Item 1. FINANCIAL STATEMENTS

143K characters. Original on sec.gov · Markdown

Item 1. FINANCIAL STATEMENTS

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share data)


	March 31, 2023		December 31, 2022
	(unaudited)
Assets:
Real estate assets, net	$	9,991,446	$	9,997,978
Real estate assets - operating lease right-of-use assets	226,483		221,725
Investments in unconsolidated real estate entities	600,617		582,412
Investments in debt securities and notes receivable	863,913		858,049
Cash and cash equivalents	47,951		92,868

Other assets, net	402,259		414,426
Total assets	$	12,132,669	$	12,167,458
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	1,306,301	$	1,288,555
Unsecured term loans, net	2,672,668		2,340,116
Unsecured senior notes, net	3,258,329		2,757,791
Revolving lines of credit	94,500		945,000
Operating lease liabilities	234,255		229,035
Cash distributions in unconsolidated real estate ventures	68,284		67,352
Accounts payable and accrued expenses	178,156		171,680
Other liabilities	287,475		289,655
Total liabilities	8,099,968		8,089,184
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, 135,007,280 and 133,921,020 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	1,350		1,339
Additional paid-in capital	3,376,458		3,345,332
Accumulated other comprehensive income	35,081		48,798
Accumulated deficit	(159,556)		(135,872)
Total Extra Space Storage Inc. stockholders' equity	3,253,333		3,259,597
Noncontrolling interest represented by Preferred Operating Partnership units, net	222,940		261,502
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	556,428		557,175
Total noncontrolling interests and equity	4,032,701		4,078,274
Total liabilities, noncontrolling interests and equity	$	12,132,669	$	12,167,458

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 March 31,
	2023		2022
Revenues:
Property rental	$	433,962	$	379,808
Tenant reinsurance	47,704		43,797
Management fees and other income	21,384		19,957
Total revenues	503,050		443,562
Expenses:
Property operations	117,166		103,542
Tenant reinsurance	9,089		7,042

General and administrative	34,763		29,762
Depreciation and amortization	78,490		67,906
Total expenses	239,508		208,252

Income from operations	263,542		235,310
Interest expense	(80,099)		(42,538)

Interest income	19,438		18,989
Income before equity in earnings and dividend income from unconsolidated real estate entities and income tax expense	202,881		211,761
Equity in earnings and dividend income from unconsolidated real estate entities	10,305		9,097

Income tax expense	(4,308)		(3,141)
Net income	208,878		217,717
Net income allocated to Preferred Operating Partnership noncontrolling interests	(2,254)		(4,333)
Net income allocated to Operating Partnership and other noncontrolling interests	(10,320)		(9,805)
Net income attributable to common stockholders	$	196,304	$	203,579
Earnings per common share
Basic	$	1.46	$	1.52
Diluted	$	1.46	$	1.51
Weighted average number of shares
Basic	134,511,273		134,180,175
Diluted	142,940,384		141,581,862
Cash dividends paid per common share	$	1.62	$	1.50

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 March 31,
	2023		2022
Net income	$	208,878	$	217,717
Other comprehensive income:
Change in fair value of interest rate swaps	(14,510)		51,649
Total comprehensive income	194,368		269,366
Less: comprehensive income attributable to noncontrolling interests	11,781		16,784
Comprehensive income attributable to common stockholders	$	182,587	$	252,582

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 Interest							Extra Space Storage Inc. Stockholders' Equity
		Preferred Operating Partnership		Operating Partnership		Other		Shares	Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Noncontrolling Interests and Equity
Balances at December 31, 2021		$	259,110	$	410,053	$	317	133,922,305	$	1,339	$	3,285,948	$	(42,546)	$	(128,245)	$	3,785,976

Issuance of common stock in connection with share based compensation		—		—		—		142,784	2		4,542		—		—		4,544
Restricted stock grants cancelled		—		—		—		(779)	—		—		—		—		—


Redemption of Operating Partnership units for cash		—		(829)		—		—	—		(1,843)		—		—		(2,672)
Redemption of Preferred B Units in the Operating Partnership for cash		(3,375)		—		—		—	—		—		—		—		(3,375)



Issuance of common stock in conjunction with acquisitions		—		—		—		186,766	2		40,961		—		—		40,963



Net income		4,333		9,805				—	—		—		—		203,579		217,717
Other comprehensive income		313		2,333		—		—	—		—		49,003		—		51,649
Distributions to Operating Partnership units held by noncontrolling interests		(4,330)		(9,781)		—		—	—		—		—		—		(14,111)
Dividends paid on common stock at $1.50 per share		—		—		—		—	—		—		—		(202,527)		(202,527)
Balances at March 31, 2022		$	256,051	$	411,581	$	317	134,251,076	$	1,343	$	3,329,608	$	6,457	$	(127,193)	$	3,878,164



















Balances at December 31, 2022		$	261,502	$	556,095	$	1,080	133,921,020	$	1,339	$	3,345,332	$	48,798	$	(135,872)	$	4,078,274

Issuance of common stock in connection with share based compensation		—		—		—		89,564	1		5,498		—		—		5,499
Taxes paid upon net settlement of share based compensation		—						(7,087)	—		(7,449)		—		—		(7,449)
Restricted stock grants cancelled		—		—		—		(2,222)	—		—		—		—		—



Redemption of Preferred A Units in the Operating Partnership for stock		(16,339)						851,698	8		11,015		—		—		(5,316)


Redemption of Preferred D Units in the Operating Partnership for stock		(22,064)						154,307	2		22,062		—		—		—








Noncontrolling interest in consolidated joint venture		—		—		1,391		—	—		—		—		—		1,391
Net income (loss)		2,254		10,378		(58)		—	—		—		—		196,304		208,878
Other comprehensive income		—		(793)		—		—	—		—		(13,717)		—		(14,510)
Distributions to Operating Partnership units held by noncontrolling interests		(2,413)		(11,665)		—		—	—		—		—		—		(14,078)
Dividends paid on common stock at $1.62 per share		—		—		—		—	—		—		—		(219,988)		(219,988)
Balances at March 31, 2023		$	222,940	$	554,015	$	2,413	135,007,280	$	1,350	$	3,376,458	$	35,081	$	(159,556)	$	4,032,701

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 Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	208,878	$	217,717
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	78,490		67,906
Amortization of deferred financing costs	2,604		1,984

Non-cash lease expense	462		474
Compensation expense related to stock-based awards	5,499		4,542
Accrual of interest income added to principal of debt securities and notes receivable	(8,574)		(9,951)


Distributions from unconsolidated real estate ventures	3,789		2,795
Changes in operating assets and liabilities:

Other assets	(2,650)		(6,209)
Accounts payable and accrued expenses	4,724		(7,665)
Other liabilities	(11,573)		15,872
Net cash provided by operating activities	281,649		287,465
Cash flows from investing activities:
Acquisition of real estate assets	(47,296)		(195,805)

Development and redevelopment of real estate assets	(16,762)		(14,716)

Investment in unconsolidated real estate entities	(21,062)		(4,321)

Return of investment in unconsolidated real estate ventures	—		342
Issuance and purchase of notes receivable	(58,378)		(134,408)
Principal payments received from notes receivable	21,828		195,803
Proceeds from sale of notes receivable	39,261		39,718
Purchase of equipment and fixtures	(3,930)		(7,985)
Net cash used in investing activities	(86,339)		(121,372)
Cash flows from financing activities:

Proceeds from notes payable and revolving lines of credit	1,381,592		889,829
Principal payments on notes payable and revolving lines of credit	(1,879,049)		(1,230,924)
Proceeds from issuance of public bonds, net	500,000		400,000
Deferred financing costs	(6,080)		(5,842)



Redemption of Operating Partnership units held by noncontrolling interests	—		(2,672)
Redemption of Preferred Units for cash	(5,000)		(3,375)


Dividends paid on common stock	(219,988)		(202,527)
Distributions to noncontrolling interests	(14,078)		(14,110)
Net cash used in financing activities	(242,603)		(169,621)
Net decrease in cash, cash equivalents, and restricted cash	(47,293)		(3,528)
Cash, cash equivalents, and restricted cash, beginning of the period	97,735		76,194
Cash, cash equivalents, and restricted cash, end of the period	$	50,442	$	72,666
Cash and equivalents, including restricted cash at the beginning of the period:
Cash and equivalents	$	92,868	$	71,126
Restricted cash included in other assets	4,867		5,068
	$	97,735	$	76,194
Cash and equivalents, including restricted cash at the end of the period:
Cash and equivalents	$	47,951	$	65,978
Restricted cash included in other assets	2,491		6,688
	$	50,442	$	72,666

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2023		2022
Supplemental schedule of cash flow information
Interest paid	$	78,656	$	43,197
Income taxes paid	1,910		703
Supplemental schedule of noncash investing and financing activities:





Acquisition and establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	—	$	1,440
Operating lease liabilities	—		(1,440)

Acquisitions of real estate assets
Real estate assets, net	$	—	$	40,492
Value of equity issued	—		(40,965)
Net Liabilities Assumed	—		(274)
Investment in unconsolidated real estate ventures	—		747

Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	1,752	$	2,236

Accounts payable and accrued expenses	(1,752)		(2,236)






Redemption of Preferred Operating Partnership units for common stock
Preferred Operating Partnership units	$	33,403	$	—
Additional paid-in capital	(33,403)		$	—

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, which meets the definition of a variable interest entity and is consolidated. 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 March 31, 2023, the Company had direct and indirect equity interests in 1,457 stores. In addition, the Company managed 931 stores for third parties, bringing the total number of stores which it owns and/or manages to 2,388. 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 months ended March 31, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. The condensed consolidated balance sheet as of December 31, 2022 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, 2022, 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): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance that provides transition relief for reference rate reform, including optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The Company also elected to apply additional expedients related to contract modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes are made to applicable debt and derivative contracts. Application of these expedients preserves the presentation of derivatives and debt contracts consistent with past presentation. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope", which refines the scope of Topic 848 and clarifies some of its guidance. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. The Company has begun transitioning debt over to Secured Overnight Financing Rate ("SOFR") as part of the reference rate reform.

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 March 31, 2023, 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 March 31, 2023, 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	$	—	$	40,180	$	—
Other liabilities - Cash flow hedge swap agreements	$	—	$	1,190	$	—

The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of March 31, 2023 or December 31, 2022.

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

The Company evaluates goodwill for impairment at least annually and whenever events, circumstances, and other related factors indicate that the fair value of the related reporting unit may be less than the carrying value. If the fair value of the reporting unit is determined to exceed the aggregate carrying amount, no impairment charge is recorded. Otherwise, an impairment charge is recorded to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.

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 March 31, 2023, the Company had no 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 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. For acquisitions that meet the definition of a business, the Company estimates the fair value of the identifiable assets and liabilities of the acquired entity on the acquisition date. We measure goodwill as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Acquisition-related expenses arising from the transaction are expensed as incurred. The Company includes the results of operations of the businesses that it acquires beginning on the acquisition date.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable-rate notes payable, investments in debt securities and notes receivable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at March 31, 2023 and December 31, 2022 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:


	March 31, 2023				December 31, 2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	1,879	$	1,900	$	95,965	$	101,900
Fixed rate notes receivable	$	1,139	$	1,175	$	5,191	$	5,241
Fixed rate debt	$	4,797,276	$	5,207,398	$	4,320,014	$	4,762,196

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

4. REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:


	March 31, 2023		December 31, 2022
Land	$	2,362,399	$	2,356,746
Buildings, improvements and other intangibles	9,491,340		9,425,468
Right of use asset - finance lease	140,871		136,259
Intangible assets - tenant relationships	152,707		152,775
Intangible lease rights	12,943		12,943
	12,160,260		12,084,191
Less: accumulated depreciation and amortization	(2,218,705)		(2,138,524)
Net operating real estate assets	9,941,555		9,945,667
Real estate under development/redevelopment	49,891		52,311
Real estate assets, net	$	9,991,446	$	9,997,978

5. OTHER ASSETS

The components of other assets are summarized as follows:


	March 31, 2023		December 31, 2022
Goodwill	$	170,811	$	170,811
Receivables, net	84,682		85,937
Prepaid expenses and deposits	55,574		50,318
Equipment and fixtures, net	43,716		42,808
Fair value of interest rate swaps	40,180		54,839
Deferred line of credit financing costs, net	4,805		4,846
Restricted cash	2,491		4,867
	$	402,259	$	414,426

6. 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

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

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 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 March 31, 2023 and 2022 was $157.15 and $198.83, respectively.

The following table presents the number of Preferred Operating Partnership units as if converted into 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 March 31,
	2023	2022
	Equivalent Shares (if converted)	Equivalent Shares (if converted)


Series B Units	213,606	182,974
Series D Units	—	1,033,222
	213,606	1,216,196

On January 25, 2023, the remaining Series A Units were redeemed (see Note 13 below). 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 had the option to redeem in cash or shares and where the Company had 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 was 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 was equal to the number of Series A Units outstanding, with no additional shares included related to the fixed $101,700 amount.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

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


	For the Three Months Ended March 31,
	2023		2022
Net income attributable to common stockholders	$	196,304	$	203,579
Earnings and dividends allocated to participating securities	(304)		(286)
Earnings for basic computations	196,000		203,293

Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	12,128		11,693
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	—		(572)
Net income for diluted computations	$	208,128	$	214,414

Weighted average common shares outstanding:
Average number of common shares outstanding - basic	134,511,273		134,180,175
OP Units	7,214,649		6,520,781
Series A Units	—		875,480

Series D Units	1,210,056		—

Shares related to dilutive stock options	4,406		5,426
Average number of common shares outstanding - diluted	142,940,384		141,581,862
Earnings per common share
Basic	$	1.46	$	1.52
Diluted	$	1.46	$	1.51

7. ACQUISITIONS AND DISPOSITIONS

Store Acquisitions

The following table shows the Company’s acquisitions of stores for the three months ended March 31, 2023 and 2022. The table excludes purchases of raw land and improvements made to existing assets. All store acquisitions are considered asset acquisitions under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."


							Total
Period	Number of Stores	Cash Paid	Finance Lease Liability	Investments in Real Estate Ventures	Net Liabilities/ (Assets) Assumed	Value of Equity Issued		Real estate assets



Q1 2023	1	13,111	—	—	6	—		13,117




Q1 2022	14	185,910	—	747	274	40,965		227,896

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

Other Investments

On June 1, 2022 the Company completed the acquisition of Bargold Storage Systems, LLC ("Bargold") for a purchase price of approximately $179.3 million. Bargold leases space in apartment buildings, primarily in New York City and its boroughs, builds out the space as storage units, and subleases the units to tenants. As of June 1, 2022, Bargold had approximately 17,000 storage units with an approximate occupancy of 97%. This acquisition is considered a business combination under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.


Cash and cash equivalents	$	175
Fixed assets	6,411
Developed technology	500
Trademarks	500
Customer relationships	1,870
Other assets	125
Accounts payables and accrued liabilities assumed	(1,090)
Nets asset acquired	8,491
Goodwill	170,811
Total assets acquired	$	179,302

The following table summarizes the revenues and earnings related to Bargold since the acquisition date of June 1, 2022, which are included in the Company's consolidated statement of operations for the year ended December 31, 2022:


Total revenues			$	9,374
Net income from operations			$	1,718

Pro Forma Information

During the year ended December 31, 2022, the Company acquired Bargold. The following pro forma financial information is based on the combined historical financial statements of the Company and Bargold, however, only includes revenue and presents the Company's results as if the acquisition had occurred on January 1, 2021. Net income was excluded as it was impracticable to report expenses due to the lack of historical accrual basis accounting.


	For the Year Ended December 31, 2022		For the Year Ended December 31, 2021
	Pro Forma		Pro Forma
Total revenues	$	1,930,816	$	1,592,021

8. 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.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

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.

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)	March 31,		December 31,
	2023	2022
PRISA Self Storage LLC	84	4%	4%	$	8,564	$	8,596
Storage Portfolio II JV LLC	36	10%	30%	(7,487)		(7,200)
Storage Portfolio IV JV LLC	32	10%	30%	48,861		49,139
Storage Portfolio I LLC	24	34%	49%	(41,619)		(41,372)
PR II EXR JV LLC	23	25%	25%	109,651		110,172
ESS-CA TIVS JV LP	16	55%	60%	30,405		30,778
VRS Self Storage, LLC	16	45%	54%	(15,613)		(15,399)
ARA-EXR JV LLC	12	10%	30%	19,062		19,137
ESS-NYFL JV LP	11	16%	24%	11,224		11,332
Extra Space Northern Properties Six LLC	10	10%	35%	(3,565)		(3,382)
Alan Jathoo JV LLC	9	10%	10%	7,361		7,414
ESS Bristol Investments LLC	8	10%	30%	2,062		2,110
ESS - BGO Atlanta GA JV LLC	8	20%	35%	35,398		30,467
ESS - BGO Storage JV I LLC	6	20%	35%	22,898		7,466
Storage Portfolio V JV LLC	6	10%	30%	9,509		9,517
PR EXR Self Storage, LLC	5	25%	40%	58,252		58,476
Storage Portfolio III JV LLC	5	10%	30%	5,438		5,467
Other unconsolidated real estate ventures	12	20-50%	20-50%	31,932		32,342
SmartStop Self Storage REIT, Inc. Preferred Stock (2)	n/a	n/a	n/a	200,000		200,000
Net Investments in and Cash distributions in unconsolidated real estate entities	323			$	532,333	$	515,060

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

(2) 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 three months ended March 31, 2023, the Company contributed a total of $20,622 of cash to its joint ventures, for its pro-rata portion of the purchase price of 5 operating stores.

9. 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,

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

L.P. ("NexPoint Investment") and receivables due to the Company under its bridge loan program. Information about these balances is as follows:


	March 31, 2023		December 31, 2022
Debt securities - NexPoint Preferred Stock	$	300,000	$	300,000
Notes Receivable - Bridge Loans	507,885		491,879

Dividends and Interest Receivable	56,028		66,170
	$	863,913	$	858,049

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 consisted 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. In December 2022, a modification was completed that exchanged the Series A and Series B Preferred Shares for 300,000 Series D Preferred Shares, valued at a total of $300,000. The Series D Preferred Shares are mandatorily redeemable after six years from the modification in December 2022, with two one-year extension options. NexPoint may redeem the Series D Preferred Shares at any time, subject to certain prepayment penalties. The Company accounts for the JCAP Series D Preferred Shares as a held to maturity debt security at amortized cost. The Series D Preferred Shares have initial dividend rates of 8.5%. If the investment is not retired after six 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 bore interest at 5.5%, matured in December 2023 and was 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 accounted for the discount at amortized cost. The discount was being amortized over the term of the loan receivable. In February 2022, a junior mezzanine lender exercised its right to buy the Company’s position for the full principal balance plus interest due, as a result of which the Company sold this note for a total of $103,315 in cash. The remaining unamortized discount was recognized in the February 2022 as interest income.

The Company provides bridge loan financing to third-party self-storage operators. These notes receivable consist of mortgage loans receivable, which are collateralized by self-storage properties and unsecured mezzanine loans receivable. 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. During the three months ended March 31, 2023 the Company sold a total principal amount of $39,261 of its mortgage bridge loans receivable to third parties for a total of $39,261 in cash and closed on $58,378 in new bridge loans.

The bridge loans typically have a loan to value ratio between 70% and 80%. None of the debt securities or notes receivable are in past-due or nonaccrual status and the allowance for potential credit losses is immaterial.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

10. DEBT

In March 2023, the Operating Partnership executed a public bond issuance by selling $500.0 million principal amount of 5.700% Senior Notes due 2028 (the "Notes Due 2028"). Interest on the Notes Due 2028 is paid semi-annually in arrears on April 1 and October 1 of each year. The Notes Due 2028 will mature on April 1, 2028, and the Operating Partnership may redeem the Notes Due 2028 at its option and sole discretion at any time prior to March 1, 2028 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 March 2022, the Operating Partnership executed a public bond issuance by selling $400.0 million principal amount of 3.900% Senior Notes due 2029 (the "Notes Due 2029"). Interest on the Notes Due 2029 is paid semi-annually in arrears on April 1 and October 1 of each year. The Notes Due 2029 will mature on April 1, 2029, and the Operating Partnership may redeem the Notes Due 2029 at its option and sole discretion at any time prior to February 1, 2029 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 December 15, 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 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 1, 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.

The Operating Partner may redeem the Notes Due 2028, the Notes Due 2029, the Notes Due 2031 and/or the Notes Due 2032 (collectively, the "Notes") in whole at any time or in part from time to time, at the Operating Partnership’s option and sole discretion, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed and (ii) a make-whole premium calculated in accordance with the indenture governing the notes, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date. Notwithstanding the foregoing, on or after the par call date, the redemption price will be equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but not including, the applicable redemption date. The par call date on the Notes Due 2028 is one month prior to the maturity. The par call date on the Notes Due 2029 is two months prior to the maturity. The par call date on the Notes Due 2031 and the Notes Due 2032 is three months prior to their maturity dates.

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

The Notes 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 will be a senior unsecured obligation of each Guarantor. The Guarantors have no material operations separate from the operation of the Operating Partnership and no material assets, other than their respective investments directly or indirectly in the Operating Partnership, and therefore the assets, liabilities, and results of operations of the Obligated Group are not materially different than those reported in the Company's financial statements.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

The components of term debt are summarized as follows:


Term Debt	March 31, 2023		December 31, 2022		Fixed Rate	Variable Rate (2)	Maturity Dates
Secured fixed-rate (1)	$	520,764	$	521,820	2.56% - 4.56%		April 2025 - February 2030
Secured variable-rate (1)	791,703		772,604			5.80% - 6.37%	August 2023 - September 2030
Unsecured fixed-rate	4,686,633		4,240,376		2.35% - 5.70%		February 2024 - March 2032
Unsecured variable-rate	1,273,367		884,624			5.85% - 5.85%	January 2024 - January 2028
Total	7,272,467		6,419,424

Less: Unamortized debt issuance costs	(35,169)		(32,962)
Total	$	7,237,298	$	6,386,462

(1) The loans are collateralized by mortgages on real estate assets and the assignment of rents.
(2) Basis rates include 30-day USD LIBOR, Term SOFR and Daily Simple SOFR.

The following table summarizes the scheduled maturities of term debt, excluding available extensions, at March 31, 2023:



2023	$	354,175
2024	760,000
2025	708,595
2026	809,427
2027	871,079
Thereafter	3,769,191
	$	7,272,467

As of March 31, 2023, the terms of the Second Amended and Restated Credit Agreement dated June 22, 2021 (the "Credit Agreement") are as follows:


	Debt Capacity		Maturity Date
Revolving Credit Facility	$	1,250,000	June 2025
Tranche 1 Term Loan Facility (1)	400,000		January 2027
Tranche 2 Term Loan Facility (1)	425,000		October 2026
Tranche 3 Term Loan Facility (1)	245,000		January 2025
Tranche 4 Term Loan Facility (1)	255,000		June 2026
Tranche 5 Term Loan Facility (1)	425,000		February 2024
Tranche 6 Term Loan Facility (1)	175,000		January 2028
Tranche 7 Term Loan Facility (1)	425,000		July 2029
	$	3,600,000

(1) The term loan amounts have been fully drawn as of March 31, 2023.

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

As of March 31, 2023, amounts outstanding under the revolving credit facility bore interest at floating rates, at the Company’s option, equal to either (i) Term or Daily Simple SOFR plus the Applicable Margin or (ii) the applicable base rate which is the applicable margin plus the highest of (a) 0.0%, (b) the federal funds rate plus 0.50%, (c) U.S. Bank’s prime rate or

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

(d) the SOFR rate plus 1.00%. Per the Credit Agreement, the applicable SOFR rate margin and applicable base rate margin are based on the Company’s achieved debt rating, with the SOFR rate margin ranging from 0.7% to 1.6% per annum and the applicable base rate margin ranging from 0.00% to 0.60% per annum.

The Credit Agreement is guaranteed by the Company and is not secured by any assets of the Company. The Company's unsecured debt is subject to certain financial covenants. As of March 31, 2023, the Company was in compliance with all of its financial covenants.

In July 2022, the Company completed an accordion transaction in its credit facility, which added a $175.0 million unsecured debt tranche maturing January 2028 and a $425.0 million unsecured debt tranche maturing July 2029. The current interest rates for the tranches are Adjusted Term SOFR/Adjusted Daily Simple SOFR ("ASOFR") + 0.95% and ASOFR + 1.25%, respectively.

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


	As of March 31, 2023
Revolving Lines of Credit	Amount Drawn		Capacity		Interest Rate	Maturity	Basis Rate (1)
Credit Line 1 (2)	$	24,500	$	140,000	6.22%	7/1/2026	SOFR plus 1.35%
Credit Line 2 (3)(4)	70,000		1,250,000		5.82%	6/20/2025	SOFR plus 0.95%
	$	94,500	$	1,390,000
(1) Term SOFR or Daily Simple SOFR
(2) Secured by mortgages on certain real estate assets. On January 13, 2023 the maturity date was extended to July 1, 2026 with one extension of one year available.
(3) Unsecured with two six-month extensions available.
(4) Basis Rate as of March 31, 2023. Rate is subject to change based on our investment grade rating.

As of March 31, 2023, the Company’s percentage of fixed-rate debt to total debt was 70.7%. The weighted average interest rates of the Company’s fixed and variable-rate debt were 3.6% and 6.0%, respectively. The combined weighted average interest rate was 4.3%.

11. 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

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

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 months ended March 31, 2023 and 2022, 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 $30,899 will be reclassified as an increase to interest income.

The Company held 18 derivative financial instruments which had a total combined notional amount of $1,782,610 as of March 31, 2023.

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:	March 31, 2023		December 31, 2022
Other assets	$	40,180	$	54,839
Other liabilities	$	1,190	$	73

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 March 31,				Location of amounts reclassified from OCI into income	Gain (loss) reclassified from OCI for the Three Months Ended March 31,
Type	2023		2022		2023	2022
Swap Agreements	$	(5,562)	$	42,741	Interest expense	$	8,950	$	(8,912)

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 March 31, 2023, the Company did not have any net liability positions in the fair value of derivatives.

12. STOCKHOLDERS’ EQUITY

On January 7, 2022, the Company issued 186,766 shares of its common stock to acquire two stores for $40,965.

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 $66,617.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

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. During 2022, a total of $63,008 was paid to repurchase 381,786 shares. During the three months ended March 31, 2023, no shares were repurchased. As of March 31, 2023, the Company had remaining authorization to repurchase shares with an aggregate value up to $336,992.

13. 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 March 31, 2023 and December 31, 2022, 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 December 31, 2022, 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:


	March 31, 2023		December 31, 2022
Series A Units	$	—	$	16,498
Series B Units	33,568		33,568
Series D Units	189,372		211,436
	$	222,940	$	261,502

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 bore a fixed priority return of 2.3% and originally had a fixed liquidation value of $115,000. The remaining balance participated in distributions with, and had a liquidation value equal to that of the OP Units. The Series A Units were redeemable at the option of the holder, which redemption obligation could have been satisfied, at the Company’s option, in cash or shares of its common stock. As a result of a redemption of 114,500 Series A Units in October 2014, the remaining fixed liquidation value was reduced to $101,700, which represented 875,480 Series A Units.

On June 25, 2007, the Operating Partnership loaned the holder of the Series A Units $100,000. The loan bore interest at 2.1%. The loan was secured by the borrower’s Series A Units, which are shown on the balance sheet net of the $100,000 loan as of December 31, 2022 because the borrower under the loan was 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

On January 25, 2023, the redemption obligation for all outstanding Series A Units was satisfied, at the Company’s option, in $5,000 cash, 851,698 shares of its common stock, which was net of the noncash settlement of the $100,000 loan. As a result of this redemption, no Series A Units were outstanding as of March 31, 2023.

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 $33,568 which represents 1,342,727 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 May 10, 2022, 45,000 Series B Units were redeemed for $1,125 in cash.

Series C 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.

As of March 31, 2023 and December 31, 2022, there were no outstanding Series C Units.

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 a liquidation value of $25.00 per unit, for a fixed liquidation value of $189,171, which represents 7,566,828 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.

The Series D Units have been issued at various times from 2014 to 2022. On June 1, 2022, the Operating Partnership issued a total of 240,000 Series D units valued at $6,000 in connection with the acquisition of Bargold.

On January 3, 2023, 890,594 Series D units were redeemed for 154,307 shares of common stock.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

14. 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 94.0% ownership interest in the Operating Partnership as of March 31, 2023. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 6.0% are held by certain former owners of assets acquired by the Operating Partnership. As of March 31, 2023 and December 31, 2022, the noncontrolling interests in the Operating Partnership are shown on the balance sheet net of a note receivable of $1,900 because a borrower under the note receivable is also a holder of OP Units. This note receivable originated in December 2014, 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 March 31, 2023, the ten-day average closing price of the Company's common stock was $155.29 and there were 7,214,649 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on March 31, 2023 and the Company elected to pay the OP Unit holders cash, the Company would have paid $1,120,363 in cash consideration to redeem the units.

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


	For the Three Months Ended March 31,
	2023		2022

OP Units redeemed for cash	—		13,028
Cash paid for OP Units redeemed	$	—	$	2,672

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 five consolidated joint ventures as of March 31, 2023. One joint venture owns one operating store and the other four joint ventures have a combined total of six properties under development. The voting interest of each third-party owner is between 3.0% and 31.0%.

15. 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. The Company’s segments are comprised of two reportable segments: (1) self-storage operations and (2) tenant reinsurance. 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 self-storage operations activities include rental operations of wholly-owned stores and self-storage units acquired in the Bargold transaction. 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 March 31,
	2023		2022
Revenues:
Self-Storage Operations	$	433,962	$	379,808
Tenant Reinsurance	47,704		43,797
Total segment revenues	$	481,666	$	423,605

Operating expenses:
Self-Storage Operations	$	117,166	$	103,542
Tenant Reinsurance	9,089		7,042
Total segment operating expenses	$	126,255	$	110,584

Net operating income:
Self-Storage Operations	$	316,796	$	276,266
Tenant Reinsurance	38,615		36,755
Total segment net operating income:	$	355,411	$	313,021

Other components of net income:
Management fees and other income	$	21,384	$	19,957

General and administrative expense	(34,763)		(29,762)
Depreciation and amortization expense	(78,490)		(67,906)

Interest expense	(80,099)		(42,538)

Interest income	19,438		18,989

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

Income tax expense	(4,308)		(3,141)
Net income	$	208,878	$	217,717

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

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

16. COMMITMENTS AND CONTINGENCIES

As of March 31, 2023, 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 March 31, 2023, the Company was under agreement to acquire 11 stores at a total purchase price of $144,106. Five stores are scheduled to close in 2023 and six stores are scheduled to close in 2024. Additionally, the Company is under agreement to acquire three stores with joint venture partners, for a total investment of $9,864. Two stores are scheduled to close in 2023 and one store is scheduled to close in 2024.

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.

17. SUBSEQUENT EVENTS

On April 3, 2023, the Company entered into a definitive merger agreement with Life Storage, Inc. (NYSE: LSI) (“Life Storage”) in an all-stock transaction. Under the terms of the agreement, Life Storage stockholders will receive 0.895 of an Extra Space common share for each Life Storage share they own for estimated total consideration of $12.7 billion, based on Life Storage's closing share price on March 31, 2023. The combined company will own and/or manage over 3,500 locations and over 264.0 million net rentable square feet. The transaction is currently expected to close in the second half of 2023, subject to the approval of the Company and Life Storage stockholders and satisfaction of other customary closing conditions.

On May 1, 2023, the Company invested $150.0 million in shares of newly issued convertible preferred stock of Strategic Storage Trust VI, Inc., an affiliate of SmartStop Self Storage REIT, Inc. The dividend rate for the preferred shares is 8.35% per annum, subject to increase after five years. The preferred shares are generally not redeemable for three years, except in the case of a change of control, initial listing or certain other events, and are redeemable thereafter subject to a redemption premium.

Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS