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	28
Consolidated Balance Sheets as of December 31, 2019 and 2018	30
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017	31
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	32
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017	33
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017	36
Notes to Consolidated Financial Statements	37
Schedule III - Real Estate and Accumulated Depreciation	70

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

To the Stockholders and the Board of Directors 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 25, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-02

As discussed in Note 13 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 31, 2019 due to the adoption of ASU No. 2016-02, “Leases (Topic 842).”

Basis for Opinion

These financial statements are the responsibility of the 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

	Accounting treatment of investments in real estate ventures
Description of the Matter	At December 31, 2019, the Company’s investments in unconsolidated real estate ventures was $292.8 million. As explained in Note 5 to the consolidated financial statements, the Company enters into real estate ventures and performs an assessment to determine whether the equity or consolidation method of accounting is appropriate.
	Application and auditing of the accounting treatment of the Company’s real estate ventures, including the process of evaluating the criteria for consolidation based on the variable interest entity (VIE) model or a voting interest entity (VOE) model, is complex and requires significant judgment. This evaluation and analysis include the determination of which party, if any, has power to direct the activities most significant to the economic performance of each real estate venture and whether the venture has sufficient equity to finance its activities without additional subordinated support.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant controls over the Company's qualitative analysis that determines whether the Company has control over the venture through voting interest or through the presence of a variable interest in a real estate venture (thus requiring consolidation if the Company is the primary beneficiary of the VIE).
	For each new investment in a real estate venture, our procedures included reading the real estate venture agreement, and reviewing management’s evaluation of the applicability of the variable interest model as compared to the voting interest model. As such, we assessed whether each investee has sufficient equity to finance its activities without additional subordinated financial support and whether the equity holders, as a group, lack the characteristics of a controlling financial interest. Our testing included examining all contributions made by the Company as part of the initial formation of the real estate venture to support management’s conclusions about the sufficiency of equity to finance the venture’s activities. We also performed procedures to determine whether the Company correctly identified terms that would result in the equity holders, as a group, lacking the characteristics of a controlling financial interest, which would lead to the classification of the real estate venture as a variable interest entity. Specifically, for each new real estate venture entered into during the year, we inspected the agreement to determine whether the decisions that most significantly impact the entity’s economic performance were controlled by the equity holders as a group. In the case that the venture has sufficient equity at risk and the equity holders, as a group, do not lack the characteristics of a controlling financial interest, we evaluated whether the Company properly accounted for the investment under the voting interest model. underlying data, including the participant data provided to management’s actuarial specialists.

/s/ Ernst & Young LLP

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

Salt Lake City, Utah

February 25, 2020

Extra Space Storage Inc.

Consolidated Balance Sheets

(dollars in thousands, except share data)

	December 31, 2019				December 31, 2018
Assets:
Real estate assets, net	$	7,696,864			$	7,491,831
Real estate assets - operating lease right-of-use assets	264,643				—
Investments in unconsolidated real estate entities	338,054				125,326
Cash and cash equivalents	65,746				57,496
Restricted cash	4,987				15,194
Other assets, net	162,083				158,131
Total assets	$	8,532,377			$	7,847,978
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,318,973			$	4,137,213
Exchangeable senior notes, net	569,513				562,374
Notes payable to trusts	—				30,928
Revolving lines of credit	158,000				81,000
Operating lease liabilities	274,783				—
Cash distributions in unconsolidated real estate ventures	45,264				45,197
Accounts payable and accrued expenses	111,382				101,461
Other liabilities	132,768				104,383
Total liabilities	5,610,683				5,062,556
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, 129,534,407 and 127,103,750 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively	1,295				1,271
Additional paid-in capital	2,868,681				2,640,705
Accumulated other comprehensive income (loss)	(28,966		)		34,650
Accumulated deficit	(301,049		)		(262,902		)
Total Extra Space Storage Inc. stockholders' equity	2,539,961				2,413,724
Noncontrolling interest represented by Preferred Operating Partnership units, net	175,948				153,096
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	205,785				218,602
Total noncontrolling interests and equity	2,921,694				2,785,422
Total liabilities, noncontrolling interests and equity	$	8,532,377			$	7,847,978

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Operations

(dollars in thousands, except share data)

	For the Year Ended December 31,
	2019				2018				2017
Revenues:
Property rental	$	1,130,177			$	1,039,340			$	967,229
Tenant reinsurance	128,387				115,507				98,401
Management fees and other income	49,890				41,757				39,379
Total revenues	1,308,454				1,196,604				1,105,009
Expenses:
Property operations	336,050				291,695				271,974
Tenant reinsurance	29,376				25,707				19,173
General and administrative	89,418				81,256				78,961
Depreciation and amortization	219,857				209,050				193,296
Total expenses	674,701				607,708				563,404
Gain on real estate transactions and impairment of real estate	1,205				30,807				112,789
Income from operations	634,958				619,703				654,394
Interest expense	(186,526		)		(178,436		)		(153,511		)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(4,742		)		(4,687		)		(5,103		)
Interest income	7,467				5,292				6,736
Income before equity in earnings of unconsolidated real estate ventures and income tax expense	451,157				441,872				502,516
Equity in earnings of unconsolidated real estate ventures	11,274				14,452				15,331
Income tax expense	(11,308		)		(9,244		)		(3,625		)
Net income	451,123				447,080				514,222
Net income allocated to Preferred Operating Partnership noncontrolling interests	(12,492		)		(13,995		)		(14,989		)
Net income allocated to Operating Partnership and other noncontrolling interests	(18,664		)		(17,796		)		(20,220		)
Net income attributable to common stockholders	$	419,967			$	415,289			$	479,013
Earnings per common share
Basic	$	3.27			$	3.29			$	3.79
Diluted	$	3.24			$	3.27			$	3.76
Weighted average number of shares
Basic	128,203,568				126,087,487				125,967,831
Diluted	136,433,769				133,159,033				134,155,771

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Comprehensive Income

(amounts in thousands)

	For the Year Ended December 31,
	2019				2018				2017
Net income	$	451,123			$	447,080			$	514,222
Other comprehensive income (loss):
Change in fair value of interest rate swaps	(66,843		)		1,430				17,308
Total comprehensive income	384,280				448,510				531,530
Less: comprehensive income attributable to noncontrolling interests	27,929				31,861				35,997
Comprehensive income attributable to common stockholders	$	356,351			$	416,649			$	495,533

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
				Shares			Par Value
Balances at December 31, 2016		$	147,920			$	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)		14,989				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		(14,540		)		(17,432		)		—				—			—				—				—				—				(31,972		)
Dividends paid on common stock at $3.12 per share		—				—				—				—			—				—				—				(393,040		)		(393,040		)
Balances at December 31, 2017		$	159,636			$	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
				Shares			Par Value
Balances at December 31, 2017		$	159,636			$	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)		13,995				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		(14,191		)		(19,059		)		—				—			—				—				—				—				(33,250		)
Dividends paid on common stock at $3.36 per share		—				—				—				—			—				—				—				(424,907		)		(424,907		)
Balances at December 31, 2018		$	153,096			$	218,362			$	240			127,103,750			$	1,271			$	2,640,705			$	34,650			$	(262,902	)		$	2,785,422

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
				Shares			Par Value
Balances at December 31, 2018		$	153,096			$	218,362			$	240			127,103,750			$	1,271			$	2,640,705			$	34,650			$	(262,902	)		$	2,785,422
Issuance of common stock upon the exercise of options		—				—				—				211,057			3				3,060				—				—				3,063
Restricted stock grants issued		—				—				—				109,081			2				—				—				—				2
Restricted stock grants cancelled		—				—				—				(8,863	)		—				—				—				—				—
Issuance of common stock, net of offering costs		—				—				—				1,779,200			19				198,808				—				—				198,827
Compensation expense related to stock-based awards		—				—				—				—			—				13,051				—				—				13,051
Repayment of receivable for preferred operating units pledged as collateral on loan		—				1,211				—				—			—				—				—				—				1,211
Redemption of Operating Partnership units for stock		—				(13,057		)		—				340,182			—				13,057				—				—				—
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions		28,022				—				—				—			—				—				—				—				28,022
Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units		(4,374		)		4,374				—				—			—				—				—				—				—
Noncontrolling interest in consolidated joint venture		—				—				173				—			—				—				—				—				173
Net income (loss)		12,492				18,711				(47		)		—			—				—				—				419,967				451,123
Other comprehensive loss		(407		)		(2,820		)		—				—			—				—				(63,616		)		—				(66,843		)
Distributions to Operating Partnership units held by noncontrolling interests		(12,881		)		(21,362		)		—				—			—				—				—				—				(34,243		)
Dividends paid on common stock at $3.56 per share		—				—				—				—			—				—				—				(458,114		)		(458,114		)
Balances at December 31, 2019		$	175,948			$	205,419			$	366			129,534,407			$	1,295			$	2,868,681			$	(28,966	)		$	(301,049	)		$	2,921,694

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

	For the Year Ended December 31,
	2019				2018				2017
Cash flows from operating activities:
Net income	$	451,123			$	447,080			$	514,222
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	219,857				209,050				193,296
Amortization of deferred financing costs	11,989				14,286				12,289
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	4,742				4,687				5,103
Non-cash lease expense	1,064				—				—
Compensation expense related to stock-based awards	13,051				11,176				9,561
Gain on real estate transactions and impairment of real estate	(1,205		)		(30,807		)		(112,789		)
Distributions from unconsolidated real estate ventures in excess of earnings	6,358				6,867				4,567
Changes in operating assets and liabilities:
Other assets	(12,482		)		(1,664		)		(12,728		)
Accounts payable and accrued expenses	15,522				2,736				(10,515		)
Other liabilities	(2,333		)		14,384				(5,631		)
Net cash provided by operating activities	707,686				677,795				597,375
Cash flows from investing activities:
Acquisition of real estate assets	(349,494		)		(426,388		)		(653,185		)
Development and redevelopment of real estate assets	(53,717		)		(60,677		)		(31,746		)
Proceeds from sale of real estate assets	11,254				52,458				312,165
Investment in unconsolidated real estate entities	(197,759		)		(65,500		)		(17,944		)
Return of investment in unconsolidated real estate ventures	3,982				49,130				581
Issuance of notes receivable	(185,993		)		(13,850		)		—
Principal payments received from notes receivable	157,861				25,226				44,869
Purchase of equipment and fixtures	(7,764		)		(4,297		)		(7,819		)
Net cash used in investing activities	(621,630		)		(443,898		)		(353,079		)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	198,827				90,231				—
Proceeds from notes payable and revolving lines of credit	2,214,000				1,413,030				1,325,623
Principal payments on notes payable and revolving lines of credit	(1,977,805		)		(1,109,854		)		(1,088,679		)
Principal payments on notes payable to trusts	(30,928		)		(88,662		)		—
Deferred financing costs	(2,986		)		(12,302		)		(6,967		)
Repurchase of exchangeable senior notes	—				(80,270		)		(19,916		)
Net proceeds from exercise of stock options	3,063				1,169				1,266
Redemption of Operating Partnership units held by noncontrolling interests	—				(2,558		)		(2,510		)
Contributions from noncontrolling interests	173				122				201
Dividends paid on common stock	(458,114		)		(424,907		)		(393,040		)
Distributions to noncontrolling interests	(34,243		)		(33,250		)		(31,972		)
Net cash used in financing activities	(88,013		)		(247,251		)		(215,994		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(1,957		)		(13,354		)		28,302
Cash, cash equivalents, and restricted cash, beginning of the period	72,690				86,044				57,742
Cash, cash equivalents, and restricted cash, end of the period	$	70,733			$	72,690			$	86,044
Supplemental schedule of cash flow information
Interest paid	$	174,155			$	159,474			$	136,202
Income taxes paid	10,359				730				5,648
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	$	(13,057	)		$	(1,337	)		$	—
Common stock and paid-in capital	13,057				1,337				—
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	277,557			$	—			$	—
Operating lease liabilities	(286,914		)		—				—
Accounts payable and accrued expenses	9,357				—				—
Acquisitions of real estate assets
Real estate assets, net	$	21,066			$	88,842			$	51,455
Value of Operating Partnership units issued	—				(1,877		)		(14,428		)
Notes payable assumed	(17,157		)		(87,500		)		(24,055		)
Investment in unconsolidated real estate ventures	(2,780		)		535				(12,957		)
Other noncontrolling interests	—				—				(15		)
Net liabilities assumed	(1,129		)		—				—
Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	2,203			$	778			$	3,509
Development and redevelopment of real estate assets	1,601				554				1,703
Accounts payable and accrued expenses	(3,804		)		(1,332		)		(5,212		)
Contribution of Preferred OP Units to unconsolidated real estate venture
Investments in unconsolidated real estate ventures	$	(28,022	)		$	—			$	—
Value of Preferred Operating Partnership units issued	28,022				—				—
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
Conversion of Preferred OP Units to common OP Units
Preferred OP Units	$	4,374			$	6,851			$	—
Common OP Units	(4,374		)		(6,851		)		—

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, 2019, the Company had direct and indirect equity interests in 1,171 storage facilities. In addition, the Company managed 646 stores for third parties bringing the total number of stores which it owns and/or manages to 1,817. These stores are located in 40 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.

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.

The Company has concluded that under certain circumstances when the Company enters into arrangements for the formation of joint ventures or when entering into a new bridge loan agreement, 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. As of December 31, 2019 and 2018, the Company had no consolidated VIEs. Additionally, the Operating Partnership had a note payable to a trust that was a VIE under condition (ii)(a) above. Since the Operating Partnership was not the primary beneficiary of the trust, this VIE was 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019, 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, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.

					Fair Value Measurements at Reporting Date Using
Description	December 31, 2019				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	$	6,214			$	—			$	6,214			$	—
Other liabilities - Cash flow hedge swap agreements	$	31,400			$	—			$	31,400			$	—

There were no transfers of assets and liabilities between Level 1 and Level 2 during the year ended December 31, 2019. 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, 2019 or 2018.

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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019 and 2018, 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 and notes receivable, revolving lines of credit and other liabilities reflected in the consolidated balance sheets at December 31, 2019 and 2018, approximate fair value.

The fair values of the Company’s notes receivable from Preferred Operating Partnership unit holders 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.

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

	December 31, 2019								December 31, 2018
	Fair Value				Carrying Value				Fair Value				Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	116,184			$	118,524			$	115,467			$	119,735
Fixed rate notes payable and notes payable to trusts	$	3,511,151			$	3,417,928			$	2,985,731			$	3,022,414
Exchangeable senior notes	$	673,831			$	575,000			$	620,149			$	575,000

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 Entities

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 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.

The Company evaluated its investments in preferred stock of non-public real estate entities and determined it did not have significant influence over the entity, and the investment in preferred stock does not have a readily determinable fair value, therefore it has been recorded at the transaction price. The Company periodically evaluates the investment for impairment. No impairment indicators were noted as of December 31, 2019.

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 escrowed funds deposited with financial institutions located throughout the United States relating to earnest money deposits on potential acquisitions, real estate taxes, loan collateral, operating reserves and insurance and capital expenditures.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Other Assets

Other assets consist of equipment and fixtures, rents receivable from our tenants, bridge loan receivables, investments in trusts 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.

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 ventures 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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019, the average insurance coverage for tenants was approximately 3,300 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.

For the years ended December 31, 2019, 2018 and 2017, the number of claims made were 9,059, 8,091 and 6,214, 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:	2019				2018				2017
Unpaid claims liability at beginning of year	$	7,326			$	5,167			$	3,896
Claims and claim adjustment expense for claims incurred in the current year	16,280				15,800				11,700
Claims and claim adjustment expense (benefit) for claims incurred in the prior years	98				107				(203		)
Payments for current year claims	(11,352		)		(11,010		)		(8,895		)
Payments for prior year claims	(4,243		)		(2,738		)		(1,331		)
Unpaid claims liability at the end of the year	$	8,109			$	7,326			$	5,167

Advertising Costs

The Company incurs advertising costs primarily attributable to digital and other advertising. These costs are expensed as incurred. The Company recognized $25,106, $16,153 and $14,410 in advertising expense for the years ended December 31, 2019, 2018 and 2017, 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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019, 0% (unaudited) of all distributions to stockholders qualified as a return of capital.

The Company owns and may acquire direct or indirect interests in entities that have elected or will elect to be taxed as REITs under the Internal Revenue Code (each, a “Subsidiary REIT ”). A Subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to the Company. If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to U.S. federal income tax, (ii) shares in such Subsidiary REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs, and (iii) it is possible that the Company would fail certain of the asset tests applicable to REITs, in which event the Company would fail to qualify as a REIT unless it could avail itself of certain relief provisions.

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, 2019 and 2018, 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, 2019 and 2018, 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.

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, 2019, 2018 and 2017, options to purchase approximately zero, 36,075, and 45,286 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 liquidation value of the Preferred OP Units by the average share price of $106.57 for the year ended December 31, 2019.

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,
	2019			2018			2017
	Equivalent Shares (if converted)			Equivalent Shares (if converted)			Equivalent Shares (if converted)
Series B Units	393,189			464,033			533,174
Series C Units (1)	—			312,075			377,135
Series D Units	1,081,369			1,019,524			—
	1,474,558			1,795,632			910,309

(1) The remainder of the Series C Units were converted to OP Units on April 25, 2019.

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, 2019. 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 $91.76 per share as of December 31, 2019, 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 diluted earnings per share computation. For the years ended December 31, 2019 and 2018, the Company had repaid the principal and accrued interest of its Exchangeable Senior Notes due 2033 (the “2013 Notes”), and therefore, no shares relating to the 2013 Notes were included in the computation of diluted earnings per share. For the year ended December 31, 2017, 344,430 shares related to the 2013 Notes were included in the computation of diluted earnings per share. For the year ended December 31, 2019, 993,114 shares related to the 2015 Notes were included in the computation of diluted earnings per share. For the years ended December 31, 2018 and 2017, no shares related to the 2015 Notes were included in the computation of diluted earnings per share as the exchange price exceeded the per share price of the Company’s common stock during these periods.

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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

	For the Year Ended December 31,
	2019				2018				2017
Net income attributable to common stockholders	$	419,967			$	415,289			$	479,013
Earnings and dividends allocated to participating securities	(680		)		(723		)		(975		)
Earnings for basic computations	419,287				414,566				478,038
Earnings and dividends allocated to participating securities	680				723				—
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	23,727				22,831				30,088
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	(2,288		)		(2,288		)		(3,119		)
Net income for diluted computations	$	441,406			$	435,832			$	505,007
Weighted average common shares outstanding:
Average number of common shares outstanding - basic	128,203,568				126,087,487				125,967,831
OP Units	6,006,114				5,675,547				5,590,831
Series A Units	875,480				875,480				875,480
Series D Units	—				—				1,081,561
Unvested restricted stock awards included for treasury stock method	212,402				244,215				—
Shares related to exchangeable senior notes and dilutive stock options	1,136,205				276,304				640,068
Average number of common shares outstanding - diluted	136,433,769				133,159,033				134,155,771
Earnings per common share
Basic	$	3.27			$	3.29			$	3.79
Diluted	$	3.24			$	3.27			$	3.76

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 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 requires 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. ASU 2016-02 became effective for annual and interim periods beginning after December 15, 2018. The Company adopted the standard using the modified retrospective approach as of January 1, 2019. The Company elected 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 also elected the practical expedient provided in a subsequent amendment to ASU 2016-02 that removed the requirement to separate lease and nonlease components. The

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Company did not record a significant cumulative catch-up adjustment upon the adoption of ASC 2016-02. The primary impact was related to the Company's 22 operating ground leases and two corporate facility leases under which it served as lessee as of the adoption date. The Company recognized lease liabilities totaling $104,863 and right-of-use assets related to operating leases totaling $95,506 as of the adoption date. Refer to footnote 13 for further discussion of the Company's leases.

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. 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 were reclassified to conform to this presentation.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities measure credit losses for most financial assets. This standard requires an entity to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which clarified that receivables arising from operating leases are within the scope of the leasing standard (ASU 2016-02), and not within the scope of ASU 2016-13. This new standard was effective for the Company on January 1, 2020. The Company does not expect this new standard to have a material impact on the Company's consolidated financial statements.

3. REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:

	December 31, 2019				December 31, 2018
Land - operating	$	1,935,551			$	1,825,133
Land - development	3,372				7,359
Buildings, improvements and other intangibles	7,047,654				6,743,355
Right of use asset - finance lease	8,050				—
Intangible assets - tenant relationships	122,489				119,557
Intangible lease rights	12,443				12,443
	9,129,559				8,707,847
Less: accumulated depreciation and amortization	(1,473,852		)		(1,262,438		)
Net operating real estate assets	7,655,707				7,445,409
Real estate under development/redevelopment	41,157				46,422
Net real estate assets	$	7,696,864			$	7,491,831
Real estate assets held for sale included in net real estate assets	$	2,947			$	13,032

As of December 31, 2019, the Company had one parcel of land classified as held for sale. The estimated fair value less selling costs of this asset is greater than the carrying value of the assets, and therefore no loss has been recorded related to this asset. 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 $6,614, $9,050, and $14,349 for the years ended December 31, 2019, 2018 and 2017, respectively. The remaining balance of the unamortized lease rights will be amortized over the next nine to 42 years. Accumulated amortization related to intangibles was $127,712 and $121,238 as of December 31, 2019 and 2018, 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, 2019 and 2018. 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			Investments in Real Estate Ventures			Net Liabilities/ (Assets) Assumed			Value of OP Units Issued			Number of OP Units Issued		Real estate assets
Q4 2019	5		$	51,278			$	51,058			$	—		$	—		$	220		$	—		—		$	51,278
Q3 2019	1		16,937				16,941				—			—			(4		)	—			—		16,937
Q2 2019	1		8,424				8,424				—			—			—			—			—		8,424
Q1 2019	14		223,740				202,890				17,157			2,780			913			—			—		223,740
	21	(1)	$	300,379			$	279,313			$	17,157		$	2,780		$	1,129		$	—		—		$	300,379
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	(2)	$	457,617			$	365,678			$	87,500		$	(535	)	$	3,097		$	1,877		21,768		$	457,617

(1)

Store acquisitions during the year ended December 31, 2019 include the acquisition of 12 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. No gain or loss was recognized as a result of these acquisitions.

(2)

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. No gain or loss was recognized as a result of these acquisitions.

Store Disposals

On April 11, 2019, the Company closed on the sale of a store located in New York that had been classified as held for sale for $11,272 in cash. The Company recorded a gain on the sale of $1,205.

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 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

5. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

Investments in unconsolidated real estate entities and cash distributions in unconsolidated real estate ventures represent the Company's interest in preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop") and the Company's noncontrolling interest in real estate joint ventures that own stores. The Company accounts for its investment in SmartStop preferred stock, which does not have a readily determinable fair value, at the transaction price less impairment, if any. The Company accounts for its investments in joint ventures using the equity method of accounting. The Company initially records these investments at cost and subsequently adjusts for cash contributions, distributions and net equity in income or loss, which is allocated in accordance with the provisions of the applicable partnership or joint venture agreement.

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.

The Company separately reports investments with net equity less than zero in cash distributions in unconsolidated real estate ventures in the consolidated balance sheets. The net equity of certain joint ventures is less than zero because distributions have exceeded the Company's investment in and share of income from these joint ventures. This is generally the result of financing distributions, capital events or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization while distributions do not.

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

	Number of Stores	Equity Ownership %		Excess Profit % (1)		December 31,
	2019				2018
PRISA Self Storage LLC	85	4%		4%		$	9,133			$	9,334
Storage Portfolio II JV LLC	36	10%		30%		(4,827		)		(4,233		)
Storage Portfolio I LLC	24	34%		49%		(38,345		)		(38,129		)
VRS Self Storage, LLC	16	45%		54%		17,639				18,281
ESS-NYFL JV LP	11	16%		24%		13,320				—
WICNN JV LLC (3)	10	10%		25%		36,552				26,885
Extra Space Northern Properties Six LLC	10	10%		35%		(2,091		)		(1,700		)
Alan Jathoo JV LLC	9	10%		10%		7,977				8,180
PR EXR Self Storage, LLC	5	25%		40%		59,391				19,841
ESS Bristol Investments LLC	8	10%		28%		3,046				2,331
GFN JV, LLC (3)	5	10%		30%		12,168				10,586
Extra Space West Two LLC (4)	—	5%		40%		—				3,818
Extra Space West One LLC (4)	—	5%		40%		—				(1,038		)
Other minority owned stores	22	10-50%		19-50%		28,827				25,973
SmartStop Self Storage REIT, Inc. Preferred Stock (2)	n/a	n/a		n/a		150,000				—
Net Investments in and Cash distributions in unconsolidated real estate entities	241					$	292,790			$	80,129

(1)	Includes pro-rata equity ownership share and promoted interest.

(2)

In October 2019, the Company invested $150,000 in shares of newly issued convertible preferred stock of SmartStop, with an additional commitment to purchase up to $50,000 of the preferred shares over the 12 months after the original purchase. The dividend rate for the preferred shares is 6.25% per annum, subject to increase after five years. The preferred shares are generally not redeemable for five years, except in the case of a change of control or initial listing of SmartStop. Dividend income from this investment is included on the management fees and other income line 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

(3)	The Company had $31,500 and $10,335 of preferred equity in the WICNN JV LLC and GFN JV, LLC joint ventures, respectively, as of December 31, 2019. The Company earns an 8.0% return on its preferred equity in these joint ventures, which has priority over other distributions.

(4)	In January 2019, the Company purchased its joint venture partners' interests in the Extra Space West One LLC and Extra Space West Two LLC joint ventures, which owned a total of 12 stores. The Company paid $172,505 of cash to acquire the equity interests, and subsequent to this acquisition, the Company owned 100.0% of the joint ventures and the related stores.

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, 2019, there were no previously unconsolidated entities that were required to be consolidated as a result of this review.

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 new real estate ventures is summarized as follows:

	Number of Stores		Equity ownership %		Total initial investment
For the Year Ended December 31, 2019	16		10.0%-50.0%		$	19,663
For the Year Ended December 31, 2018	28		10.0% -50.0%		$	63,723
For the Year Ended December 31, 2017	39		10.0% - 25.0%		$	13,341

During the year ended December 31, 2019, the Company contributed a total of $104,338 to its joint ventures (new and existing) for the purchase of 15 operating stores and nine stores acquired at the issuance of certificate of occupancy.

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.

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

	For the Year Ended December 31,
	2019				2018				2017
Equity in earnings of PRISA Self Storage LLC	$	2,327			$	2,338			$	2,430
Equity in earnings of Storage Portfolio II JV LLC	291				79				33
Equity in earnings of Storage Portfolio I LLC	1,809				1,886				2,684
Equity in earnings of VRS Self Storage, LLC	3,583				3,640				3,562
Equity in earnings of ESS-NYFL JV LLC	(96		)		—				—
Equity in earnings of WICNN JV LLC	1,373				622				—
Equity in earnings of Extra Space Northern Properties Six LLC	1,091				1,014				918
Equity in earnings of Alan Jathoo JV LLC	(47		)		(12		)		—
Equity in earnings of Bristol Investments LLC	(262		)		(152		)		—
Equity in earnings of GFN JV, LLC	450				22				—
Equity in earnings of PR EXR Self Storage, LLC	(443		)		(75		)		(105		)
Equity in earnings of WCOT Self Storage LLC	—				359				1,033
Equity in earnings of Extra Space West Two LLC	—				1,042				1,210
Equity in earnings of Extra Space West One LLC	—				2,526				2,502
Equity in earnings of other minority owned stores	1,198				1,163				1,064
	$	11,274			$	14,452			$	15,331

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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.

The Company provides management services to certain joint ventures for a fee. Management fee revenues for affiliated real estate joint ventures for the years ended December 31, 2019, 2018 and 2017 were $14,624, $14,123 and $12,650, respectively.

6. NOTES PAYABLE AND REVOLVING LINES OF CREDIT

The components of notes payable are summarized as follows:

Notes Payable	December 31, 2019				December 31, 2018				Fixed Rate		Variable Rate		Basis Rate (2)		Maturity Dates
Secured fixed rate notes payable (1)	$	1,365,408			$	2,032,414			2.53% - 6.00%						September 2020 - February 2030
Secured variable rate notes payable (1)	878,093				834,835						3.01% - 3.31%		Libor plus 1.3% - 1.6%		April 2020 - August 2028
Unsecured fixed rate notes payable	2,052,521				990,000				2.80% - 4.39%						October 2023 - October 2029
Unsecured variable rate notes payable	47,480				310,000						2.76% - 3.31%		Libor plus 1.0% - 1.6%		January 2025 - June 2026
Total	4,343,502				4,167,249
Less: unamortized debt issuance costs	(24,529		)		(29,936		)
Total	$	4,318,973			$	4,137,313
(1) The loans are collateralized by mortgages on real estate assets and the assignment of rents.
(2) 30-day USD LIBOR

On July 1, 2019, and December 20, 2019, the Company executed amendments to the credit agreement originally entered into on October 14, 2016 and amended and restated as of December 7, 2018 (the "Credit Agreement"), which sets forth the terms of the revolving credit facility and loans comprising the Company's "Credit Facility." The July 1 amendment increased total commitments in the Credit Facility by creating two new term loan tranches (the "Tranche 3 Term Loan Facility" and the "Tranche 4 Term Loan Facility"), which total $245 million and $255 million, respectively, and mature January 2025 and June 2026, respectively. The proceeds from these new tranches were used to pay off existing secured debt. The December 20th amendment changed the requirements for the Investment Grade Election and increased the limit of total maximum potential borrowings under the facility to $2.5 billion from $2.0 billion at December 31, 2018. As part of the Investment Grade Election which the company completed on December 20, 2019, on December 27, 2019, the Company released all but 4 Guarantors under the Credit Facility.

At December 31, 2019, the amended Credit Facility provided for aggregate borrowings of up to $1.85 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”), a senior unsecured loan of $220 million maturing October 2023 (the “Tranche 2 Term Loan Facility), the Tranche 3 Term Loan Facility of $245 million, and the Tranche 4 Term Loan Facility of $255 million. The Company may request an extension of the term of the Credit Facility for up to two additional periods of six months each, after satisfying certain conditions.

As of December 31, 2019, amounts outstanding under the Credit Facility bore 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%. Per the Credit Agreement, the applicable Eurodollar rate margin and applicable base rate margin are based on the Company’s achieved debt rating pursuant to the ‘Investment Grade Election,’ with the Eurodollar rate margin ranging from 0.75% to 2.25% per annum and the applicable base rate margin ranging from 0.0% to 1.3% per annum.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Credit Agreement is guaranteed by the Company and is not secured by any assets of the Company. The Company is subject to certain restrictive covenants relating to its outstanding debt. As of December 31, 2019, 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, 2019:

2020	$	568,431
2021	252,053
2022	150,796
2023	767,405
2024	712,972
Thereafter	1,891,845
	$	4,343,502

Real estate assets are pledged as collateral for the secured loans. Of the Company’s $4,343,502 principal amount of notes payable outstanding at December 31, 2019, $2,012,791 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, 2019
Revolving Lines of Credit	Amount Drawn				Capacity				Interest Rate		Origination Date		Maturity		Basis Rate (1)
Credit Line 1 (2)	$	38,000			$	140,000			3.2%		6/4/2010		7/1/2021		LIBOR plus 1.45%
Credit Line 2 (3)(4)	120,000				650,000				2.7%		12/7/2018		1/29/2023		LIBOR plus 0.9%
	$	158,000			$	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, 2019. Rate is subject to change based on our investment grade rating.

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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019, 2018 and 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. During 2020, the Company estimates that $4,374 will be reclassified as an increase to interest expense.

The following table summarizes the terms of the Company’s 24 derivative financial instruments, which have a total combined notional amount of $2,354,609 as of December 31, 2019:

Hedge Product		Range of Notional Amounts		Strike		Effective Dates		Maturity Dates
Swap Agreements		$30,943 - $267,431		1.13% - 4.60%		1/1/2014 - 7/29/2019		9/14/2020 - 6/29/2026

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, 2019				December 31, 2018
Derivatives designated as hedging instruments:	Fair Value
Other assets	$	6,214			$	42,324
Other liabilities	$	31,400			$	2,131

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		2019				2018				2019				2018				2017
Swap Agreements		$	(54,680	)		$	9,889			Interest expense		$	12,322			$	8,258			$	(8,853	)

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, 2019, 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 $30,269. As of December 31, 2019, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2019, it could have been required to cash settle its obligations under these agreements at their termination value of $32,245.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

8. NOTES PAYABLE TO TRUSTS

During 2005, the Company's Operating Partnership formed three wholly-owned unconsolidated subsidiaries: ESS Statutory Trust I (“Trust") ESS Statutory Trust II, (“Trust II”) and ESS Statutory Trust III (“Trust III,” and together with Trust and Trust II, the "Trusts"). The Trusts issued trust preferred securities to third parties and common securities to the Operating Partnership. The Trust loaned the proceeds from the sale of the preferred and common securities to the Operating Partnership in the form of notes. The Trusts were VIEs because the holders of the equity investment at risk (that is the Trusts' preferred securities) did not have the power to direct the activities of the entities that most significantly affected the entities’ economic performance due to 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 was not considered an equity investment at risk. The Operating Partnership’s investment in the Trusts was 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 was not the primary beneficiary of the Trusts. Since the Company was not the primary beneficiary of the Trusts, they were not consolidated. A debt obligation was recorded in the form of notes for the proceeds as discussed above, which were owed to the Trusts. The Company had also included its investment in the Trusts’ common securities in other assets on the Company's consolidated balance sheets.

During the year ended December 31, 2018, the Company repaid a total principal amount of $88,662 of the notes payable to Trusts, 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. In January 2019, the Company repaid the remaining balance of $30,928 of notes payable to Trust.

During the time they were outstanding, the Company did not provide 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 was 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 was equal to the notes payable that the Trusts owed to third parties for their investments in the Trusts’ preferred securities.

The Company had no consolidated VIEs during the years ended December 31, 2019 or December 31, 2018.

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, 2019 was approximately 10.90 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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019.

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 2015 Notes, including the total carrying amounts of the equity component, the principal amount of the liability component, the unamortized discount and net carrying amount, was as follows for the periods indicated:

	December 31, 2019				December 31, 2018
Carrying amount of equity component	$	22,597			$	22,597
Principal amount of liability component	$	575,000			$	575,000
Unamortized discount - equity component	(3,675		)		(8,417		)
Unamortized debt issuance costs	(1,812		)		(4,209		)
Net carrying amount of liability component	$	569,513			$	562,374

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,
	2019				2018				2017
Contractual interest	$	17,968			$	18,106			$	19,303
Amortization of discount	4,742				4,687				5,103
Total interest expense recognized	$	22,710			$	22,793			$	24,406

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.

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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.

Information about the repurchases is as follows:

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

10. 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, 2019, 129,534,407 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 May 15, 2019, the Company filed its current $500,000 "at the market" equity program with the Securities and Exchange Commission using a shelf registration statement on Form S-3, and entered into separate equity distribution agreements with nine 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 $500,000, through its sales agents.

During the year ended December 31, 2019, the Company sold 1,779,200 shares of common stock under its "at the market" equity program at an average sales price of $113.19 per share, resulting in net proceeds of $198,827. At December 31, 2019, the Company had $298,621 available for issuance under the current equity distribution agreements.

During the year ended December 31, 2018, the Company sold 933,789 shares of common stock under its prior "at the market" equity program at an average sales price of $97.93 per share, resulting in net proceeds of $90,531.

11. 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019 and 2018, 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 $100,000 and $108,644 as of December 31, 2019 and 2018, 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 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 had a liquidation value of $42.10 per unit. From issuance to the fifth anniversary of issuance, each Series C Unit holder received quarterly distributions equal to the quarterly distribution for

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

common OP Unit plus $0.18. These distributions were cumulative. The Series C Units became redeemable at the option of the holder one year from the date of issuance, which redemption obligation could be satisfied at the Company’s option in cash or shares of its common stock. The Series C Units were 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 expired 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 note receivable, which was collateralized by the Series C Units, bears interest at 5.0% and matures on December 15, 2024. The Series C Units were shown on the balance sheet net of the loan because the borrower under the loan receivable was 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 was shown as a reduction of the noncontrolling interests related to the Series C Units and $11,091 was shown as a reduction of the noncontrolling interests related to the common OP Units on the Company's consolidated balance sheets. On April 25, 2019, the remaining 296,020 Series C Units were converted into 270,709 OP Units. The remaining outstanding balance of the loan receivable of $18,524 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2019. See footnote 12 for further discussion of noncontrolling interests.

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 2019. During the year ended December 31, 2019, the Operating Partnership issued a total of 1,120,924 Series D Units valued at $28,023 in conjunction with joint venture acquisitions. 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.

The Series D Units have a liquidation value of $25.00 per unit, for a current fixed liquidation value of $120,086 which represents 4,803,445 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

12.	NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS

Noncontrolling interest in Operating Partnership

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 90.7% majority ownership interest therein as of December 31, 2019. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 9.3% 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, 2019, was $104.18 and there were 5,924,778 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on December 31, 2019 and the Company elected to pay the OP Unit holders cash, the Company would have paid $617,243 in cash consideration to redeem the units.

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

	For the Year Ended December 31,
	2019			2018			2017
OP Units redeemed for common stock	340,182			35,000			—
OP Units redeemed for cash	—			30,000			33,896
Cash paid for OP Units redeemed	$	—		$	2,558		$	2,510
OP Units issued in conjunction with acquisitions	—			21,768			90,228
Value of OP Units issued in conjunction with acquisitions	$	—		$	1,877		$	7,618
OP Units issued upon redemption of Series C Units	270,709			373,113			—

On December 1, 2018, 373,113 common OP Units were issued in the conversion of 407,996 Series C Units. These newly issued OP Units were pledged as collateral on the existing loan receivable to the Series C Unit holders. As a result, noncontrolling interests in the Operating Partnership was reported net of $11,091 of the loan receivable as of December 31, 2018, which represents the portion of the note receivable that is collateralized by the OP Units. The remaining 296,020 Series C Units were converted into 270,709 OP Units on April 25, 2019 and the remainder of the loan receivable was reported net with the OP Units. The remaining total outstanding balance of the loan receivable of $18,524 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2019.

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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interest of third parties in two consolidated joint ventures as of December 31, 2019. One joint venture owns two operating stores in Texas and two operating stores in Colorado, and the other owns an operating store in Pennsylvania and a development property in New Jersey. The voting interests of the third-party owners are between 5.0% and 20.0%.

13.	LEASES

The Company adopted ASC 842, "Leases," effective January 1, 2019 on a modified retrospective basis as allowed under the standard and thus prior periods have not been restated. The Company elected the package of transition practical expedients, and has therefore (1) not reassessed whether any expired or existing contracts are or contain leases, (2) not reassessed the lease classification for any expired or existing leases, and (3) not reassessed initial direct costs for any expired or existing leases.

Lessee Accounting

The Company recognized right-of-use assets related to operating leases totaling $95,506 and lease liabilities of $104,863 as of the adoption date, January 1, 2019. These are presented as “Operating lease liabilities” and “Real estate assets-operating lease right-of-use assets” on the Company’s consolidated balance sheets.

In June and August 2019, the Company entered into new triple-net lease agreements to lease land and buildings at 22 and five operating stores, respectively. These leases are categorized as operating leases, and have contractual lease terms of 25 years, but have termination options after 10 years that result in lease terms of 10 years under ASC 842. The Company recorded new operating lease right-of-use assets and operating lease liabilities of $127,532 and $52,224, respectively, in conjunction with these new lease agreements.

The Company is lessee under several types of lease agreements. Generally, these leases fall into the following categories:

•	Leases of real estate at 49 stores classified as wholly-owned. These leases generally have original lease terms between 10-67 years. Under these leases, the Company typically has the option to extend the lease term for additional terms of 5-35 years.

•	Leases of its corporate offices and call center. These leases have original lease terms between 5.3 and 12.1 years, with no extension options.

•	Leases of 13 regional offices. These leases have original lease terms between three and five years. The Company has the option on five of these leases to extend the lease term for three additional years.

•	Leases of small district offices. These leases generally have terms of 12 months or less. The Company has made an election to account for these under the short-term lease exception outlined under ASC 842. Therefore, no lease assets or liabilities are recorded related to these leases.

The Company has included lease extension options in the lease term for calculations of its right-of-use assets and liabilities related to the real estate asset leases at its stores when it is reasonably certain that the Company plans to extend the lease terms as the options arise.

Several of the leases of real estate at the Company’s stores include escalation clauses based on an index or rate, such as the Consumer Price Index (CPI). The Company included these lease payments in its calculations of right-of-use assets and liabilities based on the prevailing index or rate as of the adoption date. The Company will recognize changes to these variable lease payments in earnings in the period of change.

One of the real estate leases includes variable lease payments that are based upon a percentage of gross revenues. Certain other leases include additional variable payments relating to a percentage of sales in excess of a specified amount, common area maintenance, property taxes, and similar items. These payments are variable lease payments that do not depend on an index or rate and are excluded from the measurement of the lease liabilities and right-of-use-assets for these leases. The Company will recognize costs from these variable lease payments in the period in which the obligation for those payments is incurred.

The Company has signed a lease agreement for a store in New Jersey. The store is currently under construction by the lessor, and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in early to mid-2020. The lease term is 75 years from the lease commencement date, with three 10-year extension options. The Company has also signed a lease agreement for a store in California. The store is under construction by the lessor,

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in late 2020. The lease term is 15 years from the lease commencement date, with three 10-year extension options and one 5-year extension option. The Company has not recorded right-of-use assets or lease liabilities related to these leases as of December 31, 2019 as the lease term has not yet commenced for either lease. The lease commencement date will occur when the Company takes possession of the leased asset, and the Company will recognize a lease liability and right-of-use asset relating to the leases at that time.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s unsecured borrowing rates and implied secured spread at the lease commencement date in determining the present value of lease payments. These discount rates vary depending on the term of the specific leases.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Following is information on our total lease costs as of the period indicated:

	For the Year Ended December 31,
	2019
Finance lease cost:
Amortization of finance lease right-of-use assets	$	168
Interest expense related to finance lease liabilities	290
Operating lease cost	20,268
Variable lease cost	5,068
Short-term lease cost	164
Total lease cost	$	25,958
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows for finance lease payments	$	231
Operating cash outflows for operating lease payments	19,226
Total cash flows for lease liability measurement	$	19,457
Right-of-use assets obtained in exchange for new operating lease liabilities	$	277,557
Right-of-use assets obtained in exchange for new finance lease liabilities	$	8,050
Weighted average remaining lease term - finance leases (years)	46.9
Weighted average remaining lease term - operating leases (years)	14.7
Weighted average discount rate - finance leases	6.07		%
Weighted average discount rate - operating leases	3.65		%

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

The following table presents information about the Company’s undiscounted cash flows on an annual basis for operating and finance leases, including a reconciliation of the undiscounted cash flows to the finance lease and operating lease liabilities recognized in the Company’s consolidated balance sheets:

	Operating				Finance				Total
2020	$	28,369			$	232			$	28,601
2021	28,628				237				28,865
2022	28,651				255				28,906
2023	28,707				255				28,962
2024	29,198				255				29,453
Thereafter	223,823				16,522				240,345
Total	$	367,376			$	17,756			$	385,132
Present value adjustments	(92,593		)		(12,918		)		(105,511		)
Lease liabilities	$	274,783			$	4,838			$	279,621

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Company elected the package of practical expedients upon adoption of ASC 842, which allows for the application of the standard solely to the transition period in 2019 and does not require application to prior fiscal comparative periods presented. Disclosures required under the previous leasing standard are presented for prior years. The following table summarizes future minimum lease payments required under operating leases as of December 31, 2018:

2019	$	8,203
2020	8,307
2021	8,137
2022	7,837
2023	7,021
Thereafter	111,653
	$	151,158

Lessor Accounting

The Company's property rental revenue is primarily related to rents received from tenants at its operating stores. The Company's leases with its self-storage tenants are generally on month-to-month terms, include automatic monthly renewals, allow flexibility to increase rental rates over time as market conditions permit, and provide for the collection of contingent fees such as late fees. These leases do not include any terms or conditions that allow the tenants to purchase the leased space. All self-storage leases for which the Company acts as lessor have been classified as operating leases. The real estate assets related to the Company's stores are included in "Real estate assets, net" on the Company's condensed consolidated balance sheets and are presented at historical cost less accumulated depreciation and impairment, if any. Rental income related to these operating leases is included in Property rental revenue on the Company's condensed consolidated statements of operations, and is recognized each month during the month-to-month terms at the rental rate in place during each month.

14. STOCK-BASED COMPENSATION

As of December 31, 2019, 1,438,073 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019
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
Exercised	(211,057	)		14.65
Outstanding at December 31, 2019	206,524			$	48.88			3.43		$11,719
Vested and Expected to Vest	206,460			$	48.87			3.43		$11,717
Ending Exercisable	197,576			$	47.20			3.30		$11,543

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 2019 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, 2019. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017 was $18,089, $3,693 and $1,786, respectively.

There have been no options granted since 2016. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. 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, 2019, 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, 2019, is as follows:

		Options Outstanding									Options Exercisable
Exercise Price		Shares			Weighted Average Remaining Contractual Life		Weighted Average Exercise Price				Shares			Weighted Average Exercise Price
$12.21 - $12.21		77,400			0.18		$	12.21			77,400			$	12.21
$38.40 - $38.40		8,085			3.14		38.40				8,085			38.40
$47.50 - $47.50		9,800			4.13		47.50				9,800			47.50
$65.36 - $65.36		15,647			5.15		65.36				15,647			65.36
$65.45 - $65.45		11,960			5.13		65.45				11,960			64.45
$73.52 - $73.52		50,000			5.58		73.52				50,000			73.52
$85.99 - $85.99		33,632			6.15		85.99				24,684			85.99
		206,524			3.42		$	48.88			197,576			$	47.20

The Company recorded compensation expense relating to outstanding options of $364, $570 and $649 in general and administrative expense for the years ended December 31, 2019, 2018 and 2017, respectively. Net proceeds received for the years ended December 31, 2019, 2018 and 2017, related to option exercises was $3,063, $1,169 and $1,266, respectively. At December 31, 2019, there was no unrecognized compensation expense related to non-vested stock options under the Plan. The

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate.

Common Stock Granted to Employees and Directors

The Company recorded $9,173, $8,733 and $7,232 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, 2019, 2018 and 2017, respectively. The forfeiture rate, which is estimated at a weighted-average of 9.7% of unvested awards outstanding as of December 31, 2019, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates. At December 31, 2019 there was $11,712 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 2.17 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.

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, 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
Granted	109,081			101.52
Released	(110,724	)		79.58
Cancelled	(8,863	)		90.11
Unreleased at December 31, 2019	212,608			$	90.85

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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
Granted		49,334			103.18
Unvested at December 31, 2019		108,140			$	95.94

The Company recorded $3,514, $1,873 and $840 of expense in general and administrative expense in its statement of operations related to PSUs granted to employees and directors for the years ended December 31, 2019, 2018 and 2017, respectively. 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:

		For the Year Ended December 31,
		2019		2018		2017
Intrinsic value		$6,211		$5,321		$2,630
Risk-free rate		2.53%		2.37%		1.62%
Volatility		20.7%		22.6%		21.4%
Expected term (in years)		2.8		2.9		2.8
Dividend yield		—%		—%		—%
Unrecognized compensation cost		$4,315		$2,739		$1,681
Term over which compensation cost recognized		3		3		3

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, 2019 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, 2019, 2018 and 2017, the Company made matching contributions to the plan of $3,355, $2,833 and $2,212, respectively, based on 100% of the first 3% and up to 50% of the next 2% of an employee’s compensation.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2019, 2018 and 2017, is comprised of the following components:

	For the Year Ended December 31, 2019
	Federal				State				Total
Current expense	$	10,164			$	2,936			$	13,100
Tax credits/true-up	(3,633		)		(30		)		(3,663		)
Change in deferred expense/(benefit)	1,787				84				1,871
Total tax expense	$	8,318			$	2,990			$	11,308

	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	3,730				(32		)		3,698
Total tax expense	$	7,025			$	2,219			$	9,244

	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 benefit	1,700				542				2,242
Total tax expense	$	1,804			$	1,821			$	3,625

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,
	2019							2018							2017
Expected tax at statutory rate	$	97,110			21.0	%		$	95,828			21.0	%		$	186,274			35.0	%
Non-taxable REIT income	(82,717		)		(17.9	)%		(83,022		)		(18.2	)%		(170,811		)		(32.1	)%
State and local tax expense - net of federal benefit	2,837				0.6	%		2,385				0.5	%		2,306				0.4	%
Change in valuation allowance	(207		)		—	%		(1,052		)		(0.2	)%		159				—	%
Tax credits/true-up	(3,663		)		(0.8	)%		(6,016		)		(1.3	)%		(5,956		)		(1.1	)%
Remeasurement of deferred balances	—				—	%		—				—	%		(8,460		)		(1.6	)%
Miscellaneous	(2,052		)		(0.4	)%		1,121				0.2	%		113				—	%
Total provision	$	11,308			2.5	%		$	9,244			2.0	%		$	3,625			0.6	%

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, 2019				December 31, 2018
Deferred tax liabilities:
Fixed assets	$	(23,805	)		$	(20,907	)
Operating lease right-of-use assets	(2,475		)		—
Other	(84		)		(96		)
State deferred taxes	(3,405		)		(3,076		)
Total deferred tax liabilities	(29,769		)		(24,079		)
Deferred tax assets:
Captive insurance subsidiary	312				324
Accrued liabilities	2,006				1,772
Stock compensation	2,118				1,604
Operating lease liabilities	2,478				—
SmartStop TRS	219				219
Other	50				53
State deferred taxes	7,250				7,196
Total deferred tax assets	14,433				11,168
Valuation allowance	(3,665		)		(3,872		)
Net deferred income tax liabilities	$	(19,001	)		$	(16,783	)

The state income tax net operating losses expire between 2020 and 2037. The valuation allowance is associated with the state income tax net operating losses. The tax years 2015 through 2018 remain open related to the state returns, and 2016 through 2018 for the federal returns.

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 are comprised of 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. 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,
	2019				2018				2017
Revenues:
Self-Storage Operations	$	1,130,177			$	1,039,340			$	967,229
Tenant Reinsurance	128,387				115,507				98,401
Total segment revenues	$	1,258,564			$	1,154,847			$	1,065,630
Operating expenses:
Self-Storage Operations	$	336,050			$	291,695			$	271,974
Tenant Reinsurance	29,376				25,707				19,173
Total segment operating expenses	$	365,426			$	317,402			$	291,147
Net operating income:
Self-Storage Operations	$	794,127			$	747,645			$	695,255
Tenant Reinsurance	99,011				89,800				79,228
Total segment net operating income:	$	893,138			$	837,445			$	774,483
Total segment net operating income	$	893,138			$	837,445			$	774,483
Other components of net income (loss):
Property management fees and other income	49,890				41,757				39,379
General and administrative expense	(89,418		)		(81,256		)		(78,961		)
Depreciation and amortization expense	(219,857		)		(209,050		)		(193,296		)
Gain on real estate transactions and impairment of real estate	1,205				30,807				112,789
Interest expense	(186,526		)		(178,436		)		(153,511		)
Non-cash interest expense related to the amortization of discount on equity component of exchangeable senior notes	(4,742		)		(4,687		)		(5,103		)
Interest income	7,467				5,292				6,736
Equity in earnings of unconsolidated real estate entities	11,274				14,452				15,331
Income tax expense	(11,308		)		(9,244		)		(3,625		)
Net income	$	451,123			$	447,080			$	514,222

18. COMMITMENTS AND CONTINGENCIES

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, 2019, 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

As of December 31, 2019, the Company was under agreement to acquire three stores at a total purchase price of $27,400. Of these stores, two are scheduled to close in 2020 at a purchase price of $16,000, and one is scheduled to close in 2021 at a purchase price of $11,400. Additionally, the Company is under agreement to acquire seven stores in 2020 with joint venture partners, for a total investment of $25,095.

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.

19. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)

	For the Three Months Ended
	March 31, 2019				June 30, 2019				September 30, 2019				December 31, 2019
Revenues	$	311,546			$	323,602			$	337,505			$	335,801
Cost of operations	163,069				165,609				174,867				171,156
Revenues less cost of operations	$	148,477			$	157,993			$	162,638			$	164,645
Net income	$	102,160			$	112,689			$	115,995			$	120,279
Net income attributable to common stockholders	$	94,770			$	104,828			$	108,087			$	112,282
Earnings per common share—basic	$	0.74			$	0.82			$	0.84			$	0.87
Earnings per common share—diluted	$	0.74			$	0.81			$	0.83			$	0.86
	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

Extra Space Storage Inc.

Schedule III

Real Estate and Accumulated Depreciation

(Dollars in thousands)

As of December 31, 2019

								Building and Improvements Initial Cost			Adjustments and Costs to Land and Building Subsequent to Acquisition			Gross carrying amount at December 31, 2019
Self - Storage Facilities by State:	Store Count				Land Initial Cost						Building and Improvements						Accumulated Depreciation
Debt			Land			Total
AL	8	$	29,567		$	7,690		$	42,770		$	3,693		$	7,691		$	46,462		$	54,153		$	8,277
AZ	23	21,845			27,535			117,304			9,574			27,533			126,880			154,413			24,239
CA	165	531,406			539,355			1,166,591			109,246			540,043			1,275,149			1,815,192			264,874
CO	16	30,432			16,809			71,894			16,652			17,527			87,828			105,355			19,546
CT	7	23,557			9,875			50,966			4,766			9,874			55,733			65,607			9,934
FL	91	263,634			163,455			588,353			56,727			163,919			644,616			808,535			134,121
GA	63	85,820			83,742			406,477			27,502			83,726			433,995			517,721			60,262
HI	13	31,029			17,663			133,870			6,025			17,663			139,895			157,558			25,676
IL	37	50,669			45,435			234,396			25,785			44,888			260,728			305,616			43,160
IN	15	10,987			12,447			58,247			5,850			12,447			64,097			76,544			11,698
KS	1	—			366			1,897			866			366			2,763			3,129			1,087
KY	11	34,066			8,640			68,679			18,260			9,412			86,167			95,579			12,296
LA	2	—			6,114			8,541			1,312			6,115			9,852			15,967			4,221
MA	46	105,046			73,544			270,243			50,778			73,725			320,840			394,565			80,863
MD	32	118,007			99,147			284,253			16,756			97,180			302,976			400,156			70,387
MI	7	5,792			9,583			51,359			3,239			9,583			54,598			64,181			5,740
MN	5	—			7,377			50,057			514			7,377			50,571			57,948			2,585
MO	5	—			4,129			15,444			4,107			4,086			19,594			23,680			7,392
MS	3	—			2,420			20,849			1,450			2,420			22,299			24,719			2,635
NC	19	28,221			31,969			104,104			7,379			31,967			111,485			143,452			11,241
NH	2	5,938			754			4,054			1,278			817			5,269			6,086			2,388
NJ	59	155,754			134,032			560,512			41,422			137,258			598,708			735,966			129,970
NM	11	17,689			32,252			71,142			5,049			32,252			76,191			108,443			9,373
NV	14	37,557			15,252			74,376			4,671			15,252			79,047			94,299			10,422
NY	27	43,218			121,945			230,875			34,801			122,680			264,941			387,621			59,450
OH	17	34,470			17,788			50,493			6,733			17,787			57,227			75,014			13,318
OR	6	30,267			7,906			39,576			2,042			7,906			41,618			49,524			7,545
PA	18	34,475			24,297			149,144			12,297			23,589			162,149			185,738			24,480
RI	2	11,841			3,191			6,926			1,253			3,191			8,179			11,370			2,939
SC	23	43,543			37,075			135,760			10,029			37,076			145,788			182,864			22,598
TN	17	45,601			25,938			91,497			8,750			25,938			100,247			126,185			18,046
TX	100	213,291			169,160			648,128			57,365			169,012			705,641			874,653			112,790
UT	10	13,181			9,008			39,295			2,247			9,008			41,542			50,550			9,854
VA	46	163,675			139,318			414,335			19,385			139,319			433,719			573,038			69,063
WA	8	20,345			12,528			47,645			2,694			12,530			50,337			62,867			11,380
DC	1	8,762			14,394			18,172			429			14,394			18,601			32,995			1,824
Other corporate assets		—			—			2,202			138,483			—			140,685			140,685			40,298
Intangible tenant relationships and lease rights		—			—			132,000			2,932			—			134,932			134,932			127,712
Construction in Progress/Undeveloped Land		—			5,978			—			39,788			3,372			42,394			45,766			—
Right of use asset - finance lease (1)		—			—			—			8,050			—			8,050			8,050			168
Totals (1)	930	$	2,249,685		$	1,938,111		$	6,462,425		$	770,180		$	1,938,923		$	7,231,793		$	9,170,716		$	1,473,852

(1) No right-of-use assets related to operating leases are included in the ending net real estate assets information above. As of December 31, 2019, there was a right-of-use asset relating to a finance lease in the amount of $8,050 included in net real estate assets on the Company's consolidated balance sheets.

Extra Space Storage Inc. Schedule III (continued)

Activity in real estate facilities during the years ended December 31, 2019, 2018 and 2017 is as follows:

	2019				2018				2017
Operating facilities
Balance at beginning of year	$	8,709,315			$	8,158,741			$	7,649,448
Acquisitions	303,588				459,223				628,391
Improvements	68,459				64,336				71,090
Transfers from construction in progress	59,614				49,449				19,079
Dispositions and other	(11,418		)		(22,434		)		(209,267		)
Balance at end of year	$	9,129,558			$	8,709,315			$	8,158,741
Accumulated depreciation:
Balance at beginning of year	$	1,262,438			$	1,060,060			$	900,861
Depreciation expense	212,202				203,030				185,903
Dispositions and other	(789		)		(652		)		(26,704		)
Balance at end of year	$	1,473,851			$	1,262,438			$	1,060,060
Real estate under development/redevelopment:
Balance at beginning of year	$	44,954			$	33,750			$	21,860
Current development	55,817				60,677				33,484
Transfers to operating facilities	(59,614		)		(49,449		)		(19,079		)
Dispositions and other	—				(24		)		(2,515		)
Balance at end of year	$	41,157			$	44,954			$	33,750
Net non-lease real estate assets (1)	$	7,696,864			$	7,491,831			$	7,132,431

(1) No right-of-use assets related to operating leases leases are included in the ending net real estate assets information above. As of December 31, 2019, there was a right-of-use asset relating to a finance lease in the amount of $8,050 included in net real estate assets on the Company's consolidated balance sheets.

As of December 31, 2019, the aggregate cost of real estate for U.S. federal income tax purposes was $7,721,422.