filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| (unaudited) | |||||||||||
| Assets: | |||||||||||
| Real estate assets, net | $ | 8,272,671 | $ | 7,893,802 | |||||||
| Real estate assets - operating lease right-of-use assets | 229,184 | 252,172 | |||||||||
| Investments in unconsolidated real estate entities | 373,765 | 397,444 | |||||||||
| Investments in debt securities and notes receivable | 606,115 | 593,810 | |||||||||
| Cash and cash equivalents | 65,565 | 109,124 | |||||||||
| Restricted cash | 15,717 | 18,885 | |||||||||
| Other assets, net | 145,342 | 130,611 | |||||||||
| Total assets | $ | 9,708,359 | $ | 9,395,848 | |||||||
| Liabilities, Noncontrolling Interests and Equity: | |||||||||||
| Notes payable, net | $ | 5,409,828 | $ | 4,797,303 | |||||||
| Revolving lines of credit | 174,000 | 949,000 | |||||||||
| Operating lease liabilities | 234,118 | 263,485 | |||||||||
| Cash distributions in unconsolidated real estate ventures | 63,196 | 47,126 | |||||||||
| Accounts payable and accrued expenses | 164,674 | 130,012 | |||||||||
| Other liabilities | 279,668 | 272,798 | |||||||||
| Total liabilities | 6,325,484 | 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, 133,819,163 and 131,357,961 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 1,338 | 1,314 | |||||||||
| Additional paid-in capital | 3,283,848 | 3,000,458 | |||||||||
| Accumulated other comprehensive loss | (64,155) | (99,093) | |||||||||
| Accumulated deficit | (229,269) | (354,900) | |||||||||
| Total Extra Space Storage Inc. stockholders' equity | 2,991,762 | 2,547,779 | |||||||||
| Noncontrolling interest represented by Preferred Operating Partnership units, net | 170,248 | 172,052 | |||||||||
| Noncontrolling interests in Operating Partnership, net and other noncontrolling interests | 220,865 | 216,293 | |||||||||
| Total noncontrolling interests and equity | 3,382,875 | 2,936,124 | |||||||||
| Total liabilities, noncontrolling interests and equity | $ | 9,708,359 | $ | 9,395,848 |
See accompanying notes to unaudited condensed consolidated financial statements.
Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
(unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Property rental | $ | 351,355 | $ | 290,423 | $ | 976,448 | $ | 856,438 | |||||||||||||||||||||||||||||||||||||||
| Tenant reinsurance | 44,258 | 39,294 | 126,211 | 107,985 | |||||||||||||||||||||||||||||||||||||||||||
| Management fees and other income | 16,879 | 13,307 | 47,320 | 38,299 | |||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 412,492 | 343,024 | 1,149,979 | 1,002,722 | |||||||||||||||||||||||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Property operations | 92,794 | 92,322 | 274,316 | 271,659 | |||||||||||||||||||||||||||||||||||||||||||
| Tenant reinsurance | 7,509 | 7,189 | 21,405 | 20,725 | |||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 24,395 | 23,894 | 74,276 | 72,242 | |||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 61,516 | 56,412 | 179,685 | 167,705 | |||||||||||||||||||||||||||||||||||||||||||
| Total expenses | 186,214 | 179,817 | 549,682 | 532,331 | |||||||||||||||||||||||||||||||||||||||||||
| Gain on real estate transactions | — | — | 63,883 | — | |||||||||||||||||||||||||||||||||||||||||||
| Income from operations | 226,278 | 163,207 | 664,180 | 470,391 | |||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (39,670) | (42,213) | (120,605) | (127,610) | |||||||||||||||||||||||||||||||||||||||||||
| Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes | — | (1,233) | — | (3,675) | |||||||||||||||||||||||||||||||||||||||||||
| Interest income | 11,729 | 3,145 | 36,871 | 6,488 | |||||||||||||||||||||||||||||||||||||||||||
| Income before equity in earnings and dividend income from unconsolidated real estate ventures and income tax expense | 198,337 | 122,906 | 580,446 | 345,594 | |||||||||||||||||||||||||||||||||||||||||||
| Equity in earnings and dividend income from unconsolidated real estate entities | 8,255 | 5,605 | 23,533 | 15,692 | |||||||||||||||||||||||||||||||||||||||||||
| 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 | (6,772) | (4,657) | (16,330) | (10,013) | |||||||||||||||||||||||||||||||||||||||||||
| Net income | 199,820 | 123,854 | 593,900 | 351,273 | |||||||||||||||||||||||||||||||||||||||||||
| Net income allocated to Preferred Operating Partnership noncontrolling interests | (3,529) | (3,248) | (10,647) | (9,498) | |||||||||||||||||||||||||||||||||||||||||||
| Net income allocated to Operating Partnership and other noncontrolling interests | (8,015) | (5,973) | (24,031) | (16,052) | |||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 188,276 | $ | 114,633 | $ | 559,222 | $ | 325,723 | |||||||||||||||||||||||||||||||||||||||
| Earnings per common share | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 1.41 | $ | 0.89 | $ | 4.19 | $ | 2.52 | |||||||||||||||||||||||||||||||||||||||
| Diluted | $ | 1.40 | $ | 0.88 | $ | 4.19 | $ | 2.50 | |||||||||||||||||||||||||||||||||||||||
| Weighted average number of shares | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 133,809,750 | 128,862,341 | 133,197,903 | 129,044,954 | |||||||||||||||||||||||||||||||||||||||||||
| Diluted | 140,425,269 | 129,871,096 | 139,854,881 | 130,066,121 | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid per common share | $ | 1.25 | $ | 0.90 | $ | 3.25 | $ | 2.70 |
See accompanying notes to unaudited condensed consolidated financial statements.
Extra Space Storage Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
(unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Net income | $ | 199,820 | $ | 123,854 | $ | 593,900 | $ | 351,273 | |||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate swaps | 8,055 | 11,181 | 36,685 | (83,791) | |||||||||||||||||||||||||||||||
| Total comprehensive income | 207,875 | 135,035 | 630,585 | 267,482 | |||||||||||||||||||||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 11,924 | 9,854 | 36,425 | 21,501 | |||||||||||||||||||||||||||||||
| Comprehensive income attributable to common stockholders | $ | 195,951 | $ | 125,181 | $ | 594,160 | $ | 245,981 |
See accompanying notes to unaudited condensed consolidated financial statements.
Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
(amounts in thousands, except share data)
(unaudited)
| Noncontrolling Interests | Extra Space Storage Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Operating Partnership | Operating Partnership | Other | Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests and Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | 77,400 | 1 | 943 | — | — | 944 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 73,602 | 1 | 2,979 | — | — | 2,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (1,767) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Buyback of common stock, net of offering costs | — | — | — | (653,597) | (7) | — | — | (52,197) | (52,204) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for stock | — | (330) | — | 8,862 | — | 330 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 3,112 | 4,877 | (6) | — | — | — | — | 108,179 | 116,162 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (563) | (3,807) | — | — | — | — | (84,874) | — | (89,244) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,178) | (5,327) | — | — | — | — | — | — | (8,505) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $0.90 per share | — | — | — | — | — | — | — | (117,197) | (117,197) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2020 | $ | 175,319 | $ | 200,832 | $ | 360 | 129,038,907 | $ | 1,290 | $ | 2,872,933 | $ | (113,840) | $ | (362,264) | $ | 2,774,630 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon the exercise of options | — | — | — | 13,610 | — | 726 | — | — | 726 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 60,032 | 1 | 4,883 | — | — | 4,884 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (889) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Buyback of common stock, net of offering costs | — | — | — | (172,600) | (1) | — | — | (15,614) | (15,615) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for stock | — | (3,675) | — | 100,000 | 1 | 3,674 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred D Units in the Operating Partnership for Stock | (2,724) | — | — | 30,495 | — | 2,724 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated joint venture | — | — | 68 | — | — | — | — | — | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 3,139 | 5,216 | (9) | — | — | — | — | 102,911 | 111,257 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (41) | (271) | — | — | — | — | (5,416) | — | (5,728) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,151) | (5,235) | — | — | — | — | — | — | (8,386) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $0.90 per share | — | — | — | — | — | — | — | (116,318) | (116,318) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2020 | $ | 172,542 | $ | 196,867 | $ | 419 | 129,069,555 | $ | 1,291 | $ | 2,884,940 | $ | (119,256) | $ | (391,285) | $ | 2,745,518 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon the exercise of options | — | — | — | 18,605 | — | 1,200 | — | — | 1,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 8,289 | — | 3,452 | — | — | 3,452 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (949) | — | — | — | — | — |
Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
(amounts in thousands, except share data)
(unaudited)
| Noncontrolling Interests | Extra Space Storage Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Operating Partnership | Operating Partnership | Other | Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests and Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Buyback of common stock, net of offering costs | — | — | — | (600) | — | — | — | (54) | (54) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of receivable with Preferred operating units pledged as collateral on loan | — | 8,226 | — | — | — | — | — | — | 8,226 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred B Units in the Operating Partnership for cash | (1,000) | — | — | — | — | — | — | — | (1,000) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 3,248 | 5,986 | (13) | — | — | — | — | 114,633 | 123,854 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 83 | 550 | — | — | — | — | 10,548 | — | 11,181 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,135) | (5,235) | — | — | — | — | — | — | (8,370) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $0.90 per share | — | — | — | — | — | — | — | (116,185) | (116,185) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | 171,738 | $ | 206,394 | $ | 406 | 129,094,900 | $ | 1,291 | $ | 2,889,592 | $ | (108,708) | $ | (392,891) | $ | 2,767,822 |
| Noncontrolling Interest | Extra Space Storage Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Operating Partnership | Operating Partnership | Other | Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests and Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | 56,722 | — | 4,254 | — | — | 4,254 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 89,793 | — | 3,652 | — | — | 3,652 | |||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (2,499) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs | — | — | — | 2,185,685 | 22 | 273,698 | — | — | 273,720 | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for stock | — | (193) | — | 5,000 | — | 193 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated joint venture | — | — | (50) | — | — | — | — | — | (50) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 3,680 | 8,828 | (5) | — | — | — | — | 202,998 | 215,501 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 144 | 956 | — | — | — | — | 21,913 | — | 23,013 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,224) | (5,801) | — | — | — | — | — | — | (9,025) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $1.00 per share | — | — | — | — | — | — | — | (132,540) | (132,540) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | $ | 172,652 | $ | 219,682 | $ | 346 | 133,692,662 | $ | 1,336 | $ | 3,282,255 | $ | (77,180) | $ | (284,442) | $ | 3,314,649 | |||||||||||||||||||||||||||||||||||||||
Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
(amounts in thousands, except share data)
(unaudited)
| Noncontrolling Interest | Extra Space Storage Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Operating Partnership | Operating Partnership | Other | Shares | Par Value | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests and Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 44,990 | — | 4,983 | — | — | 4,983 | |||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (4,972) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs associated with previous stock issuance | — | — | — | — | — | (211) | — | — | (211) | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for stock | — | (2,185) | — | 58,429 | 1 | 2,184 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for cash | — | (113) | — | — | — | (359) | — | — | (472) | |||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of receivable with Operating Partnership units pledged as collateral | — | 411 | — | — | — | — | — | — | 411 | |||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated joint venture | — | — | 150 | — | — | — | — | — | 150 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 3,438 | 7,190 | 3 | — | — | — | — | 167,948 | 178,579 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 35 | 232 | — | — | — | — | 5,350 | — | 5,617 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,223) | (5,751) | — | — | — | — | — | — | (8,974) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $1.00 per share | — | — | — | — | — | — | — | (133,777) | (133,777) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 | $ | 172,902 | $ | 219,466 | $ | 499 | 133,791,109 | $ | 1,337 | $ | 3,288,852 | $ | (71,830) | $ | (250,271) | $ | 3,360,955 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon the exercise of options | — | — | — | 5,600 | — | 318 | — | — | 318 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | 10,913 | — | 4,012 | — | — | 4,012 | |||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | (4,582) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs associated with previous stock issuance | — | — | — | — | — | (151) | — | — | (151) | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for stock | — | (34) | — | 858 | — | 34 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred B Units in the Operating Partnership for stock | (2,834) | — | — | 15,265 | 1 | 2,833 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of remaining equity interest in existing consolidated joint venture | — | — | — | — | — | (12,050) | — | — | (12,050) | |||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated joint venture | — | — | (225) | — | — | — | — | — | (225) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 3,529 | 8,015 | — | — | — | — | 188,276 | 199,820 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 50 | 330 | — | — | — | — | 7,675 | — | 8,055 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | (3,399) | (7,186) | — | — | — | — | — | — | (10,585) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid on common stock at $1.25 per share | — | — | — | — | — | — | — | (167,274) | (167,274) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | 170,248 | $ | 220,591 | $ | 274 | 133,819,163 | $ | 1,338 | $ | 3,283,848 | $ | (64,155) | $ | (229,269) | $ | 3,382,875 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
| For the Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 593,900 | $ | 351,273 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 179,685 | 167,705 | |||||||||
| Amortization of deferred financing costs | 6,656 | 7,356 | |||||||||
| Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes | — | 3,675 | |||||||||
| Non-cash lease expense | 1,396 | 799 | |||||||||
| Compensation expense related to stock-based awards | 12,647 | 11,316 | |||||||||
| Accrual of interest income added to principal of debt securities and notes receivable | (25,871) | — | |||||||||
| Gain on real estate transactions | (63,883) | — | |||||||||
| 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 | 4,640 | 5,097 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Other assets | (10,612) | (17,977) | |||||||||
| Accounts payable and accrued expenses | 33,907 | 41,780 | |||||||||
| Other liabilities | 3,054 | 12,243 | |||||||||
| Net cash provided by operating activities | 729,268 | 583,267 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of real estate assets | (589,382) | (151,244) | |||||||||
| Development and redevelopment of real estate assets | (42,719) | (46,112) | |||||||||
| Proceeds from sale of real estate assets and investments in real estate ventures | 196,241 | 234 | |||||||||
| Investment in unconsolidated real estate entities | (20,834) | (13,937) | |||||||||
| Return of investment in unconsolidated real estate ventures | 31,534 | 371 | |||||||||
| Issuance and purchase of notes receivable | (143,270) | (149,750) | |||||||||
| Principal payments received from notes receivable | 36,874 | — | |||||||||
| Proceeds from sale of notes receivable | 116,822 | — | |||||||||
| Purchase of equipment and fixtures | (3,058) | (3,407) | |||||||||
| Net cash used in investing activities | (417,792) | (363,845) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from the sale of common stock, net of offering costs | 273,358 | — | |||||||||
| Proceeds from notes payable and revolving lines of credit | 3,323,000 | 1,419,000 | |||||||||
| Principal payments on notes payable and revolving lines of credit | (4,526,549) | (1,192,750) | |||||||||
| Proceeds from issuance of public bonds, net | 1,040,349 | — | |||||||||
| Deferred financing costs | (10,698) | (3,161) | |||||||||
| Net proceeds from exercise of stock options | 4,572 | 2,870 | |||||||||
| Repurchase of common stock | — | (67,873) | |||||||||
| Redemption of Operating Partnership units held by noncontrolling interests | (472) | (1,000) | |||||||||
| Proceeds from principal payments on note receivable collateralized by OP Units | 411 | — | |||||||||
| Proceeds from principal payments on note receivable collateralized by Preferred OP Units | — | 8,226 | |||||||||
| Contributions from noncontrolling interests | — | 68 | |||||||||
| Dividends paid on common stock | (433,591) | (349,700) | |||||||||
| Distributions to noncontrolling interests | (28,584) | (25,261) | |||||||||
| Net cash used in financing activities | (358,204) | (209,581) | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (46,728) | 9,841 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of the period | 128,009 | 70,733 | |||||||||
| Cash, cash equivalents, and restricted cash, end of the period | $ | 81,281 | $ | 80,574 |
Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
| For the Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental schedule of cash flow information | |||||||||||
| Interest paid | $ | 116,937 | $ | 119,977 | |||||||
| Income taxes paid | 21,365 | 5,181 | |||||||||
| 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 | $ | (2,412) | $ | (4,005) | |||||||
| Common stock and paid-in capital | 2,412 | 4,005 | |||||||||
| Establishment of operating lease right of use assets and lease liabilities | |||||||||||
| Real estate assets - operating lease right-of-use assets | $ | 2,911 | $ | 6,779 | |||||||
| Operating lease liabilities | (2,911) | (6,779) | |||||||||
| Acquisitions of real estate assets | |||||||||||
| Real estate assets, net | $ | 2,228 | $ | (13,833) | |||||||
| Investment in unconsolidated real estate ventures | (2,673) | — | |||||||||
| Finance lease liability | 445 | 13,833 | |||||||||
| Accrued construction costs and capital expenditures | |||||||||||
| Acquisition of real estate assets | $ | 756 | $ | 676 | |||||||
| Accounts payable and accrued expenses | (756) | (676) | |||||||||
| 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 | |||||||||
| Establishment of finance lease assets and lease liabilities | |||||||||||
| Real estate assets, net | $ | 41,438 | $ | 8,605 | |||||||
| Other liabilities | (41,438) | (8,605) | |||||||||
| Investment in unconsolidated real estate ventures received on sale of stores to joint venture | |||||||||||
| Investment in unconsolidated real estate ventures | $ | 33,878 | $ | — | |||||||
| Real estate assets | (33,878) | — |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Amounts in thousands, except store and share data, unless otherwise stated
1. ORGANIZATION
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 self-storage properties ("stores") 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 September 30, 2021, the Company had direct and indirect equity interests in 1,227 stores. In addition, the Company managed 827 stores for third parties, bringing the total number of stores which it owns and/or manages to 2,054. 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. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. The condensed consolidated balance sheet as of December 31, 2020 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission.
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848)." ASU 2020-04 and subsequent amendments contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur through December 31, 2022. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)." ASU 2020-06 simplifies the accounting for convertible instruments and contracts in an entity's own equity, and amended related earnings per share guidance. The guidance in ASU 2020-06 becomes effective for fiscal years beginning after December 15, 2021. Early adoption is permitted no earlier than the fiscal years beginning after December 15, 2020. The guidance may be adopted on a modified or fully retrospective basis. The Company is currently assessing the impact of the adoption of ASU 2020-06 on its consolidated financial statements.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
3. 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 FASB’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 the Company and its counterparties. However, as of September 30, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety were 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 September 30, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall.
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Description | 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 | $ | — | $ | — | $ | — | |||||||||||||||||
| Other liabilities - Cash flow hedge swap agreements | $ | — | $ | 61,421 | $ | — |
The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of September 30, 2021 or December 31, 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.
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.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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. 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 an impairment loss on the assets held for sale. The operations of assets held for sale or sold during the period is presented as part of normal operations for all periods presented. As of September 30, 2021, the Company had 16 operating stores classified as held for sale which are included in real estate assets, net.
The Company assesses annually whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired annually 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.
In connection with the Company’s acquisition of stores, the purchase price is allocated to the tangible and intangible assets and liabilities 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 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 an acquisition is recorded at fair value based on current interest rates compared to contractual rates. Acquisition-related transaction costs are capitalized as part of the purchase price.
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, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at September 30, 2021 and December 31, 2020 approximate fair value. Restricted cash is comprised of funds deposited with financial institutions located throughout the United States primarily relating to earnest money deposits on potential acquisitions.
The fair values of the Company’s notes receivable from Preferred and Common Operating Partnership unit holders and other fixed rate notes receivable were based on the discounted estimated future cash flows 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 values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Notes receivable from Preferred and Common Operating Partnership unit holders | $ | 100,815 | $ | 101,900 | $ | 102,333 | $ | 102,311 | |||||||||||||||
| Fixed rate notes receivable | $ | 107,176 | $ | 104,251 | $ | 114,145 | $ | 104,000 | |||||||||||||||
| Fixed rate notes payable | $ | 4,575,824 | $ | 4,512,030 | $ | 3,816,530 | $ | 3,637,220 | |||||||||||||||
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
4. 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 D Redeemable Preferred Units (“Series D Units” and, together with the Series A Units and Series B 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 (i.e. those that reduce earnings per common share) are included. For the three and nine months ended September 30, 2021 and 2020, there were no anti-dilutive options.
For the purposes of computing the diluted impact of the potential exchange of the Preferred Operating Partnership units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, the Company divided the total value of the Preferred Operating Partnership units by the average share price for the period presented. The average share price for the three months ended September 30, 2021 and 2020 was $176.78 and $103.36, respectively.
The following table presents the number of Preferred Operating Partnership 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 Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Equivalent Shares (if converted) | Equivalent Shares (if converted) | Equivalent Shares (if converted) | Equivalent Shares (if converted) | ||||||||||||||||||||||||||||||||
| Common OP Units | — | 5,815,916 | — | 5,870,459 | |||||||||||||||||||||||||||||||
| Series A Units (Variable Only) | — | 875,480 | — | 875,480 | |||||||||||||||||||||||||||||||
| Series B Units | 225,972 | 400,668 | 271,132 | 416,796 | |||||||||||||||||||||||||||||||
| Series D Units | 663,888 | 1,135,469 | 784,139 | 1,187,083 | |||||||||||||||||||||||||||||||
| 889,860 | 8,227,533 | 1,055,271 | 8,349,818 |
As of September 30, 2021, the Operating Partnership had no exchangeable senior notes issued or outstanding. The Operating Partnership had $575,000 of its 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) issued and outstanding as of September 30, 2020. In October and November 2020, a portion of 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 the 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,” requires an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and requires
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 three and nine months ended September 30, 2021 and 2020, zero and 761,975 shares, respectively, related to the 2015 Notes were included in the computation for 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 fixed $101,700 amount.
The computation of earnings per common share is as follows for the periods presented:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 188,276 | $ | 114,633 | $ | 559,222 | $ | 325,723 | |||||||||||||||||||||||||||
| Earnings and dividends allocated to participating securities | (260) | (177) | (800) | (513) | |||||||||||||||||||||||||||||||
| Earnings for basic computations | 188,016 | 114,456 | 558,422 | 325,210 | |||||||||||||||||||||||||||||||
| Earnings and dividends allocated to participating securities | — | 177 | — | 513 | |||||||||||||||||||||||||||||||
| Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units | 9,810 | — | 29,395 | — | |||||||||||||||||||||||||||||||
| Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units) | (572) | — | (1,716) | — | |||||||||||||||||||||||||||||||
| Net income for diluted computations | $ | 197,254 | $ | 114,633 | $ | 586,101 | $ | 325,723 | |||||||||||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||||||||||||
| Average number of common shares outstanding - basic | 133,809,750 | 128,862,341 | 133,197,903 | 129,044,954 | |||||||||||||||||||||||||||||||
| OP Units | 5,733,936 | — | 5,767,132 | — | |||||||||||||||||||||||||||||||
| Series A Units | 875,480 | — | 875,480 | — | |||||||||||||||||||||||||||||||
| Unvested restricted stock awards included for treasury stock method | — | 214,909 | — | 212,311 | |||||||||||||||||||||||||||||||
| Shares related to exchangeable senior notes and dilutive stock options | 6,103 | 793,846 | 14,366 | 808,856 | |||||||||||||||||||||||||||||||
| Average number of common shares outstanding - diluted | 140,425,269 | 129,871,096 | 139,854,881 | 130,066,121 | |||||||||||||||||||||||||||||||
| Earnings per common share | |||||||||||||||||||||||||||||||||||
| Basic | $ | 1.41 | $ | 0.89 | $ | 4.19 | $ | 2.52 | |||||||||||||||||||||||||||
| Diluted | $ | 1.40 | $ | 0.88 | $ | 4.19 | $ | 2.50 |
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
5. STORE ACQUISITIONS AND DISPOSITIONS
Store Acquisitions
The following table shows the Company’s acquisitions of stores for the three and nine months ended September 30, 2021 and 2020. The table excludes purchases of raw land and improvements made to existing assets. All acquisitions are considered asset acquisitions under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."
| Consideration Paid | Total | |||||||||||||||||||||||||||||||||||||||||||
| Quarter | Number of Stores | Total | Cash Paid | Loan Assumed | Finance Lease Liability | Investments in Real Estate Ventures | Net Liabilities/ (Assets) Assumed | Real estate assets | ||||||||||||||||||||||||||||||||||||
| Q3 2021 | 12 | (1) | $ | 186,689 | $ | 185,497 | $ | — | $ | 445 | $ | — | $ | 747 | $ | 186,689 | ||||||||||||||||||||||||||||
| Q2 2021 | 15 | (2) | 193,783 | 190,729 | — | — | 2,673 | 381 | 193,783 | |||||||||||||||||||||||||||||||||||
| Q1 2021 | 9 | 151,884 | 148,940 | — | — | — | 2,944 | 151,884 | ||||||||||||||||||||||||||||||||||||
| 36 | $ | 532,356 | $ | 525,166 | $ | — | $ | 445 | $ | 2,673 | $ | 4,072 | $ | 532,356 | ||||||||||||||||||||||||||||||
| Q3 2020 | 8 | (3) | $ | 101,731 | $ | 86,996 | $ | — | $ | 13,833 | $ | — | $ | 902 | $ | 101,731 | ||||||||||||||||||||||||||||
| Q2 2020 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Q1 2020 | 2 | 19,399 | 19,354 | — | — | — | 45 | 19,399 | ||||||||||||||||||||||||||||||||||||
| 10 | $ | 121,130 | $ | 106,350 | $ | — | $ | 13,833 | $ | — | $ | 947 | $ | 121,130 | ||||||||||||||||||||||||||||||
(1) Store acquisitions during the three months ended September 30, 2021 include the acquisition of one store that was subject to a finance land lease. The right-of-use asset associated with this lease is included in real estate assets above.
(2) Store acquisitions during the three months ended June 30, 2021 include the acquisition of two stores previously held in joint ventures where the Company held a noncontrolling interest. The Company purchased its partners' equity interests in these joint ventures, and the properties owned by the joint ventures became wholly owned by the Company. No gain or loss was recognized as a result of these acquisitions.
(3) Store acquisitions during the three months ended September 30, 2020 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.
Store Dispositions
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 cash of $132,759 and maintained a 55% interest in the new joint venture valued at $33,878. The Company recognized a gain of $64,804 related to the sale of these properties.
6. 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 than its equity interest.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The Company separately reports investments with net equity less than zero in cash distributions in unconsolidated real estate ventures in the condensed consolidated balance sheets. The net equity of certain joint ventures is less than zero because distributions have exceeded the Company's investment in and share of income from these joint ventures. This is generally the result of financing distributions, capital events or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization while distributions do not.
Net investments in unconsolidated real estate ventures and cash distributions in unconsolidated real estate ventures consist of the following:
| Number of Stores | Equity Ownership % | Excess Profit % (1) | September 30, | December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||
| PR EXR Self Storage, LLC | 5 | 25% | 40% | $ | 59,633 | $ | 60,092 | ||||||||||||||||||||||
| WICNN JV LLC (2) | — | 10% | 35% | — | 36,032 | ||||||||||||||||||||||||
| ESS-CA TIVS JV LP (3) | 16 | 55% | 60% | 33,543 | — | ||||||||||||||||||||||||
| GFN JV, LLC (2) | — | 10% | 30% | — | 18,397 | ||||||||||||||||||||||||
| ESS-NYFL JV LP | 11 | 16% | 24% | 11,959 | 12,211 | ||||||||||||||||||||||||
| PRISA Self Storage LLC | 85 | 4% | 4% | 8,694 | 8,815 | ||||||||||||||||||||||||
| Alan Jathoo JV LLC | 9 | 10% | 10% | 7,651 | 7,780 | ||||||||||||||||||||||||
| Storage Portfolio IV JV LLC | 15 | 10% | 30% | 20,528 | — | ||||||||||||||||||||||||
| Storage Portfolio III JV LLC | 5 | 10% | 30% | 5,613 | 5,726 | ||||||||||||||||||||||||
| ESS Bristol Investments LLC | 8 | 10% | 30% | 2,715 | 2,810 | ||||||||||||||||||||||||
| Extra Space Northern Properties Six LLC | 10 | 10% | 35% | (2,855) | (2,541) | ||||||||||||||||||||||||
| Storage Portfolio II JV LLC | 36 | 10% | 30% | (5,954) | (5,441) | ||||||||||||||||||||||||
| VRS Self Storage, LLC | 16 | 45% | 54% | (14,570) | 17,186 | ||||||||||||||||||||||||
| Storage Portfolio I LLC | 24 | 34% | 49% | (39,817) | (39,144) | ||||||||||||||||||||||||
| Other minority owned stores | 17 | 10-50% | 19-50% | 23,429 | 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 | 257 | $ | 310,569 | $ | 350,318 |
(1) Includes pro-rata equity ownership share and maximum potential 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 condensed 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 $33,878. 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 condensed consolidated statements of operations.
During the nine months ended September 30, 2021, the Company contributed a total of $20,834 of cash to its joint ventures, including its pro-rata portion of the purchase price of 15 operating stores and other capital contributions related to cash flow requirements for lease up stores.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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.
7. 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:
| September 30, 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 | 174,215 | 187,368 | |||||||||
| Notes Receivable-Senior Mezzanine Loan, net | 101,955 | 101,553 | |||||||||
| Dividends Receivable | 29,945 | 4,889 | |||||||||
| $ | 606,115 | $ | 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 a 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 is not 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 equity interest in which it or its subsidiaries wholly own 62 storage facilities. The Company paid cash of $101,142 for the loan receivable and accounts for the discount at amortized cost. The discount is being amortized over the term of the loan receivable.
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 nine months ended September 30, 2021 the Company sold a total principal amount of $117,336 of its mortgage bridge loans receivable to third parties for a total of $116,822 in cash and closed on $143,270 in new mortgage and mezzanine bridge loans.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
8. NOTES PAYABLE, NET
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 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.
9. DERIVATIVES
The Company is exposed to certain risks 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 by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposure that arises 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 these objectives, 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 three and nine months ended September 30, 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. In the coming 12 months, the Company estimates that $35,685 will be reclassified and increase interest expense.
The Company held 20 derivative financial instruments which had a total combined notional amount of $1,986,266 as of September 30, 2021.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Fair Values of Derivative Instruments
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets:
| Asset / Liability Derivatives | |||||||||||
| Derivatives designated as hedging instruments: | September 30, 2021 | December 31, 2020 | |||||||||
| Other assets | $ | — | $ | — | |||||||
| Other liabilities | $ | 61,421 | $ | 98,325 |
Effect of Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the condensed 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 Three Months Ended September 30, | Location of amounts reclassified from OCI into income | Gain (loss) reclassified from OCI For the Three Months Ended September 30, | |||||||||||||||||||||||||||
| Type | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Swap Agreements | $ | (736) | $ | 1,525 | Interest expense | $ | (8,794) | $ | (9,666) | ||||||||||||||||||||
| Gain (loss) recognized in OCI For the Nine Months Ended September 30, | Location of amounts reclassified from OCI into income | Gain (loss) reclassified from OCI For the Nine Months Ended September 30, | |||||||||||||||||||||||||||
| Type | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Swap Agreements | $ | 10,316 | $ | (101,535) | Interest expense | $ | (26,386) | $ | (17,868) |
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 September 30, 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 $63,272. As of September 30, 2021, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of September 30, 2021, it could have been required to cash settle its obligations under the agreements at their termination value of $63,272, including accrued interest.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 are included in exchangeable senior notes, net, in the condensed consolidated balance sheets. Prior to the full redemption of the 2015 Notes in November 2020 as described below, 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 beginning April 1, 2016, until the maturity date of October 1, 2035. The 2015 Notes bore interest at 3.125% per annum and contained an exchange settlement feature, which provided that the 2015 Notes could have been, under certain circumstances, 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.
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 components of the 2015 Notes separately. The equity components are included in paid-in capital in stockholders’ equity in the condensed consolidated balance sheets, and the value of the equity components are treated as original issue discount for purposes of accounting for the debt components. The discounts were amortized as interest expense over the remaining period of the debt through its first redemption date of October 1, 2020. The effective interest rate on the liability components of the 2015 Notes was 4.0%, which approximated 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 of the 2015 Notes were as follows for the periods indicated:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Contractual interest | $ | — | $ | 4,492 | $ | — | $ | 8,984 | |||||||||||||||||||||||||||
| Amortization of discount | — | 1,233 | — | 3,675 | |||||||||||||||||||||||||||||||
| Total interest expense recognized | $ | — | $ | 5,725 | $ | — | $ | 12,659 |
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 and the Company redeemed the remaining $55 of outstanding principal amount of the 2015 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.
11. STOCKHOLDERS’ EQUITY
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 resulting in net proceeds of $66,786.
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 $206,573.
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 nine months ended September 30, 2021.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
12. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS
Classification of Noncontrolling Interests
GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.
The Company has evaluated the terms of the Operating Partnership’s preferred units and classifies the noncontrolling interest represented by such preferred units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the condensed 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 and (2) the redemption value as of the end of the period in which the determination is made.
At September 30, 2021 and December 31, 2020, the noncontrolling interests represented by the Preferred OP Units qualified for classification as permanent equity on the Company's condensed 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 September 30, 2021 and December 31, 2020, noncontrolling interests in Preferred OP Units were presented net of notes receivable from Preferred OP Unit holders of $100,000 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:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Series A Units | $ | 14,818 | $ | 13,788 | |||||||
| Series B Units | 38,068 | 40,902 | |||||||||
| Series D Units | 117,362 | 117,362 | |||||||||
| $ | 170,248 | $ | 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 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 holder of the Series A Units $100,000. The loan 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 receivable is also the holder of the Series A Units.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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. The Series B Units have a liquidation value of $25.00 per unit for a 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 obligation 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 ranked 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. The Series C Units were convertible into OP Units at the option of the holder at a rate of 0.9145 OP Units per Series C Unit converted. This conversion option expired upon the fifth anniversary of the date of issuance.
In December 2014, the Operating Partnership loaned certain holders of the Series C Units $20,230. The loan receivable, which was collateralized by the Series C Units, bears interest at 5.0% per annum and matures on December 15, 2024. The Series C Units were shown on the balance sheet net of the loan balance 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 OP Units, with a total of 407,996 Series C Units being converted into a total of 373,113 OP Units. On April 25, 2019, the remaining 296,020 Series C Units were converted into 270,709 OP Units. The remaining outstanding balance of the loan receivable of $1,900 is shown as a reduction of the noncontrolling interests related to the OP Units as of September 30, 2021 and December 31, 2020. 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 interests of the Operating Partnership with respect to distributions and liquidation.
The Series D Units have been issued at various times from 2014 to 2019. The Series D Units have a liquidation value of $25.00 per unit, for a fixed liquidation value of $117,362, which represents 4,694,485 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 OP Units at the option of the holder until the tenth anniversary of the date of issuance, with the number of OP Units to be issued equal to $25.00 per Series D Unit, divided by the value of a share of common stock as of the exchange date.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 94.7% ownership interest in the Operating Partnership as of September 30, 2021. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 5.3% are held by certain former owners of assets acquired by the Operating Partnership. As of September 30, 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 Partnership Agreement. As of September 30, 2021, the ten-day average closing price of the Company's common stock was $174.98 and there were 5,733,498 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on September 30, 2021 and the Company elected to pay the OP Unit holders cash, the Company would have paid $1,003,247 in cash consideration to redeem the units.
OP Unit activity is summarized as follows for the periods presented:
| For the Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| OP Units redeemed for common stock | 64,287 | 108,862 | |||||||||
| OP Units redeemed for cash | 3,000 | — | |||||||||
| Cash paid for OP Units redeemed | $ | 472 | $ | — | |||||||
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 OP Units and classifies the noncontrolling interest represented by the OP Units as stockholders’ equity in the accompanying condensed 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 condensed 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 and (2) the redemption value as of the end of the period in which the determination is made.
Other Noncontrolling Interests
Other noncontrolling interests represent the ownership interests of third parties in two consolidated joint ventures as of September 30, 2021. One joint venture owns four operating stores and the other owns one property that is under development. The voting interests of the third-party owners are between 10.0% and 20.0%.
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.
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
14. 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 the Company's self-storage operations represents total property revenue less direct property operating expenses. NOI for the Company's tenant reinsurance segment represents tenant reinsurance revenues less tenant reinsurance expense.
The Company has 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 the Company's 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:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Self-Storage Operations | $ | 351,355 | $ | 290,423 | $ | 976,448 | $ | 856,438 | ||||||||||||||||||
| Tenant Reinsurance | 44,258 | 39,294 | 126,211 | 107,985 | ||||||||||||||||||||||
| Total segment revenues | $ | 395,613 | $ | 329,717 | $ | 1,102,659 | $ | 964,423 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Self-Storage Operations | $ | 92,794 | $ | 92,322 | $ | 274,316 | $ | 271,659 | ||||||||||||||||||
| Tenant Reinsurance | 7,509 | 7,189 | 21,405 | 20,725 | ||||||||||||||||||||||
| Total segment operating expenses | $ | 100,303 | $ | 99,511 | $ | 295,721 | $ | 292,384 | ||||||||||||||||||
| Net operating income: | ||||||||||||||||||||||||||
| Self-Storage Operations | $ | 258,561 | $ | 198,101 | $ | 702,132 | $ | 584,779 | ||||||||||||||||||
| Tenant Reinsurance | 36,749 | 32,105 | 104,806 | 87,260 | ||||||||||||||||||||||
| Total segment net operating income: | $ | 295,310 | $ | 230,206 | $ | 806,938 | $ | 672,039 | ||||||||||||||||||
| Other components of net income: | ||||||||||||||||||||||||||
| Management fees and other income | $ | 16,879 | $ | 13,307 | $ | 47,320 | $ | 38,299 | ||||||||||||||||||
| General and administrative expense | (24,395) | (23,894) | (74,276) | (72,242) | ||||||||||||||||||||||
| Depreciation and amortization expense | (61,516) | (56,412) | (179,685) | (167,705) | ||||||||||||||||||||||
| Gain on real estate transactions | — | — | 63,883 | — | ||||||||||||||||||||||
| Interest expense | (39,670) | (42,213) | (120,605) | (127,610) | ||||||||||||||||||||||
| Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes | — | (1,233) | — | (3,675) | ||||||||||||||||||||||
| Interest income | 11,729 | 3,145 | 36,871 | 6,488 | ||||||||||||||||||||||
| Equity in earnings and dividend income from unconsolidated real estate entities | 8,255 | 5,605 | 23,533 | 15,692 | ||||||||||||||||||||||
| 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 | (6,772) | (4,657) | (16,330) | (10,013) | ||||||||||||||||||||||
| Net income | $ | 199,820 | $ | 123,854 | $ | 593,900 | $ | 351,273 |
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
15. COMMITMENTS AND CONTINGENCIES
As of September 30, 2021, the Company was involved in various legal proceedings and was subject to various claims and complaints arising in the ordinary course of business. Because litigation is inherently unpredictable, the outcome of these matters cannot presently be determined with any degree of certainty. In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. The Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period, notwithstanding the fact that the Company is currently vigorously defending any legal proceedings against it.
As of September 30, 2021, the Company was under agreement to acquire 15 stores at a total purchase price of $221,850. Fourteen stores are scheduled to close in 2021 and one store is scheduled to close in 2022. Additionally, the Company is under agreement to acquire 11 stores with joint venture partners, for a total investment of $23,775. Ten stores are scheduled to close in 2021 and one store scheduled to close in 2022.
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 stores, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to its stores could result in future material environmental liabilities.
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