EXTRA SPACE STORAGE INC. MANAGEMENT DESCRIPTION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Form 10-Q)

Sub Levels


Amounts are in thousands, except for data storage and sharing

word of caution


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
ended December 31, 2022. 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."

Significant 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 ended December 31, 2022 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 typically 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.

On April 3, 2023, we entered into a definitive merger agreement for an all-stock
transaction with Life Storage, Inc. ("Life Storage"), Life Storage LP (the
"Operating Partnership"), Extra Space Storage LP ("Extra Space OP"), Eros Merger
Sub, LLC ("Eros Merger Sub") and Eros OP Merger Sub, LLC ("Eros OP Merger Sub"),
pursuant to which Eros Merger Sub will merge with and into Life Storage (the
"company merger"), with Life Storage surviving the company merger as our wholly
owned subsidiary and (b) following certain conversion and contributions
transactions, Eros OP Merger Sub will merge with and into the Operating
Partnership (the "partnership merger" and together with the company merger, the
"mergers"), with the Operating Partnership surviving the partnership merger and
becoming a wholly owned subsidiary of Extra Space OP. Under the terms of the
merger agreement, Life Storage stockholders will receive 0.895 of an Extra Space
common share for each Life Storage share they own for estimated total
consideration of $12.7 billion, based on Life Storage's closing share price on
March 31, 2023. The combined company will own and/or manage over 3,500 locations
and over 264.0 million net rentable square feet. The transaction is currently
expected to close in the second half of 2023, subject to the approval of our
stockholders and Life Storage stockholders and satisfaction of other customary
closing conditions.


PROPERTIES

As of March 31, 2023, we owned or had ownership interests in 1,457 operating
stores. Of these stores, 1,133 are wholly-owned, and 323 are in unconsolidated
joint ventures. In addition, we managed an additional 931 stores for third
parties bringing the total number of stores which we own and/or manage to 2,388.
These stores are located in 41 states and Washington, 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 of March 31, 2023, approximately 1,380,000 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
of March 31, 2023, the average length of stay was approximately 16.6 months.

The average annual rent per square foot for our existing customers at stabilized
stores, net of discounts and bad debt, was $21.05 for the three months ended
March 31, 2023, compared to $19.47 for the three months ended March 31, 2022.
Average annual rent per square foot for new leases was $17.00 for the three
months ended March 31, 2023, compared to $19.23 for the three months ended March
31, 2022. The average discounts, as a percentage of rental revenues, at all
stabilized properties during these periods were 2.4% and 3.0%, 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 provides additional information about Net Rentable Square Feet and Number of Stores by State.

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                                                                                                                March 31, 2023
                                              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                679,423                   2                      150,808                   5                 331,376             16                       1,161,607

Arizona                                 25              1,782,842                  11                      838,314                  22               1,886,960             58                       4,508,116

California                             177             13,674,825                  49                    3,593,534                 103               9,438,394            329                      26,706,753
Colorado                                17              1,149,673                   9                      664,192                  26               1,883,566             52                       3,697,431
Connecticut                              7                538,516                   7                      575,936                   9                 565,783             23                       1,680,235
Delaware                                 -                      -                   2                      143,615                   3                 229,006              5                         372,621
Florida                                112              8,676,790                  45                    3,780,667                 113               8,775,945            270                      21,233,402
Georgia                                 68              5,270,188                  15                    1,216,731                  25               1,916,018            108                       8,402,937
Hawaii                                  14                943,023                   -                            -                   3                 159,393             17                       1,102,416
Idaho                                    2                131,444                   -                            -                   2                 144,965              4                         276,409
Illinois                                60              3,761,398                  10                      740,804                  32               2,323,422            102                       6,825,624
Indiana                                 91              3,947,901                   1                       57,786                  21               1,511,350            113                       5,517,037

Kansas                                   1                 50,209                   2                      108,920                   3                 229,403              6                         388,532
Kentucky                                13                961,009                   1                       51,771                   9                 784,596             23                       1,797,376
Louisiana                                5                386,884                   -                            -                  13                 968,790             18                       1,355,674
Maine                                    -                      -                   -                            -                   8                 572,816              8                         572,816
Maryland                                35              2,953,703                  11                      898,245                  43               3,137,011             89                       6,988,959
Massachusetts                           47              3,001,958                   9                      614,539                  29               1,819,757             85                       5,436,254
Michigan                                 8                667,804                   4                      309,126                  11                 831,784             23                       1,808,714
Minnesota                                7                584,539                   4                      304,397                  16               1,171,915             27                       2,060,851
Mississippi                              3                234,295                   -                            -                   1                  65,368              4                         299,663
Missouri                                 6                431,181                   2                      119,600                  13                 986,582             21                       1,537,363

Nebraska                                 -                      -                   -                            -                   3                 278,106              3                         278,106
Nevada                                  14              1,039,847                   4                      474,001                   8                 817,803             26                       2,331,651
New Hampshire                            2                134,764                   2                       84,165                   9                 483,879             13                         702,808
New Jersey                              64              5,116,539                  17                    1,228,585                  40               3,028,054            121                       9,373,178
New Mexico                              11                712,687                  10                      683,410                  13                 955,943             34                       2,352,040
New York                                28              2,050,035                  18                    1,512,084                  37               2,274,036             83                       5,836,155
North Carolina                          23              1,728,522                   5                      401,432                  21               1,642,836             49                       3,772,790

Ohio                                    24              1,464,162                   5                      325,295                  10                 766,260             39                       2,555,717
Oklahoma                                 1                 61,503                   -                            -                  20               1,550,456             21                       1,611,959
Oregon                                   8                550,177                   1                       65,245                  10                 738,443             19                       1,353,865
Pennsylvania                            21              1,547,250                   9                      680,007                  38               2,767,209             68                       4,994,466
Rhode Island                             2                138,252                   -                            -                   5                 425,653              7                         563,905
South Carolina                          23              1,718,988                  11                      708,356                  28               2,358,398             62                       4,785,742

Tennessee                               22              1,855,601                  13                      880,881                  12                 890,194             47                       3,626,676
Texas                                  111              9,109,526                  30                    2,369,336                  87               7,617,215            228                      19,096,077
Utah                                    10                729,132                   -                            -                  24               1,951,598             34                       2,680,730

Virginia                                53              4,271,375                   9                      703,437                  27               1,814,830             89                       6,789,642
Washington                               9                685,706                   -                            -                  13               1,057,123             22                       1,742,829
Washington, DC                           1                100,019                   1                      103,618                   4                 311,337              6                         514,974

Wisconsin                                -                      -                   4                      371,423                  12                 921,101             16                       1,292,524

Totals                               1,134             82,841,690                 323                   24,760,260                 931              72,384,674          2,388                     179,986,624


(1) Excludes 17,000 units related to Bargold transactions. See Note 7 of Notes to Condensed Consolidated Financial Statements.

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Operation result

Ended 3-month comparison March 31, 2023 and in 2022

overview


Results for the three months ended March 31, 2023 included the operations of
1,457 stores (1,133 wholly-owned, one in a consolidated joint venture, and 323
in joint ventures accounted for using the equity method) compared to the results
for the three months ended March 31, 2022, which included the operations of
1,283 stores (995 wholly-owned, zero in consolidated joint ventures, and 288 in
joint ventures accounted for using the equity method).

Earnings


The following table presents information on revenues earned for the periods
indicated:


                                                        For the Three Months Ended March
                                                                      31,
                                                            2023                2022            $ Change            % Change
Revenues:
Property rental                                         $  433,962          $ 379,808          $ 54,154                 14.3  %
Tenant reinsurance                                          47,704             43,797             3,907                  8.9  %
Management fees and other income                            21,384             19,957             1,427                  7.2  %
Total revenues                                          $  503,050          $ 443,562          $ 59,488                 13.4  %



Property Rental-The increase in property rental revenues for the three months
ended March 31, 2023 was primarily the result of an increase of $26,692 at our
stabilized stores related primarily to higher average rates to existing
customers. Property rental revenue also increased by $21,109 associated with
acquisitions completed in 2023 and 2022. We acquired one wholly-owned store
during the three months ended March 31, 2023 and a total of 153 stores during
the year ended December 31, 2022.

Tenant Reinsurance – The increase in tenant reinsurance revenue was primarily due to an increase in the number of stores operated. Operates 2,388 stores March 31, 2023 compared to 2,130 stores March 31, 2022.


Management Fees and Other Income-Management fees and other income primarily
represent the fees collected for our management of stores owned by third parties
and unconsolidated joint ventures and other transaction fee income. The increase
for the three months ended March 31, 2023 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 of March 31, 2023, we
managed 1,255 stores for joint ventures and third parties, compared to 1,135
stores as of March 31, 2022.

expenses


The following table presents information on expenses for the periods indicated:
                                                            For the Three Months Ended March
                                                                          31,
                                                                2023                2022            $ Change            % Change
Expenses:
Property operations                                         $  117,166          $ 103,542          $ 13,624                 13.2  %
Tenant reinsurance                                               9,089              7,042             2,047                 29.1  %

General and administrative                                      34,763             29,762             5,001                 16.8  %
Depreciation and amortization                                   78,490             67,906            10,584                 15.6  %
Total expenses                                              $  239,508          $ 208,252          $ 31,256                 15.0  %



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Property Operations-The increase in property operations expense during the three
months ended March 31, 2023 consists primarily of an increase of $7,006 related
to acquisitions completed in 2023 and 2022. We acquired one wholly-owned store
during the three months ended March 31, 2023 and a total of 153 stores during
the year ended December 31, 2022. Additionally, for the three months ended March
31, 2023 there was an increase of $4,394 at our stabilized stores primarily due
to payroll, marketing, credit card processing fees, utilities and insurance,
partially offset by repairs and maintenance and property taxes.

Tenant Reinsurance – Tenant Reinsurance Expenses represent the costs incurred to provide tenant reinsurance. Operates 2,388 stores March 31, 2023 compared to 2,130 stores March 31, 2022.


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 months ended March 31, 2023 increases relate in part to the
acquisition of Bargold in June 2022 and 106 stores added with the Storage
Express acquisition in September 2022 compared to the same period last year.

Depreciation and Amortization-Depreciation and amortization expense increased as
a result of the acquisition of new stores. We acquired one wholly-owned store
during the three months ended March 31, 2023 and a total of 153 stores during
the year ended December 31, 2022.

Other balance


The following table presents information about other revenues and expenses for
the periods indicated:
                                                        For the Three Months Ended March
                                                                      31,
                                                            2023                2022             $ Change            % Change

Interest expense                                           (80,099)           (42,538)           (37,561)                 88.3  %

Interest income                                             19,438             18,989                449                   2.4  %

Equity in earnings and dividend income from                 10,305              9,097              1,208                  13.3  %

Unconsolidated Real Estate Entities


Income tax expense                                          (4,308)            (3,141)            (1,167)                 37.2  %
Total other revenues & expenses, net                    $  (54,664)         $ (17,593)         $ (37,071)                210.7  %



Interest Expense-The increase in interest expense during the three months ended
March 31, 2023 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 months ended March 31, 2023 was primarily the
result of an increase in the notes receivable for our bridge loan program along
with an increase in interest rates.

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.

Income tax expense – increased income tax expense for the three months ended
March 31, 2023 This was primarily due to higher book value income and lower permanent tax credits related to stock awards.

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Operating funds


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 shows the calculation of FFO for the periods indicated.

Three months ending in March

                                                                                          31,
                                                                                2023                2022
Net income attributable to common stockholders                              $  196,304          $ 203,579

Adjustments:
Real estate depreciation                                                        71,248             62,692
Amortization of intangibles                                                      4,170              2,766

Real estate depreciation of non-consolidated joint venture business

      4,939              3,853

Distribution payment date Series A Preferred Operating Partnership unit

       (159)              (572)

income allocated to operating partnership Non-controlling interest

     12,574             14,138

Funds from operations attributable to ordinary shareholders and unitholders $289,076 $286,456




SAME-STORE RESULTS

Our same-store pool for the periods presented consists of 914 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.
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                                                                  For the Three Months Ended March
                                                                                31,                         Percent
                                                                      2023                2022               Change
Same-store rental revenues
Net rental income                                                 $  370,630          $ 345,875                  7.2  %
Other operating income                                                13,462             11,748                 14.6  %
Total same-store rental revenues                                     384,092            357,623                  7.4  %

Same-store operating expenses
Payroll and benefits                                                  20,842             20,060                  3.9  %
Marketing                                                              6,172              5,560                 11.0  %
Office expense                                                        11,979             10,679                 12.2  %
Property operating expense                                             9,863              8,828                 11.7  %
Repairs and maintenance                                                6,417              7,486                (14.3) %
Property taxes                                                        34,346             34,790                 (1.3) %
Insurance                                                              3,622              2,713                 33.5  %
Total same-store operating expenses                                   93,241             90,116                  3.5  %

Same-store net operating income                                   $  290,851          $ 267,507                  8.7  %

Same-store square foot occupancy as of quarter end                    93.5%              94.3%
Properties included in same-store                                      914                914


Same-store revenues for the three months ended March 31, 2023 increased compared
to the same period in 2022 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 months ended March 31, 2023 compared
to the same period in 2022 due to increases in payroll, marketing, credit card
processing fees, utilities and insurance, partially offset by saving in repairs
and maintenance and property taxes.
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The following table presents a reconciliation of comparable store net operating income and net income presented in the Condensed Consolidated Statements of Income for the periods indicated.

                                                                     For the Three Months Ended March
                                                                                   31,
                                                                         2023                2022
Net Income                                                           $  208,878          $ 217,717
Adjusted to exclude:

Equity in earnings and dividend income from unconsolidated real
estate entities                                                         (10,305)            (9,097)

Interest expense                                                         80,099             42,538
Depreciation and amortization                                            78,490             67,906
Income tax expense                                                        4,308              3,141

General and administrative                                               34,763             29,762
Management fees, other income and interest income                       (40,822)           (38,946)
Net tenant insurance                                                    (38,615)           (36,755)
Non same-store rental revenue                                           (49,870)           (22,185)
Non same-store operating expense                                         23,925             13,426
Total same-store net operating income                                $  

290,851 $267,507


Same-store rental revenues                                           $  384,092          $ 357,623
Same-store operating expenses                                            93,241             90,116
Same-store net operating income                                      $  290,851          $ 267,507



CASH FLOWS

Cash flows from operating activities for the three months ended March 31, 2023
decreased when compared to the same period in the prior year. 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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