Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

EXTRA SPACE STORAGE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND SCHEDULES


Report of Independent Registered Public Accounting Fir m (PCAOB ID: 42)			30
Consolidated Balance Sheets as of December 31, 202 1 and 20 20			32
Consolidated Statements of Operations for the years ended December 31, 202 1 , 20 20 and 201 9			33
Consolidated Statements of Comprehensive Income for the years ended December 31, 202 1 , 20 20 and 20 19			34
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 202 1 , 20 20 and 20 19			35
Consolidated Statements of Cash Flows for the years ended December 31, 202 1 , 20 20 and 20 19			38
Notes to Consolidated Financial Statements			39
Schedule III - Real Estate and Accumulated Depreciation			74

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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 28, 2022 expressed an unqualified opinion thereon.

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.


			Purchase price allocation

Description of the Matter			For the year ended December 31, 2021, the Company completed the acquisition of 70 self-storage properties (“stores”) for a total purchase price of $1.1 billion. As further discussed in Note 2 of the consolidated financial statements, the transactions were accounted for as asset acquisitions, and the purchase price was allocated to the real estate assets acquired based on their relative fair values, which are estimated using unobservable inputs.

			Auditing the accounting for the Company’s 2021 acquisitions of stores was subjective because in determining the fair value of acquired land and buildings, the Company had to rely on unobservable inputs due to the lack of available directly comparable market information. In particular, the fair value estimates were sensitive to assumptions such as price of land per square foot, and current replacement cost estimates, including adjustments for the age, class, height, square footage, condition, location, and turnkey factor associated with the acquired assets.

How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over management’s accounting for acquired stores, including controls over the review of assumptions underlying the purchase price allocation and accuracy of the underlying data used. For example, we tested controls over the determination of the fair value of the land and building assets, including the controls over the review of the valuation models and the underlying assumptions used to develop such estimates.

			For the 2021 store acquisitions described above, our procedures included, but were not limited to, evaluating the Company’s valuation methodologies and evaluating the significant assumptions used to determine the fair value of the assets acquired. For certain of these asset acquisitions, we tested the completeness and accuracy of the underlying data by, among other things, recalculating the current replacement cost of buildings and comparing the adjustments for the age, class, height, square footage, condition, location, and turnkey factor with the acquired assets to industry publications. Additionally, we also compared significant assumptions, including prices per square foot to third-party sources such as recent land sales. For certain of these asset acquisitions, we involved our valuation specialists to assist in the assessment of the methodology utilized by the Company, in addition to performing corroborative analyses to assess whether the conclusions in the valuation were supported by observable market data. For example, our valuation specialists used independently identified data sources to evaluate management’s selected comparable land sales and replacement cost assumptions.

/s/ Ernst & Young LLP

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

Salt Lake City, Utah

February 28, 2022

Extra Space Storage Inc.

Consolidated Balance Sheets

(dollars in thousands, except share data)


	December 31, 2021		December 31, 2020
Assets:
Real estate assets, net	$	8,834,649	$	7,893,802
Real estate assets - operating lease right-of-use assets	227,949		252,172
Investments in unconsolidated real estate entities	457,326		397,444
Investments in debt securities and notes receivable	719,187		593,810
Cash and cash equivalents	71,126		109,124
Restricted cash	5,068		18,885

Other assets, net	159,172		130,611
Total assets	$	10,474,477	$	9,395,848
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	1,320,755	$	2,283,454
Unsecured term loans, net	1,741,926		1,194,383
Unsecured senior notes, net	2,360,066		1,319,466
Revolving lines of credit	535,000		949,000
Operating lease liabilities	233,356		263,485
Cash distributions in unconsolidated real estate ventures	63,582		47,126
Accounts payable and accrued expenses	142,285		130,012
Other liabilities	291,531		272,798
Total liabilities	6,688,501		6,459,724
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, 133,922,305 and 131,357,961 shares issued and outstanding at December 31, 2021 and 2020, respectively	1,339		1,314
Additional paid-in capital	3,285,948		3,000,458
Accumulated other comprehensive loss	(42,546)		(99,093)
Accumulated deficit	(128,245)		(354,900)
Total Extra Space Storage Inc. stockholders' equity	3,116,496		2,547,779
Noncontrolling interest represented by Preferred Operating Partnership units, net	259,110		172,052
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	410,370		216,293
Total noncontrolling interests and equity	3,785,976		2,936,124
Total liabilities, noncontrolling interests and equity	$	10,474,477	$	9,395,848

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Operations

(dollars in thousands, except share data)


	For the Year Ended December 31,
	2021		2020		2019
Revenues:
Property rental	$	1,340,990	$	1,157,522	$	1,130,177
Tenant reinsurance	170,108		146,561		128,387
Management fees and other income	66,264		52,129		49,890
Total revenues	1,577,362		1,356,212		1,308,454
Expenses:
Property operations	368,608		360,615		336,050
Tenant reinsurance	29,488		26,494		29,376
General and administrative	102,194		96,594		89,418
Depreciation and amortization	241,879		224,444		219,857
Total expenses	742,169		708,147		674,701
Gain on real estate transactions	140,760		18,075		1,205
Income from operations	975,953		666,140		634,958

Interest expense	(166,183)		(168,626)		(186,526)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		(3,675)		(4,742)
Interest income	49,703		15,192		7,467

Income before equity in earnings and dividend income from unconsolidated real estate ventures and income tax expense	859,473		509,031		451,157
Equity in earnings and dividend income from unconsolidated real estate entities	32,358		22,361		11,274
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest	6,251		—		—
Income tax expense	(20,324)		(13,810)		(11,308)
Net income	877,758		517,582		451,123
Net income allocated to Preferred Operating Partnership noncontrolling interests	(14,697)		(12,882)		(12,492)
Net income allocated to Operating Partnership and other noncontrolling interests	(35,412)		(22,921)		(18,664)
Net income attributable to common stockholders	$	827,649	$	481,779	$	419,967
Earnings per common share
Basic	$	6.20	$	3.71	$	3.27
Diluted	$	6.19	$	3.71	$	3.24
Weighted average number of shares
Basic	133,374,938		129,541,531		128,203,568
Diluted	140,016,028		129,584,829		136,433,769

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Comprehensive Income

(amounts in thousands)


	For the Year Ended December 31,
	2021		2020		2019
Net income	$	877,758	$	517,582	$	451,123
Other comprehensive income (loss):
Change in fair value of interest rate swaps	59,325		(73,686)		(66,843)
Total comprehensive income	937,083		443,896		384,280
Less: comprehensive income attributable to noncontrolling interests	52,887		32,244		27,929
Comprehensive income attributable to common stockholders	$	884,196	$	411,652	$	356,351

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 Loss	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		—		—		—

Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units				(4,374)		4,374		—		—	—		—		—		—		—
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions				28,022		—		—		—	—		—		—		—		28,022
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


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 Loss	Accumulated Deficit		Total Noncontrolling Interests and Equity
						Shares		Par Value
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
Issuance of common stock upon the exercise of options				—		—		—		134,930	1		4,758		—		—			4,759
Issuance of common stock in connection with share based compensation				—		—		—		143,187	1		16,280		—		—		`	16,281

Restricted stock grants cancelled				—		—		—		(5,083)	—		—		—		—			—
Issuance of common stock, net of offering costs				—		—		—		899,048	9		103,459		—		—			103,468
Buyback of common stock, net of offering costs				—		—		—		(826,797)	(8)		—		—		(67,865)			(67,873)

Redemption of Operating Partnership units for stock				—		(4,572)		—		123,993	1		4,571		—		—			—
Repurchase of equity portion of 2015 exchangeable senior notes				—		—		—		1,323,781	14		(14)		—		—			—
Repayment of receivable with Preferred operating units pledged as collateral on loan				—		16,213		—		—	—		—		—		—			16,213

Redemption of Preferred B Units in the Operating Partnership for cash				(1,000)		—		—		—	—		—		—		—			(1,000)
Redemption of Preferred D Units in the Operating Partnership for stock				(2,724)		—		—		30,495	1		2,723		—		—			—

Noncontrolling interest in consolidated joint venture				—		—		66		—	—		—		—		—			66
Net income (loss)				12,882		22,952		(31)		—	—		—		—		481,779			517,582
Other comprehensive loss				(456)		(3,103)		—		—	—		—		(70,127)		—			(73,686)
Distributions to Operating Partnership units held by noncontrolling interests				(12,598)		(21,017)		—		—	—		—		—		—			(33,615)
Dividends paid on common stock at $3.60 per share				—		—		—		—	—		—		—		(467,765)			(467,765)
Balances at December 31, 2020				$	172,052	$	215,892	$	401	131,357,961	$	1,314	$	3,000,458	$	(99,093)	$	(354,900)		$	2,936,124


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 Loss	Accumulated Deficit		Total Noncontrolling Interests and Equity
						Shares		Par Value
Balances at December 31, 2020				$	172,052	$	215,892	$	401	131,357,961	$	1,314	$	3,000,458	$	(99,093)	$	(354,900)	$	2,936,124
Issuance of common stock upon the exercise of options				—		—		—		62,322	—		4,572		—		—		4,572
Issuance of common stock in connection with share based compensation				—		—		—		148,228	—		17,303		—		—		17,303
Restricted stock grants cancelled				—		—		—		(12,808)	—		—		—		—		—
Issuance of common stock, net of offering costs				—		—		—		2,185,685	22		273,167		—		—		273,189
Redemption of Operating Partnership units for stock				—		(6,373)		—		165,652	2		6,371		—		—		—
Redemption of Preferred B Units in the Operating Partnership for stock				(2,834)		—		—		15,265	1		2,833		—		—		—
Redemption of Operating Partnership units for cash				—		(173)		—		—	—		(615)		—		—		(788)
Repayment of receivable with Operating Partnership units pledged as collateral				—		411		—		—	—		—		—		—		411
Issuance of Operating Partnership units in conjunction with acquisitions				—		188,319		—		—	—		—		—		—		188,319
Issuance of Preferred D units in the Operating Partnership in conjunction with acquisitions				88,074		—		—		—	—		—		—		—		88,074
Purchase of remaining equity interest in existing consolidated joint venture				—		—		—		—	—		(18,141)		—		—		(18,141)
Noncontrolling interest in consolidated joint venture				—		—		(82)		—	—		—		—		—		(82)
Net income (loss)				14,697		35,414		(2)		—	—		—		—		827,649		877,758
Other comprehensive income				366		2,412		—		—	—		—		56,547		—		59,325
Distributions to Operating Partnership units held by noncontrolling interests				(13,245)		(25,849)		—		—	—		—		—		—		(39,094)
Dividends paid on common stock at $4.50 per share				—		—		—		—	—		—		—		(600,994)		(600,994)
Balances at December 31, 2021				$	259,110	$	410,053	$	317	133,922,305	$	1,339	$	3,285,948	$	(42,546)	$	(128,245)	$	3,785,976

See accompanying notes

Extra Space Storage Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)


	For the Year Ended December 31,
	2021		2020		2019
Cash flows from operating activities:
Net income	$	877,758	$	517,582	$	451,123
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	241,879		224,444		219,857
Amortization of deferred financing costs	10,587		9,386		11,989
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		3,675		4,742
Non-cash lease expense	1,869		1,173		1,064
Compensation expense related to stock-based awards	17,303		16,281		13,051
Accrual of interest income added to principal of debt securities and notes receivable	(34,550)		(8,059)		—
Gain on real estate transactions	(140,760)		(18,075)		(1,205)
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest	(6,251)		—
Distributions from unconsolidated real estate ventures in excess of earnings	7,035		6,893		6,358
Changes in operating assets and liabilities:

Other assets	(23,891)		(19,674)		(12,482)
Accounts payable and accrued expenses	10,951		17,974		15,522
Other liabilities	(9,494)		19,632		(2,333)
Net cash provided by operating activities	952,436		771,232		707,686
Cash flows from investing activities:
Acquisition of real estate assets	(1,233,298)		(320,148)		(349,494)
Development and redevelopment of real estate assets	(56,226)		(67,300)		(53,717)
Proceeds from sale of real estate assets and investments in real estate ventures	572,728		44,024		11,254

Investment in unconsolidated real estate entities	(54,602)		(64,792)		(197,759)
Return of investment in unconsolidated real estate ventures	31,534		371		3,982
Issuance and purchase of notes receivable	(317,482)		(313,355)		(185,993)
Investment in debt securities	—		(300,000)		—
Proceeds from sale of notes receivable	172,002		62,764		—
Principal payments received from notes receivable	51,463		10,102		157,861
Purchase of equipment and fixtures	(3,659)		(7,093)		(7,764)
Net cash used in investing activities	(837,540)		(955,427)		(621,630)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	273,189		103,468		198,827
Proceeds from notes payable and revolving lines of credit	4,666,632		3,281,000		2,214,000
Principal payments on notes payable and revolving lines of credit	(5,500,290)		(2,014,730)		(1,977,805)
Principal payments on notes payable to trusts	—		—		(30,928)
Proceeds from issuance of public bonds, net	1,040,349		—		—
Deferred financing costs	(10,698)		(4,052)		(2,986)
Repurchase of exchangeable senior notes	—		(575,000)		—
Net proceeds from exercise of stock options	4,572		4,759		3,063
Repurchase of common stock	—		(67,873)		—
Proceeds from principal payments on notes receivable collateralized by OP Units and Preferred OP Units	411		16,213		—
Redemption of Operating Partnership units held by noncontrolling interests	(788)		(1,000)		—
Contributions from noncontrolling interests	—		66		173
Dividends paid on common stock	(600,994)		(467,765)		(458,114)
Distributions to noncontrolling interests	(39,094)		(33,615)		(34,243)
Net cash provided by (used in) financing activities	(166,711)		241,471		(88,013)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(51,815)		57,276		(1,957)
Cash, cash equivalents, and restricted cash, beginning of the period	128,009		70,733		72,690
Cash, cash equivalents, and restricted cash, end of the period	$	76,194	$	128,009	$	70,733

Supplemental schedule of cash flow information
Interest paid	$	152,170	$	159,597	$	174,155
Income taxes paid	26,252		5,181		10,359
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	$	(6,373)	$	(4,005)	$	(13,057)
Common stock and paid-in capital	6,373		4,005		13,057
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
Redemption of Preferred Operating Partnership units for common stock
Preferred Operating Partnership units	$	(2,834)	$	(2,724)	$	—
Additional paid-in capital	2,834		2,724		—
Issuance of Preferred OP Units for additional investment in unconsolidated real estate venture



Preferred OP Units	$	—	$	—	$	4,374
Common OP Units	—		—		(4,374)
Acquisition and establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	6,655	$	8,014	$	277,557
Operating lease liabilities	(6,655)		(8,014)		(286,914)
Accounts payable and accrued expenses	—		—		9,357
Acquisitions of real estate assets
Real estate assets, net	$	318,036	$	41,491	$	21,066
Value of Operating Partnership and Preferred Operating Partnership units issued	(276,393)		—		—
Notes payable assumed	(20,028)		—		(17,157)
Investment in unconsolidated real estate ventures	5,383		—		(2,780)
Finance lease liability	(26,998)		(41,491)		—
Net liabilities assumed	—		—		(1,129)
Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	1,323	$	656	$	2,203
Development and redevelopment of real estate assets	—		—		1,601
Accounts payable and accrued expenses	(1,323)		(656)		(3,804)

See accompanying notes

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, 2021, the Company had direct and indirect equity interests in 1,268 storage facilities. In addition, the Company managed 828 stores for third parties bringing the total number of stores which it owns and/or manages to 2,096. These stores are located in 41 states and Washington, D.C. 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.

For comparison purposes, the Company has reclassified a portion of Notes payable, net to Unsecured term loans, net and Unsecured senior notes, net on the Consolidated Balance Sheets as of December 31, 2020, to conform to the presentation as of December 31, 2021.

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. The Company had one consolidated VIE consisting of four stores as of December 31, 2021 and no consolidated VIEs as of December 31, 2020.

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

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, 2021, 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, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall.


			Fair Value Measurements at Reporting Date Using
Description	December 31, 2021		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	$	271	$	—	$	271	$	—
Other liabilities - Cash flow hedge swap agreements	$	39,569	$	—	$	39,569	$	—

There were no transfers of assets and liabilities between Level 1 and Level 2 during the year ended December 31, 2021. 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, 2021 or 2020.

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 entities 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, 2021 and 2020, 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, investments in debt securities and notes receivable, revolving lines of credit and other liabilities reflected in the consolidated balance sheets at December 31, 2021 and 2020, approximate fair value.

The fair values of the Company’s notes receivable and 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 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, 2021				December 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	101,824	$	101,900	$	102,333	$	102,311
Fixed rate notes receivable	$	105,954	$	104,251	$	114,145	$	104,000
Fixed rate debt	$	4,643,072	$	4,506,435	$	3,816,530	$	3,637,220

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.

The purchase of stores 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

Investments in unconsolidated real estate entities and Cash distributions in unconsolidated real estate ventures represent the Company's noncontrolling interest in real estate joint ventures that own stores and the Company's interest in preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop"). 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 “nature of distribution” approach for classification of distributions from joint ventures. Under this approach, cash flows are classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow from operating activities) or a return of investment (classified as a cash inflow from investing activities).

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, 2021.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Investments in Debt Securities and Notes Receivable

The Company accounts for its investment in debt securities and loans receivable at amortized cost. The Company recognizes interest income related to the debt securities and notes receivable using the effective interest method, with deferred fees and costs amortized over the lives of the related loans as yield adjustment. Additionally, the discount related to purchased notes receivable is being amortized to interest income over the remaining period of the notes.

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.

Other Assets

Other assets consist of equipment and fixtures, capitalized software, rents receivable from our tenants, 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. The Company capitalizes certain costs during the application development stage when developing software for internal use. As of December 31, 2021 and 2020, unamortized software costs were $20,280 and $22,708. During the year ended December 31, 2021 and 2020, the Company recorded amortization expense of $2,428 and $1,571, respectively, relating to capitalized software costs. No significant amortization of software costs was recorded prior to 2020 as the software was still in the application development stage.

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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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.

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

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

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

Tenant reinsurance premiums are recognized as revenue over the period of insurance coverage. The Company records an unpaid claims liability at the end of each period based on existing unpaid claims and historical claims payment history. The unpaid claims liability represents an estimate of the ultimate cost to settle all unpaid claims as of each period end, including both reported but unpaid claims and claims that may have been incurred but have not been reported. The Company uses a third party claims administrator to adjust all tenant reinsurance claims received. The administrator evaluates each claim to determine the ultimate claim loss and includes an estimate for claims that may have been incurred but not reported. Annually, a third party actuary evaluates the adequacy of the unpaid claims liability. Prior year claim reserves are adjusted as experience develops or new information becomes known. The impact of such adjustments is included in the current period operations. The unpaid claims liability is not discounted to its present value. Each tenant chooses the amount of insurance coverage they want through the tenant reinsurance program. Tenants can purchase policies in amounts of 2,000 dollars to 10,000 dollars of insurance coverage in exchange for a monthly fee. As of December 31, 2021, 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

For the years ended December 31, 2021, 2020 and 2019, the number of individual claims made were 8,748, 8,226 and 7,888, respectively (claim numbers not in thousands).

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:	2021		2020		2019
Unpaid claims liability at beginning of year	$	8,294	$	8,109	$	7,326
Claims and claim adjustment expense for claims incurred in the current year	16,901		14,534		16,280
Claims and claim adjustment expense (benefit) for claims incurred in the prior years	122		(1,351)		98
Payments for current year claims	(11,913)		(9,697)		(11,352)
Payments for prior year claims	(4,292)		(3,301)		(4,243)
Unpaid claims liability at the end of the year	$	9,112	$	8,294	$	8,109

Advertising Costs

The Company incurs advertising costs primarily attributable to digital and other advertising. These costs are expensed as incurred. The Company recognized $18,793, $28,336 and $25,106 in advertising expense for the years ended December 31, 2021, 2020 and 2019, 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 U.S. 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, the Company would be subject to U.S. federal corporate income tax on all of its 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, 2021, 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 certain corporate subsidiaries, including Extra Space Management, Inc. (“ESMI”), as a taxable REIT subsidiary (“TRS”). In general, a 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 U.S. federal corporate income tax and may also be subject to state and local income taxes. ESM Reinsurance Limited, a wholly-owned subsidiary of ESMI, generates income from insurance premiums that are subject to U.S. 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, 2021 and 2020, there were no material unrecognized tax benefits. Interest and penalties relating

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

to uncertain tax positions will be recognized in income tax expense when incurred. As of December 31, 2021 and 2020, 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, 2021, 2020 and 2019 there were no anti-dilutive shares outstanding.

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 $161.98 for the year ended December 31, 2021.

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,
	2021	2020	2019
	Equivalent Shares (if converted)	Equivalent Shares (if converted)	Equivalent Shares (if converted)
Common OP Units	—	5,853,814	—
Series A Units (Variable Only)	—	875,480	—
Series B Units	246,618	400,771	393,189

Series D Units	726,037	1,143,547	1,081,369
	972,655	8,273,612	1,474,558

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, 2021 and 2020 the Operating Partnership had no exchangeable senior notes issued or outstanding. In October and November 2020, a portion of the 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) were exchanged for cash and shares of the Company's common stock and the remaining 2015 Notes were redeemed for cash. The 2015 Notes could potentially have had a dilutive impact on the Company's earnings per share calculations. The 2015 Notes were 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 Company had 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.

Although the Company had retained that right to satisfy the exchange obligation in excess of the accreted principal amount of the 2015 Notes in cash and/or common stock, Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” required an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and required 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 year ended December 31, 2021, the Company had repaid the principal and accrued interest of its 2015 Notes, and therefore, no shares relating to the 2015 Notes were included in the computation of diluted earnings per share. For the years ended December 31, 2020 and 2019, zero and 993,114 shares, respectively, related to the 2015 Notes were included in the computation of diluted earnings per share.

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. Accordingly, the number of shares included in the computation for diluted earnings per share related to the Series A Units is equal to the number of Series A Units outstanding, with no additional shares included related to the $101,700 fixed amount.

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,
	2021		2020		2019
Net income attributable to common stockholders	$	827,649	$	481,779	$	419,967
Earnings and dividends allocated to participating securities	(1,183)		(706)		(680)
Earnings for basic computations	826,466		481,073		419,287
Earnings and dividends allocated to participating securities	—		—		680
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	43,093		—		23,727
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	(2,288)		—		(2,288)
Net income for diluted computations	$	867,271	$	481,073	$	441,406

Weighted average common shares outstanding:
Average number of common shares outstanding - basic	133,374,938		129,541,531		128,203,568
OP Units	5,752,902		—		6,006,114
Series A Units	875,480		—		875,480


Unvested restricted stock awards included for treasury stock method	—		—		212,402
Shares related to exchangeable senior notes and dilutive stock options	12,708		43,298		1,136,205
Average number of common shares outstanding - diluted	140,016,028		129,584,829		136,433,769
Earnings per common share
Basic	$	6.20	$	3.71	$	3.27
Diluted	$	6.19	$	3.71	$	3.24

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("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 non-lease components. The 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 Note 14 for further discussion of the Company's leases.

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 became effective for the Company on January 1, 2020. The adoption of this standard by the Company did not have a material impact on the Company's consolidated financial statements.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance that provides transition relief for reference rate reform, including optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The Company also elected to apply additional expedients related to contract modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes are made to applicable debt and derivative contracts. Application of these expedients preserves the presentation of derivatives and debt contracts consistent with past presentation. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of Topic 848 and clarifies some of its guidance. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

3. REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:


	December 31, 2021		December 31, 2020
Land - operating	$	2,148,093	$	1,952,097
Land - development	3,226		3,372
Buildings, improvements and other intangibles	8,227,094		7,357,033
Right of use asset - finance lease	117,718		58,148
Intangible assets - tenant relationships	134,577		124,695
Intangible lease rights	12,443		12,443
	10,643,151		9,507,788
Less: accumulated depreciation and amortization	(1,867,750)		(1,681,429)
Net operating real estate assets	8,775,401		7,826,359
Real estate under development/redevelopment	59,248		67,443
Real estate assets, net	$	8,834,649	$	7,893,802
Real estate assets held for sale included in real estate assets, net	$	8,436	$	103,624

As of December 31, 2021, the Company had one store classified as held for sale. The estimated fair value less selling costs of this asset is greater than the carrying value of the asset, 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 $4,778, $2,258, and $6,614 for the years ended December 31, 2021, 2020 and 2019, respectively. The remaining balance of the unamortized lease rights will be amortized over the next seven to 40 years. Accumulated amortization related to intangibles was $130,561 and $129,385 as of December 31, 2021 and 2020, 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

Store Acquisition

The following table shows the Company’s acquisitions of stores for the years ended December 31, 2021 and 2020. The table excludes purchases of raw land and improvements made to existing assets.


		Consideration Paid														Total
Quarter	Number of Stores	Total		Cash Paid		Loan Assumed		Finance Lease Liability		Investments in Real Estate Ventures		Net Liabilities/ (Assets) Assumed		Value of OP Units Issued			Real estate assets




Total 2021	74	$	1,344,575	$	1,011,483	$	20,028	$	26,998	$	5,383	$	4,293	$	276,390		$	1,344,575





Total 2020	23	$	296,725	$	254,111	$	—	$	41,491	$	—	$	1,123	$	—		$	296,725

(1)Store acquisitions during the year ended December 31, 2021 included the acquisition of five stores previously held in joint venture where the Company held a noncontrolling interest. The Company purchased its partner's equity interest in these joint ventures, and the properties owned by the joint ventures became wholly owned by the Company. In addition, store acquisitions include the acquisition of two stores that were subject to finance land leases. The right-of-use assets associated with these leases are included in real estate assets above.

(2)Store acquisitions during the year ended December 31, 2020 include the acquisition of three stores that were subject to finance land leases. The right-of-use assets associated with these leases are included in real estate assets above.

Store Dispositions

On December 16, 2021 the Company sold 16 stores that had been classified as held for sale for total cash consideration of $200,292. The Company recorded a gain of $73,854.

On March 1, 2021 the Company sold 16 stores that had been classified as held for sale to a newly established unconsolidated joint venture. The Company received $132,759 and maintained a 55% interest in the new joint venture valued at $33,878. The Company recognized a gain of $63,477 related to the sale of these properties.

On December 18, 2020, the Company sold four stores located in Florida that had been classified as held for sale for a total sale price of $46,592. The Company recorded a gain on the sale of $19,600.

On April 11, 2019, the Company sold 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.

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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,
		2021		2020
PR EXR Self Storage, LLC	5		25%		40%	$	59,393	$	60,092
WICNN JV LLC (2)	—		10%		35%	—		36,032
VRS Self Storage, LLC	16		45%		54%	(14,269)		17,186
ESS-CA TIVS JV LP (3)	16		55%		60%	32,288		—
GFN JV, LLC (2)	—		10%		30%	—		18,397
ESS-NYFL JV LP	11		16%		24%	11,796		12,211
PRISA Self Storage LLC	85		4%		4%	8,792		8,815
Alan Jathoo JV LLC	9		10%		10%	7,621		7,780
Storage Portfolio IV JV LLC	27		10%		30%	40,174		—
Storage Portfolio III JV LLC	5		10%		30%	5,596		5,726
ESS Bristol Investments LLC	8		10%		30%	2,628		2,810
Extra Space Northern Properties Six LLC	10		10%		35%	(3,029)		(2,541)
Storage Portfolio II JV LLC	36		10%		30%	(6,116)		(5,441)
Storage Portfolio I LLC	24		34%		49%	(40,168)		(39,144)
PR II EXR JV LLC	18		25%		25%	70,403		—
Other minority owned stores	13		10-50%		19-50%	18,635		28,395
SmartStop Self Storage REIT, Inc. Preferred Stock (4)	n/a		n/a		n/a	200,000		200,000
Net Investments in and Cash distributions in unconsolidated real estate entities	283					$	393,744	$	350,318

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

(2)In June 2021, the WICNN JV LLC and GFN JV, LLC joint ventures sold all 17 of the stores owned by the joint ventures to a third party. Subsequent to the sales, these joint ventures were dissolved. As a result of these transactions, the Company recorded a gain of $5,739, which is included in Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest in the Company's consolidated statements of operations.

(3)The Company sold 16 operating stores to this newly formed joint venture in March 2021. The Company received cash of $132,759 and an interest in the new joint venture valued at $33,556. This joint venture is unconsolidated and the Company accounts for its investment under the equity method of accounting as the Company does not have voting control but does exercise significant influence over the joint venture.

(4)The Company invested in shares of convertible preferred stock of SmartStop. 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 equity in earnings and dividend income from unconsolidated real estate entities line on the Company's consolidated statement of operations.

In June 2021, the Company sold its interest in two unconsolidated joint ventures to its joint venture partner. The Company received proceeds of $1,888 in cash, and recorded a gain of $525 which is included in Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest in the Company's condensed consolidated statements of operations. The Company also purchased its joint venture partners' interests in two unconsolidated joint ventures.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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, 2021, there were no previously unconsolidated entities that were required to be consolidated as a result of this review.

The Company entered into two new unconsolidated real estate ventures with a total of 45 stores and a total investment of $109,583 during the year ended December 31, 2021. The Company accounts for its investment in these ventures under the equity method of accounting.

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.

Equity in earnings and dividend income from unconsolidated real estate entities consists of the following:


	For the Year Ended December 31,
	2021		2020		2019
Dividend income from SmartStop preferred stock	$	12,500	$	9,968	$	1,636
Equity in earnings of PRISA Self Storage LLC	2,719		2,229		2,327
Equity in earnings of Storage Portfolio II JV LLC	1,802		559		291
Equity in earnings of Storage Portfolio I LLC	2,833		1,636		1,809
Equity in earnings of VRS Self Storage, LLC	4,352		3,509		3,583
Equity in earnings of ESS-NYFL JV LLC	427		(331)		(96)
Equity in earnings of WICNN JV LLC	1,050		1,878		1,373
Equity in earnings of Extra Space Northern Properties Six LLC	1,363		1,088		1,091
Equity in earnings of Alan Jathoo JV LLC	270		57		(47)
Equity in earnings of Bristol Investments LLC	177		(67)		(262)
Equity in earnings of GFN JV, LLC	546		788		450
Equity in earnings of PR EXR Self Storage, LLC	491		(211)		(443)
Equity in earnings of Storage Portfolio IV JV LLC	112		—		—
Equity in earnings of ESS-CA TIVS JV LP	1,274		—		—
Equity in earnings of PR II EXR JV LLC	(8)		—		—



Equity in earnings of other minority owned stores	2,450		1,258		(438)
	$	32,358	$	22,361	$	11,274

Equity in earnings of certain of our joint ventures includes the amortization of the Company’s excess purchase price of $24,721 of these equity investments over its original basis. The excess basis is amortized over forty years.

The Company provides management services to joint ventures for a fee. Management fee revenues for affiliated real estate joint ventures for the years ended December 31, 2021, 2020 and 2019 were $17,619, $15,657 and $14,624, respectively.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

6. INVESTMENTS IN DEBT SECURITIES AND NOTES RECEIVABLE

Investments in debt securities and notes receivable consists of the Company's investment in mandatorily redeemable preferred stock of Jernigan Capital, Inc. ("JCAP") in connection with JCAP's acquisition by affiliates of NexPoint Advisors, L.P. ("NexPoint Investment") and receivables due to the Company under its bridge loan program. Information about these balances is as follows:


	December 31, 2021		December 31, 2020
Debt securities - NexPoint Series A Preferred Stock	$	200,000	$	200,000
Debt securities - NexPoint Series B Preferred Stock	100,000		100,000
Notes Receivable-Bridge Loans	279,042		187,368
Notes Receivable-Senior Mezzanine Loan, net	102,079		101,553
Dividends Receivable	38,066		4,889
	$	719,187	$	593,810

In November 2020, the Company invested $300,000 in the preferred stock of JCAP in connection with the acquisition of JCAP by affiliates of NexPoint Advisors, L.P. This investment consists of 200,000 Series A Preferred Shares valued at total of $200,000, and 100,000 Series B Preferred Shares valued at a total of $100,000. The JCAP preferred stock is mandatorily redeemable after five years, with two one-year extension options. NexPoint may redeem the Preferred Shares at any time, subject to certain prepayment penalties. The Company accounts for the JCAP preferred stock as a held to maturity debt security at amortized cost. The Series A Preferred Shares and the Series B Preferred Shares have initial dividend rates of 10.0% and 12.0%, respectively. If the investment isn't retired after five years, the preferred dividends increase annually.

In July 2020, the Company purchased a senior mezzanine note receivable with a principal amount of $103,000. This note receivable bears interest at 5.5%, matures in December 2023 and is collateralized through an entity interest in which it or its subsidiaries wholly own 62 storage facilities. The Company paid cash of $101,142 for the note receivable and accounts for the discount at amortized cost. The discount is being amortized over the term of the note receivable. In February 2022, the Company sold this note receivable to a junior mezzanine lender, which exercised its right to buy the Company's position for the full principal balance plus interest due.

The Company provides bridge loan financing to third-party self-storage operators. These notes receivable consist of primary mortgage and mezzanine loans receivable, collateralized by self-storage properties. These notes receivable typically have a term of three years with two one year extensions, and have variable interest rates. The Company intends to sell the majority of the mortgage receivables and keep the mezzanine receivables to maturity. During the year ended December 31, 2021, the Company sold a total principal amount of $172,566 of its mortgage bridge loans receivable to third parties for a total of $172,002 in cash and closed on $317,482 in new mortgage and mezzanine bridge loan.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

7. DEBT

In May 2021, the Operating Partnership executed its initial public bond issuance by selling $450.0 million principal amount of 2.550% Senior Notes due 2031 (the "Notes Due 2031"). Interest on the Notes Due 2031 is paid semi-annually in arrears on June 1 and December 1 of each year. The Notes Due 2031 will mature on June 1, 2031, and the Operating Partnership may redeem the Notes Due 2031 at its option and sole discretion at any time prior to March 31, 2031 for cash equal to the outstanding principal amount plus the present value of the remaining scheduled interest payments, plus any accrued but unpaid interest.

In September 2021, the Operating Partnership executed a public bond issuance by selling $600.0 million principal amount of 2.350% Senior Notes due 2032 (the "Notes Due 2032"). Interest on the Notes Due 2032 is paid semi-annually in arrears on March 15 and September 15 of each year. The Notes Due 2032 will mature on March 15, 2032, and the Operating Partnership may redeem the Notes Due 2032 at its option and sole discretion at any time prior to March 15, 2032 for cash equal to the outstanding principal amount plus the present value of the remaining scheduled interest payments, plus any accrued but unpaid interest.

The Operating Partner may redeem the Notes Due 2031 and/or the Notes Due in 2032 in whole at any time or in part from time to time, at the Operating Partnership’s option and sole discretion, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed and (ii) a make-whole premium calculated in accordance with the indenture governing the notes, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date. Notwithstanding the foregoing, on or after the date three months prior to the maturity date of the applicable notes, the redemption price will be equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but not including, the applicable redemption date.

Certain events are considered events of default, which may result in the accelerated maturity of the Notes Due 2031 and/or the Notes Due 2032, including, among other things, a default for 30 days in the payment of any installment of interest under the notes or a default in the payment of the principal amount or redemption price due with respect to the notes, when the same become due and payable.

The Notes Due 2031 and the Notes Due 2032 are unsecured, and are fully and unconditionally guaranteed by the Company, ESS Holdings Business Trust I, and ESS Holdings Business Trust II (the "Guarantors," and together with the Operating Partnership, the "Obligated Group"), on a joint and several basis. The guarantee of the Notes Due 2031 and the Notes Due 2032 will be a senior unsecured obligation of each Guarantor. The Guarantors have no material operations separate from the operation of the Operating Partnership and no material assets, other than their respective investments directly or indirectly in the Operating Partnership, and therefore the assets, liabilities, and results of operations of the Obligated Group are not materially different than those reported in the Company's financial statements.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The components of term debt are summarized as follows:


Term Debt	December 31, 2021		December 31, 2020		Fixed Rate	Variable Rate (2)	Maturity Dates
Secured fixed-rate (1)	$	930,830	$	1,112,220	2.46% - 4.23%		June 2022 - February 2030
Secured variable-rate (1)	392,679		1,081,551			1.10% - 2.45%	April 2022 - May 2027
Unsecured fixed-rate	3,575,000		2,525,000		2.02% - 4.39%		February 2024 - March 2032
Unsecured variable-rate	550,000		100,000			1.05%	February 2024 - October 2026
Total	5,448,509		4,818,771

Less: Unamortized debt issuance costs	(25,762)		(21,468)
Total	$	5,422,747	$	4,797,303

(1) The loans are collateralized by mortgages on real estate assets and the assignment of rents.
(2) Basis rate is 30-day USD LIBOR

At December 31, 2021, the terms of the Second Amended and Restated Credit Agreement dated June 22, 2021 (the "Credit Agreement") are as follows:


	Debt Capacity		Maturity Date
Revolving Credit Facility	$	1,250,000	June 2025
Tranche 1 Term Loan Facility (1)	400,000		January 2027
Tranche 2 Term Loan Facility (1)	425,000		October 2026
Tranche 3 Term Loan Facility (1)	245,000		January 2025
Tranche 4 Term Loan Facility (1)	255,000		June 2026
Tranche 5 Term Loan Facility (1)	425,000		February 2024
	$	3,000,000

(1) The term loan amounts have been fully drawn as of December 31, 2021.

Pursuant to the terms of the Credit Agreement, the Company may request an extension of the term of the revolving credit facility for up to two additional periods of six months each, after satisfying certain conditions.

As of December 31, 2021, amounts outstanding under the revolving 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, with the Eurodollar rate margin ranging from 0.7% to 2.25% per annum and the applicable base rate margin ranging from 0.00% to 0.60% per annum.

The Credit Agreement is guaranteed by the Company and is not secured by any assets of the Company. The Company's unsecured debt is subject to certain financial covenants. As of December 31, 2021, the Company was in compliance with all of its financial covenants.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The following table summarizes the scheduled maturities of term debt, excluding available extensions, at December 31, 2021:



2022	$	311,412
2023	486,688
2024	496,407
2025	447,266
2026	802,104
Thereafter	2,904,632
	$	5,448,509

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, 2021
Revolving Lines of Credit	Amount Drawn		Capacity		Interest Rate	Maturity	Basis Rate (1)
Credit Line 1 (2)	$	55,000	$	140,000	1.6%	7/1/2023	LIBOR plus 1.45%
Credit Line 2 (3)(4)	480,000		1,250,000		1.0%	6/20/2025	LIBOR plus 0.85%

	$	535,000	$	1,390,000
(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, 2021. Rate is subject to change based on our investment grade rating.

8. DERIVATIVES

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

Cash Flow Hedges of Interest Rate Risk

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. A portion of these changes is excluded from accumulated other comprehensive income as it is allocated to noncontrolling interests. During the years ended December 31, 2021, 2020 and 2019,

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. During 2022, the Company estimates that $28,070 will be reclassified as an increase to interest expense.

The following table summarizes the terms of the Company’s 20 derivative financial instruments, which have a total combined notional amount of $1,982,632 as of December 31, 2021:


Hedge Product						Range of Notional Amounts						Strike						Effective Dates						Maturity Dates
Swap Agreements						$32,847 - $231,972						1.07% - 2.67%						7/8/2015 - 3/30/2020						3/31/2022 - 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
Derivatives designated as hedging instruments:	December 31, 2021		December 31, 2020
Other assets	$	271	$	—
Other liabilities	$	39,569	$	98,325

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	2021		2020		2021	2020		2019
Swap Agreements	$	23,580	$	(100,352)	Interest expense	$	(35,764)	$	(26,794)	$	12,322

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, 2021, 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 $41,331. As of December 31, 2021, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2021, it could have been required to cash settle its obligations under these agreements at their termination value of $41,331.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

9. NOTES PAYABLE TO TRUSTS

The Operating Partnership had three wholly-owned unconsolidated subsidiaries (“Trust", “Trust II”, “Trust III,” together, the "Trusts") that had issued trust preferred securities to third parties and common securities to the Operating Partnership during 2005. The Trusts loaned 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 the notes 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.

10. 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 were amortized as an adjustment to interest expense over five years, which represented the estimated term based on the first available redemption date, and were included in exchangeable senior notes, net, in the consolidated balance sheets. The 2015 Notes were general unsecured senior obligations of the Operating Partnership and were fully guaranteed by the Company. Interest was payable on April 1 and October 1 of each year. The Notes bore interest at 3.125% per annum and contained an exchange settlement feature, which provided that the 2015 Notes could, 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 Operating Partnership could 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 could 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 had 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 had 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. Additionally, the 2015 Notes could have been exchanged during any calendar quarter, if the last reported sale price of the common stock of the Company was greater than or equal to 130% of the exchange price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter. The Company redeemed all outstanding 2015 Notes on November 2, 2020.

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 accounted for the liability and equity component of the 2015 Notes separately. The equity components were included in paid-in capital in stockholders’ equity in the consolidated balance sheets, and the value of the

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

equity components were treated as original issue discount for purposes of accounting for the debt components. The discount was 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 was 4.0%, which approximates the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

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,
	2021		2020		2019
Contractual interest	$	—	$	13,476	$	17,968
Amortization of discount	—		3,675		4,742
Total interest expense recognized	$	—	$	17,151	$	22,710

Repurchase of 2015 Notes

On October 1, 2020, the holders of $71,513 principal amount of the 2015 Notes exchanged their Notes. The Company paid cash of $71,513 for the principal amount and issued 124,819 shares of common stock with a value of $13,495 for the exchange value in excess of the principal amount. On November 2, 2020, the holders of an additional $503,432 principal amount of the 2015 Notes exchanged their Notes. The Company paid cash of $503,487 for the principal amount and issued 1,198,962 shares of common stock with a value of $138,900 for the exchange value in excess of the principal amount. Also on November 2, 2020, the Company redeemed the remaining $55 of outstanding principal amount of the 2015 Notes for cash.

The Company allocated the value of the consideration paid to repurchase the 2013 Notes and the 2015 Notes (1) to the extinguishment of the liability component and (2) to the reacquisition of the equity component. The amount allocated to the extinguishment of the liability component is equal to the fair value of that component immediately prior to extinguishment. The difference between the consideration attributed to the extinguishment of the liability component and the sum of (a) the net carrying amount of the repurchased liability component, and (b) the related unamortized debt issuance costs, is recognized as a gain on debt extinguishment. The remaining settlement consideration is allocated to the reacquisition of the equity component of the repurchased 2013 Notes and 2015 Notes and recognized as a reduction of stockholders’ equity.

Information about the repurchases is as follows:


	For the Year Ended December 31,
	2021		2020		2019
Principal amount repurchased	$	—	$	575,000	$	—

Amount allocated to:
Extinguishment of liability component	$	—	$	575,000	$	—
Reacquisition of equity component	—		—		—
Total consideration paid for repurchase	$	—	$	575,000	$	—
Exchangeable senior notes repurchased	$	—	$	575,000	$	—
Extinguishment of liability component	—		(575,000)		—
Discount on exchangeable senior notes	—		—		—
Related debt issuance costs	—		—		—
Gain/(loss) on repurchase	$	—	$	—	$	—

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

11. STOCKHOLDERS’ EQUITY

The Company’s charter provides that it can issue up to 500,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of December 31, 2021, 133,922,305 shares of common stock were issued and outstanding, and no shares of preferred stock were issued or outstanding.

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

On August 9, 2021, the Company filed its $800,000 "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 ten sales agents. No shares have been sold under the current "at the market" equity program. From January 1, 2021, through August 8, 2021, the Company sold 585,685 shares of common stock under its prior "at the market" equity program at an average sales price of $115.90 per share resulting in net proceeds of $66,617.

On March 23, 2021, the Company sold 1,600,000 shares of its common stock in a registered offering structured as a bought deal at a price of $129.13 per share resulting in net proceeds of $206,572.

During the year ended December 31, 2020, the Company sold 899,048 shares of common stock at an average sales price of $116.42 per share, resulting in net proceeds of $103,468.

In November 2017, the Company's board of directors authorized a three-year share repurchase program to allow for the repurchase of shares with an aggregate value up to $400,000. During the year ended December 31, 2020, the Company repurchased 826,797 shares at an average price of $82.09 per share, paying a total of $67,873. On October 15, 2020, the Company's board of directors authorized a new share repurchase program allowing for the repurchase of shares with an aggregate value up to $400,000. No shares were repurchased during the year ended December 31, 2021.

12. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

Classification of Noncontrolling Interests

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

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

At December 31, 2021 and 2020, 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. As of December 31, 2021 and 2020, noncontrolling interests in Preferred OP Units were presented net of notes receivable from Preferred Operating Partnership unit holders of $100,000 as of December 31, 2021 and 2020, respectively, as more fully described below. The balances for each of the specific preferred OP units as presented in the Statement of Noncontrolling Interests and Equity as of the periods indicated is as follows:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


	December 31, 2021		December 31, 2020
Series A Units	$	15,606	$	13,788
Series B Units	38,068		40,902
Series D Units	205,436		117,362
	$	259,110	$	172,052

Series A Participating Redeemable Preferred Units

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.

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 are redeemable at the option of the holder, 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 June 25, 2007, the Operating Partnership loaned the holders of the Series A Units $100,000. The note receivable bears interest at 2.1%. 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 $38,068 which represents 1,522,727 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 became 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.

On August 31, 2021, 113,360 Series B Units were redeemed for 15,265 shares of common stock.

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. 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.

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. On April 25, 2019, the remaining

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

296,020 Series C Units were converted into 270,709 OP Units. The remaining outstanding balance of the loan receivable of $1,900 and $2,311 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2021 and December 31, 2020, respectively. See footnote 13 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 a liquidation value of $25.00 per unit, for a current fixed liquidation value of $205,435 which represents 8,217,422 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 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.

The Series D Units have been issued at various times from 2014 to 2021. During the year ended December 31, 2021, the Operating Partnership issued a total of 3,522,937 Series D Units valued at $88,073 in conjunction with store acquisitions.

13. 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 93.9% majority ownership interest in the Operating Partnership as of December 31, 2021. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 6.1% are held by certain former owners of assets acquired by the Operating Partnership. As of December 31,2021 and December 31, 2020, the noncontrolling interests in the Operating Partnership are shown on the balance sheet net of notes receivable of $1,900 and $2,311, respectively, because the borrowers under the loan receivable are also holders of OP Units (Note 12). This loan receivable bears interest at 5.0% per annum and matures on December 15, 2024.

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, or shares of the Company's common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Operating Partnership agreement. As of December 31, 2021, the ten-day average closing stock price was $220.58 and there were 6,528,436 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on December 31, 2021 and the Company elected to pay the OP Unit holders cash, the Company would have paid $1,440,042 in cash consideration to redeem the units.

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


	For the Year Ended December 31,
	2021		2020		2019
OP Units redeemed for common stock	165,652		123,993		340,182
OP Units redeemed for cash	4,500		—		—
Cash paid for OP Units redeemed	$	788	$	—	$	—
OP Units issued in conjunction with acquisitions	897,803		—		—
Value of OP Units issued in conjunction with acquisitions	$	188,319	$	—	$	—
OP Units issued upon redemption of Series C Units	—		—		270,709

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 $1,900 and $2,311 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2021 and 2020, respectively.

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

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

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interest of partners in two consolidated joint ventures as of December 31, 2021. One joint venture owns four stores in Georgia and the other owns one property under development in Florida. The voting interests of the partners are 10% or less.

On August 25, 2021, the Company purchased for $12,215 in cash the remaining third party ownership interest in a previously consolidated joint venture that owned two operating stores.

On December 15, 2021, the Company purchased for $6,100 in cash the remaining third party ownership interest in previously consolidated joint venture that owned four operating stores.

14. 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. Right-of-use assets associated with finance leases are included in real estate assets, net and finance lease liabilities are included in other liabilities on the Company's consolidated balance sheets.

During the year ended December 31, 2021, the Company recorded new finance lease right-of-use assets and finance lease liabilities totaling $26,998 associated with the acquisition of two stores with land leases. The Company also recorded a finance lease right-of-use asset and a finance lease liability of $40,916 related to a corporate office lease.

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 58 stores classified as wholly-owned or in consolidated joint ventures. These leases generally have original lease terms between 10-99 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 five and 14 years, with no extension options. Subsequent to year-end the Company modified and extended the lease of its corporate offices to add additional space and extend the lease until 2034.
Leases of 14 regional offices. These leases have original lease terms between three and five years. The Company has the option on certain of these leases to extend the lease term for up to 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 a signed lease agreement for a store in California. The store is 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 2022. 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 asset or lease liability related to this lease as of December 31, 2021 as the lease term has not yet commenced. 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 lease 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,
	2021			2020

Finance lease cost:
Amortization of finance lease right-of-use assets	$	3,049		$	400
Interest expense related to finance lease liabilities	2,812			712
Operating lease cost	29,258			28,709
Variable lease cost	8,100			9,056
Short-term lease cost	51			80
Total lease cost	$	43,270		$	38,957


Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows for finance lease payments	$	2,812		$	712
Operating cash outflows for operating lease payments	23,961			25,037

Total cash flows for lease liability measurement	$	26,773		$	25,749

Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,655		$	8,014
Right-of-use assets obtained in exchange for new finance lease liabilities	$	67,992		$	50,096

Weighted average remaining lease term - finance leases (years)	54.97			78.48
Weighted average remaining lease term - operating leases (years)	21.25			13.99
Weighted average discount rate - finance leases	3.18		%	3.47		%
Weighted average discount rate - operating leases	3.63		%	3.66		%

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
2022	$	27,641	$	4,214	$	31,855
2023	27,719		5,679		33,398
2024	27,973		5,788		33,761
2025	28,148		5,793		33,941
2026	28,451		5,912		34,363
Thereafter	166,931		312,022		478,953
Total	$	306,863	$	339,408	$	646,271
Present value adjustments	(73,507)		(214,871)		(288,378)
Lease liabilities	$	233,356	$	124,537	$	357,893

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 represented. Disclosures required under the previous leasing standard are presented for prior years.

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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.

15. STOCK-BASED COMPENSATION

As of December 31, 2021, 1,051,208 shares were available for issuance under the Company’s 2015 Incentive Award Plan (the “Plan”).

Options are exercisable once vested. Options are exercisable at such times and subject to such terms as determined by the Compensation 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 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 Compensation 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. For actions taken prior to July 2020, references to the Compensation Committee refer to its predecessor, the CNG Committee; the Board split the CNG Committee into two committees, the Compensation Committee and the Nominating and Governance Committee, effective July 1, 2020.

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, 2021
Outstanding at December 31, 2018	417,581	$	31.58

Exercised	(211,057)	14.65

Outstanding at December 31, 2019	206,524	$	48.88

Exercised	(134,930)	35.26

Outstanding at December 31, 2020	71,594	$	74.54

Exercised	(62,322)	73.36

Outstanding at December 31, 2021	9,272	$	82.47	3.98	$1,338

Vested	9,272	$	82.47	3.98	$1,338
Ending Exercisable	9,272	$	82.47	3.98	$1,338

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 2021 and the exercise price, multiplied by the number of in-the-money options) that would

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

have been received by the option holders had all option holders exercised their options on December 31, 2021. 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, 2021, 2020 and 2019 was $3,925, $10,016 and $18,089, 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 4.6% of unvested options outstanding as of December 31, 2021, 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, 2021, is as follows:


	Options Outstanding				Options Exercisable
Exercise Price	Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$65.36 - $65.36	1,582	3.15	$	65.36	1,582	$	65.36
$85.99 - $85.99	7,690	4.15	85.99		7,690	85.99

The Company recorded compensation expense relating to outstanding options of $0, $27 and $364 in general and administrative expense for the years ended December 31, 2021, 2020 and 2019, respectively. Net proceeds received for the years ended December 31, 2021, 2020 and 2019, related to option exercises was $4,572, $4,759 and $3,063, respectively. At December 31, 2021, there was no unrecognized compensation expense related to non-vested stock options under the Plan.

Common Stock Granted to Employees and Directors

The Company recorded $9,260, $9,244 and $9,173 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, 2021, 2020 and 2019, respectively. The forfeiture rate, which is estimated at a weighted-average of 10.0% of unvested awards outstanding as of December 31, 2021, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates. At December 31, 2021 there was $13,843 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 2.15 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:

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


Restricted Stock Grants	Shares	Weighted-Average Grant-Date Fair Value
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	$	91.62
Granted	95,671	98.81
Released	(94,164)	89.43
Cancelled	(5,083)	93.16
Unreleased at December 31, 2020	209,032	$	95.86
Granted	99,802	132.75
Released	(96,248)	91.65
Cancelled	(12,808)	113.89
Unreleased at December 31, 2021	199,778	$	115.16

Performance-based Stock Units

The performance-based stock units (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, 2018	58,806	$	89.87
Granted	49,334	103.18
Unvested at December 31, 2019	108,140	$	95.94
Granted	45,242	129.38
Released	(30,071)	$	112.16
Unvested at December 31, 2020	123,311	$	104.25
Granted	40,832	138.04
Released	(28,735)	$	117.19
Unvested at December 31, 2021	135,408	$	111.69

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Company recorded $8,043, $7,048 and $3,514 of expense in general and administrative expense in its statement of operations related to PSUs granted to employees for the years ended December 31, 2021, 2020 and 2019, 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,
	2021	2020	2019
Intrinsic value	$30,701	$12,266	$6,211
Risk-free rate	0.22%	1.42%	2.53%
Volatility	28.5%	18.4%	20.7%
Expected term (in years)	2.9	2.9	2.8
Dividend yield	—%	—%	—%
Unrecognized compensation cost	$8,859	$6,406	$4,315
Term over which compensation cost recognized (in years)	3	3	3

Under the terms of the PSUs, dividends for the entire measurement period are paid in cash when the shares are released, 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, 2021 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.

16. 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, 2021, 2020 and 2019, the Company made matching contributions to the plan of $4,239, $3,980 and $3,355, respectively, based on 100% of the first 3% and up to 50% of the next 2% of an employee’s compensation.

17. INCOME TAXES

As a REIT, the Company is generally not subject to U.S. 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 certain of its corporate subsidiaries, including Extra Space Management, Inc., as a TRS. In general, a 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 U.S. federal corporate income tax and may be subject to state and local income taxes. 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, 2021, 2020 and 2019, is comprised of the following components:


	For the Year Ended December 31, 2021
	Federal		State		Total
Current expense	$	21,017	$	3,520	$	24,537
Tax credits/true-up	(4,979)		(138)		(5,117)
Change in deferred expense/(benefit)	818		86		904
Total tax expense	$	16,856	$	3,468	$	20,324

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


	For the Year Ended December 31, 2020
	Federal		State		Total
Current expense	$	15,553	$	3,347	$	18,900
Tax credits/true-up	(5,610)		(135)		(5,745)
Change in deferred expense	594		61		655
Total tax expense	$	10,537	$	3,273	$	13,810


	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 benefit	1,787		84		1,871
Total tax expense	$	8,318	$	2,990	$	11,308

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,
	2021				2020				2019
Expected tax at statutory rate	$	188,600	21.0	%	$	111,760	21.0	%	$	97,110	21.0	%
Non-taxable REIT income	(166,137)		(18.5)	%	(94,270)		(17.7)	%	(82,717)		(17.9)	%
State and local tax expense - net of federal benefit	3,259		0.4	%	3,075		0.6	%	2,837		0.6	%
Change in valuation allowance	(1,061)		(0.1)	%	(363)		(0.1)	%	(207)		—	%
Tax credits/true-up	(5,117)		(0.6)	%	(5,745)		(1.1)	%	(3,663)		(0.8)	%

Miscellaneous	780		0.1	%	(647)		(0.1)	%	(2,052)		(0.4)	%
Total provision	$	20,324	2.3	%	$	13,810	2.6	%	$	11,308	2.5	%

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, 2021		December 31, 2020
Deferred tax liabilities:
Fixed assets	$	(30,499)	$	(27,374)
Operating and Finance lease right-of-use assets	(6,016)		(2,223)
Other	(61)		(72)
State deferred taxes	(3,842)		(3,210)
Total deferred tax liabilities	(40,418)		(32,879)

Deferred tax assets:
Captive insurance subsidiary	396		378
Accrued liabilities	2,383		2,325
Stock compensation	3,076		2,635

Operating and Finance lease liabilities	7,936		2,232
SmartStop TRS	—		219
Other	916		1,554
State deferred taxes	6,548		6,725
Total deferred tax assets	21,255		16,068

Valuation allowance	(2,241)		(3,302)

Net deferred income tax liabilities	$	(21,404)	$	(20,113)

The state income tax net operating losses expire between 2022 and 2041. The valuation allowance is associated with the state income tax net operating losses. The tax years 2017 through 2020 remain open related to the state returns, and 2018 through 2020 for the federal returns.

18. 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,
	2021		2020		2019
Revenues:
Self-Storage Operations	$	1,340,990	$	1,157,522	$	1,130,177
Tenant Reinsurance	170,108		146,561		128,387
Total segment revenues	$	1,511,098	$	1,304,083	$	1,258,564

Operating expenses:
Self-Storage Operations	$	368,608	$	360,615	$	336,050
Tenant Reinsurance	29,488		26,494		29,376
Total segment operating expenses	$	398,096	$	387,109	$	365,426

Net operating income:
Self-Storage Operations	$	972,382	$	796,907	$	794,127
Tenant Reinsurance	140,620		120,067		99,011
Total segment net operating income:	$	1,113,002	$	916,974	$	893,138

Total segment net operating income	$	1,113,002	$	916,974	$	893,138
Other components of net income:
Property management fees and other income	66,264		52,129		49,890
General and administrative expense	(102,194)		(96,594)		(89,418)
Depreciation and amortization expense	(241,879)		(224,444)		(219,857)
Gain on real estate transactions	140,760		18,075		1,205

Interest expense	(166,183)		(168,626)		(186,526)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		(3,675)		(4,742)
Interest income	49,703		15,192		7,467

Equity in earnings and dividend income from unconsolidated real estate entities	32,358		22,361		11,274
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest	6,251		—		—
Income tax expense	(20,324)		(13,810)		(11,308)
Net income	$	877,758	$	517,582	$	451,123

19. COMMITMENTS AND CONTINGENCIES

As of December 31, 2021, the Company was under agreement to acquire nine stores at a total purchase price of $136,491. These stores are scheduled to close in 2022. Additionally, the Company is under agreement to acquire three stores in 2022 with joint venture partners, for a total investment of $5,850.

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

vigorously defending any legal proceedings against it. As of December 31, 2021, 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.

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

EXTRA SPACE STORAGE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


						Building and Improvements Initial Cost		Adjustments and Costs to Land and Building Subsequent to Acquisition		Gross carrying amount at December 31, 2021
Self - Storage Facilities by State:	Store Count			Land Initial Cost				Building and Improvements				Accumulated Depreciation
Debt	Land	Total
AL	8	$	5,261	$	11,021	$	62,772	$	3,712	$	11,021	$	66,484	$	77,505	$	10,573
AZ	23	22,469		27,535		117,304		11,820		27,533		129,126		156,659		31,818
CA	173	369,493		646,278		1,365,639		160,072		646,728		1,525,261		2,171,989		333,516
CO	17	28,776		17,224		81,144		17,834		17,942		98,260		116,202		25,649
CT	6	6,811		8,598		46,974		5,211		8,598		52,185		60,783		11,055
FL	105	173,529		186,083		799,941		63,289		186,209		863,104		1,049,313		163,231
GA	71	68,819		98,519		529,048		37,329		98,503		566,393		664,896		86,525
HI	13	—		17,663		133,870		12,984		17,663		146,854		164,517		33,733
IL	37	23,283		49,304		247,958		34,806		48,757		283,311		332,068		52,591
IN	14	—		12,652		60,605		7,255		12,652		67,860		80,512		14,639
KS	1	—		366		1,897		1,102		366		2,999		3,365		1,326
KY	10	30,996		5,670		60,442		18,768		6,442		78,438		84,880		16,198
LA	4	—		9,105		34,923		5,082		9,106		40,004		49,110		5,130
MA	46	32,251		73,544		270,243		57,334		73,725		327,396		401,121		100,242
MD	34	76,478		104,486		327,904		30,986		103,894		359,482		463,376		88,599
MI	8	5,588		10,900		63,388		4,594		10,900		67,982		78,882		9,011
MN	7	—		9,696		74,960		6,095		9,696		81,055		90,751		5,613
MO	4	—		3,517		13,674		3,374		3,474		17,091		20,565		7,292
MS	3	—		2,914		29,630		1,298		2,914		30,928		33,842		3,244
NC	23	6,684		38,463		150,475		10,399		38,461		160,876		199,337		18,159
NH	2	—		754		4,054		1,353		817		5,344		6,161		2,716
NJ	62	106,726		138,417		605,834		51,542		141,643		654,150		795,793		164,838
NM	10	17,085		30,806		63,495		5,105		30,806		68,600		99,406		12,628
NV	14	29,942		15,252		74,376		6,379		15,252		80,755		96,007		14,958
NY	28	13,886		121,945		237,795		41,749		122,680		278,809		401,489		76,295
OH	16	11,651		17,568		49,287		9,036		17,567		58,324		75,891		16,292
OR	8	16,804		15,066		68,044		2,268		15,066		70,312		85,378		10,284
PA	21	8,673		35,104		190,966		14,639		34,396		206,313		240,709		34,860
RI	2	3,952		3,191		6,926		1,369		3,191		8,295		11,486		3,473
SC	23	25,008		36,617		148,900		10,789		36,618		159,688		196,306		29,256
TN	21	42,375		34,740		138,399		11,557		34,740		149,956		184,696		25,607
TX	101	116,803		173,040		635,935		67,710		172,892		703,793		876,685		143,451
UT	10	14,316		9,008		39,295		3,072		9,008		42,367		51,375		12,587
VA	50	52,508		150,324		470,969		27,164		150,325		498,132		648,457		93,787
WA	9	5,167		13,762		60,926		11,618		13,764		72,542		86,306		14,437
DC	1	8,175		14,394		18,172		507		14,394		18,679		33,073		2,865
Other corporate assets		—		—		1,323		181,117		—		182,440		182,440		57,041
Intangible tenant relationships and lease rights		—		—		147,020		—		—		147,020		147,020		130,561
Construction in Progress/Undeveloped Land		—		7,111		2,778		56,441		3,576		62,754		66,330		621
Right of use asset - finance lease		—		—		—		117,718		—		117,718		117,718		3,049
Totals (1)	985	$	1,323,509	$	2,150,637	$	7,437,285	$	1,114,477	$	2,151,319	$	8,551,080	$	10,702,399	$	1,867,750

(1) No right-of-use assets related to operating leases are included in the ending net real estate assets information above.

Extra Space Storage Inc. Schedule III (continued)

Activity in real estate facilities during the years ended December 31, 2021, 2020 and 2019 is as follows:


	2021		2020		2019
Operating facilities
Balance at beginning of year	$	9,507,788	$	9,129,558	$	8,709,315
Acquisitions	1,500,703		255,235		303,588
Improvements	80,131		66,693		68,459
Transfers from construction in progress	62,462		40,988		59,614
Dispositions and other	(507,362)		15,314		(11,418)
Balance at end of year	$	10,643,722	$	9,507,788	$	9,129,558
Accumulated depreciation:
Balance at beginning of year	$	1,681,429	$	1,473,851	$	1,262,438
Depreciation expense	230,445		217,364		212,202
Dispositions and other	(43,553)		(9,786)		(789)
Balance at end of year	$	1,868,321	$	1,681,429	$	1,473,851
Real estate under development/redevelopment:
Balance at beginning of year	$	67,443	$	41,157	$	44,954
Current development	54,267		67,274		55,817
Transfers to operating facilities	(62,462)		(40,988)		(59,614)
Dispositions and other	—		—		—
Balance at end of year	$	59,248	$	67,443	$	41,157
Net non-lease real estate assets	$	8,834,649	$	7,893,802	$	7,696,864

(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, 2021, the aggregate cost of real estate for U.S. federal income tax purposes was $8,865,491.

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