17 1,315,221 5 327,213 7 546,293 29 2,188,727
Oklahoma - - - - 21 1,731,033 21 1,731,033
Oregon 6 399,921 4 281,709 11 766,965 21 1,448,595
Pennsylvania 18 1,351,196 7 513,083 23 1,720,165 48 3,584,444
Rhode Island 2 130,696 - - 2 165,617 4 296,313
South Carolina 24 1,843,372 7 497,758 15 1,180,662 46 3,521,792
Tennessee 17 1,433,223 12 803,886 16 1,161,571 45 3,398,680
Texas 100 8,603,027 10 707,712 81 6,589,954 191 15,900,693
Utah 10 710,019 - - 18 1,343,811 28 2,053,830
Virginia 46 3,682,996 7 567,003 18 1,365,942 71 5,615,941
Washington 8 590,132 1 57,340 10 811,993 19 1,459,465
Washington, DC 1 100,039 1 103,567 5 392,974 7 596,580
Wisconsin - - 5 508,836 5 428,525 10 937,361
Puerto Rico - - - - 8 916,914 8 916,914
Totals 932 71,404,346 244 18,577,184 676 53,020,879 1,852 143,002,409
(1) Includes five consolidated joint venture stores.
30
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the three months ended
Overview
Results for the three months endedMarch 31, 2020 included the operations of 1,176 stores (927 wholly-owned, five in consolidated joint ventures, and 244 in joint ventures accounted for using the equity method) compared to the results for the three months endedMarch 31, 2019 , which included the operations of 1,119 stores (891 wholly-owned, four in consolidated joint ventures, and 224 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,
2020 2019 $ Change % Change
Revenues:
Property rental $ 286,703 $ 271,003 $ 15,700 5.8 %
Tenant reinsurance 33,613 29,797 3,816 12.8 %
Management fees and other income 12,136 10,746 1,390 12.9 %
Total revenues $ 332,452 $ 311,546 $ 20,906 6.7 %
Property Rental-The increase in property rental revenues for the three months
ended March 31, 2020 was primarily the result of revenues from newly-acquired
stores and increases in rental rates at our stabilized stores. An increase of
$9,655 was attributable to store acquisitions completed in 2020 and 2019. We
acquired two wholly-owned stores during the three months ended March 31, 2020 .
We acquired 21 stores and added 27 leased properties (as part of a new net lease
agreement) during
the year ended December 31, 2019 . An increase of $5,034 for the three months
ended March 31, 2020 was due to higher net rental rates for new and existing
customers at our stabilized stores.
Tenant Reinsurance-The increase in our tenant reinsurance revenues was due
primarily to an increase in the number of stores operated. We operated 1,852
stores at
Management Fees and Other Income-Management fees and other income primarily represent the fee 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, 2020 was primarily due to an increase in the number of stores managed. As ofMarch 31, 2020 , we managed 925 stores for joint ventures and third parties, compared to 805 stores as ofMarch 31, 2019 .
Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended March
31,
2020 2019 $ Change % Change
Expenses:
Property operations $ 90,297 $ 78,765 $ 11,532 14.6 %
Tenant reinsurance 6,678 6,967 (289) (4.1) %
General and administrative 23,011 22,678 333 1.5 %
Depreciation and amortization 55,275 54,659 616 1.1 %
Total expenses $ 175,261 $ 163,069 $ 12,192 7.5 %
31-------------------------------------------------------------------------------- Property Operations-The increase in property operations expense during the three months endedMarch 31, 2020 was due primarily to an increase of$8,976 attributable to store acquisitions completed in 2020 and 2019. We acquired two wholly-owned stores during the three months endedMarch 31, 2020 . We acquired 21 stores and added 27 leased properties (as part of a new net lease agreement) during the year endedDecember 31, 2019 . An additional increase of$2,339 for the three months endedMarch 31, 2020 was related to an increase in expenses from property taxes, payroll and benefits, and marketing. Tenant Reinsurance-Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The decrease in tenant reinsurance expense for three months endedMarch 31, 2020 was due primarily to a reduction in the number of claims as well as a decrease in the overall average payout on individual claims when compared to the three months endedMarch 31, 2019 . 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. We did not observe any material trends in specific payroll, 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 two stores during the three months endedMarch 31, 2020 . We acquired 21 stores during the year endedDecember 31, 2019 . 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, 2020 2019 $ Change % Change Interest expense$ (44,358) $ (47,360) $ 3,002 (6.3) %
Non-cash interest expense related to amortization of (1,209)
(1,162) (47) 4.0 %
discount on equity component of exchangeable senior notes Interest income
1,674 1,388 286 20.6 %
Equity in earnings and dividend income from 5,043 2,630 2,413 91.7 %
unconsolidated real estate entities
Income tax expense (2,179) (1,813) (366) 20.2 %
$ (41,029) $ (46,317) $ 5,288 (11.4) %
Interest Expense-The decrease in interest expense during the three months ended
March 31, 2020 was primarily the result of a lower average interest rate
compared to the same period in the prior year. The average interest rate for the
three months ended March 31, 2020 was 3.1%, compared to an average interest rate
of 3.5% for the three months ended March 31, 2019 .
Non-cash Interest Expense Related to Amortization of Discount on Equity
Component of Exchangeable Senior Notes-Represents the amortization of the
discounts related to the equity components of the exchangeable senior notes
issued by our
Interest Income-Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions, interest earned on bridge loans and income earned on note receivable fromCommon and Preferred Operating Partnership unit holders. In late 2018 we began to provide bridge financing on completed properties, including recently completed properties, owned by third parties that we manage. The increase in interest income during the three months endedMarch 31, 2020 was primarily the result of interest earned on these bridge loans. 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 . The increase related primarily to the dividends income recognized during the three months endedMarch 31, 2020 . 32 -------------------------------------------------------------------------------- Income Tax Expense-For the three months endedMarch 31, 2020 , the increase in income tax expense was the result of an increase in income earned by our taxable REIT subsidiary when compared to the same period in the prior year.
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 March
31,
2020 2019
Net income attributable to common stockholders $ 108,179 $ 94,770
Adjustments:
Real estate depreciation 52,926 50,773
Amortization of intangibles 617 2,288
Unconsolidated joint venture real estate depreciation and amortization
2,164 1,872
Distributions paid on
(572) (572)
Income allocated to
7,983 7,390
Funds from operations attributable to common stockholders and unit holders
$ 171,297 $ 156,521 SAME-STORE RESULTS Our same-store pool for the periods presented consists of 863 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. 33 --------------------------------------------------------------------------------
For the Three Months Ended March
31, Percent
2020 2019 Change
Same-store rental revenues $ 270,063 $ 264,905 1.9%
Same-store operating expenses 78,401 75,502 3.8%
Same-store net operating income $ 191,662 $ 189,403 1.2%
Same-store square foot occupancy as of quarter end 91.3% 91.4%
Properties included in same-store 863 863
Same-store revenues for the three months ended March 31, 2020 increased due to
higher average occupancy and net rental rates for customers. Same-store expenses
were higher for the three months ended March 31, 2020 primarily due to increases
in marketing, payroll and benefits, and property taxes. For the three months
ended March 31, 2020 , the increase in same-store expenses was partially offset
by decreases in repairs and maintenance expense.
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,
2020 2019
Net Income $ 116,162 $ 102,160
Adjusted to exclude:
Equity in earnings and dividend income from unconsolidated real
estate entities (5,043) (2,630)
Interest expense 45,567 48,522
Depreciation and amortization 55,275 54,659
Income tax expense 2,179 1,813
General and administrative 23,011 22,678
Management fees, other income and interest income (13,810) (12,134)
Net tenant insurance (26,935) (22,830)
Non-same store rental revenue (16,640) (6,098)
Non-same store operating expense 11,896 3,263
Total Same-store net operating income $ 191,662 $ 189,403
Same-store rental revenues $ 270,063 $ 264,905
Same-store operating expenses 78,401 75,502
Same-store net operating income $ 191,662 $ 189,403
CASH FLOWS
Cash flows from operating activities increased as a result of our continued
revenue growth. This growth was due to increased rental rates and an increase in
the number of stores we own and operate. 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:
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