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 varied and sometimes dramatic action in an effort to slow the spread of COVID-19. Federal, state and local jurisdictions have issued varying forms of states of emergency orders. 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. Our business has been impacted by COVID-19 in several ways, including reductions in new rentals and vacates due to stay-at-home orders and other restrictions, lower achieved rental rates from new customers, fewer existing customer rent increases, reduced late fee collection and impaired ability to hold auctions resulting in higher accounts receivable and bad debt. These impacts from COVID-19 were especially prevalent during the second quarter of 2020. As restrictions began to lessen during the three months endedSeptember 30, 2020 , we saw some return toward normalcy, including higher achieved rates in August and September, accounts receivable and collections less than 60 days returning to historical norms, and auctions being held in most locations. As a result of the reductions in vacates, we saw record occupancy levels during the three months endedSeptember 30, 2020 . 28 -------------------------------------------------------------------------------- Although the self-storage industry 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 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 of January 1 of the current
year, or has been open for three years prior to January 1 of the current year.
PROPERTIES
As ofSeptember 30, 2020 , we owned or had ownership interests in 1,188 operating stores. Of these stores, 935 are wholly-owned, six are in consolidated joint ventures, and 247 are in unconsolidated joint ventures. In addition, we managed an additional 718 stores for third parties bringing the total number of stores which we own and/or manage to 1,906. 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 ofSeptember 30, 2020 , approximately 1,140,000 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, 2020 , the average length of stay was approximately 15.7 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$16.03 for the three months endedSeptember 30, 2020 , compared to$16.36 for the three months endedSeptember 30, 2019 . Average annual rent per square foot for new leases was$15.41 for the three months endedSeptember 30, 2020 , compared to$14.29 for the three months endedSeptember 30, 2019 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 3.5% and 3.8%, respectively. 29 -------------------------------------------------------------------------------- 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.
September 30, 2020
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 FeetAlabama 8 557,473 1 75,801 15 1,062,225 24 1,695,499Arizona 23 1,623,730 7 467,733 20 1,638,387 50 3,729,850California 168 12,874,874 41 3,010,476 68 6,395,959 277 22,281,309Colorado 17 1,153,951 2 186,273 24 1,821,269 43 3,161,493Connecticut 7 531,183 7 629,770 5 350,291 19 1,511,244Delaware - - 1 76,645 2 137,913 3 214,558Florida 93 7,168,634 32 2,659,188 98 7,594,790 223 17,422,612Georgia 63 4,893,459 6 511,067 24 1,801,362 93 7,205,888Hawaii 13 847,815 - - 4 211,629 17 1,059,444Idaho - - - - 7 712,402 7 712,402Illinois 39 2,966,472 7 568,875 25 1,840,392 71 5,375,739Indiana 15 951,924 1 58,166 15 852,247 31 1,862,337Kansas 1 83,401 2 108,920 5 371,560 8 563,881Kentucky 11 931,308 1 51,118 5 406,478 17 1,388,904Louisiana 2 160,760 - - 5 469,895 7 630,655Maryland 31 2,591,388 8 618,478 32 2,334,329 71 5,544,195Massachusetts 46 2,971,672 10 640,789 13 848,875 69 4,461,336Michigan 7 563,839 4 313,176 3 249,680 14 1,126,695Minnesota 5 382,587 4 267,187 10 752,916 19 1,402,690Mississippi 3 219,822 - - - - 3 219,822Missouri 5 332,795 2 119,275 8 539,978 15 992,048Nebraska - - - - 3 307,038 3 307,038Nevada 14 1,039,568 4 473,641 5 531,515 23 2,044,724New Hampshire 2 135,835 2 84,165 2 118,541 6 338,541New Jersey 60 4,741,052 17 1,246,863 17 1,315,524 94 7,303,439New Mexico 11 722,233 6 350,900 12 893,285 29 1,966,418New York 27 1,971,361 18 1,513,971 19 1,119,630 64 4,604,962North Carolina 19 1,412,323 5 373,829 18 1,367,349 42 3,153,501Ohio 17 1,314,950 5 325,963 6 493,909 28 2,134,822Oklahoma - - - - 21 1,733,548 21 1,733,548Oregon 6 400,153 4 281,656 14 1,114,842 24 1,796,651Pennsylvania 19 1,412,346 7 513,219 25 1,851,144 51 3,776,709Rhode Island 2 133,416 - - 2 166,571 4 299,987South Carolina 24 1,844,911 7 498,233 17 1,407,142 48 3,750,286Tennessee 17 1,455,326 12 803,086 13 913,965 42 3,172,377Texas 101 8,673,025 10 708,331 79 6,463,858 190 15,845,214Utah 10 710,487 - - 21 1,639,000 31 2,349,487Virginia 46 3,683,246 7 567,443 25 1,919,703 78 6,170,392Washington 8 589,880 1 57,290 13 1,004,130 22 1,651,300Washington, DC 1 100,039 1 103,766 5 483,562 7 687,367Wisconsin - - 5 523,579 5 430,293 10 953,872Puerto Rico - - - - 8 917,507 8 917,507 Totals 941 72,147,238 247 18,788,872 718 56,584,633 1,906 147,520,743
(1) Includes six consolidated joint venture stores.
30
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the three and nine months ended
Overview
Results for the three and nine months endedSeptember 30, 2020 included the operations of 1,188 stores (935 wholly-owned, six in consolidated joint ventures, and 247 in joint ventures accounted for using the equity method) compared to the results for the three and nine months endedSeptember 30, 2019 , which included the operations of 1,167 stores (920 wholly-owned, five in consolidated joint ventures, and 242 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 30, September 30,
2020 2019 $ Change % Change 2020 2019 $ Change % ChangeRevenues:
Property rental$ 290,423 $ 290,917 $ (494) (0.2) %$ 856,438 $ 841,504 $ 14,934 1.8 % Tenant reinsurance 39,294 33,588 5,706 17.0 % 107,985 95,086 12,899 13.6 % Management fees and other income 13,307 13,000 307 2.4 % 38,299 36,063 2,236 6.2 % Total revenues$ 343,024 $ 337,505 $ 5,519 1.6 %$ 1,002,722 $ 972,653 $ 30,069 3.1 % Property Rental-The decrease in property rental revenues for the three months endedSeptember 30, 2020 was primarily the result of a decrease of$4,279 related to lower rental rates and other fee income at our stabilized stores primarily attributable to the COVID-19 pandemic. This was offset by an increase of$3,159 attributable to store acquisitions completed in 2020 and 2019. We acquired ten wholly-owned stores and completed the development of a consolidated joint venture store during the nine months endedSeptember 30, 2020 . We acquired 21 stores and added 27 leased properties (as part of a new net lease agreement) during the year endedDecember 31, 2019 . The increase in property rental revenues for the nine months endedSeptember 30, 2020 was due to increases of$20,309 attributable to store acquisitions completed in 2020 and 2019 and$2,551 attributable to revenue increases at our lease-up stores. These increases were offset by a decrease of$7,665 related to decreases in rental rates and other fee income 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 and the higher
occupancy at both our lease up and mature sites. We operated 1,906 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 and nine months endedSeptember 30, 2020 was primarily due to an increase in the number of stores managed. As ofSeptember 30, 2020 , we managed 971 stores for joint ventures and third parties, compared to 877 stores as ofSeptember 30, 2019 . As a result, we had a$3,500 increase in management fees for the nine months endedSeptember 30, 2020 , partially offset by a reduction of$2,100 from non-recurring transaction fees from 2019. 31 --------------------------------------------------------------------------------
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,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
Expenses:
Property operations $ 92,322 $ 88,653 $ 3,669 4.1 % $ 271,659 $ 248,288 $ 23,371 9.4 %
Tenant reinsurance 7,189 7,644 (455) (6.0) % 20,725 21,593 (868) (4.0) %
General and administrative 23,894 22,519 1,375 6.1 % 72,242 68,548 3,694 5.4 %
Depreciation and amortization 56,412 56,051 361 0.6 % 167,705 165,116 2,589 1.6 %
Total expenses $ 179,817 $ 174,867 $ 4,950 2.8 % $ 532,331 $ 503,545 $ 28,786 5.7 %
Property Operations-The increase in property operations expense during the three
and nine months ended September 30, 2020 was due primarily to increases of
$2,475 and $18,254 , respectively, attributable to store acquisitions completed
in 2020 and 2019. We acquired ten wholly-owned stores and completed the
development of a consolidated joint venture store during the nine months ended
September 30, 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 .
Additional increases of $1,054 and $4,638 for the three and nine months ended
September 30, 2020 , respectively were related to an increase in expenses from
property taxes, payroll and benefits, and marketing at our stabilized stores.
Tenant Reinsurance-Tenant reinsurance expense represents the costs that are
incurred to provide tenant reinsurance. The decrease in tenant reinsurance
expense for the three and nine months ended September 30, 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 and nine months
ended September 30, 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. During the nine
months ended September 30, 2020 , we recorded an additional $1,823 in
compensation expense as a result of modifications to the terms of the
stock-based awards related to the retirement of an executive in June 2020 . We
did not observe any other 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 ten stores during the
nine months ended September 30, 2020 . We acquired 21 stores during the year
ended December 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 For the Nine Months Ended
September 30, September 30,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
Interest expense $ (42,213) $ (46,908) $ 4,695 (10.0) % (127,610) (141,716) 14,106 (10.0) %
Non-cash interest expense (1,233) (1,186) (47) 4.0 % (3,675) (3,533) (142) 4.0 %
related to amortization of
discount on equity
component of exchangeable
senior notes
Interest income 3,145 2,799 346 12.4 % 6,488 5,905 583 9.9 %
Equity in earnings and 5,605 2,704 2,901 107.3 % 15,692 8,455 7,237 85.6 %
dividend income from
unconsolidated real estate
entities
Income tax expense (4,657) (4,052) (605) 14.9 % (10,013) (8,580) (1,433) 16.7 %
$ (39,353) $ (46,643) $ 7,290 (15.6) % $ (119,118) $ (139,469) $ 20,351 (14.6) %
32-------------------------------------------------------------------------------- Interest Expense-The decrease in interest expense during the three and nine months endedSeptember 30, 2020 was primarily the result of a lower average variable interest rates compared to the same period in the prior year. The average variable interest rate for the three months endedSeptember 30, 2020 was 1.8%, compared to an average variable interest rate of 3.4% for the three months endedSeptember 30, 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 notes receivable fromCommon and Preferred Operating Partnership unit holders. 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 for the three and nine months endedSeptember 30, 2020 related primarily to the dividend income related to the SmartStop preferred stock. Income Tax Expense-For the three and nine months endedSeptember 30, 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.
33
--------------------------------------------------------------------------------
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,
2020 2019 2020 2019
Net income attributable to common stockholders $ 114,633 Adjustments:
Real estate depreciation 53,909 51,828 160,202 153,745 Amortization of intangibles 247 1,184 1,402 5,281 Gain on real estate transactions - - - (1,205)
Unconsolidated joint venture real estate depreciation and amortization
2,279 2,160 6,667 5,944
Distributions paid on
(572) (572) (1,716) (1,716)
Income allocated to
9,221 7,908 25,550 23,159
Funds from operations attributable to common
stockholders and unit holders $ 179,717 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.
For the Three Months Ended For the Nine Months Ended
September 30, Percent September 30, Percent
2020 2019 Change 2020 2019 Change
Same-store rental revenues $ 271,717 $ 275,963 (1.5) % $ 804,469 $ 812,048 (0.9) %
Same-store operating expenses 79,266 78,091 1.5 % 234,828 230,225 2.0 %
Same-store net operating income $ 192,451 $ 197,872 (2.7) % $ 569,641 $ 581,823 (2.1) %
Same-store square foot occupancy as of
quarter end 95.9% 93.8% 95.9% 93.8%
Properties included in same-store 863 863 863 863
Same-store revenues for the three and nine months ended September 30, 2020
decreased due to lower net rental rates for existing customers, lower late fees
collected and higher bad debt expense related to non-paying tenants, partially
offset by higher occupancy. Same-store expenses were higher for the three months
ended September 30, 2020 primarily due to increases in marketing expenses and
property taxes. Same-store expenses were higher for the nine months ended
September 30, 2020 primarily due to increases in payroll, marketing expenses and
property taxes. Expenses in both periods were partially offset by reduced
utilities expense, auction fees and repairs and maintenance.
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 For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net Income $ 123,854 $ 115,995 $ 351,273 $ 330,844
Adjusted to exclude:
Gain on real estate transactions - - - (1,205)
Equity in earnings and dividend income from
unconsolidated real estate entities (5,605) (2,704) (15,692) (8,455)
Interest expense 43,446 48,094 131,285 145,249
Depreciation and amortization 56,412 56,051 167,705 165,116
Income tax expense 4,657 4,052 10,013 8,580
General and administrative 23,894 22,519 72,242 68,548Management fees, other income and interest income (16,452) (15,799)
(44,787) (41,968)
Net tenant insurance (32,105) (25,944) (87,260) (73,493)
Non-same store rental revenue (18,706) (14,954) (51,969) (29,456)
Non-same store operating expense 13,056 10,562 36,831 18,063
Total Same-store net operating income $ 192,451 $
197,872
Same-store rental revenues$ 271,717 $ 275,963 $ 804,469 $ 812,048 Same-store operating expenses 79,266 78,091 234,828 230,225 Same-store net operating income$ 192,451 $ 197,872 $ 569,641 $ 581,823 CASH FLOWS Cash flows from operating activities for the nine months endedSeptember 30, 2020 increased when compared to the same period in the prior year as a result of our continued total revenue growth. This growth was due to an increase in the number of stores we own and operate and higher average occupancy at our stores. 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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