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, 2020 . 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, 2020 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 we have started to see certain
governmental restrictions 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. With the lifting of many governmental
restrictions, we have seen record occupancy in our stores. However, given the
uncertainty resulting from the pandemic, our business may be impacted by the
COVID-19 pandemic including additional governmental restrictions.
PROPERTIES
As ofJune 30, 2021 , we owned or had ownership interests in 1,205 operating stores. Of these stores, 952 are wholly-owned, six are in consolidated joint ventures, and 247 are in unconsolidated joint ventures. In addition, we managed an additional 768 stores for third parties bringing the total number of stores which we own and/or manage to 1,973. These stores are located in 40 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 ofJune 30, 2021 , approximately 1,215,000 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 ofJune 30, 2021 , the average length of stay was approximately 15.3 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$17.09 for the three months endedJune 30, 2021 , compared to$15.69 for the three months endedJune 30, 2020 . Average annual rent per square foot for new leases was$20.65 for the three months endedJune 30, 2021 , compared to$12.81 for the three months endedJune 30, 2020 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 3.5% and 3.2%, 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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June 30, 2021
REIT Owned Joint Venture Owned Managed Total
Property Net Rentable Square
Location Property Count(1) Net Rentable Square Feet Property Count Net Rentable Square Feet Count Feet Property Count Net Rentable Square Feet
Alabama 10 688,412 1 75,801 14 1,004,509 25 1,768,722
Arizona 23 1,623,418 8 555,273 19 1,604,902 50 3,783,593
California 162 12,542,076 47 3,436,170 74 7,133,574 283 23,111,820
Colorado 17 1,152,806 2 186,209 26 1,907,966 45 3,246,981
Connecticut 7 531,451 6 489,573 7 489,443 20 1,510,467
Delaware - - 1 76,645 2 138,479 3 215,124
Florida 97 7,473,508 28 2,456,339 113 8,955,413 238 18,885,260
Georgia 67 5,193,294 5 434,433 26 1,953,401 98 7,581,128
Hawaii 13 862,996 - - 4 211,854 17 1,074,850
Idaho - - - - 2 131,589 2 131,589
Illinois 36 2,733,764 9 674,573 26 1,933,850 71 5,342,187
Indiana 15 950,223 1 58,166 17 1,183,558 33 2,191,947
Kansas 1 50,209 2 108,920 6 472,359 9 631,488
Kentucky 11 930,785 1 51,148 6 507,098 18 1,489,031
Louisiana 2 164,114 - - 9 702,348 11 866,462
Maryland 33 2,763,170 8 550,819 35 2,633,281 76 5,947,270
Massachusetts 46 2,966,289 10 640,779 15 981,649 71 4,588,717
Michigan 7 567,629 4 309,086 4 341,028 15 1,217,743
Minnesota 6 509,241 4 305,846 15 1,107,912 25 1,922,999
Mississippi 3 221,957 - - 1 83,015 4 304,972
Missouri 5 332,820 2 119,275 11 757,593 18 1,209,688
Nebraska - - - - 3 278,391 3 278,391
Nevada 14 1,040,063 4 473,751 7 709,158 25 2,222,972
New Hampshire 2 135,835 2 84,693 3 192,052 7 412,580
New Jersey 60 4,821,988 16 1,142,042 24 1,840,990 100 7,805,020
New Mexico 11 718,360 6 355,243 13 958,516 30 2,032,119
New York 28 2,029,942 17 1,467,061 25 1,516,443 70 5,013,446
North Carolina 20 1,505,344 4 298,667 19 1,429,920 43 3,233,931
Ohio 17 1,316,224 5 325,713 7 573,101 29 2,215,038
Oklahoma - - - - 20 1,612,383 20 1,612,383
Oregon 8 552,184 1 65,285 10 728,678 19 1,346,147
Pennsylvania 21 1,537,085 7 513,427 29 2,118,628 57 4,169,140
Rhode Island 2 133,582 - - 3 231,840 5 365,422
South Carolina 23 1,812,228 8 537,319 17 1,409,789 48 3,759,336
Tennessee 21 1,772,988 12 807,403 12 841,847 45 3,422,238
Texas 104 8,937,221 17 1,339,415 73 5,845,808 194 16,122,444
Utah 10 710,457 - - 24 1,857,803 34 2,568,260
Virginia 47 3,784,709 8 628,603 23 1,794,470 78 6,207,782
Washington 8 624,614 - - 13 1,039,984 21 1,664,598
Washington, DC 1 100,039 1 103,731 6 534,855 8 738,625
Wisconsin - - - - 5 430,343 5 430,343
Totals 958 73,791,025 247 18,671,408 768 60,179,820 1,973 152,642,253
(1) Includes six consolidated joint venture stores.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the three and six months ended
Overview
Results for the three and six months endedJune 30, 2021 included the operations of 1,205 stores (952 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 six months endedJune 30, 2020 , which included the operations of 1,178 stores (927 wholly-owned, six in consolidated joint ventures, and 245 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 June For the Six Months Ended June
30, 30,
2021 2020 $ Change % Change 2021 2020 $ Change % ChangeRevenues: Property rental$ 321,500 $ 279,312 $ 42,188 15.1 %$ 625,093 $ 566,015 $ 59,078 10.4 % Tenant reinsurance 42,334 35,078 7,256 20.7 % 81,953 68,691 13,262 19.3 % Management fees and other income 14,796 12,856 1,940 15.1 % 30,441 24,992 5,449 21.8 % Total revenues$ 378,630 $ 327,246 $ 51,384 15.7 %$ 737,487 $ 659,698 $ 77,789 11.8 % Property Rental-The increase in property rental revenues for the three and six months endedJune 30, 2021 was primarily the result of an increase of$35,122 and$46,928 , respectively, related to higher occupancy and increased rental rates at our stabilized stores. An additional increase of$9,417 and$15,013 , respectively, was attributable to store acquisitions completed in 2021 and 2020. We acquired 24 wholly-owned stores during the six months endedJune 30, 2021 and a total of 23 stores during the year endedDecember 31, 2020 . Tenant Reinsurance-The increase in our tenant reinsurance revenues was due primarily to an increase in the number of stores operated and higher occupancy. We operated 1,973 stores atJune 30, 2021 compared to 1,878 stores atJune 30, 2020 . 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 six months endedJune 30, 2021 was primarily due to an increase in the number of stores managed and other transaction fee income. As ofJune 30, 2021 , we managed 1,021 stores for joint ventures and third parties, compared to 951 stores as ofJune 30, 2020 .
Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended June For the Six Months Ended June
30, 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Expenses:
Property operations $ 89,155 $ 89,040 $ 115 0.1 % $ 181,522 $ 179,337 $ 2,185 1.2 %
Tenant reinsurance 6,735 6,858 (123) (1.8) % 13,896 13,536 360 2.7 %
General and administrative 26,341 25,337 1,004 4.0 % 49,881 48,348 1,533 3.2 %
Depreciation and amortization 59,570 56,018 3,552 6.3 % 118,169 111,293 6,876 6.2 %
Total expenses $ 181,801 $ 177,253 $ 4,548 2.6 % $ 363,468 $ 352,514 $ 10,954 3.1 %
30-------------------------------------------------------------------------------- Property Operations-The increase in property operations expense during the three and six months endedJune 30, 2021 was due primarily to an increase of$3,345 and$5,972 , respectively, attributable to store acquisitions completed in 2021 and 2020. We acquired 24 wholly-owned stores during the six months endedJune 30, 2021 and a total of 23 stores during the year endedDecember 31, 2020 . The property operations increase was partially offset by decreases in payroll and marketing expenses of$1,997 and$2,118 , respectively, at stabilized stores and by decreases of$1,590 and$2,304 , respectively, due to stores sold in 2021 and 2020.
Tenant Reinsurance-Tenant reinsurance expense represents the costs that are
incurred to provide tenant reinsurance. We operated 1,973 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. 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 24 wholly-owned stores during the six months endedJune 30, 2021 and a total of 23 stores during the year endedDecember 31, 2020 . Other Revenues and Expenses The following table presents information about other revenues and expenses for the periods indicated: For the Three Months Ended June For the Six Months Ended June 30, 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Gain on real estate $ - $ - $ -
- % $ 63,883 $ - $ 63,883 (100.0) %
transactions
Interest expense (40,240) (41,039) 799 (1.9) % (80,935) (85,397) 4,462 (5.2) % Non-cash interest expense - (1,233) 1,233 (100.0) % - (2,442) 2,442 (100.0) % related to amortization of discount on equity component of exchangeable senior notes Interest income 12,838 1,669 11,169 669.2 % 25,142 3,343 21,799 652.1 % Equity in earnings and 8,322 5,044 3,278 65.0 % 15,278 10,087 5,191 51.5 % 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 % 6,251 - 6,251 100.0 % Income tax expense (5,421) (3,177) (2,244) 70.6 % (9,558) (5,356) (4,202) 78.5 % Total other revenues & expenses, net$ (18,250) $ (38,736) $ 20,486 (52.9) %$ 20,061 $ (79,765) $ 99,826 (125.2) % Gain on Real Estate Transactions-During the six months endedJune 30, 2021 , we sold 16 stores to a newly established unconsolidated joint venture. We recognized a total gain of$64,804 related to this transaction. This gain was partially offset by losses related to the sale of notes receivable and solar assets. Interest Expense-The decrease in interest expense during the six months endedJune 30, 2021 was primarily the result of a lower weighted average interest rate compared to the same period in the prior year, as well as a shift in outstanding balances between fixed- and variable-rate debt. 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 ourOperating Partnership . The 2015 Notes had an effective interest rate of 4.0% relative to the carrying amount of the liability. The exchangeable senior notes were paid off in full during October andNovember 2020 .
Interest Income-Interest income represents interest earned on bridge loans,
notes receivable and debt securities and income earned on notes receivable from
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during the three and six months ended June 30, 2021 was primarily the result of
interest earned on these loans as well as interest earned from a senior
mezzanine note receivable with a principal amount of $103,000 , which was
purchased in July 2020 , and our investment in preferred stock of JCAP, which was
purchased in November 2020 for $300,000 . The interest related to this investment
accrues quarterly. A portion of the interest accrued will be paid out each
quarter beginning on the first anniversary of the issuance date, with the
remainder to be received upon maturity.
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 investment in preferred stock of SmartStop, which was purchased in
October 2019 for $150,000 with another $50,000 invested in October 2020 . The
increase for the three and six months ended June 30, 2021 related primarily to
the dividend income from the additional SmartStop preferred stock purchased in
October 2020 .
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 and six 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 June For the Six Months Ended June
30, 30,
2021 2020 2021 2020
Net income attributable to common stockholders $ 167,948 Adjustments:
Real estate depreciation 56,470 53,367 112,285 106,293 Amortization of intangibles 1,008 538 1,701 1,155 Gain on real estate transactions - - (63,883) -
Unconsolidated joint venture real estate depreciation and amortization
3,079 2,224 5,584 4,388
Unconsolidated joint venture gain on sale of real estate assets and purchase of partner's interest
(6,251) - (6,251) -
Distributions paid on
(572) (572) (1,144) (1,144)
Income allocated to
10,631 8,346 23,134 16,329
Funds from operations attributable to common
stockholders and unit holders $ 232,313 SAME-STORE RESULTS
Our same-store pool for the periods presented consists of 860 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 June For the Six Months Ended June
30, Percent 30, Percent
2021 2020 Change 2021 2020 Change
Same-store rental revenues $ 294,772 $ 259,585 13.6 % $ 573,653 $ 526,318 9.0 %
Same-store operating expenses 74,848 76,600 (2.3) % 152,736 154,608 (1.2) %
Same-store net operating income $ 219,924 $ 182,985 20.2 % $ 420,917 $ 371,710 13.2 %
Same-store square foot occupancy as of quarter end 97.0% 94.2% 97.0% 94.2% Properties included in same-store 860 860 860 860 Same-store revenues for the three and six months endedJune 30, 2021 increased due to higher average occupancy and higher average rates to new and existing customers. For the three months endedJune 30, 2021 , revenue also increased due to higher late fees and lower bad debt, partially offset by higher discounts. Same-store expenses were lower for the three and six months endedJune 30, 2021 due to decreases in payroll and marketing expense, partially offset by increases in property taxes and credit card processing fees. 33 --------------------------------------------------------------------------------
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 June For the Six Months Ended June
30, 30,
2021 2020 2021 2020
Net Income $ 178,579 $ 111,257 $ 394,080 $ 227,419
Adjusted to exclude:
Gain on real estate transactions - - (63,883) -
Equity in earnings and dividend income from
unconsolidated real estate entities (8,322) (5,044) (15,278) (10,087)
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) -
Interest expense 40,240 42,272 80,935 87,839
Depreciation and amortization 59,570 56,018 118,169 111,293
Income tax expense 5,421 3,177 9,558 5,356
General and administrative 26,341 25,337 49,881 48,348
Management fees, other income and interest
income (27,634) (14,525) (55,583) (28,335)
Net tenant insurance (35,599) (28,220) (68,057) (55,155)
Non-same store rental revenue (26,728) (19,727) (51,440) (39,697)
Non-same store operating expense 14,307 12,440 28,786 24,729
Total same-store net operating income $ 219,924 $
182,985
Same-store rental revenues$ 294,772 $ 259,585 $ 573,653 $ 526,318 Same-store operating expenses 74,848 76,600 152,736 154,608 Same-store net operating income$ 219,924 $ 182,985 $ 420,917 $ 371,710 CASH FLOWS Cash flows from operating activities for the six months endedJune 30, 2021 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 34 --------------------------------------------------------------------------------
significant components are as follows:
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