Item 8. Financial Statements and Supplementary Data

EXTRA SPACE STORAGE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SCHEDULES

Report of Independent Registered Public Accounting Firm	32
Consolidated Balance Sheets as of December 31, 2018 and 2017	33
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016	34
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016	35
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016	36
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016	39
Notes to Consolidated Financial Statements	40
Schedule III - Real Estate and Accumulated Depreciation	75

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Extra Space Storage Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Extra Space Storage Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2019 expressed an unqualified opinion thereon

Basis for Opinion

These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2005.

Salt Lake City, Utah

February 26, 2019

Extra Space Storage Inc.

Consolidated Balance Sheets

(dollars in thousands, except share data)

	December 31, 2018				December 31, 2017
Assets:
Real estate assets, net	$	7,491,831			$	7,132,431
Investments in unconsolidated real estate ventures	125,326				75,907
Cash and cash equivalents	57,496				55,683
Restricted cash	15,194				30,361
Other assets, net	158,131				166,571
Total assets	$	7,847,978			$	7,460,953
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,137,213			$	3,738,497
Exchangeable senior notes, net	562,374				604,276
Notes payable to trusts, net	30,928				117,444
Revolving lines of credit	81,000				94,000
Cash distributions in unconsolidated real estate ventures	45,197				5,816
Accounts payable and accrued expenses	101,461				96,087
Other liabilities	104,383				81,026
Total liabilities	5,062,556				4,737,146
Commitments and contingencies
Noncontrolling Interests and Equity:
Extra Space Storage Inc. stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued or outstanding	—				—
Common stock, $0.01 par value, 500,000,000 shares authorized, 127,103,750 and 126,007,091 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively	1,271				1,260
Additional paid-in capital	2,640,705				2,569,485
Accumulated other comprehensive income	34,650				33,290
Accumulated deficit	(262,902		)		(253,284		)
Total Extra Space Storage Inc. stockholders' equity	2,413,724				2,350,751
Noncontrolling interest represented by Preferred Operating Partnership units, net	153,096				159,636
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	218,602				213,420
Total noncontrolling interests and equity	2,785,422				2,723,807
Total liabilities, noncontrolling interests and equity	$	7,847,978			$	7,460,953

See accompanying notes.

Extra Space Storage Inc.

Consolidated Statements of Operations

(dollars in thousands, except share data)

	For the Year Ended December 31,
	2018				2017				2016
Revenues:
Property rental	$	1,039,340			$	967,229			$	864,742
Tenant reinsurance	115,507				98,401				87,291
Management fees and other income	41,757				39,379				39,842
Total revenues	1,196,604				1,105,009				991,875
Expenses:
Property operations	291,695				271,974				250,005
Tenant reinsurance	25,707				19,173				15,555
Acquisition related costs and other	—				—				12,111
General and administrative	81,256				78,961				81,806
Depreciation and amortization	209,050				193,296				182,560
Total expenses	607,708				563,404				542,037
Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate	30,807				112,789				8,465
Income from operations	619,703				654,394				458,303
Interest expense	(178,436		)		(153,511		)		(133,479		)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(4,687		)		(5,103		)		(4,980		)
Interest income	5,292				6,736				10,998
Income before equity in earnings of unconsolidated real estate ventures and income tax expense	441,872				502,516				330,842
Equity in earnings of unconsolidated real estate ventures	14,452				15,331				12,895
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partners' interests	—				—				69,199
Income tax expense	(9,244		)		(3,625		)		(15,847		)
Net income	447,080				514,222				397,089
Net income allocated to Preferred Operating Partnership noncontrolling interests	(13,995		)		(14,989		)		(14,700		)
Net income allocated to Operating Partnership and other noncontrolling interests	(17,796		)		(20,220		)		(16,262		)
Net income attributable to common stockholders	$	415,289			$	479,013			$	366,127
Earnings per common share
Basic	$	3.29			$	3.79			$	2.92
Diluted	$	3.27			$	3.76			$	2.91
Weighted average number of shares
Basic	126,087,487				125,967,831				125,087,554
Diluted	133,159,033				134,155,771				125,948,076

See accompanying notes.

Extra Space Storage Inc.

Consolidated Statements of Comprehensive Income

(amounts in thousands)

	For the Year Ended December 31,
	2018				2017				2016
Net income	$	447,080			$	514,222			$	397,089
Other comprehensive income:
Change in fair value of interest rate swaps	1,430				17,308				24,598
Total comprehensive income	448,510				531,530				421,687
Less: comprehensive income attributable to noncontrolling interests	31,861				35,997				32,438
Comprehensive income attributable to common stockholders	$	416,649			$	495,533			$	389,249

See accompanying notes

Extra Space Storage Inc. Consolidated Statements of Stockholders' Equity (amounts in thousands, except share data)
	Noncontrolling Interests																								Extra Space Storage Inc. Stockholders' Equity
	Preferred Operating Partnership																Operating Partnership				Other											Additional Paid-in Capital				Accumulated Other Comprehensive Income				Accumulated Deficit				Total Noncontrolling Interests and Equity
	Series A				Series B				Series C				Series D					Shares			Par Value
Balances at Balances at December 31, 2015	$	14,189			$	41,902			$	10,730			$	13,710			$	202,834			$	162			124,119,531			$	1,241			$	2,431,754			$	(6,352	)		$	(337,566	)		$	2,372,604
Issuance of common stock upon the exercise of options	—				—				—				—				—				—				97,855			—				1,444				—				—				1,444
Restricted stock grants issued	—				—				—				—				—				—				119,931			2								—				—				2
Restricted stock grants cancelled	—				—				—				—				—				—				(9,947	)		—				—				—				—				—
Issuance of common stock, net of offering costs	—				—				—				—				—				—				1,381,300			14				123,408				—				—				123,422
Compensation expense related to stock-based awards	—				—				—				—				—				—				—			—				8,045				—				—				8,045
Purchase of remaining equity interest in existing consolidated joint venture	—				—				—				—				800				(162		)		—			—				(638		)		—				—				—
Issuance of Operating Partnership units in conjunction with acquisitions	—				—				—				—				7,247				—				—			—				—				—				—				7,247
Redemption of Operating Partnership units for sale of property	—				—				—				—				(7,689		)		—				—			—								—				—				(7,689		)
Redemption of Operating Partnership units for common stock and cash	—				—				—				—				(1,083		)		—				23,850			—				577				—				—				(506		)
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions	—				—				—				67,193				—				—				—			—				—				—				—				67,193
Repurchase of equity portion of 2013 exchangeable senior notes	—				—				—				—				—				—				148,940			2				(874		)		—				—				(872		)
Net income	7,645				2,514				2,570				1,971				16,262				—				—			—				—				—				366,127				397,089
Other comprehensive income	201				—				—				—				1,275				—				—			—				—				23,122				—				24,598
Tax effect from vesting of restricted stock grants and stock option exercises	—				—				—				—				—				—				—			—				2,404				—				—				2,404
Distributions to Operating Partnership units held by noncontrolling interests	(7,650		)		(2,514		)		(2,570		)		(1,971		)		(16,292		)		—				—			—				—				—				—				(30,997		)
Dividends paid on common stock at $2.93 per share	—				—				—				—				—				—				—			—				—				—				(367,818		)		(367,818		)
Balances at Balances at December 31, 2016	$	14,385			$	41,902			$	10,730			$	80,903			$	203,354			$	—			125,881,460			$	1,259			$	2,566,120			$	16,770			$	(339,257	)		$	2,596,166

Extra Space Storage Inc. Consolidated Statements of Stockholders' Equity (amounts in thousands, except share data)
	Noncontrolling Interests																								Extra Space Storage Inc. Stockholders' Equity
	Preferred Operating Partnership																Operating Partnership				Other											Additional Paid-in Capital				Accumulated Other Comprehensive Income				Accumulated Deficit				Total Noncontrolling Interests and Equity
	Series A				Series B				Series C				Series D					Shares			Par Value
Balances at Balances at December 31, 2016	$	14,385			$	41,902			$	10,730			$	80,903			$	203,354			$	—			125,881,460			$	1,259			$	2,566,120			$	16,770			$	(339,257	)		$	2,596,166
Issuance of common stock upon the exercise of options	—				—				—				—				—				—				38,418			—				1,266				—				—				1,266
Restricted stock grants issued	—				—				—				—				—				—				95,392			1				(1		)		—				—				—
Restricted stock grants cancelled	—				—				—				—				—				—				(8,179	)		—				—				—				—				—
Compensation expense related to stock-based awards	—				—				—				—				—				—				—			—				9,561				—				—				9,561
Issuance of Operating Partnership units in conjunction with acquisitions	—				—				—				—				7,618				—				—			—								—				—				7,618
Redemption of Operating Partnership units for cash	—				—				—				—				(1,238		)		—				—			—				(1,272		)		—				—				(2,510		)
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions	—				—				—				11,161				—				—				—			—				—				—				—				11,161
Noncontrolling Interest in consolidated joint venture	—				—				—				—				—				216				—			—				—				—				—				216
Repurchase of equity portion of 2013 exchangeable senior notes	—				—				—				—				—				—				—			—				(6,189		)		—				—				(6,189		)
Net income (loss)	6,300				2,514				2,703				3,472				20,317				(97		)		—			—				—				—				479,013				514,222
Other comprehensive income	106				—				—				—				682				—				—			—				—				16,520				—				17,308
Distributions to Operating Partnership units held by noncontrolling interests	(5,851		)		(2,514		)		(2,703		)		(3,472		)		(17,432		)		—				—			—				—				—				—				(31,972		)
Dividends paid on common stock at $3.12 per share	—				—				—				—				—				—				—			—				—				—				(393,040		)		(393,040		)
Balances at Balances at December 31, 2017	$	14,940			$	41,902			$	10,730			$	92,064			$	213,301			$	119			126,007,091			$	1,260			$	2,569,485			$	33,290			$	(253,284	)		$	2,723,807

Extra Space Storage Inc. Consolidated Statements of Stockholders' Equity (amounts in thousands, except share data)
	Noncontrolling Interests																								Extra Space Storage Inc. Stockholders' Equity
	Preferred Operating Partnership																Operating Partnership				Other											Additional Paid-in Capital				Accumulated Other Comprehensive Income				Accumulated Deficit				Total Noncontrolling Interests and Equity
	Series A				Series B				Series C				Series D					Shares			Par Value
Balances at Balances at December 31, 2017	$	14,940			$	41,902			$	10,730			$	92,064			$	213,301			$	119			126,007,091			$	1,260			$	2,569,485			$	33,290			$	(253,284	)		$	2,723,807
Issuance of common stock upon the exercise of options	—				—				—				—				—				—				54,575			—				1,169				—				—				1,169
Restricted stock grants issued	—				—				—				—				—				—				85,066			1				—				—				—				1
Restricted stock grants cancelled	—				—				—				—				—				—				(11,771	)		—				—				—				—				—
Issuance of common stock, net of offering costs	—				—				—				—				—				—				933,789			10				90,221				—				—				90,231
Compensation expense related to stock-based awards	—				—				—				—				—				—				—			—				11,176				—				—				11,176
Repayment of receivable for preferred operating units pledged as collateral on loan	—				—				495				—				—				—				—			—				—				—				—				495
Issuance of Operating Partnership units in conjunction with acquisitions	—				—				—				—				1,877				—				—			—				—				—				—				1,877
Redemption of Operating Partnership units for stock	—				—				—				—				(1,337		)		—				35,000			—				1,337				—				—				—
Redemption of Operating Partnership units for cash	—				—				—				—				(1,126		)		—				—			—				(1,432		)		—				—				(2,558		)
Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units	—				—				(6,851		)		—				6,851				—				—			—				—				—				—				—
Noncontrolling interest in consolidated joint venture	—				—				—				—				—				122				—			—				—				—				—				122
Repurchase of equity portion of 2013 exchangeable senior notes	—				—				—				—				—				—				—			—				(31,251		)		—				—				(31,251		)
Net income (loss)	5,035				2,514				2,731				3,715				17,797				(1		)		—			—				—				—				415,289				447,080
Other comprehensive income	12				—				—				—				58				—				—			—				—				1,360				—				1,430
Distributions to Operating Partnership units held by noncontrolling interests	(5,231		)		(2,514		)		(2,731		)		(3,715		)		(19,059		)		—				—			—				—				—				—				(33,250		)
Dividends paid on common stock at $3.36 per share	—				—				—				—				—				—				—			—				—				—				(424,907		)		(424,907		)
Balances at Balances at December 31, 2018	$	14,756			$	41,902			$	4,374			$	92,064			$	218,362			$	240			127,103,750			$	1,271			$	2,640,705			$	34,650			$	(262,902	)		$	2,785,422

See accompanying notes.

Extra Space Storage Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

	For the Year Ended December 31,
	2018				2017				2016
Cash flows from operating activities:
Net income	$	447,080			$	514,222			$	397,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	209,050				193,296				182,560
Amortization of deferred financing costs	14,286				12,289				12,922
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	4,687				5,103				4,980
Non-cash interest expense related to amortization of premium on notes payable	—				—				(872		)
Compensation expense related to stock-based awards	11,176				9,561				8,045
Gain on sale of real estate assets and purchase of joint venture partners' interests	—				—				(69,199		)
Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate	(30,807		)		(112,789		)		(8,465		)
Distributions from unconsolidated real estate ventures in excess of earnings	6,867				4,567				3,534
Changes in operating assets and liabilities:
Other assets	(1,664		)		(12,728		)		(1,614		)
Accounts payable and accrued expenses	2,736				(10,515		)		10,075
Other liabilities	14,384				(5,631		)		208
Net cash provided by operating activities	677,795				597,375				539,263
Cash flows from investing activities:
Acquisition of real estate assets	(426,388		)		(653,185		)		(1,086,523		)
Development and redevelopment of real estate assets	(60,677		)		(31,746		)		(23,279		)
Proceeds from sale of real estate assets, investments in real estate ventures and other assets	52,458				312,165				60,813
Investment in unconsolidated real estate ventures	(65,500		)		(17,944		)		(28,241		)
Return of investment in unconsolidated real estate ventures	49,130				581				16,953
Issuance of notes receivable	(13,850		)		—				(26,429		)
Principal payments received from notes receivable	25,226				44,869				42,785
Purchase of equipment and fixtures	(4,297		)		(7,819		)		(4,968		)
Net cash used in investing activities	(443,898		)		(353,079		)		(1,048,889		)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	90,231				—				123,424
Proceeds from notes payable and revolving lines of credit	1,413,030				1,325,623				1,900,357
Principal payments on notes payable and revolving lines of credit	(1,109,854		)		(1,088,679		)		(1,122,442		)
Principal payments on notes payable to trusts	(88,662		)		—				—
Deferred financing costs	(12,302		)		(6,967		)		(17,486		)
Repurchase of exchangeable senior notes	(80,270		)		(19,916		)		(22,195		)
Net proceeds from exercise of stock options	1,169				1,266				1,444
Proceeds from termination of interest rate cap	—				—				1,650
Payment of earnout from prior acquisition	—				—				(4,600		)
Redemption of Operating Partnership units held by noncontrolling interests	(2,558		)		(2,510		)		(506		)
Contributions from noncontrolling interests	122				201				—
Dividends paid on common stock	(424,907		)		(393,040		)		(367,818		)
Distributions to noncontrolling interests	(33,250		)		(31,972		)		(30,997		)
Net cash (used in) provided by financing activities	(247,251		)		(215,994		)		460,831
Net increase (decrease) in cash, cash equivalents, and restricted cash	(13,354		)		28,302				(48,795		)
Cash, cash equivalents, and restricted cash, beginning of the period	86,044				57,742				106,537
Cash, cash equivalents, and restricted cash end of the period	$	72,690			$	86,044			$	57,742
Supplemental schedule of cash flow information
Interest paid	$	159,474			$	136,202			$	122,265
Income taxes paid	730				5,648				14,864
Supplemental schedule of noncash investing and financing activities:
Redemption of Operating Partnership units held by noncontrolling interests for common stock
Noncontrolling interests in Operating Partnership	$	(1,337	)		$	—			$	(577	)
Common stock and paid-in capital	1,337				—				577
Tax effect from vesting of restricted stock grants and option exercises
Other assets	$	—			$	—			$	2,404
Additional paid-in capital	—				—				(2,404		)
Acquisitions of real estate assets
Real estate assets, net	$	88,842			$	51,455			$	84,163
Value of Operating Partnership units issued	(1,877		)		(14,428		)		(74,440		)
Notes payable assumed	(87,500		)		(24,055		)		(9,723		)
Investment in unconsolidated real estate ventures	535				(12,957		)		—
Other noncontrolling interests	—				(15		)		—
Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	778			$	3,509			$	8,497
Development and redevelopment of real estate assets	554				1,703				125
Accounts payable and accrued expenses	(1,332		)		(5,212		)		(8,622		)
Distribution of real estate from investments in unconsolidated real estate ventures
Real estate assets, net	$	—			$	—			$	25,055
Investments in unconsolidated real estate ventures	—				—				(25,055		)
Disposition of real estate assets
Real estate assets, net	$	—			$	—			$	(7,869	)
Operating Partnership units redeemed	—				—				7,869
Acquisition of noncontrolling interests
Operating Partnership units issued	$	—			$	—			$	(800	)
Other noncontrolling interests	—				—				162
Additional paid-in capital	—				—				638
Issuance of Preferred OP Units for additional investment in unconsolidated real estate venture
Preferred OP Units issued	$	—			$	(4,351	)		$	—
Investment in unconsolidated real estate ventures	—				4,351				—

See accompanying notes.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts in thousands, except store and share data, unless otherwise stated

1. DESCRIPTION OF BUSINESS

Extra Space Storage Inc. (the “Company”) is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”), formed as a Maryland corporation on April 30, 2004, to own, operate, manage, acquire, develop and redevelop professionally managed self-storage properties located throughout the United States. The Company was formed to continue the business of Extra Space Storage LLC and its subsidiaries, which had engaged in the self-storage business since 1977. The Company’s interest in its stores is held through its operating partnership, Extra Space Storage LP (the “Operating Partnership”), which was formed on May 5, 2004. The Company’s primary assets are general partner and limited partner interests in the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

The Company invests in stores by acquiring wholly-owned stores or by acquiring an equity interest in real estate entities. At December 31, 2018, the Company had direct and indirect equity interests in 1,111 storage facilities. In addition, the Company managed 536 stores for third parties bringing the total number of stores which it owns and/or manages to 1,647. These stores are located in 39 states, Washington, D.C. and Puerto Rico. The Company also offers tenant reinsurance at its owned and managed stores that insures the value of goods in the storage units.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly- or majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to change the presentation of Gain on real estate transactions, earnout from prior acquisitions, and impairment of real estate on the consolidated statement of operations. The Company has included Gain on real estate transactions, earnout from prior acquisitions, and impairment of real estate as a component of Income from operations to present gain and losses on sales of properties in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities and Exchange Commission has eliminated Rule 3-15(a) of Regulation S-X as part of Release No. 33-10532; 34-83875; IC-33203, which had required REITs to present gain and losses on sale of properties outside of continuing operations in the statement of operations.

Immaterial Correction to Consolidated Balance Sheets

In connection with the preparation of the financial statements for the quarter ended March 31, 2018, the Company determined that the negative balances in the "Investments in unconsolidated real estate ventures" line should be presented separately as liabilities. As a result, $5,816 should have been reported as "Cash distributions in unconsolidated real estate ventures" as of December 31, 2017. The Company concluded that the amount was not material to the consolidated balance sheet as of December 31, 2017 but has elected to present these amounts as liabilities in the accompanying financial statements for consistent presentation. The classification error had no effect on the previously reported consolidated statements of operations, comprehensive income, stockholders' equity or cash flows for the year ended December 31, 2017.

Variable Interest Entities

The Company accounts for arrangements that are not controlled through voting or similar rights as variable interest entities (“VIEs”). An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. A VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) the entity’s equity holders as a group either: (a) lack the power, through voting or similar rights, to direct the activities of the entity that most significantly impact the entity’s economic performance, (b) are not obligated to absorb expected losses of the entity if they occur, or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, the enterprise that is deemed to have a variable interest, or combination of variable interests, that provides the enterprise with a controlling financial interest in the VIE, is considered the primary beneficiary and must consolidate the VIE.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

The Company has concluded that under certain circumstances when the Company enters into arrangements for the formation of joint ventures, a VIE may be created under condition (i), (ii) (b) or (c) of the previous paragraph. For each VIE created, the Company has performed a qualitative analysis, including considering which party, if any, has the power to direct the activities most significant to the economic performance of each VIE and whether that party has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Company’s financial statements. Additionally, the Operating Partnership has notes payable to one trust that is a VIE under condition (ii)(a) above. Since the Operating Partnership is not the primary beneficiary of the trust, this VIE is not consolidated.

The Company’s investments in real estate joint ventures, where the Company has significant influence, but not control, and joint ventures which are VIEs in which the Company is not the primary beneficiary, are recorded under the equity method of accounting on the accompanying consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value Disclosures

Derivative financial instruments

Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate forward curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the Financial Accounting Standard Board’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall.

					Fair Value Measurements at Reporting Date Using
Description	December 31, 2018				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Other assets - Cash Flow Hedge Swap Agreements	$	42,324			$	—			$	42,324			$	—
Other liabilities - Cash Flow Hedge Swap Agreements	$	(2,131	)		$	—			$	(2,131	)		$	—

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

There were no transfers of assets and liabilities between Level 1 and Level 2 during the year ended December 31, 2018. The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of December 31, 2018 or 2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Long-lived assets held for use are evaluated for impairment when events or circumstances indicate there may be impairment. The Company reviews each store at least annually to determine if any such events or circumstances have occurred or exist. The Company focuses on stores where occupancy and/or rental income have decreased by a significant amount. For these stores, the Company determines whether the decrease is temporary or permanent, and whether the store will likely recover the lost occupancy and/or revenue in the short term. In addition, the Company reviews stores in the lease-up stage and compares actual operating results to original projections.

When the Company determines that an event that may indicate impairment has occurred, the Company compares the carrying value of the related long-lived assets to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the assets exceeds the undiscounted future net operating cash flows attributable to the assets. The impairment loss recognized equals the excess of net carrying value over the related fair value of the assets.

When real estate assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the fair value of the assets, net of selling costs. The Company compares the carrying value of the related long-lived assets to the undiscounted future net operating cash flows attributable to the assets (categorized within Level 3 of the fair value hierarchy). If the estimated fair value, net of selling costs, of the assets that have been identified as held for sale is less than the net carrying value of the assets, the Company would recognize a loss on the assets held for sale. The operations of assets held for sale or sold during the period are presented as part of normal operations for all periods presented.

The Company assesses annually whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired and when events or circumstances indicate that there may be impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment.

As of December 31, 2018 and 2017, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable-rate notes payable, revolving lines of credit and other liabilities reflected in the consolidated balance sheets at December 31, 2018 and 2017, approximate fair value.

The fair values of the Company’s notes receivable from Preferred Operating Partnership unit holders and other fixed rate notes receivable were based on the discounted estimated future cash flow of the notes (categorized within Level 3 of the fair value hierarchy); the discount rate used approximated the current market rate for loans with similar maturities and credit quality. The fair values of the Company’s fixed rate notes payable and notes payable to trusts were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximated current market rates for loans, or groups of loans, with similar maturities and credit quality. The fair value of the Company’s exchangeable senior notes was estimated using an average market price for similar securities obtained from a third party.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

The fair values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:

	December 31, 2018								December 31, 2017
	Fair Value				Carrying Value				Fair Value				Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	115,467			$	119,735			$	113,683			$	120,230
Fixed rate notes receivable	$	—			$	—			$	20,942			$	20,608
Fixed rate notes payable and notes payable to trusts	$	2,985,731			$	3,022,414			$	2,774,242			$	2,815,085
Exchangeable senior notes	$	620,149			$	575,000			$	719,056			$	624,259

Real Estate Assets

Real estate assets are stated at cost, less accumulated depreciation. Direct and allowable internal costs associated with the development, construction, renovation, and improvement of real estate assets are capitalized. Interest, property taxes, and other costs associated with development incurred during the construction period are capitalized. The construction period begins when expenditures for the real estate assets have been made and activities that are necessary to prepare the asset for its intended use are in progress. The construction period ends when the asset is substantially complete and ready for its intended use.

Expenditures for maintenance and repairs are charged to expense as incurred. Major replacements and betterments that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between five and 39 years.

Stores purchased at the time of certificate of occupancy issuance and stores purchased subsequent to the Company's adoption of ASU 2017-01 on January 1, 2017 are considered asset acquisitions. As such, the purchase price is allocated to the real estate assets acquired based on their relative fair values, which are estimated using significant unobservable inputs. The value of the tangible assets, consisting of land and buildings, is determined as if vacant. Intangible assets, which represent the value of existing tenant relationships, are recorded at their relative fair values based on the avoided cost to replace the current leases. The Company measures the value of tenant relationships based on the rent lost due to the amount of time required to replace existing customers, which is based on the Company’s historical experience with turnover in its stores. Any debt assumed as part of the acquisition is recorded at fair value based on current interest rates compared to contractual rates. Acquisition-related transactions costs are capitalized as part of the purchase price.

Intangible lease rights represent: (1) purchase price amounts allocated to leases on three stores that cannot be classified as ground or building leases; these rights are amortized to expense over the life of the leases and (2) intangibles related to ground leases on eight stores where the leases were assumed by the Company at rates that were lower than the current market rates for similar leases. The values associated with these assumed leases were recorded as intangibles, which will be amortized over the lease terms.

Real Estate Sales

In general, sales of real estate and related profits/losses are recognized when all consideration has changed hands and risks and rewards of ownership have been transferred. Certain types of continuing involvement preclude sale treatment and related profit recognition; other forms of continuing involvement allow for sale recognition but require deferral of profit recognition.

Investments in Unconsolidated Real Estate Ventures

The Company’s investments in real estate joint ventures, where the Company has significant influence, but not control and joint ventures which are VIEs in which the Company is not the primary beneficiary, are recorded under the equity method of accounting in the accompanying consolidated financial statements.

Under the equity method, the Company’s investment in real estate ventures is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the Company’s ownership interest in the earnings of each of the unconsolidated real estate ventures. For

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

the purposes of presentation in the statement of cash flows, the Company follows the “look through” approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets), in which case it is reported as an investing activity.

Cash and Cash Equivalents

The Company’s cash is deposited with financial institutions located throughout the United States and at times may exceed federally insured limits. The Company considers all highly liquid debt instruments with a maturity date of three months or less to be cash equivalents.

Restricted Cash

Restricted cash is comprised of letters of credit and escrowed funds deposited with financial institutions located throughout the United States relating to earnest money deposits on potential acquisitions, real estate taxes, insurance and capital expenditures.

Other Assets

Other assets consist of equipment and fixtures, rents receivable from our tenants, investments in trusts, notes and other receivables, other intangible assets, deferred tax assets, prepaid expenses and the fair value of interest rate swaps. Depreciation of equipment and fixtures is computed on a straight-line basis over three to five years.

Derivative Instruments and Hedging Activities

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Risk Management and Use of Financial Instruments

In the normal course of its ongoing business operations, the Company encounters economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is the risk of inability or unwillingness of tenants to make contractually required payments. Market risk is the risk of declines in the value of stores due to changes in rental rates, interest rates or other market factors affecting the value of stores held by the Company. The Company has entered into interest rate swap agreements to manage a portion of its interest rate risk.

Exchange of Common Operating Partnership Units

Redemption of common Operating Partnership units for shares of common stock, when redeemed under the original provisions of the Operating Partnership agreement, are accounted for by reclassifying the underlying net book value of the units from noncontrolling interest to the Company’s equity.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Revenue and Expense Recognition

Rental revenues are recognized as earned based upon amounts that are currently due from tenants. Leases are generally on month-to-month terms. Prepaid rents are recognized on a straight-line basis over the term of the leases. Promotional discounts are recognized as a reduction to rental income over the promotional period. Late charges, administrative fees and merchandise sales are recognized as income when earned. Equity in earnings of unconsolidated real estate entities is recognized based on the Company's ownership interest in the earnings of each of the unconsolidated real estate entities. Interest income is recognized as earned.

The Company's management fees are earned subject to the terms of the related management services agreements ("MSAs"). These MSAs provide that the Company will perform management services, which include leasing and operating the property and providing accounting, marketing, banking, maintenance and other services. These services are provided in exchange for monthly management fees, which are based on a percentage of revenues collected from stores owned by third parties and unconsolidated joint ventures. MSAs generally have original terms from three to five years, after which management services are provided on a month-to-month basis unless terminated. Management fees are due on the last day of each calendar month that management services are provided.

The Company accounts for the management services provided to a customer as a single performance obligation which are rendered over time each month. The total amount of consideration from the contract is variable as it is based on monthly revenues, which are influenced by multiple factors, some of which are outside the Company's control. Therefore, the Company recognizes the revenue at the end of each month once the uncertainty is resolved. Due to the standardized terms of the MSAs, the Company accounts for all MSAs in a similar, consistent manner. Therefore, no disaggregated information relating to MSAs is presented.

Property expenses, including utilities, property taxes, repairs and maintenance and other costs to manage the facilities are recognized as incurred. The Company accrues for property tax expense based upon invoice amounts and estimates. If these estimates are incorrect, the timing of expense recognition could be affected.

Tenant reinsurance premiums are recognized as revenue over the period of insurance coverage. The Company records an unpaid claims liability at the end of each period based on existing unpaid claims and historical claims payment history. The unpaid claims liability represents an estimate of the ultimate cost to settle all unpaid claims as of each period end, including both reported but unpaid claims and claims that may have been incurred but have not been reported. The Company uses a third party claims administrator to adjust all tenant reinsurance claims received. The administrator evaluates each claim to determine the ultimate claim loss and includes an estimate for claims that may have been incurred but not reported. Annually, a third party actuary evaluates the adequacy of the unpaid claims liability. Prior year claim reserves are adjusted as experience develops or new information becomes known. The impact of such adjustments is included in the current period operations. The unpaid claims liability is not discounted to its present value. Each tenant chooses the amount of insurance coverage they want through the tenant reinsurance program. Tenants can purchase policies in amounts of 2,000 dollars to 10,000 dollars of insurance coverage in exchange for a monthly fee. As of December 31, 2018, the average insurance coverage for tenants was approximately 2,900 dollars. The Company’s exposure per claim is limited by the maximum amount of coverage chosen by each tenant. The Company purchases reinsurance for losses exceeding a set amount for any one event. The Company does not currently have any amounts recoverable under the reinsurance arrangements.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

For the years ended December 31, 2018, 2017 and 2016, the number of claims made were 7,870, 5,671 and 4,055, respectively. The following table presents information on the portion of the Company’s unpaid claims liability, which is included in other liabilities on the Company's consolidated balance sheets, that relates to tenant insurance for the periods indicated:

	For the Year Ended December 31,
Tenant Reinsurance Claims:	2018				2017				2016
Unpaid claims liability at beginning of year	$	5,167			$	3,896			$	3,908
Claims and claim adjustment expense for claims incurred in the current year	15,800				11,700				7,250
Claims and claim adjustment expense (benefit) for claims incurred in the prior years	107				(203		)		87
Payments for current year claims	(11,010		)		(8,895		)		(5,423		)
Payments for prior year claims	(2,738		)		(1,331		)		(1,926		)
Unpaid claims liability at the end of the year	$	7,326			$	5,167			$	3,896

Advertising Costs

The Company incurs advertising costs primarily attributable to digital and other advertising. These costs are expensed as incurred. The Company recognized $16,153, $14,410 and $12,867 in advertising expense for the years ended December 31, 2018, 2017 and 2016, respectively, which are included in property operating expenses on the Company’s consolidated statements of operations.

Income Taxes

The Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). In order to maintain its qualification as a REIT, among other things, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income which meets certain criteria and is distributed annually to stockholders. The Company plans to continue to operate so that it meets the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. For any taxable year that the Company fails to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years. The Company is subject to certain state and local taxes. Provision for such taxes has been included in income tax expense on the Company’s consolidated statements of operations. For the year ended December 31, 2018, 0% (unaudited) of all distributions to stockholders qualified as a return of capital.

The Company has elected to treat its corporate subsidiary, Extra Space Management, Inc. (“ESMI”), as a taxable REIT subsidiary (“TRS”). In general, the Company’s TRS may perform additional services for tenants and may engage in any real estate or non-real estate related business. A TRS is subject to federal corporate income tax. ESM Reinsurance Limited, a wholly-owned subsidiary of ESMI, generates income from insurance premiums that are subject to federal corporate income tax and state insurance premiums tax.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. At December 31, 2018 and 2017, there were no material unrecognized tax benefits. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. As of December 31, 2018 and 2017, the Company had no interest or penalties related to uncertain tax provisions.

Stock-Based Compensation

The measurement and recognition of compensation expense for all share-based payment awards to employees and directors are based on estimated fair values. Awards granted are valued at fair value and any compensation expense is recognized over the service periods of each award.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Earnings Per Common Share

Basic earnings per common share is computed using the two-class method by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. All outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common stockholders; accordingly, they are considered participating securities that are included in the two-class method. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the weighted average number of basic shares and the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued, and is calculated using either the two-class, treasury stock or as if-converted method, whichever is most dilutive. Potential common shares are securities (such as options, convertible debt, Series A Participating Redeemable Preferred Units (“Series A Units”), Series B Redeemable Preferred Units (“Series B Units”), Series C Convertible Redeemable Preferred Units (“Series C Units”), Series D Redeemable Preferred Units (“Series D Units” and together with the Series A Units, Series B Units and Series C Units, the “Preferred OP Units") and common Operating Partnership units (“OP Units”)) that do not have a current right to participate in earnings of the Company but could do so in the future by virtue of their option, redemption or conversion right.

In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per common share, only potential common shares that are dilutive (those that reduce earnings per common share) are included. For the years ended December 31, 2018, 2017 and 2016, options to purchase approximately 36,075, 45,286, and 88,552 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

For the purposes of computing the diluted impact of the potential exchange of the Preferred OP Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, The Company divided the total value of the Preferred OP Units by the average share price of $90.30 for the year ended December 31, 2018.

The following table presents the number of weighted OP Units and Preferred OP Units, and the potential common shares, that were excluded from the computation of earnings per share as their effect would have been anti-dilutive:

	For the Year Ended December 31,
	2018			2017			2016
	Equivalent Shares (if converted)			Equivalent Shares (if converted)			Equivalent Shares (if converted)
Common OP Units	—			—			5,564,631
Series A Units (Variable Only)	—			—			875,480
Series B Units	464,033			533,174			499,966
Series C Units	312,075			377,135			353,646
Series D Units	1,019,524			—			552,796
	1,795,632			910,309			7,846,519

The Operating Partnership had $575,000 of its 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) issued and outstanding as of December 31, 2018. The 2015 Notes could potentially have a dilutive impact on the Company’s earnings per share calculations. The 2015 Notes are exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the 2015 Notes. The exchange price of the 2015 Notes was $92.80 per share as of December 31, 2018, and could change over time as described in the indenture. The Company has irrevocably agreed to pay only cash for the accreted principal amount of the 2015 Notes relative to its exchange obligations, but retained the right to satisfy the exchange obligation in excess of the accreted principal amount in cash and/or common stock.

Though the Company has retained that right, Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” requires an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and requires that those shares be included in the Company’s calculation of weighted average common shares outstanding for the

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

diluted earnings per share computation. As of December 31, 2018, the Company had repaid the principal and accrued interest of its Exchangeable Senior Notes due 2033 (the “2013 Notes”), and therefore, no shares underlying the 2013 Notes were included in the dilution calculation for 2018. For the years ended December 31, 2017 and 2016, 344,430 shares and 309,730 shares, respectively, related to the 2013 Notes were included in the computation for diluted earnings per share. For the years ended December 31, 2018, 2017 and 2016, no shares related to the 2015 Notes were included in the computation for diluted earnings per share as the exchange price exceeded the per share price of the Company’s common stock during this period.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series A Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the positive intent and ability to settle at least $101,700 of the instrument in cash (or net settle a portion of the Series A Units against the related outstanding note receivable), only the amount of the instrument in excess of $101,700 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by ASC 260-10-45-46.

The computation of earnings per share is as follows for the periods presented:

	For the Year Ended December 31,
	2018				2017				2016
Net income attributable to common stockholders	$	415,289			$	479,013			$	366,127
Earnings and dividends allocated to participating securities	(723		)		(975		)		(792		)
Earnings for basic computations	414,566				478,038				365,335
Earnings and dividends allocated to participating securities	723				—				792
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	22,831				30,088				—
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	(2,288		)		(3,119		)		—
Net income for diluted computations	$	435,832			$	505,007			$	366,127
Weighted average common shares outstanding:
Average number of common shares outstanding - basic	126,087,487				125,967,831				125,087,554
OP Units	5,675,547				5,590,831				—
Series A Units	875,480				875,480				—
Series D Units	—				1,081,561				—
Unvested restricted stock awards included for treasury stock method	244,215				—				299,585
Shares related to exchangeable senior notes and dilutive stock options	276,304				640,068				560,937
Average number of common shares outstanding - diluted	133,159,033				134,155,771				125,948,076
Earnings per common share
Basic	$	3.29			$	3.79			$	2.92
Diluted	$	3.27			$	3.76			$	2.91

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-9, “Revenue from Contracts with Customers,” ("Topic 606") which amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. Topic 606 outlines a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Topic 606 became effective for annual and interim periods beginning after December 15, 2017. The Company determined that its property rental revenue and tenant reinsurance revenue are not subject to the guidance in Topic 606, as they qualify as lease contract and insurance contracts, which are excluded from its scope. The Company's management fee revenue is included in the scope of Topic 606, and revenue recognized under the standard does not differ materially from revenue recognized under previous guidance. The Company adopted the standard

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

using the modified retrospective transition method as of January 1, 2018. The Company's adoption of Topic 606 did not result in a cumulative catch-up adjustment or any significant changes to financial statement line items.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which modifies the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. ASU 2016-02 will require entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. ASU 2016-02 requires that assets and liabilities be presented or disclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to these lease agreements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018. The Company plans to adopt the standard using the modified retrospective approach as of January 1, 2019. The Company expects to elect the package of practical expedients upon adoption, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. The Company estimates that the cumulative catch-up adjustment recorded upon adoption will not have a significant impact on retained earnings. The primary impact is expected to be related to the Company's 23 operating ground leases and two corporate facility leases under which it serves as lessee. The Company estimates the lease assets and lease liabilities to be between $90,000 and $110,000 related to its operating leases upon the adoption of Topic 842.

In October 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance as of January 1, 2018, and now presents restricted cash along with cash and cash equivalents in its consolidated statements of cash flows. Prior periods have been reclassified to conform to the current year's presentation.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," which provides guidance on whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Specifically, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. Additionally, ASU 2017-01 also provides other guidance providing a more robust framework to use in determining whether a set of assets and activities is a business. This guidance is effective for annual periods beginning after December 15, 2017. Early application of ASU 2017-01 is permitted for transactions for which the acquisition or disposition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued. The Company adopted the guidance in ASU 2017-01 prospectively to new acquisitions beginning on January 1, 2017. The adoption of this guidance resulted in a decrease in acquisition related costs, as the Company's acquisition of operating stores are considered asset acquisitions rather than business combinations under ASU 2017-01, and such costs are capitalized under the new guidance.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements for Accounting for Hedging Activities," which amends and simplifies existing guidance for the financial reporting of hedging relationships to allow companies to better portray the economic effects of risk management activities in their financial statements. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." ASU 2018-15 amends the accounting for implementation costs incurred in a hosting arrangement that is a service contract, and aligns them with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 also requires that entities amortize the capitalized implementation costs over the term of the hosting arrangement. ASU 2018-15 is effective for annual periods beginning after December 15, 2020, with early adoption permitted,

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

including early adoption in any interim period. The Company adopted this guidance on a prospective basis as of October 1, 2018. The adoption of this standard did not have a material impact on the Company's financial statements.

3. REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:

	December 31, 2018				December 31, 2017
Land - operating	$	1,825,133			$	1,731,915
Land - development	7,359				13,246
Buildings, improvements and other intangibles	6,743,355				6,286,762
Intangible assets - tenant relationships	119,557				114,375
Intangible lease rights	12,443				12,443
	8,707,847				8,158,741
Less: accumulated depreciation and amortization	(1,262,438		)		(1,060,060		)
Net operating real estate assets	7,445,409				7,098,681
Real estate under development/redevelopment	46,422				33,750
Net real estate assets	$	7,491,831			$	7,132,431
Real estate assets held for sale included in net real estate assets	$	13,032			$	10,276

As of December 31, 2018, the Company had one operating store and one parcel of land classified as held for sale. The estimated fair value less selling costs of these assets are greater than the carrying value of the assets, and therefore no loss has been recorded related to these assets. These assets held for sale are included in the self-storage operations segment of the Company’s segment information.

The Company amortizes to expense intangible assets—tenant relationships on a straight-line basis over the average period that a tenant is expected to utilize the facility (currently estimated at 18 months). The Company amortizes to expense the intangible lease rights over the terms of the related leases. Amortization related to the tenant relationships and lease rights was $9,050, $14,349, and $21,133 for the years ended December 31, 2018, 2017 and 2016, respectively. The remaining balance of the unamortized lease rights will be amortized over the next one year to 43 years. Accumulated amortization related to intangibles was $121,238 and $112,347 as of December 31, 2018 and 2017, respectively.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

4. PROPERTY ACQUISITIONS AND DISPOSITIONS

The following table shows the Company’s acquisitions of stores for the years ended December 31, 2018 and 2017. The table excludes purchases of raw land or improvements made to existing assets.

			Consideration Paid																									Total
Quarter	Number of Stores		Total				Cash Paid				Loan Assumed			Non- controlling interests			Investments in Real Estate Ventures			Net Liabilities/ (Assets) Assumed			Value of OP Units Issued			Number of OP Units Issued		Real estate assets
Q4 2018	6		$	74,852			$	74,868			$	—		$	—		$	—		$	(16	)	$	—		—		$	74,852
Q3 2018	6		74,694				71,989				—			—			—			2,705			—			—		74,694
Q2 2018	17		237,284				148,650				87,500			—			(1,024		)	281			1,877			21,768		237,284
Q1 2018	5		70,787				70,171				—			—			489			127			—			—		70,787
	34	(1)	$	457,617			$	365,678			$	87,500		$	—		$	(535	)	$	3,097		$	1,877		21,768		$	457,617
Q4 2017	37		$	535,299			$	502,845			$	14,592		$	(1,812	)	$	12,957		$	1,099		$	5,618		64,708		$	535,299
Q3 2017	4		31,966				29,919				—			—			—			47			2,000			25,520		31,966
Q2 2017	3		34,641				16,608				9,463			1,827			—			(67		)	6,810			272,400		34,641
Q1 2017	2		25,556				25,541				—			—			—			15			—			—		25,556
	46	(2)	$	627,462			$	574,913			$	24,055		$	15		$	12,957		$	1,094		$	14,428		362,628		$	627,462

(1)	Store acquisitions during the year ended December 31, 2018 include the acquisition of 15 stores previously held in joint ventures where the Company held a noncontrolling interest. The Company purchased its partners' remaining equity interests in the joint ventures, and the properties owned by the joint ventures became wholly owned by the Company.

(2)	Store acquisitions during the year ended December 31, 2017 include the acquisition of seven stores that had been owned by joint ventures in which the Company held an equity interest.

Store Disposals

On August 16, 2018, the Company sold a store located in California that had been classified as held for sale for $40,235 in cash. The Company recorded a gain on the sale of $30,671.

On November 30, 2017, the Company sold 36 stores located in various states that had been classified as held for sale for an aggregate sales price of $295,000. The buyer of these properties was Storage Portfolio II JV, LLC ("SP II"), a newly formed joint venture in which the Company has a 10.0% equity interest. The Company recognized a gain of $118,776 related to this disposition, which represented 90.0% of the total gain. This amount is included in Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate on the Company's consolidated statements of operations. The Company deferred 10.0% of the gain due to the fact that it held an equity interest in the buyer, which resulted in a reduction in the carrying value of the Company's investment in SP II.

On September 13, 2017, the Company closed on the sale of a parcel of land located in New York that had been classified as held for sale for $19,000 in cash. This parcel of land had been written down to its fair value less selling costs during the six months ended June 30, 2017, and a loss of $3,500 was recorded. Therefore, no additional gain or loss was recorded related to this sale at the time of closing.

On July 26, 2016, the Company completed the sale of an operating store located in Indiana that had been classified as held for sale for $4,447 in cash. The Company recognized no gain or loss related to this disposition.

On April 20, 2016, the Company completed the sale of seven operating stores located in Ohio and Indiana that had been classified as held for sale for $17,555 in cash. The Company recognized a gain of $11,265 related to this disposition, which is included in Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate on the Company's consolidated statements of operations.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

On April 1, 2016, the Company disposed of a single store in Texas in exchange for 85,452 of the Company's OP Units valued at $7,689. The Operating Partnership canceled the OP Units received in this disposition. The Company recognized a gain of $93 related to this disposition, which is included in Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate on the Company's consolidated statements of operations.

Loss on Earnouts from Prior Acquisitions

On December 2014, the Company acquired a portfolio of five stores located in New Jersey and Virginia. As part of this acquisition, the Company agreed to make an additional cash payment to the sellers if the acquired stores exceeded a specified amount of net operating income for the years ending December 31, 2015 and 2016. At the acquisition date, the Company recorded an estimated liability related to this earnout provision. The operating income of these stores during the earnout period was higher than expected, resulting in an increase in the estimate of the amount due to the sellers of $4,284, which was recorded as a loss and included in Gain on real estate transactions, earnout on prior acquisitions and impairment of real estate on the Company's consolidated statements of operations for the year ended December 31, 2016.

5. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE VENTURES

Investments in unconsolidated real estate ventures and cash distributions in unconsolidated real estate ventures consist of the following:

	Number of Stores	Equity Ownership %		Excess Profit %		December 31,
	2018				2017
WICNN JV LLC	7	10%		25%		$	26,885			$	—
VRS Self Storage, LLC	16	45%		54%		18,281				19,467
PRISA Self Storage LLC	85	4%		4%		9,334				9,638
Alan Jathoo JV LLC	9	10%		10%		8,180				—
Extra Space West Two LLC (1)	5	5%		40%		3,818				3,939
ESS Bristol Investments LLC	7	10%		28%		2,331				1,258
WCOT Self Storage LLC	—	5%		20%		—				(357		)
Extra Space West One LLC (1)	7	5%		40%		(1,038		)		(900		)
Extra Space Northern Properties Six LLC	10	10%		35%		(1,700		)		(1,279		)
Storage Portfolio II JV LLC	36	10%		30%		(4,233		)		(3,140		)
Storage Portfolio I LLC	24	34%		49%		(38,129		)		11,495
Other minority owned stores (17 joint ventures)	23	10-50%		19-50%		56,400				29,970
Net Investments in and Cash distributions in unconsolidated real estate ventures	229					$	80,129			$	70,091

(1)	Subsequent to year end, the Company acquired its joint venture partner's interests in Extra Space West One LLC and Extra Space West Two LLC joint ventures. The 12 stores owned by these joint ventures became wholly-owned by the Company subsequent to this acquisition. The Company paid cash of $172,515 and assumed an existing loan of $17,157.

In these joint ventures, the Company and the joint venture partner generally receive a preferred return on their invested capital. To the extent that cash or profits in excess of these preferred returns are generated through operations or capital transactions, the Company would receive a higher percentage of the excess cash or profits, as applicable, than its equity interest.

In accordance with ASC 810, the Company reviews all of its joint venture relationships annually to ensure that there are no entities that require consolidation. As of December 31, 2018, there were no previously unconsolidated entities that were required to be consolidated as a result of this review.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

The Company has entered into several new unconsolidated real estate ventures. The Company accounts for its investment in the following ventures under the equity method of accounting. Information about these real estate ventures is summarized as follows:

	Number of Stores		Equity ownership %		Investment in new stores
For the Year Ended December 31, 2018(1)	28		10.0% -50.0%		$	63,723
For the Year Ended December 31, 2017	39		10.0% - 25.0%		$	13,341
For the Year Ended December 31, 2016	8		20.0% - 50.0%		$	26,387

(1)	Included in the new unconsolidated joint ventures for the year ended December 31, 2018 were two new joint ventures (WICNN JV LLC and GFV JV, LLC), in which the Company has $22,734 and $8,720 of preferred equity, respectively. The Company earns an 8.0% return on its preferred equity in these joint ventures, which has priority over other distributions.

On April 30, 2018, the Company acquired its partner's interest in the WCOT Self Storage LLC joint venture. The Company paid cash of $115,797 and assumed a loan of $87,500. The 14 properties owned by this joint venture became wholly-owned properties of the Company subsequent to this acquisition.

On November 17, 2016, the Company acquired 11 stores from its ESS WCOT LLC joint venture ("WCOT") in a step acquisition. The Company owned 5.0% of WCOT, with the other 95.0% owned by affiliates of Prudential Global Investment Management ("Prudential"). WCOT created a new subsidiary, Extra Space Properties 132 LLC ("ESP 132") and transferred 11 stores into ESP 132. WCOT then distributed ESP 132 to the Company and Prudential on a pro rata basis. This distribution was accounted for as a spinoff, and was therefore recorded at the net carrying amount of the properties of $68,814. Immediately after the distribution, the Company acquired Prudential's 95.0% interest in ESP 132 for $153,304, resulting in 100% ownership of ESP 132 and the related 11 stores. Based on the purchase price of Prudential's share of ESP 132, the Company determined that the fair value of its investment in ESP 132 immediately prior to the acquisition of Prudential's share was $8,119, and the Company recorded a gain of $4,651 as a result of remeasuring to fair value its existing equity interest in ESP 132. This gain is included in equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partners' interests on the Company's consolidated statements of operations. The fair value of the stores purchased was recorded at $161,072.

On September 16, 2016, the Company acquired 23 stores from its ESS PRISA II LLC joint venture ("PRISA II") in a step acquisition. The Company owned 4.4% of PRISA II, with the other 95.6% owned by affiliates of Prudential. PRISA II created a new subsidiary, Extra Space Properties 131 LLC ("ESP 131"), and transferred 23 stores into ESP 131. PRISA II then distributed ESP 131 to the Company and Prudential on a pro rata basis. This distribution was accounted for as a spinoff, and was therefore recorded at the net carrying amount of the properties of $4,326. Immediately after the distribution, the Company acquired Prudential's 95.6% interest in ESP 131 for $238,679, resulting in 100% ownership of ESP 131 and the related 23 stores. Based on the purchase price of Prudential's share of ESP 131, the Company determined that the fair value of its investment in ESP 131 immediately prior to the acquisition of Prudential's share was $10,988, and the Company recorded a gain of $6,778 as a result of re-measuring to fair value its existing equity interest in ESP 131. This gain is included in equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partners' interests on the Company's consolidated statements of operations. The fair value of the stores purchased was recorded at $248,530. Subsequent to these transactions, PRISA II owned 42 stores.

On September 16, 2016, subsequent to its acquisition of 23 properties as outlined above, the Company sold its 4.42% interest in PRISA II to Prudential for $34,758 in cash. The carrying value of the Company's investment prior to the acquisition was $3,912, and the Company recorded a gain on the sale of $30,846. This gain is included in equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partners' interests on the Company's consolidated statements of operations.

On April 25, 2016, the Company and Prudential entered into the “Second Amendment to Amended and Restated Operating Agreement of ESS PRISA LLC” and the “First Amendment to Amended and Restated Operating Agreement of ESS PRISA II LLC” (the “Amendments”). The Amendments are deemed effective as of April 1, 2016. Under the Amendments, the Company gave up any future rights to receive distributions from these joint ventures at the higher “excess profit participation”

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

percentage of 17.0% in exchange for a higher equity ownership percentage. The Company’s equity ownership in ESS PRISA LLC increased from 2.0% to 4.0%, and the Company’s equity ownership in ESS PRISA II LLC increased from 2.0% to 4.4%. The Company continues to account for its investment in PRISA under the equity method of accounting. The Company subsequently sold its interest in PRISA II as noted above.

On February 2, 2016, the Company acquired six stores from its VRS Self Storage LLC joint venture (“VRS”) in a step acquisition. The Company owns 45.0% of VRS, with the other 55.0% owned by affiliates of Prudential. VRS created a new subsidiary, Extra Space Properties 122 LLC (“ESP 122”) and transferred six stores into ESP 122. VRS then distributed ESP 122 to the Company and Prudential on a pro rata basis. This distribution was accounted for as a spinoff, and was therefore recorded at the net carrying amount of the properties of $17,261. Immediately after the distribution, the Company acquired Prudential’s 55.0% interest in ESP 122 for $53,940, resulting in 100% ownership of ESP 122 and the related six stores. Based on the purchase price of Prudential’s share of ESP 122, the Company determined that the fair value of its investment in ESP 122 immediately prior to the acquisition of Prudential’s share was $44,184, and the Company recorded a gain of $26,923 as a result of re-measuring to fair value its existing equity interest in ESP 122. This gain is included in equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partners’ interests on the Company’s consolidated statements of operations. The fair value of the stores purchased was recorded at $98,082.

Equity in earnings of unconsolidated real estate ventures consists of the following:

	For the Year Ended December 31,
	2018				2017				2016
Equity in earnings of WICNN JV LLC	$	622			$	—			$	—
Equity in earnings of VRS Self Storage, LLC	3,640				3,562				2,919
Equity in earnings of PRISA Self Storage LLC	2,338				2,430				1,912
Equity in earnings of Alan Jathoo JV LLC	(12		)		—				—
Equity in earnings of Extra Space West Two LLC	1,042				1,210				174
Equity in earnings of ESS Bristol Investments LLC	(152		)		—				—
Equity in earnings of Extra Space West One LLC	2,526				2,502				2,269
Equity in earnings of WCOT Self Storage LLC	359				1,033				614
Equity in earnings of Extra Space Northern Properties Six LLC	1,014				918				823
Equity in earnings of Storage Portfolio I LLC	1,886				2,684				2,380
Equity in earnings of Storage Portfolio II JV LLC	79				33				—
Equity in earnings of other minority owned stores	1,110				959				1,804
	$	14,452			$	15,331			$	12,895

Equity in earnings of certain of our joint ventures includes the amortization of the Company’s excess purchase price of $27,867 of these equity investments over its original basis. The excess basis is amortized over 40 years.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

6. NOTES PAYABLE AND REVOLVING LINES OF CREDIT

The components of notes payable are summarized as follows:

Notes Payable	December 31, 2018				December 31, 2017				Fixed Rate		Variable Rate		Basis Rate (2)		Maturity Dates
Secured fixed rate notes payable (1)	$	2,032,414			$	2,095,495			2.5% - 6.0%						February 2019 - February 2030
Secured variable rate notes payable (1)	834,735				717,979						3.9% - 4.1%		Libor plus 1.4% - 1.6%		May 2019 - August 2028
Unsecured fixed rate notes payable	990,000				600,000				3.4% - 4.4%						January 2024 - July 2028
Unsecured variable rate notes payable	310,000				350,000						3.8%		Libor plus 1.3%		October 2023 - January 2024
Total	4,167,149				3,763,474
Less: unamortized debt issuance costs	(29,936		)		(24,977		)
Total	$	4,137,213			$	3,738,497
(1) The loans are collateralized by mortgages on real estate assets and the assignment of rents.
(2) 30-day USD LIBOR

On December 7, 2018, the Company amended the credit agreement originally entered into on October 14, 2016 (the "Credit Agreement"). The amended Credit Agreement provides for aggregate borrowings of up to $1.35 billion consisting of a senior unsecured four-year revolving credit facility of $650 million maturing January 2023 (the “Revolving Credit Facility”), a senior unsecured loan of $480 million maturing January 2024 (the Tranche 1 Term Loan Facility”) and a senior unsecured loan of $220 million maturing October 2023 (the “Tranche 2 Term Loan Facility” and, together with the Revolving Credit Facility and the Tranche 1 Term Loan Facility, the “Credit Facility”). The Company may request an increase in the amount of the commitments under the Credit Facility up to an aggregate of $2.0 billion, and extend the term of the Revolving Credit Facility for up to two additional periods of six months each, after satisfying certain conditions.

Amounts outstanding under the Credit Facility bear interest at floating rates, at the Company’s option, equal to either (i) LIBOR plus the applicable Eurodollar rate margin or (ii) the applicable base rate which is the applicable margin plus the highest of (a) 0.0%, (b) the federal funds rate plus 0.50%, (c) U.S. Bank’s prime rate or (d) the Eurodollar rate plus 1.00%. The applicable Eurodollar rate margin will range from 1.05% to 1.7% per annum and the applicable base rate margin will range from 0.05% to 0.7% per annum, in each case depending on the Company’s Consolidated Leverage Ratio, as defined in the Credit Agreement, and the type of loan. If the Operating Partnership obtains a specified investment grade rating from two or more specified credit rating agencies, and elects to use the alternative rates based on the Company’s debt rating, the applicable Eurodollar rate margin will range from 0.75% to 1.65% per annum and the applicable base rate margin will range from 0.0% to 0.7% per annum, in each case depending on the rating achieved and the type of loan.

The Credit Agreement is guaranteed by the Company and is not secured by any assets of the Company. We are subject to certain restrictive covenants relating to our outstanding debt. As of December 31, 2018, the Company was in compliance with all of its financial covenants.

The following table summarizes the scheduled maturities of notes payable, excluding available extensions, at December 31, 2018:

2019	$	208,742
2020	699,522
2021	228,015
2022	294,948
2023	915,646
Thereafter	1,820,276
	$	4,167,149

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Real estate assets are pledged as collateral for the secured loans. Of the Company’s $4,167,149 principal amount of notes payable outstanding at December 31, 2018, $2,601,960 was recourse due to guarantees or other security provisions.

All of the Company’s lines of credit are guaranteed by the Company. The following table presents information on the Company’s lines of credit, the proceeds of which are used to repay debt and for general corporate purposes, for the periods indicated:

	As of December 31, 2018
Revolving Lines of Credit	Amount Drawn				Capacity				Interest Rate		Origination Date		Maturity		Basis Rate (1)
Credit Line 1 (2)	$	81,000			$	140,000			4.0%		6/4/2010		7/1/2021		LIBOR plus 1.5%
Credit Line 2 (3)(4)	—				650,000				3.6%		12/7/2018		1/29/2023		LIBOR plus 1.1%
	$	81,000			$	790,000
(1) 30-day USD LIBOR
(2) Secured by mortgages on certain real estate assets. One two-year extension available.
(3) Unsecured. Two six-month extensions available.
(4) Basis Rate as of December 31, 2018. Rate is subject to change based on our consolidated leverage ratio.

7. DERIVATIVES

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. A portion of these changes is excluded from accumulated other comprehensive income as it is allocated to noncontrolling interests. During the years ended December 31, 2018, 2017 and 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. During 2019, the Company estimates that $17,439 will be reclassified as a decrease to interest expense.

The following table summarizes the terms of the Company’s 28 derivative financial instruments, which have a total combined notional amount of $2,231,162 as of December 31, 2018:

Hedge Product		Range of Notional Amounts		Strike		Effective Dates		Maturity Dates
Swap Agreements		$4,873 - $267,431		1.13% - 3.87%		2/29/2012 - 12/31/2018		2/28/2019 - 7/12/2025

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Fair Values of Derivative Instruments

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets:

	Asset / Liability Derivatives
	December 31, 2018				December 31, 2017
Derivatives designated as hedging instruments:	Fair Value
Other assets	$	42,324			$	38,365
Other liabilities	$	2,131			$	9

Effect of Derivative Instruments

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the periods presented. No tax effect has been presented as the derivative instruments are held by the Company:

		Gain (loss) recognized in OCI For the Year Ended December 31,								Location of amounts reclassified from OCI into income		Gain (loss) reclassified from OCI For the Year Ended December 31,
Type		2018				2017				2018				2017				2016
Swap Agreements		$	9,889			$	8,499			Interest expense		$	8,258			$	(8,853	)		$	(18,800	)

Credit-Risk-Related Contingent Features

The Company has agreements with some of its derivative counterparties that contain provisions pursuant to which, the Company could be declared in default of its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender.

The Company also has an agreement with some of its derivative counterparties that incorporates the loan covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

As of December 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1,785. As of December 31, 2018, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2018, it could have been required to cash settle its obligations under these agreements at their termination value of $2,422.

8. NOTES PAYABLE TO TRUSTS

During July 2005, ESS Statutory Trust III (the “Trust III”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $40,000 of preferred securities which mature on July 31, 2035. In addition, Trust III issued 1,238 of Trust common securities to the Operating Partnership for a purchase price of $1,238. On July 27, 2005, the proceeds from the sale of the preferred and common securities of $41,238 were loaned in the form of a note to the Operating Partnership (“Note 3”). Note 3 had a fixed rate of 6.91% through July 31, 2010, and then was payable at a variable rate equal to the three month LIBOR plus 2.4% per annum. Effective July 11, 2011, Trust III entered into an interest rate swap that fixed the interest rate to be paid at 5.0% per annum and matured July 11, 2018. The interest on Note 3, payable quarterly, was be used by Trust III to pay dividends on the trust preferred securities. The trust preferred securities became redeemable by Trust III with no prepayment premium on July 27, 2010.

During May 2005, ESS Statutory Trust II (the “Trust II”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership of the Company, issued an aggregate of $41,000 of preferred securities which mature on June 30, 2035. In addition, Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1,269. On May 24, 2005, the proceeds from the sale of the preferred and common securities of $42,269 were

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

loaned in the form of a note to the Operating Partnership (“Note 2”). Note 2 had a fixed rate of 6.7% through June 30, 2010, and then was payable at a variable rate equal to the three month LIBOR plus 2.4% per annum. Effective July 11, 2011, Trust II entered into an interest rate swap that fixed the interest rate to be paid at 5.0% per annum and matured July 11, 2018. The interest on Note 2, payable quarterly, was be used by Trust II to pay dividends on the trust preferred securities. The trust preferred securities became redeemable by Trust II with no prepayment premium on June 30, 2010.

During April 2005, ESS Statutory Trust I (the “Trust”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership of the Company issued an aggregate of $35,000 of trust preferred securities which mature on June 30, 2035. In addition, Trust issued 1,083 of Trust common securities to the Operating Partnership for a purchase price of $1,083. On April 8, 2005, the proceeds from the sale of the trust preferred and common securities of $36,083 were loaned in the form of a note to the Operating Partnership (the “Note”). The Note has a variable rate equal to the three month LIBOR plus 2.3% per annum. Effective June 30, 2010, Trust entered into an interest rate swap that fixed the interest rate to be paid at 5.1% per annum and matured on June 30, 2018. The interest on the Note, payable quarterly, will be used by Trust to pay dividends on the trust preferred securities. The trust preferred securities are redeemable by Trust with no prepayment premium.

Trust, Trust II and Trust III (together, the “Trusts”) are VIEs because the holders of the equity investment at risk (the trust preferred securities) do not have the power to direct the activities of the entities that most significantly affect the entities’ economic performance because of their lack of voting or similar rights. Because the Operating Partnership’s investment in the Trusts’ common securities was financed directly by the Trusts as a result of its loan of the proceeds to the Operating Partnership, that investment is not considered to be an equity investment at risk. The Operating Partnership’s investment in the Trusts is not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk, and therefore the Operating Partnership cannot be the primary beneficiary of the Trusts. Since the Company is not the primary beneficiary of the Trusts, they have not been consolidated. A debt obligation has been recorded in the form of notes as discussed above for the proceeds, which are owed to the Trusts by the Company. The Company has also recorded its investment in the Trusts’ common securities as other assets.

During the year ended December 31, 2018, the Company repaid a total principal amount of $88,662, representing all of the notes payable to Trust III, all of the notes payable to Trust II, and all but $30,928 of the notes payable to Trust. The Trusts used the proceeds from these repayments to redeem their preferred and common securities.

The Company has not provided financing or other support during the periods presented to the Trusts that it was not previously contractually obligated to provide. The Company’s maximum exposure to loss as a result of its involvement with the Trusts is equal to the total amount of the notes discussed above less the amounts of the Company’s investments in the Trusts’ common securities. The net amount is the notes payable that the Trusts owe to third parties for their investments in the Trusts’ preferred securities.

The notes payable to trusts are presented net of unamortized deferred financing costs of $0 and $2,146 as of December 31, 2018 and 2017, respectively.

Following is a tabular comparison of the liabilities the Company has recorded as a result of its involvements with the Trusts to the maximum exposure to loss the Company is subject to related to the Trusts as of December 31, 2018:

	Notes payable to Trusts				Investment Balance				Maximum exposure to loss				Difference
Trust	$	30,928			$	928			$	30,000			$	—

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

9. EXCHANGEABLE SENIOR NOTES

In September 2015, the Operating Partnership issued $575,000 of its 3.125% Exchangeable Senior Notes due 2035. Costs incurred to issue the 2015 Notes were approximately $11,992, consisting primarily of a 2.0% underwriting fee. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term based on the first available redemption date, and are included in exchangeable senior notes, net, in the consolidated balance sheets. The 2015 Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on April 1 and October 1 of each year beginning April 1, 2016, until the maturity date of October 1, 2035. The Notes bear interest at 3.125% per annum and contain an exchange settlement feature, which provides that the 2015 Notes may, under certain circumstances, be exchangeable for cash (for the principal amount of the 2015 Notes) and, with respect to any excess exchange value, for cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option. The exchange rate of the 2015 Notes as of December 31, 2018 was approximately 10.78 shares of the Company’s common stock per $1,000 principal amount of the 2015 Notes.

The Operating Partnership may redeem the 2015 Notes at any time to preserve the Company’s status as a REIT. In addition, on or after October 5, 2020, the Operating Partnership may redeem the 2015 Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to the holders of the 2015 Notes. The holders of the 2015 Notes have the right to require the Operating Partnership to repurchase the 2015 Notes for cash, in whole or in part, on October 1 of the years 2020, 2025 and 2030, (unless the Operating Partnership has called the 2015 Notes for redemption), and upon the occurrence of certain designated events, in each case for a repurchase price equal to 100% of the principal amount of the 2015 Notes plus accrued and unpaid interest. Certain events are considered “Events of Default,” as defined in the indenture governing the 2015 Notes, which may result in the accelerated maturity of the 2015 Notes.

Additionally, the 2015 Notes can be exchanged during any calendar quarter, if the last reported sale price of the common stock of the Company is greater than or equal to 130% of the exchange price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter. The price of the Company’s common stock did not exceed 130% of the exchange price for the required time period for the 2015 Notes during the quarter ended December 31, 2018.

On June 21, 2013, the Operating Partnership issued $250,000 of its 2013 Notes at a 1.5% discount, or $3,750. Costs incurred to issue the 2013 Notes were approximately $1,672. These costs were amortized as an adjustment to interest expense over five years, which represented the estimated term based on the first available redemption date. The 2013 Notes bore interest at 2.375% per annum and contained an exchange settlement feature. The Operating Partnership redeemed all remaining outstanding 2013 Notes on July 5, 2018.

GAAP requires entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The Company therefore accounts for the liability and equity component of the 2015 Notes separately. The equity components are included in paid-in capital in stockholders’ equity in the consolidated balance sheets, and the value of the equity components are treated as original issue discount for purposes of accounting for the debt components. The discount is being amortized as interest expense over the remaining period of the debt through its first redemption date, October 1, 2020 for the 2015 Notes. The effective interest rate on the liability components of the 2015 Notes is 4.0%, which approximates the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

Information about the 2013 Notes and 2015 Notes (collectively, the "Notes"), including the total carrying amounts of the equity components, the principal amounts of the liability components, their unamortized discounts and net carrying amount were as follows for the periods indicated:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

	December 31, 2018				December 31, 2017
Carrying amount of equity component - 2015 Notes	$	22,597			$	22,597
Carrying amount of equity component - 2013 Notes	—				—
Carrying amount of equity components	$	22,597			$	22,597
Principal amount of liability component - 2015 Notes	$	575,000			$	575,000
Principal amount of liability component - 2013 Notes	—				49,259
Unamortized discount - equity component - 2015 Notes	(8,417		)		(12,974		)
Unamortized discount - equity component - 2013 Notes	—				(315		)
Unamortized cash discount - 2013 Notes	—				(74		)
Unamortized debt issuance costs	(4,209		)		(6,620		)
Net carrying amount of liability components	$	562,374			$	604,276

The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component for the Notes were as follows for the periods indicated:

	For the Year Ended December 31,
	2018				2017				2016
Contractual interest	$	18,106			$	19,303			$	19,483
Amortization of discount	4,687				5,103				4,980
Total interest expense recognized	$	22,793			$	24,406			$	24,463

Repurchase of 2013 Notes

During the year ended December 31, 2018, the Company repurchased a total principal amount of $49,259 of the 2013

Notes, which represented all of the remaining principal amount outstanding. The Company paid cash of $80,270 for the total of

the principal amount and the exchange value in excess of the principal amount.

During the year ended December 31, 2017, the Company repurchased a total principal amount of $13,911 of the 2013 Notes. The Company paid cash of $20,042 for the total of the principal amount and the exchange value in excess of the principal amount.

During the year ended December 31, 2016, the Company repurchased a total principal amount of $22,194 of the 2013 Notes. The Company paid cash for the principal amount, and issued a total of 148,940 shares of common stock valued at $13,066 for the exchange value in excess of the principal amount.

The Company allocated the value of the consideration paid to repurchase the 2013 Notes (1) to the extinguishment of the liability component and (2) to the reacquisition of the equity component. The amount allocated to the extinguishment of the liability component is equal to the fair value of that component immediately prior to extinguishment. The difference between the consideration attributed to the extinguishment of the liability component and the sum of (a) the net carrying amount of the repurchased liability component, and (b) the related unamortized debt issuance costs, is recognized as a gain on debt extinguishment. The remaining settlement consideration is allocated to the reacquisition of the equity component of the repurchased 2013 Notes and recognized as a reduction of stockholders’ equity.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Information about the repurchases is as follows:

	For the Year Ended December 31,
	2018				2017				2016
Principal amount repurchased	$	49,259			$	13,911			$	22,194
Amount allocated to:
Extinguishment of liability component	$	49,019			$	13,692			$	21,363
Reacquisition of equity component	31,251				6,350				13,898
Total consideration paid for repurchase	$	80,270			$	20,042			$	35,261
Exchangeable senior notes repurchased	$	49,259			$	13,911			$	22,194
Extinguishment of liability component	(49,019		)		(13,692		)		(21,363		)
Discount on exchangeable senior notes	(230		)		(184		)		(788		)
Related debt issuance costs	(10		)		(35		)		(43		)
Gain/(loss) on repurchase	$	—			$	—			$	—

10. RELATED PARTY AND AFFILIATED REAL ESTATE JOINT VENTURE TRANSACTIONS

The Company provides management services to certain joint ventures for a fee. Management fee revenues for related party and affiliated real estate joint ventures for the years ended December 31, 2018, 2017 and 2016 were $14,123, $12,650 and $16,066, respectively.

11. STOCKHOLDERS’ EQUITY

The Company’s charter provides that it can issue up to 500,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of December 31, 2018, 127,103,750 shares of common stock were issued and outstanding, and no shares of preferred stock were issued or outstanding.

All holders of the Company's common stock are entitled to receive dividends and to one vote on all matters submitted to a vote of stockholders. The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company.

On August 28, 2015, the Company filed a $400,000 “at the market” equity program with the Securities and Exchange Commission, and entered into separate equity distribution agreements with five sales agents. On May 6, 2016, the Company filed its current $400,000 "at the market" equity program with the Securities and Exchange Commission using a new shelf registration statement on Form S-3, and entered into separate equity distribution agreements with five sales agents. Under the terms of the current equity distribution agreements, the Company may from time to time offer and sell shares of common stock, up to the aggregate offering price of $400,000, through its sales agents. The current equity distribution agreements, dated May 6, 2016, replaced and superseded the previous equity distribution agreements, dated August 28, 2015.

During the year ended December 31, 2018, the Company sold 933,789 shares of common stock under its "at the market" equity program at an average sales price of $97.93 per share, resulting in net proceeds of $90,531. At December 31, 2018, the Company had $257,929 available for issuance under the current equity distribution agreements.

During July 2016, the Company sold 550,000 shares of common stock under the current “at the market” equity program at an average sales price of $92.04 per share, resulting in net proceeds of $50,062.

From January 1, 2016, through May 6, 2016, the Company sold 831,300 shares of common stock under the previous “at the market” equity program at an average sales price of $89.66 per share, resulting in net proceeds of $73,360.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

12. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

Classification of Noncontrolling Interests

GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the Operating Partnership’s preferred units and classifies the noncontrolling interest represented by such preferred units as stockholders’ equity in the accompanying consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount, or (2) its redemption value as of the end of the period in which the determination is made.

At December 31, 2018 and 2017, the noncontrolling interests represented by the Preferred OP Units qualified for classification as permanent equity on the Company's consolidated balance sheets. The partnership agreement of the Operating Partnership (as amended, the "Partnership Agreement") provides for the designation and issuance of the OP Units. Noncontrolling interests in Preferred OP Units were presented net of notes receivable from preferred Operating Partnership unit holders of $108,644 and $120,230 as of December 31, 2018 and 2017, respectively, as more fully described below.

Series A Participating Redeemable Preferred Units

The Series A Units were issued in June 2007. Series A Units in the amount of $101,700 bear a fixed priority return of 2.3%, and originally had a fixed liquidation value of $115,000. The remaining balance participates in distributions with, and has a liquidation value equal to, that of the common OP Units. The Series A Units became redeemable at the option of the holder on September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock. As a result of the redemption of 114,500 Series A Units in October 2014, the remaining fixed liquidation value was reduced to $101,700 which represents 875,480 Series A Units. On April 18, 2017, the holder of the Series A Units and the Operating Partnership agreed to reduce the fixed priority return on the Series A Units from 5.0% to 2.3% in exchange for a reduction in the interest rate of the related loan, as more fully described below.

The Partnership Agreement provides for the designation and issuance of the Series A Units. The Series A Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

On June 25, 2007, the Operating Partnership loaned the holders of the Series A Units $100,000. The note receivable bears interest at 2.1%. On April 18, 2017, a loan amendment was signed modifying the maturity date of the loan to the later of the death of the Series A Unit holder or his spouse and also lowering the interest rate of the loan from 4.9% to 2.1%. The loan amendment was determined to be a loan modification under GAAP, and therefore no change in value was recognized. The loan is secured by the borrower’s Series A Units. No future redemption of Series A Units can be made unless the loan secured by the Series A Units is also repaid. The Series A Units are shown on the balance sheet net of the $100,000 loan because the borrower under the loan is also the holder of the Series A Units.

Series B Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series B Units. The Series B Units rank junior to the Series A Units, on parity with the Series C Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series B Units were issued in 2013 and 2014 and have a liquidation value of $25.00 per unit for a current fixed liquidation value of $41,902 which represents 1,676,087 Series B Units. Holders of the Series B Units receive distributions at an annual rate of 6.0%. These distributions are cumulative. The Series B Units are redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligations may be satisfied at the Company’s option in cash or

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

shares of its common stock. The Series B Units rank junior to the Series A Units, on parity with the Series C Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

Series C Convertible Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series C Units. The Series C Units rank junior to the Series A Units, on parity with the Series B Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series C Units were issued in 2013 and 2014 and have a liquidation value of $42.10 per unit for a current fixed liquidation value of $12,462 which represents 296,020 Series C Units. From issuance to the fifth anniversary of issuance, each Series C Unit holder will receive quarterly distributions equal to the quarterly distribution for common OP Unit plus $0.18. Beginning on the fifth anniversary of issuance, each Series C Unit holder will receive a fixed quarterly distribution equal to the aggregate quarterly distribution payable in respect of such Series C Unit during the four quarters immediately preceding the fifth anniversary of issuance divided by four. These distributions are cumulative. The Series C Units became redeemable at the option of the holder one year from the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock. The Series C Units also became convertible into common OP Units at the option of the holder one year from the date of issuance, at a rate of 0.9145 common OP Units per Series C Unit converted. This conversion option expires upon the fifth anniversary of the date of issuance.

In December 2014, the Operating Partnership loaned holders of the Series C Units $20,230. The notes receivable, which are collateralized by the Series C Units, bear interest at 5.0% and mature on December 15, 2024. The Series C Units are shown on the balance sheet net of the loan because the borrower under the loan receivable is also the holder of the Series C Units.

On December 1, 2018, certain holders of the Series C Units converted their Series C Units into common OP Units, with a total of 407,996 Series C Units being converted into a total of 373,113 common OP Units. As part of this conversion, the holders of the Series C Units agreed to pledge the common OP Units received in the conversion as collateral on the loan receivable to replace the Series C Units that were converted. As of December 31, 2018, the total outstanding balance of the loan receivable was $19,735, of which $8,644 is shown as a reduction of the noncontrolling interests related to the Series C Units and $11,091 is shown as a reduction of the noncontrolling interests related to the common OP Units on the Company's consolidated balance sheets.

Series D Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series D Units. The Series D Units rank junior to the Series A Units, on parity with the Series B Units and Series C Units, and senior to all other partnership interest of the Operating Partnership with respect to distributions and liquidation.

The Series D Units have been issued at various times from 2014 to 2017. During the year ended December 31, 2017, the Operating Partnership issued 446,420 Series D Units valued at $11,161 in conjunction with wholly-owned and joint venture acquisitions. During the year ended December 31, 2016, the Operating Partnership issued a total of 2,687,711 Series D Units valued at $67,193 in conjunction with the acquisition of real estate assets.

The Series D Units have a liquidation value of $25.00 per unit, for a current fixed liquidation value of $92,064 which represents 3,682,521 Series D Units. Holders of the Series D Units receive distributions at an annual rate between 3.0% and 5.0%. These distributions are cumulative. The Series D Units will become redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock. In addition, certain of the Series D Units are exchangeable for common OP Units until the tenth anniversary of the date of issuance, with the number of common OP Units to be issued equal to $25.00 per Series D Unit, divided by the value of a share of common stock as of the exchange date.

13.	NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS

Noncontrolling interest in Operating Partnership

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

The Company’s interest in its stores is held through the Operating Partnership. Between its general partner and limited partner interests, the Company held a 91.0% majority ownership interest therein as of December 31, 2018. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 9.0% are held by certain former owners of assets acquired by the Operating Partnership.

The noncontrolling interest in the Operating Partnership represents OP Units that are not owned by the Company. OP Units are redeemable at the option of the holder, which redemption may be satisfied at the Company's option in cash based upon the fair market value of an equivalent number of shares of the Company’s common stock (based on the ten-day average trading price) at the time of the redemption. Alternatively, the Company may, at its sole discretion, elect to acquire those OP Units in exchange for shares of its common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Operating Partnership agreement. The ten-day average closing stock price at December 31, 2018, was $91.64 and there were 5,994,251 OP Units outstanding.

Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on December 31, 2018 and the Company elected to pay the OP Unit holders cash, the Company would have paid $549,313 in cash consideration to redeem the units.

OP Unit activity is summarized as follows for the periods presented:

	For the Year Ended December 31,
	2018			2017			2016
OP Units redeemed for common stock	35,000			—			23,850
OP Units redeemed for cash	30,000			33,896			6,760
Cash paid for OP Units redeemed	$	2,558		$	2,510		$	506
OP Units issued in conjunction with acquisitions	21,768			90,228			93,569
Value of OP Units issued in conjunction with acquisitions	$	1,877		$	7,618		$	7,247

Additionally, 373,113 common OP Units were issued in the conversion of 407,996 Series C Units on December 1, 2018. These newly issued OP Units are pledged as collateral on the existing loan receivable to the Series C Unit holders. As a result, noncontrolling interests in the Operating Partnership is reported net of $11,091 of the loan receivable, which represents the portion of the note receivable that is collateralized by the OP Units.

GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the common OP Units and classifies the noncontrolling interest represented by the common OP Units as stockholders’ equity in the accompanying consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount, or (2) its redemption value as of the end of the period in which the determination is made.

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interest of third parties in two consolidated joint ventures as of December 31, 2018. One joint venture owns two operating stores in Texas and an operating store and a development store in Colorado, and the other owns an operating store in Pennsylvania and a development store in New Jersey. The voting interests of the third-party owners are between 5.0% and 20.0%.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

14. STOCK-BASED COMPENSATION

As of December 31, 2018, 1,587,625 shares were available for issuance under the Company’s 2015 Incentive Award Plan (the “Plan”).

Option grants are issued with an exercise price equal to the closing price of stock on the date of grant. Unless otherwise determined by the Compensation, Nominating and Governance Committee (“CNG Committee”) at the time of grant, options shall vest ratably over a four-year period beginning on the date of grant. Each option will be exercisable once it has vested. Options are exercisable at such times and subject to such terms as determined by the CNG Committee, but under no circumstances may be exercised if such exercise would cause a violation of the ownership limit in the Company’s charter. Options expire 10 years from the date of grant. Beginning in 2017, the CNG Committee decided to the replace stock options granted to executives with performance based stock units for executive compensation. See the "Performance-Based Stock Units" section below.

Also as defined under the terms of the Plan, restricted stock grants may be awarded. The stock grants are subject to a vesting period over which the restrictions are released and the stock certificates are given to the grantee. During the performance or vesting period, the grantee is not permitted to sell, transfer, pledge, encumber or assign shares of restricted stock granted under the Plan; however, the grantee has the ability to vote the shares and receive nonforfeitable dividends paid on shares. Unless otherwise determined by the CNG Committee at the time of grant, the forfeiture and transfer restrictions on the shares lapse over a four-year period beginning on the date of grant.

Option Grants

A summary of stock option activity is as follows:

Options	Number of Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of December 31, 2018
Outstanding at December 31, 2015	572,629			$	24.42
Granted	35,800			85.99
Exercised	(97,855	)		14.75
Outstanding at December 31, 2016	510,574			$	30.60
Exercised	(38,418	)		32.94
Outstanding at December 31, 2017	472,156			$	30.41
Exercised	(54,575	)		21.45
Outstanding at December 31, 2018	417,581			$	31.58			2.78		$24,597
Vested and Expected to Vest	416,567			$	31.46			2.77		$24,587
Ending Exercisable	377,292			$	26.72			2.35		$24,057

The aggregate intrinsic value in the table above represents the total value (the difference between the Company’s closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

The weighted average fair value of stock options granted in 2016, was $20.30. There were no options granted in 2018 or 2017. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

			For the Year Ended December 31,
			2016
Expected volatility			37.0%
Dividend yield			3.6%
Risk-free interest rate			1.3%
Average expected term (years)			5

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility, dividend yield and average expected term. The forfeiture rate, which is estimated at a weighted-average of 7.4% of unvested options outstanding as of December 31, 2018, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates.

A summary of stock options outstanding and exercisable as of December 31, 2018, is as follows:

		Options Outstanding									Options Exercisable
Exercise Price		Shares			Weighted Average Remaining Contractual Life		Weighted Average Exercise Price				Shares			Weighted Average Exercise Price
$6.22 - $6.22		139,250			0.13		$	6.22			139,250			$	6.22
$11.59 - $11.59		20,080			1.13		11.59				20,080			11.59
$12.21 - $12.21		77,400			1.18		12.21				77,400			12.21
$19.6 - $28.79		29,469			2.65		23.56				29,469			23.56
$38.4 - $38.4		10,360			4.14		38.4				10,360			38.40
$47.5 - $47.5		17,687			5.13		47.5				17,687			47.50
$65.36 - $65.36		20,395			6.15		65.36				15,297			65.36
$65.45 - $65.45		17,140			6.13		65.45				12,345			65.45
$73.52 - $73.52		50,000			6.58		73.52				37,500			73.52
$85.99 - $85.99		35,800			7.15		85.99				17,904			85.99
		417,581			2.78		$	31.58			377,292			$	26.72

The Company recorded compensation expense relating to outstanding options of $570, $649 and $729 in general and administrative expense for the years ended December 31, 2018, 2017 and 2016, respectively. Total cash received for the years ended December 31, 2018, 2017 and 2016, related to option exercises was $1,169, $1,266 and $1,444, respectively. At December 31, 2018, there was $344 of total unrecognized compensation expense related to non-vested stock options under the Plan. That cost is expected to be recognized over a weighted-average period of 0.72 years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized compensation expense at December 31, 2018 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.

Common Stock Granted to Employees and Directors

The Company recorded $10,606, $8,072 and $7,316 of expense in general and administrative expense in its statement of operations related to restricted stock awards granted to employees and directors for the years ended December 31, 2018, 2017 and 2016, respectively. The forfeiture rate, which is estimated at a weighted-average of 10.2% of unvested awards outstanding as of December 31, 2018, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates. At December 31, 2018 there was $10,870 of total unrecognized compensation expense related to non-vested restricted stock awards under the Plan. That cost is expected to be recognized over a weighted-average period of 2.00 years. The fair value of common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

A summary of the Company’s employee and director share grant activity is as follows:

Restricted Stock Grants	Shares			Weighted-Average Grant-Date Fair Value
Unreleased at December 31, 2015	318,409			$	55.75
Granted	119,931			87.61
Released	(128,808	)		50.05
Cancelled	(9,947	)		67.36
Unreleased at December 31, 2016	299,585			$	70.57
Granted	95,392			74.49
Released	(120,323	)		63.95
Cancelled	(8,179	)		77.25
Unreleased at December 31, 2017	266,475			$	74.76
Granted	85,066			86.14
Released	(116,656	)		72.38
Cancelled	(11,771	)		80.96
Unreleased at December 31, 2018	223,114			$	80.02

Performance-based Stock Units

In 2017, the CNG Committee changed its compensation for executives to issue performance-based stock units (the "PSUs") as a replacement for stock option awards. The PSUs granted to executives represent the right to earn shares of the Company's common stock. These awards have two financial performance components: (1) the Company's core FFO performance ("FFO Target"), and (2) the Company's total stockholder return relative to the performance of a defined group of peers ("TSR Target"). Each of these performance components are weighted 50% and are measured over the performance period, which is defined as the three-year period ending December 31 from the year of grant. At the end of the performance period, the financial performance components are reviewed to determine the number of shares actually granted to executives, which can be as low as zero shares and up to a maximum of two shares issued for each PSU. A summary of the PSU activity is as follows:

Performance-Based Stock Units		Units			Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2016		—			$	—
Granted		30,071			83.84
Unvested at December 31, 2017		30,071			$	83.84
Granted		28,735			96.19
Unvested at December 31, 2018		58,806			$	89.87

The Company estimated the fair value of the PSUs as of the grant date, using the closing trading price of the Company's common stock on the grant date to value the FFO Target portion. A Monte Carlo simulation model was used to calculate the fair value of the TSR Target portion of the PSUs, using the following assumptions:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

		For the Year Ended December 31,
		2018		2017
Intrinsic value		$5,321		$2,630
Compensation cost		$1,873		$840
Risk-free rate		2.37%		1.62%
Volatility		22.6%		21.4%
Expected term (in years)		2.9		2.8
Dividend yield		—%		—%
Unrecognized compensation cost		$2,739		$1,681
Term over which unrecognized compensation cost recognized		2		2

Under the terms of the PSUs, dividends for the entire measurement period are paid in cash when the shares are issued, so a dividend yield of zero was used. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the probabilities associated with achieving the FFO Targets (categorized within Level 3 of the fair value hierarchy). Therefore, the amount of unrecognized compensation expense at December 31, 2018 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.

15. EMPLOYEE BENEFIT PLAN

The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code under which eligible employees can contribute up to 60% of their annual salary, subject to a statutory prescribed annual limit. For the years ended December 31, 2018, 2017 and 2016, the Company made matching contributions to the plan of $2,833, $2,212 and $1,944, respectively, based on 100% of the first 3% and up to 50% of the next 2% of an employee’s compensation.

16. INCOME TAXES

As a REIT, the Company is generally not subject to federal income tax with respect to that portion of its income which is distributed annually to its stockholders. However, the Company has elected to treat one of its corporate subsidiaries, Extra Space Management, Inc., as a TRS. In general, the Company’s TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate related business. A TRS is subject to federal corporate income tax. The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes.” Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. The Company has elected to use the Tax-Law-Ordering approach to determine when excess tax benefits will be realized.

The income tax provision for the years ended December 31, 2018, 2017 and 2016, is comprised of the following components:

	For the Year Ended December 31, 2018
	Federal				State				Total
Current expense	$	9,136			$	2,426			$	11,562
Tax credits/true-up	(5,841		)		(175		)		(6,016		)
Change in deferred expense/(benefit)	3,730				(32		)		3,698
Total tax expense	$	7,025			$	2,219			$	9,244

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

	For the Year Ended December 31, 2017
	Federal				State				Total
Current expense	$	5,677			$	1,662			$	7,339
Tax credits/true-up	(5,573		)		(383		)		(5,956		)
Change in deferred expense	1,700				542				2,242
Total tax expense	$	1,804			$	1,821			$	3,625

	For the Year Ended December 31, 2016
	Federal				State				Total
Current expense	$	14,627			$	2,368			$	16,995
Tax credits/true-up	(312		)		—				(312		)
Change in deferred benefit	(369		)		(467		)		(836		)
Total tax expense	$	13,946			$	1,901			$	15,847

A reconciliation of the statutory income tax provisions to the effective income tax provisions for the periods indicated is as follows:

	For the Year Ended December 31,
	2018							2017							2016
Expected tax at statutory rate	$	95,828			21.0	%		$	186,274			35.0	%		$	144,708			35.0	%
Non-taxable REIT income	(83,022		)		(18.2	)%		(170,811		)		(32.1	)%		(131,112		)		(31.7	)%
State and local tax expense - net of federal benefit	2,385				0.5	%		2,306				0.4	%		2,399				0.6	%
Change in valuation allowance	(1,052		)		(0.2	)%		159				—	%		(845		)		(0.2	)%
Tax credits/true-up	(6,016		)		(1.3	)%		(5,956		)		(1.1	)%		(312		)		(0.1	)%
Remeasurement of deferred balances	—				—	%		(8,460		)		(1.6	)%		—				—	%
Miscellaneous	1,121				0.2	%		113				—	%		1,009				0.2	%
Total provision	$	9,244			2.0	%		$	3,625			0.6	%		$	15,847			3.8	%

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

The major sources of temporary differences stated at their deferred tax effects are as follows:

	December 31, 2018				December 31, 2017
Deferred tax liabilities:
Fixed assets	$	(20,907	)		$	(15,271	)
Other	(96		)		(108		)
State deferred taxes	(3,076		)		(2,822		)
Total deferred tax liabilities	(24,079		)		(18,201		)
Deferred tax assets:
Captive insurance subsidiary	324				252
Accrued liabilities	1,772				873
Stock compensation	1,604				1,287
Solar credit	—				43
Other	53				57
SmartStop TRS	219				219
State deferred taxes	7,196				7,802
Total deferred tax assets	11,168				10,533
Valuation allowance	(3,872		)		(4,924		)
Net deferred income tax liabilities	$	(16,783	)		$	(12,592	)

The state income tax net operating losses expire between 2019 and 2036. The valuation allowance is associated with the state income tax net operating losses. The tax years 2014 through 2017 remain open related to the state returns, and 2015 through 2017 for the federal returns.

Federal tax reform legislation that was enacted on December 22, 2017 (commonly known as the Tax Cuts and Jobs Act) (the “2017 Tax Legislation”) made substantial changes to the Internal Revenue Code. Among those changes were a reduction in the U.S. federal corporate tax rate from the previous rate of 35% to 21%, the elimination or modification of various allowed deductions, and a deduction for REIT stockholders that are individuals, trusts and estates of up to 20% of ordinary REIT dividends. Many of the provisions of the 2017 Tax Legislation required guidance through the issuance of Treasury regulations in order to assess their effect. It is possible that there will be technical corrections legislation proposed with respect to the 2017 Tax Legislation, the effect of which cannot be predicted and may be adverse to the Company or its stockholders.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the 2017 Tax Legislation. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Legislation enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Legislation for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Tax Legislation is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Legislation. The Company recorded a provisional estimate of the impact of the 2017 Tax Legislation for the year ended December 31, 2017. The SAB 118 measurement period closed on December 22, 2018. The Company's accounting for the 2017 Tax Legislation under SAB 118 has been finalized with no additional adjustments.

For the year ended December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The tax benefit recorded related to the remeasurement of the deferred tax balance and valuation allowance was $8,606, which is included as a component of income

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

tax expense for the year ended December 31, 2017. The Company made no additional adjustments to this initial remeasurement for the year ended December 31, 2018.

17. SEGMENT INFORMATION

The Company’s segment disclosures present the measure used by the chief operating decision makers ("CODMs") for purposes of assessing each segment’s performance. The Company’s CODMs are comprised of several members of its executive management team who use net operating income ("NOI") to assess the performance of the business for the Company’s reportable operating segments. NOI for our self-storage operations represents total property revenue less direct property operating expenses. NOI for our tenant reinsurance segment represents tenant reinsurance revenues less tenant reinsurance expense.

The Company’s segments, prior to 2017, were comprised of three reportable segments: (1) rental operations; (2) tenant reinsurance; and (3) property management, acquisition and development. Based on how the CODMs reviews performance and makes decisions, the Company realigned its segments into two reportable segments: (1) self-storage operations and (2) tenant reinsurance. The self-storage operations activities include rental operations of wholly-owned stores. The Company's consolidated revenues equal total segment revenues plus property management fees and other income. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the stores operated by the Company. Excluded from segment revenues and net operating income is property management fees and other income.

For all periods presented, substantially all of our real estate assets, intangible assets, other assets, and accrued and other liabilities are associated with the self-storage operations segment. The prior periods have been restated to conform to the current presentation. Financial information for the Company’s business segments is set forth below:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

	Year Ended December 31,
	2018				2017				2016
Revenues:
Self-Storage Operations	$	1,039,340			$	967,229			$	864,742
Tenant Reinsurance	115,507				98,401				87,291
Total segment revenues	1,154,847				1,065,630				$	952,033
Operating expenses:
Self-Storage Operations	$	291,695			$	271,974			$	250,005
Tenant Reinsurance	25,707				19,173				15,555
Total segment operating expenses	$	317,402			$	291,147			$	265,560
Net operating income:
Self-Storage Operations	747,645				695,255				$	614,737
Tenant Reinsurance	89,800				79,228				71,736
Total segment net operating income:	$	837,445			$	774,483			$	686,473
Total segment net operating income	$	837,445			$	774,483			$	686,473
Other components of net income (loss):
Property management fees and other income	41,757				39,379				39,842
General and administrative expense	(81,256		)		(78,961		)		(81,806		)
Depreciation and amortization expense	(209,050		)		(193,296		)		(182,560		)
Acquisition and other related costs(1)	—				—				(12,111		)
Gain on real estate transactions, earnout from prior acquisitions and impairment of real estate	30,807				112,789				8,465
Interest expense	(178,436		)		(153,511		)		(133,479		)
Non-cash interest expense related to the amortization of discount on equity component of exchangeable senior notes	(4,687		)		(5,103		)		(4,980		)
Interest income	5,292				6,736				10,998
Equity in earnings of unconsolidated real estate ventures	14,452				15,331				12,895
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of partners' interests	—				—				69,199
Income tax expense	(9,244		)		(3,625		)		(15,847		)
Net income	$	447,080			$	514,222			$	397,089

(1) Beginning January 1, 2017, acquisition related costs have been capitalized due to the adoption of ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

18. COMMITMENTS AND CONTINGENCIES

The Company has operating leases on its corporate offices and owns 23 stores that are subject to leases. At December 31, 2018, future minimum rental payments under these non-cancelable operating leases were as follows (unaudited):

Less than 1 year	$	8,203
Year 2	8,307
Year 3	8,137
Year 4	7,837
Year 5	7,021
Thereafter	111,653
	$	151,158

The Company recorded expense of $8,229, $6,898 and $4,578 related to operating leases in the years ended December 31, 2018, 2017 and 2016, respectively.

The Company is involved in various legal proceedings and is subject to various claims and complaints arising in the ordinary course of business. Because litigation is inherently unpredictable, the outcome of these matters cannot presently be determined with any degree of certainty. In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. The Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period, notwithstanding the fact that the Company is currently vigorously defending any legal proceedings against it. As of December 31, 2018, the Company was involved in various legal proceedings and was subject to various claims and complaints arising in the ordinary course of business. In the opinion of management, such litigation, claims and complaints are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

As of December 31, 2018, the Company was under agreement to acquire 18 stores at a total purchase price of $271,526. Of these stores, 16 are scheduled to close in 2019 at a purchase price of $247,498, and two are scheduled to close in 2020 at a purchase price of $24,028. Additionally, the Company is under agreement to acquire 13 stores with joint venture partners, for a total investment of $73,860. Eleven of these stores are scheduled to close in 2019, while the remaining two are scheduled to close in 2020.

Although there can be no assurance, the Company is not aware of any material environmental liability, for which it believes it will be ultimately responsible, that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to its properties could result in future material environmental liabilities.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amounts in thousands, except store and share data, unless otherwise stated

19. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)

	For the Three Months Ended
	March 31, 2018				June 30, 2018				September 30, 2018				December 31, 2018
Revenues	$	285,485			$	296,813			$	306,953			$	307,353
Cost of operations	151,573				152,097				153,362				150,676
Revenues less cost of operations	$	133,912			$	144,716			$	153,591			$	156,677
Net income	$	95,430			$	102,713			$	139,687			$	109,250
Net income attributable to common stockholders	$	88,256			$	95,153			$	130,418			$	101,462
Earnings per common share—basic	$	0.70			$	0.75			$	1.03			$	0.80
Earnings per common share—diluted	$	0.70			$	0.75			$	1.02			$	0.80
	For the Three Months Ended
	March 31, 2017				June 30, 2017				September 30, 2017				December 31, 2017
Revenues	$	263,008			$	276,003			$	284,156			$	281,842
Cost of operations	138,805				139,596				144,275				140,728
Revenues less cost of operations	$	124,203			$	136,407			$	139,881			$	141,114
Net income	$	89,734			$	94,098			$	101,075			$	229,315
Net income attributable to common stockholders	$	82,282			$	87,006			$	93,742			$	215,983
Earnings per common share—basic	$	0.65			$	0.69			$	0.74			$	1.71
Earnings per common share—diluted	$	0.64			$	0.69			$	0.74			$	1.69

20. SUBSEQUENT EVENTS

Subsequent to year end, the Company acquired its joint venture partner's interests in Extra Space West One LLC and Extra Space West Two LLC. The 12 stores owned by these joint ventures are now wholly-owned by the Company. The Company paid cash of $172,515 and assumed an existing loan of $17,157.

Extra Space Storage Inc.

Schedule III

Real Estate and Accumulated Depreciation

(Dollars in thousands)

As of December 31, 2018

								Building and Improvements Initial Cost			Adjustments and Costs to Land and Building Subsequent to Acquisition			Gross carrying amount at December 31, 2018
Self - Storage Facilities by State:	Store Count				Land Initial Cost						Building and Improvements						Accumulated Depreciation
Debt			Land			Total
AL	8	$	30,215		$	7,690		$	42,770		$	3,156		$	7,691		$	45,925		$	53,616		$	6,928
AZ	23	39,974			27,535			117,304			8,680			27,533			125,986			153,519			20,509
CA	146	699,982			446,176			1,069,102			91,467			446,863			1,159,882			1,606,745			227,969
CO	15	39,092			15,700			62,816			14,186			15,887			76,815			92,702			16,942
CT	7	23,869			9,875			50,966			3,861			9,874			54,828			64,702			8,279
FL	86	331,556			161,109			579,419			45,736			161,573			624,691			786,264			115,603
GA	59	104,806			77,306			372,157			22,117			77,290			394,290			471,580			48,711
HI	9	39,644			17,663			133,870			5,094			17,663			138,964			156,627			21,756
IL	31	58,189			44,427			225,423			21,944			43,449			248,345			291,794			35,630
IN	15	11,149			12,447			58,247			5,118			12,447			63,365			75,812			9,767
KS	1	—			366			1,897			529			366			2,426			2,792			997
KY	11	34,817			8,640			68,679			4,558			8,640			73,237			81,877			9,813
LA	2	—			6,114			8,541			1,297			6,115			9,837			15,952			3,919
MA	45	126,966			72,445			254,383			36,722			72,626			290,924			363,550			71,855
MD	32	140,841			99,147			284,253			14,408			97,180			300,628			397,808			61,719
MI	7	8,639			9,583			51,359			2,025			9,583			53,384			62,967			4,206
MN	4	—			6,681			42,252			277			6,681			42,529			49,210			1,348
MO	5	5,981			4,129			15,444			3,510			4,086			18,997			23,083			6,752
MS	3	—			2,420			20,849			1,403			2,420			22,252			24,672			1,983
NC	18	33,835			31,969			104,104			3,769			31,967			107,875			139,842			8,128
NH	2	6,024			754			4,054			1,108			817			5,099			5,916			2,225
NJ	59	201,091			134,032			560,512			34,227			134,479			594,292			728,771			113,188
NM	11	22,055			32,252			71,142			4,177			32,252			75,319			107,571			7,175
NV	14	35,797			15,252			74,376			4,081			15,252			78,457			93,709			8,114
NY	23	97,930			122,835			240,816			29,767			123,570			269,848			393,418			52,400
OH	17	43,789			17,788			50,493			5,983			17,787			56,477			74,264			11,500
OR	6	30,885			7,906			39,576			1,414			7,906			40,990			48,896			6,389
PA	17	34,544			23,376			132,317			9,331			22,668			142,356			165,024			19,949
RI	2	10,327			3,191			6,926			1,176			3,191			8,102			11,293			2,676
SC	23	44,560			37,075			135,760			8,834			37,076			144,593			181,669			18,349
TN	17	49,475			25,938			91,497			7,321			25,938			98,818			124,756			15,043
TX	99	279,717			169,160			648,128			52,440			169,012			700,716			869,728			91,986
UT	10	16,625			9,008			39,295			10,044			9,008			49,339			58,347			8,925
VA	46	228,363			139,318			414,335			16,668			139,319			431,002			570,321			56,712
WA	8	33,203			12,528			47,645			2,349			12,530			49,992			62,522			9,965
DC	1	9,038			14,394			18,172			356			14,394			18,528			32,922			1,311
Other corporate assets		—			—			2,202			116,855			—			119,057			119,057			32,473
Intangible tenant relationships and lease rights		—			—			132,000			—			—			132,000			132,000			121,238
Construction in Progress/Undeveloped Land		—			10,937			—			48,034			7,359			51,612			58,971			6
Totals	882	$	2,872,978		$	1,837,166		$	6,273,080		$	644,023		$	1,832,492		$	6,921,777		$	8,754,269		$	1,262,438

Extra Space Storage Inc. Schedule III (continued)

Activity in real estate facilities during the years ended December 31, 2018, 2017 and 2016 is as follows:

	2018				2017				2016
Operating facilities
Balance at beginning of year	$	8,158,741			$	7,649,448			$	6,392,487
Acquisitions	459,223				628,391				1,159,304
Improvements	64,336				71,090				92,480
Transfers from construction in progress	49,449				19,079				26,400
Dispositions and other	(22,434		)		(209,267		)		(21,223		)
Balance at end of year	$	8,709,315			$	8,158,741			$	7,649,448
Accumulated depreciation:
Balance at beginning of year	$	1,060,060			$	900,861			$	728,087
Depreciation expense	203,030				185,903				174,906
Dispositions and other	(652		)		(26,704		)		(2,132		)
Balance at end of year	$	1,262,438			$	1,060,060			$	900,861
Real estate under development/redevelopment:
Balance at beginning of year	$	33,750			$	21,860			$	24,909
Current development	60,677				33,484				23,404
Transfers to operating facilities	(49,449		)		(19,079		)		(26,400		)
Dispositions and other	(24		)		(2,515		)		(53		)
Balance at end of year	$	44,954			$	33,750			$	21,860
Net real estate assets	$	7,491,831			$	7,132,431			$	6,770,447

As of December 31, 2018, the aggregate cost of real estate for U.S. federal income tax purposes was $7,306,350.