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Extra Space Storage Inc. - Quarter Report: 2023 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-32269

EXTRA SPACE STORAGE INC.
(Exact name of registrant as specified in its charter) 
Maryland 20-1076777
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

2795 East Cottonwood Parkway, Suite 300
Salt Lake City, Utah 84121
(Address of principal executive offices)

Registrant’s telephone number, including area code: (801) 365-4600

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each classTrading symbolName of each exchange on which registered
Common Stock, $0.01 par valueEXRNew York Stock Exchange

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of August 2, 2023, was 211,276,502.

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Table of Contents
EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS
 


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STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information presented in this report contains “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.

All forward-looking statements, including without limitation, management’s examination of historical operating trends and estimates of future earnings, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in “Part II. Item 1A. Risk Factors” below and in “Part I. Item 1A. Risk Factors” included in our most recent Annual Report on Form 10-K. Such factors include, but are not limited to:
adverse changes in general economic conditions, the real estate industry and the markets in which we operate;
failure to realize the expected benefits of the recent acquisition of Life Storage, Inc. (“Life Storage”);
the risk that Life Storage’s business will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected, including our ability to retain and hire key personnel;
the uncertainty of expected future financial performance and results of the combined company following completion of the Life Storage merger;
failure to close pending acquisitions and developments on expected terms, or at all;
the effect of competition from new and existing stores or other storage alternatives, including increased or unanticipated competition for our or Life Storage’s properties, which could cause rents and occupancy rates to decline;
potential liability for uninsured losses and environmental contamination;
the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts (“REITs”), tenant reinsurance and other aspects of our business, which could adversely affect our results;
disruptions in credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates or at all, which could impede our ability to grow;
impacts from the COVID-19 pandemic or the future outbreak of other highly infectious or contagious diseases, including reduced demand for self-storage space and ancillary products and services such as tenant reinsurance, and potential decreases in occupancy and rental rates and staffing levels, which could adversely affect our results;
our reliance on information technologies, which are vulnerable to, among other things, attack from computer viruses and malware, hacking, cyberattacks and other unauthorized access or misuse, any of which could adversely affect our business and results;
increased interest rates;
reductions in asset valuations and related impairment charges;
our lack of sole decision-making authority with respect to our joint venture investments;
our ability to recover losses under our insurance policies;
the effect of recent or future changes to U.S. tax laws;
the failure to maintain our REIT status for U.S. federal income tax purposes; and
economic uncertainty due to the impact of natural disasters, war or terrorism, which could adversely affect our business plan.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and

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uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our securities.

We disclaim any duty or obligation to update or revise any forward-looking statements set forth in this report to reflect new information, future events or otherwise.

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PART I.     FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
 
June 30, 2023December 31, 2022
(unaudited)
Assets:
Real estate assets, net$10,017,351 $9,997,978 
Real estate assets - operating lease right-of-use assets220,090 221,725 
Investments in unconsolidated real estate entities747,775 582,412 
Investments in debt securities and notes receivable891,190 858,049 
Cash and cash equivalents50,644 92,868 
Other assets, net438,403 414,426 
Total assets $12,365,453 $12,167,458 
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net$1,273,448 $1,288,555 
Unsecured term loans, net2,248,840 2,340,116 
Unsecured senior notes, net3,695,200 2,757,791 
Revolving lines of credit275,250 945,000 
Operating lease liabilities228,343 229,035 
Cash distributions in unconsolidated real estate ventures69,183 67,352 
Accounts payable and accrued expenses212,416 171,680 
Other liabilities327,366 289,655 
Total liabilities 8,330,046 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, 135,058,897 and 133,921,020 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
1,351 1,339 
Additional paid-in capital3,383,303 3,345,332 
Accumulated other comprehensive income47,065 48,798 
Accumulated deficit(175,941)(135,872)
Total Extra Space Storage Inc. stockholders' equity3,255,778 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 interests556,689 557,175 
Total noncontrolling interests and equity4,035,407 4,078,274 
Total liabilities, noncontrolling interests and equity$12,365,453 $12,167,458 

See accompanying notes to unaudited condensed consolidated financial statements.

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Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
(unaudited)
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2023202220232022
Revenues:
Property rental$440,747 $408,044 $874,709 $787,852 
Tenant reinsurance48,433 46,427 96,137 90,224 
Management fees and other income22,206 20,517 43,590 40,474 
Total revenues511,386 474,988 1,014,436 918,550 
Expenses:
Property operations114,637 104,252 231,803 207,794 
Tenant reinsurance 9,482 7,537 18,571 14,579 
Transaction related costs — 1,465 — 1,465 
General and administrative34,842 31,251 69,605 61,013 
Depreciation and amortization79,086 69,067 157,576 136,973 
Total expenses238,047 213,572 477,555 421,824 
Gain on real estate transactions— 14,249 — 14,249 
Income from operations273,339 275,665 536,881 510,975 
Interest expense(86,372)(47,466)(166,471)(90,004)
Interest income21,077 15,060 40,515 34,049 
Income before equity in earnings and dividend income from unconsolidated real estate entities and income tax expense208,044 243,259 410,925 455,020 
Equity in earnings and dividend income from unconsolidated real estate entities13,254 10,190 23,559 19,287 
Income tax expense(5,986)(5,615)(10,294)(8,756)
Net income215,312 247,834 424,190 465,551 
Net income allocated to Preferred Operating Partnership noncontrolling interests(2,254)(4,491)(4,508)(8,824)
Net income allocated to Operating Partnership and other noncontrolling interests(10,648)(11,213)(20,968)(21,018)
Net income attributable to common stockholders$202,410 $232,130 $398,714 $435,709 
Earnings per common share
Basic $1.50 $1.73 $2.96 $3.24 
Diluted $1.50 $1.73 $2.95 $3.24 
Weighted average number of shares
Basic134,832,232 134,192,540 134,672,672 134,186,426 
Diluted143,529,817 142,737,909 143,337,522 141,600,206 
Cash dividends paid per common share$1.62 $1.50 $3.24 $3.00 

See accompanying notes to unaudited condensed consolidated financial statements.

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Extra Space Storage Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
(unaudited)
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2023202220232022
Net income$215,312 $247,834 $424,190 $465,551 
Other comprehensive income:
   Change in fair value of interest rate swaps12,599 20,113 (1,911)71,762 
Total comprehensive income227,911 267,947 422,279 537,313 
   Less: comprehensive income attributable to noncontrolling interests13,517 16,719 25,298 33,503 
Comprehensive income attributable to common stockholders$214,394 $251,228 $396,981 $503,810 


See accompanying notes to unaudited condensed consolidated financial statements.

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Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
For the three and six months ended June 30, 2023
(unaudited, amounts in thousands, except share data)

Noncontrolling InterestExtra Space Storage Inc. Stockholders' Equity
Preferred Operating PartnershipOperating PartnershipOtherSharesPar ValueAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Noncontrolling Interests and Equity
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 
Issuance of common stock in connection with share based compensation— — — 53,823 6,939 — — 6,940 
Taxes paid upon net settlement of share based compensation— (573)— (94)— — (94)
Restricted stock grants cancelled— — — (1,633)— — — — — 
Noncontrolling interest in consolidated joint venture— — 709 — — — — — 709 
Net income (loss)2,254 10,691 (43)— — — — 202,410 215,312 
Other comprehensive income— 615 — — — — 11,984 — 12,599 
Distributions to Operating Partnership units held by noncontrolling interests(2,254)(11,711)— — — — — — (13,965)
Dividends paid on common stock at $1.62 per share
— — — — — — — (218,795)(218,795)
Balances at June 30, 2023$222,940 $553,610 $3,079 135,058,897 $1,351 $3,383,303 $47,065 $(175,941)$4,035,407 
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— — — 143,387 12,437 — — 12,439 
Taxes paid upon net settlement of share based compensation— — — (7,660)— (7,543)— — (7,543)
Restricted stock grants cancelled— — — (3,855)— — — — — 
Redemption of Preferred A Units in the Operating Partnership for stock(16,339)— — 851,698 11,015 — — (5,316)
Redemption of Preferred D Units in the Operating Partnership for stock(22,064)— — 154,307 22,062 — — — 
Noncontrolling interest in consolidated joint venture— — 2,100 — — — — — 2,100 
Net income (loss)4,508 21,069 (101)— — — — 398,714 424,190 
Other comprehensive income— (178)— — — — (1,733)— (1,911)
Distributions to Operating Partnership units held by noncontrolling interests(4,667)(23,376)— — — — — — (28,043)
Dividends paid on common stock at $3.24 per share
— — — — — — — (438,783)(438,783)
Balances at June 30, 2023$222,940 $553,610 $3,079 135,058,897 $1,351 $3,383,303 $47,065 $(175,941)$4,035,407 

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Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
For the three and six months ended June 30, 2022
(unaudited, amounts in thousands, except share data)

Noncontrolling InterestExtra Space Storage Inc. Stockholders' Equity
Preferred Operating PartnershipOperating PartnershipOtherSharesPar ValueAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Noncontrolling Interests and Equity
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 
Issuance of common stock in connection with share based compensation— — — 38,016 — 5,245 — — 5,245 
Restricted stock grants cancelled— — — (7,122)— — — — — 
Redemption of Operating Partnership units for cash— (296)— — — (536)— — (832)
Redemption of Preferred B Units in the Operating Partnership for cash(1,125)— — — — — — — (1,125)
Issuance of Operating Partnership units in conjunction with business combinations— 16,000 — — — — — — 16,000 
Issuance of Preferred D Units in the Operating Partnership in conjunction with business combinations6,000 — — — — — — — 6,000 
Repurchase of common stock, net of offering costs— — — (381,786)(4)— — (63,004)(63,008)
Net income4,491 11,213 — — — — — 232,130 247,834 
Other comprehensive income120 895 — — — — 19,098 — 20,113 
Distributions to Operating Partnership units held by noncontrolling interests(4,306)(9,821)— — — — — — (14,127)
Dividends paid on common stock at $1.50 per share
— — — — — — — (201,024)(201,024)
Balances at June 30, 2022$261,231 $429,572 $317 133,900,184 $1,339 $3,334,317 $25,555 $(159,091)$3,893,240 
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— — — 180,800 9,787 — — 9,789 
Restricted stock grants cancelled— — — (7,901)— — — — — 
Redemption of Operating Partnership units for cash— (1,125)— — — (2,379)— — (3,504)
Redemption of Preferred B Units in the Operating Partnership for cash(4,500)— — — — — — — (4,500)
Issuance of Operating Partnership units in conjunction with business combinations— 16,000 — — — — — — 16,000 
Issuance of Preferred D units in the Operating Partnership in conjunction with business combinations6,000 — — — — — — — 6,000 
Issuance of common stock in conjunction with acquisitions— — — 186,766 40,961 — — 40,963 
Repurchase of common stock, net of offering costs— — — (381,786)(4)— — (63,004)(63,008)
Net income8,824 21,018 — — — — — 435,709 465,551 
Other comprehensive income433 3,228 — — — — 68,101 — 71,762 
Distributions to Operating Partnership units held by noncontrolling interests(8,636)(19,602)— — — — — — (28,238)
Dividends paid on common stock at $3.00 per share
— — — — — — — (403,551)(403,551)
Balances at June 30, 2022$261,231 $429,572 $317 133,900,184 $1,339 $3,334,317 $25,555 $(159,091)$3,893,240 
See accompanying notes to unaudited condensed consolidated financial statements.

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Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 For the Six Months Ended June 30,
 20232022
Cash flows from operating activities:
Net income$424,190 $465,551 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization157,576 136,973 
Amortization of deferred financing costs5,470 3,933 
Non-cash lease expense942 939 
Compensation expense related to stock-based awards12,439 9,787 
Accrual of interest income added to principal of debt securities and notes receivable(16,200)(19,235)
Gain on real estate transactions— (14,249)
Distributions from unconsolidated real estate ventures7,594 6,204 
Changes in operating assets and liabilities:
Other assets(28,129)15,789 
Accounts payable and accrued expenses36,234 28,646 
Other liabilities29,411 6,049 
Net cash provided by operating activities629,527 640,387 
Cash flows from investing activities:
Acquisition of real estate assets(127,416)(438,287)
Cash paid for business combination— (157,301)
Development and redevelopment of real estate assets(37,244)(29,256)
Proceeds from sale of real estate assets and investments in real estate ventures1,046 39,367 
Investment in unconsolidated real estate entities(171,126)(76,339)
Return of investment in unconsolidated real estate ventures— 342 
Issuance and purchase of notes receivable(124,103)(204,930)
Principal payments received from notes receivable46,466 223,773 
Proceeds from sale of notes receivable60,696 82,115 
Purchase of equipment and fixtures(5,905)(9,512)
Net cash used in investing activities(357,586)(570,028)
Cash flows from financing activities:
Proceeds from notes payable and revolving lines of credit2,479,592 1,948,657 
Principal payments on notes payable and revolving lines of credit(3,246,378)(1,915,531)
Proceeds from issuance of public bonds, net950,000 400,000 
Deferred financing costs(28,151)(6,713)
Repurchase of common stock— (63,008)
Redemption of Operating Partnership units held by noncontrolling interests— (3,504)
Redemption of Preferred Units for cash(5,000)(4,500)
Dividends paid on common stock(438,783)(403,551)
Distributions to noncontrolling interests(28,043)(28,237)
Net cash used in financing activities(316,763)(76,387)
Net decrease in cash, cash equivalents, and restricted cash(44,822)(6,028)
Cash, cash equivalents, and restricted cash, beginning of the period97,735 76,194 
Cash, cash equivalents, and restricted cash, end of the period$52,913 $70,166 
Cash and equivalents, including restricted cash at the beginning of the period:
Cash and equivalents$92,868 $71,126 
Restricted cash included in other assets4,867 5,068 
$97,735 $76,194 

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Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 For the Six Months Ended June 30,
 20232022
Cash and equivalents, including restricted cash at the end of the period:
Cash and equivalents$50,644 $58,729 
Restricted cash included in other assets2,269 11,437 
$52,913 $70,166 
Supplemental schedule of cash flow information
Interest paid$150,459 $82,381 
Income taxes paid1,910 9,116 
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$116,336 $— 
Common stock and paid-in capital(11,336)— 
Noncontrolling interests in Operating Partnership Note Receivable Payoff(100,000)— 
OP Unit Redemption - Cash Proceeds(5,000)— 
Acquisition and establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets$— $1,689 
Operating lease liabilities— (1,689)
Acquisitions of real estate assets
Real estate assets, net$— $48,535 
Value of equity issued— (40,965)
Net Liabilities Assumed— — 
Investment in unconsolidated real estate ventures— (747)
Accrued construction costs and capital expenditures
Acquisition of real estate assets$4,503 $987 
Accounts payable and accrued expenses(4,503)(987)
Redemption of Preferred Operating Partnership units for common stock
Preferred Operating Partnership units$33,403 $— 
Additional paid-in capital(33,403)$— 
Issuance of OP and Preferred OP units in conjunction with business combination
Preferred OP units issued$— $(6,000)
OP units issued— (16,000)

See accompanying notes to unaudited condensed consolidated financial statements.


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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 June 30, 2023, the Company had direct and indirect equity interests in 1,460 stores. In addition, the Company managed 978 stores for third parties, bringing the total number of stores which it owns and/or manages to 2,438. 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 six months ended June 30, 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. As of June 30, 2023, the Company has converted all of its LIBOR-indexed debt and derivatives to SOFR-based indexes (effective with the respective instrument’s next reset date for certain instruments). For all derivatives in hedge accounting relationships, the elective relief in Topic 848 that allows for the continuation of hedge accounting throughout the transition process was utilized.

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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 June 30, 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 June 30, 2023, aggregated by the level in the fair value hierarchy within which those measurements fall. 
Fair Value Measurements at Reporting Date Using
DescriptionQuoted 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$— $51,235 $— 
Other liabilities - Cash flow hedge swap agreements$— $— $— 

The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of June 30, 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.


14


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 June 30, 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. Goodwill is measured 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 June 30, 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.

15


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated

The fair values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:
June 30, 2023December 31, 2022
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
Notes receivable from Preferred and Common Operating Partnership unit holders$1,889 $1,900 $95,965 $101,900 
Fixed rate notes receivable$1,571 $1,625 $5,191 $5,241 
Fixed rate debt$5,005,056 $5,540,970 $4,320,014 $4,762,196 

4.     REAL ESTATE ASSETS
The components of real estate assets are summarized as follows:
June 30, 2023December 31, 2022
Land$2,371,918 $2,356,746 
Buildings, improvements and other intangibles9,579,378 9,425,468 
Right of use asset - finance lease141,861 136,259 
Intangible assets - tenant relationships152,735 152,775 
Intangible lease rights12,943 12,943 
12,258,835 12,084,191 
Less: accumulated depreciation and amortization(2,295,568)(2,138,524)
Net operating real estate assets9,963,267 9,945,667 
Real estate under development/redevelopment54,084 52,311 
Real estate assets, net$10,017,351 $9,997,978 

5.     OTHER ASSETS
The components of other assets are summarized as follows:
June 30, 2023December 31, 2022
Goodwill$170,811 $170,811 
Receivables, net99,971 85,937 
Prepaid expenses and deposits67,078 50,318 
Equipment and fixtures, net42,657 42,808 
Fair value of interest rate swaps51,235 54,839 
Deferred line of credit financing costs, net4,382 4,846 
Restricted cash2,269 4,867 
$438,403 $414,426 


16


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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, 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 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 June 30, 2023 and 2022 was $150.45 and $185.25, 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 June 30,For the Six Months Ended June 30,
2023202220232022
Equivalent Shares (if converted)Equivalent Shares (if converted)Equivalent Shares (if converted)Equivalent Shares (if converted)
Series B Units223,118 183,807 218,259 183,342 
Series D Units— — — 1,074,933 
223,118 183,807 218,259 1,258,275 

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.


17


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 June 30,For the Six Months Ended June 30,
2023202220232022
Net income attributable to common stockholders$202,410 $232,130 $398,714 $435,709 
Earnings and dividends allocated to participating securities(323)(313)(627)(601)
Earnings for basic computations202,087 231,817 398,087 435,108 
Earnings and dividends allocated to participating securities323 — 627 — 
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units12,441 15,201 24,569 24,978 
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)— (572)— (1,144)
Net income for diluted computations$214,851 $246,446 $423,283 $458,942 
Weighted average common shares outstanding:
Average number of common shares outstanding - basic 134,832,232 134,192,540 134,672,672 134,186,426 
OP Units7,214,649 6,545,104 7,214,649 6,533,010 
Series A Units— 875,480 — 875,480 
Series D Units1,257,366 1,119,641 1,233,178 — 
Unvested restricted stock awards included for treasury stock method221,380 — 212,723 — 
Shares related to dilutive stock options4,190 5,144 4,300 5,290 
Average number of common shares outstanding - diluted143,529,817 142,737,909 143,337,522 141,600,206 
Earnings per common share
Basic$1.50 $1.73 $2.96 $3.24 
Diluted$1.50 $1.73 $2.95 $3.24 

7.    ACQUISITIONS AND DISPOSITIONS

Store Acquisitions

The following table shows the Company’s acquisitions of stores for the three and six months ended June 30, 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
PeriodNumber of StoresCash PaidFinance Lease LiabilityInvestments in Real Estate VenturesNet Liabilities/ (Assets) AssumedValue of Equity IssuedReal estate assets
Q2 2023332,888 — — 26 — 32,914 
Q1 2023113,111 — — — 13,117 
Total 20234$45,999 $ $ $32 $ $46,031 
Q2 202215220,933 6,823 — 811 — 228,567 
Q1 202214185,910 — 747 274 40,965 227,896 
Total 202229$406,843 $6,823 $747 $1,085 $40,965 $456,463 

Other Investments


18


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 the date of the acquisition, 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 assets6,411 
Developed technology500 
Trademarks500 
Customer relationships1,870 
Other assets125 
Accounts payables and accrued liabilities assumed(1,090)
Nets asset acquired8,491 
Goodwill170,811 
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, 2022For the Year Ended December 31, 2021
Pro FormaPro 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 Strategic Storage Trust VI, Inc. ("Strategic Storage"), an indirect subsidiary of SmartStop Self Storage REIT, Inc. 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.

19


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 StoresEquity Ownership %
Excess Profit % (1)
June 30,December 31,
 20232022
PRISA Self Storage LLC 844%4%$8,487 $8,596 
Storage Portfolio II JV LLC 3610%30%(7,628)(7,200)
Storage Portfolio IV JV LLC3210%30%48,511 49,139 
Storage Portfolio I LLC 2434%49%(42,000)(41,372)
PR II EXR JV LLC2325%25%109,014 110,172 
ESS-CA TIVS JV LP1655%60%29,938 30,778 
VRS Self Storage, LLC 1645%54%(15,922)(15,399)
ARA-EXR JV LLC1210%30%18,982 19,137 
ESS-NYFL JV LP1116%24%11,031 11,332 
Extra Space Northern Properties Six LLC1010%35%(3,633)(3,382)
Alan Jathoo JV LLC910%10%7,313 7,414 
ESS Bristol Investments LLC810%30%2,017 2,110 
ESS - BGO Atlanta GA JV LLC820%35%35,185 30,467 
ESS - BGO Storage JV I LLC620%35%22,781 7,466 
Storage Portfolio V JV LLC610%30%9,416 9,517 
PR EXR Self Storage, LLC525%40%57,984 58,476 
Storage Portfolio III JV LLC510%30%5,419 5,467 
Other unconsolidated real estate ventures12
20-50%
20-50%
31,697 32,342 
SmartStop Self Storage REIT, Inc. Preferred Stock (2)
n/an/an/a200,000 200,000 
Strategic Storage Trust VI, Inc. Preferred Stock (3)
n/an/an/a150,000 — 
Net Investments in and Cash distributions in unconsolidated real estate entities323$678,592 $515,060 
(1)    Includes pro-rata equity ownership share and maximum potential promoted interest.
(2)    In October 2019, the Company invested $200,000 in shares of convertible preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop") with a dividend rate of 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.
(3)    In May 2023, the Company invested $150,000 in shares of convertible preferred stock of Strategic Storage Trust VI, Inc. ("Strategic Storage") with a dividend rate of 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 or initial listing of Strategic Storage Trust VI, Inc.. 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.

20


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
During the six months ended June 30, 2023, the Company contributed a total of $20,686 of cash to its joint ventures, for its pro-rata portion of the purchase price of five 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, L.P. ("NexPoint Investment") and receivables due to the Company under its bridge loan program. Information about these balances is as follows:
June 30, 2023December 31, 2022
Debt securities - NexPoint Preferred Stock$300,000 $300,000 
Notes Receivable - Bridge Loans540,355 491,879 
Dividends and Interest Receivable 50,835 66,170 
$891,190 $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.

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 a portion of the mortgage receivables. During the six months ended June 30, 2023 the Company sold a total principal amount of $60,696 of its mortgage bridge loans receivable to third parties for a total of $60,696 in cash and closed on $104,120 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.

21


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 June 2023, the Operating Partnership executed a public bond issuance by selling $450.0 million principal amount of 5.500% Senior Notes due 2030 (the "Notes Due 2030"). Interest on the Notes Due 2030 is paid semi-annually in arrears on January 1 and July 1 of each year. The Notes Due 2030 will mature on July 1, 2030, and the Operating Partnership may redeem the Notes Due 2030 at its option and sole discretion at any time prior to May 1, 2030 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 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 Partnership may redeem the Notes Due 2028, the Notes Due 2029, the Notes Due 2030, 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 and the Notes Due 2030 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.

22


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 DebtJune 30, 2023December 31, 2022Fixed Rate
Variable Rate (2)
Maturity Dates
Secured fixed-rate (1)
$404,336 $521,820 
2.67% - 4.56%
April 2025 - February 2030
Secured variable-rate (1)
883,052 772,604 
6.14% - 6.59%
August 2023 - September 2030
Unsecured fixed-rate5,136,633 4,240,376 
2.35% - 5.70%
January 2025 - March 2032
Unsecured variable-rate848,367 884,624 
6.14% - 6.19%
January 2024 - January 2028
Total7,272,388 6,419,424 
Less: Unamortized debt issuance costs(54,900)(32,962)
Total$7,217,488 $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, Adjusted Term SOFR and Adjusted Daily Simple SOFR.
The following table summarizes the scheduled maturities of term debt, excluding available extensions, at June 30, 2023:
2023$332,680 
2024335,000 
2025707,289 
2026809,508 
2027869,713 
Thereafter4,218,198 
$7,272,388 
On June 22, 2023, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”), which increased the commitment of the revolving credit facility to $1,940.0 million and extended maturity to June 2027. In connection with entering into the Credit Agreement, the Company paid off Tranche 5 and added the Tranche 8 term loan, maturing June 2024, which allowed the Company to draw up to $1,000.0 million in connection with the Life Storage merger. Tranche 8 was undrawn as of June 30, 2023, but was fully drawn on July 20, 2023, in connection with the closing of the merger with Life Storage, Inc. (“Life Storage”).

As of June 30, 2023, the terms of the Credit Agreement are as follows:

23


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Debt CapacityMaturity Date
Revolving Credit Facility$1,940,000 June 2027
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 (2)
— February 2024
Tranche 6 Term Loan Facility (1)
175,000 January 2028
Tranche 7 Term Loan Facility (1)
425,000 July 2029
Tranche 8 Term Loan Facility (3)
$1,000,000 June 2024
$4,865,000 
(1) Term loan amounts have been fully drawn as of June 30, 2023.
(2) The Tranche 5 Term Loan was paid off prior to maturity as part of the June 2023 recast.
(3) The Tranche 8 Term Loan was undrawn as of June 30, 2023, but was fully drawn on July 20, 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, and the term of the Tranche 8 Term Loan Facility for one year, after satisfying certain conditions.

As of June 30, 2023, amounts outstanding under the revolving credit facility bore interest at floating rates, at the Company’s option, equal to either (i) Adjusted 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 (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 2.2% per annum and the applicable base rate margin ranging from 0.00% to 1.20% 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 June 30, 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. As of June 30, 2023, the 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 June 30, 2023
Revolving Lines of CreditAmount DrawnCapacityInterest RateMaturity
Basis Rate (1)
Credit Line 1 (2)
$23,250 $140,000 6.44%7/1/2026
SOFR plus 1.35%
Credit Line 2 (3)(4)
252,000 1,940,000 6.04%6/22/2027
ASOFR plus 0.95%
$275,250 $2,080,000 
(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. On June 22, 2023, the maturity was extended to June 22, 2027 with two six-month extensions available.
(4) Basis Rate as of June 30, 2023. Rate is subject to change based on our investment grade rating.

24


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
As of June 30, 2023, the Company’s percentage of fixed-rate debt to total debt was 73.4%. The weighted average interest rates of the Company’s fixed and variable-rate debt were 3.8% and 6.4%, respectively. The combined weighted average interest rate was 4.5%.
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 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 six months ended June 30, 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 $34,219 will be reclassified as an increase to interest income.

The Company held 17 derivative financial instruments which had a total combined notional amount of $1,666,265 as of June 30, 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:June 30, 2023December 31, 2022
Other assets$51,235 $54,839 
Other liabilities$— $73 


25


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 June 30,Location of amounts reclassified from OCI into incomeGain (loss) reclassified from OCI for the Three Months Ended June 30,
Type2023202220232022
Swap Agreements$23,628 $14,358 Interest expense$11,033 $(5,755)
Gain (loss) recognized in OCI for the Six Months Ended June 30,Location of amounts reclassified from OCI into incomeGain (loss) reclassified from OCI for the Six Months Ended June 30,
Type2023202220232022
Swap Agreements$18,065 $57,099 Interest expense$19,984 $(14,667)

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 June 30, 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.

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 six months ended June 30, 2023, no shares were repurchased. As of June 30, 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.

26


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 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 June 30, 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:

June 30, 2023December 31, 2022
Series A Units$— $16,498 
Series B Units33,568 33,568 
Series D Units189,372 211,436 
$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.
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 June 30, 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.


27


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 June 30, 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 $189,372, 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.
On January 3, 2023, 890,594 Series D units were redeemed for 154,307 shares of common stock.
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.
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 June 30, 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 June 30, 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 June 30, 2023, the ten-day average closing price of the Company's common stock was $145.79 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 June 30, 2023 and the Company elected to pay the OP Unit holders cash, the Company would have paid $1,051,824 in cash consideration to redeem the units.

OP Unit activity is summarized as follows for the periods presented:
For the Six Months Ended June 30,
20232022
OP Units redeemed for cash— 18,028 
Cash paid for OP Units redeemed$— $3,504 
OP Units issued in conjunction with business combination and acquisitions— 91,743 


28


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 seven consolidated joint ventures as of June 30, 2023. One joint venture owns one operating store and the other six joint ventures each have a property under development. The voting interest of each third-party owner is between 2.0% 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 June 30,For the Six Months Ended June 30,
2023202220232022
Revenues:
Self-Storage Operations$440,747 $408,044 $874,709 $787,852 
Tenant Reinsurance48,433 46,427 96,137 90,224 
Total segment revenues$489,180 $454,471 $970,846 $878,076 
Operating expenses:
Self-Storage Operations$114,637 $104,252 $231,803 $207,794 
Tenant Reinsurance9,482 7,537 18,571 14,579 
Total segment operating expenses$124,119 $111,789 $250,374 $222,373 
Net operating income:
Self-Storage Operations$326,110 $303,792 $642,906 $580,058 
Tenant Reinsurance38,951 38,890 77,566 75,645 
Total segment net operating income:$365,061 $342,682 $720,472 $655,703 
Other components of net income:
Management fees and other income$22,206 $20,517 $43,590 $40,474 
Transaction related costs— (1,465)— (1,465)
General and administrative expense(34,842)(31,251)(69,605)(61,013)
Depreciation and amortization expense(79,086)(69,067)(157,576)(136,973)
Gain on real estate transactions— 14,249 — 14,249 
Interest expense (86,372)(47,466)(166,471)(90,004)
Interest income 21,077 15,060 40,515 34,049 
Equity in earnings and dividend income from unconsolidated real estate entities13,254 10,190 23,559 19,287 
Income tax expense(5,986)(5,615)(10,294)(8,756)
Net income $215,312 $247,834 $424,190 $465,551 

16.    COMMITMENTS AND CONTINGENCIES

As of June 30, 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.


29


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
As of June 30, 2023, the Company was under agreement to acquire 11 stores at a total purchase price of $125,245. Four stores are scheduled to close in 2023 and seven 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 July 20, 2023, the Company closed its merger with Life Storage, Inc. in an all-stock transaction (the "Life Storage Merger"). Under the terms of the Life Storage Merger, Life Storage stockholders and holders of units of the Life Storage operating partnership received 0.895 of a share of common stock (or OP Unit, as applicable) of the Company for each issued and outstanding share (or partnership unit) of Life Storage they owned for an estimated total consideration of $11,600,000, based on the Company's closing share price on July 19, 2023. At closing, the Company retired $1,200,000 in balances on Life Storage's line of credit which included $375,000 which Life Storage used to pay off its private placement notes in connection with the closing. The Company also paid off and/or defeased $32,000 in secured loans. On July 25, 2023, the Company completed an obligor exchange of Life Storage's various Senior Notes totaling $2,400,000. Remaining Life Storage senior note balances which were not exchanged total $48,900 and no longer have any financial reporting requirements or covenants. Following the merger, the combined company owned and/or managed over 3,500 locations and over 264.0 million net rentable square feet.

.

30


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Amounts in thousands, except store and share data

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our unaudited “Condensed Consolidated Financial Statements” and the “Notes to Condensed Consolidated Financial Statements (unaudited)” appearing elsewhere in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2022. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.”

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2022 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.


OVERVIEW

We are a fully integrated, self-administered and self-managed real estate investment trust (“REIT”), formed to own, operate, manage, acquire, develop and redevelop self-storage properties (“stores”). We derive substantially all of our revenues from our two segments: storage operations and tenant reinsurance. Primary sources of revenue for our storage operations segment include rents received from tenants under leases at each of our wholly-owned stores. Our operating results depend materially on our ability to lease available self-storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. Consequently, management spends a significant portion of their time maximizing cash flows from our diverse portfolio of stores. Revenue from our tenant reinsurance segment consists of insurance revenues from the reinsurance of risks relating to the loss of goods stored by tenants in our stores.
Our stores are generally situated in highly visible locations clustered around large population centers. These areas typically enjoy above average population growth and income levels. The clustering of our assets around these population centers enables us to reduce our operating costs through economies of scale. To maximize the performance of our stores, we employ industry-leading revenue management systems. Developed internally, these systems enable us to analyze, set and adjust rental rates in real time across our portfolio in order to respond to changing market conditions. We believe our systems and processes allow us to more pro-actively manage revenues.
We operate in competitive markets, often where consumers have multiple stores from which to choose. Competition has impacted, and will continue to impact, our store results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. We believe that we are able to

31


respond quickly and effectively to changes in local, regional and national economic conditions by adjusting rental rates through the combination of our revenue management team and our proprietary pricing systems. We consider a store to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a store to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1 of the current year, or has been open for three years prior to January 1 of the current year.
On July 20, 2023, we merged with Life Storage, Inc. (“Life Storage”) in an all-stock transaction. Under the terms of the merger, Life Storage stockholders and holders of units of the Life Storage operating partnership received 0.895 of an Extra Space common share (or Extra Space OP Unit, as applicable) for each Life Storage share (or Life Storage partnership unit) they owned for total consideration of $11.6 billion. Following the merger, we owned and/or managed over 3,500 locations and over 264.0 million net rentable square feet.

PROPERTIES

As of June 30, 2023, we owned or had ownership interests in 1,460 operating stores. Of these stores, 1,136 are wholly-owned, one in a consolidated joint venture and 323 are in unconsolidated joint ventures. In addition, we managed an additional 978 stores for third parties bringing the total number of stores which we own and/or manage to 2,438. These stores are located in 41 states and Washington, D.C. The majority of our stores are clustered around large population centers. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. Our acquisitions have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

As of June 30, 2023, approximately 1,440,000 tenants were leasing storage units at the operating stores that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. Although leases are short-term in duration, the typical tenant tends to remain at our stores for an extended period of time. For stores that were stabilized as of June 30, 2023, the average length of stay was approximately 16.7 months.

The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was $21.08 for the three months ended June 30, 2023, compared to $20.38 for the three months ended June 30, 2022. Average annual rent per square foot for new leases was $17.71 for the three months ended June 30, 2023, compared to $19.74 for the three months ended June 30, 2022. The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 2.6% and 3.3%, respectively.

Our store portfolio is made up of different types of construction and building configurations. Most often sites are what we consider “hybrid” stores, a mix of drive-up and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of stores featuring ground-floor access only.

The following table presents additional information regarding net rentable square feet and the number of stores by state.

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June 30, 2023
REIT OwnedJoint Venture OwnedManagedTotal
Location
Property Count(1)
Net Rentable Square FeetProperty CountNet Rentable Square FeetProperty CountNet Rentable Square FeetProperty CountNet Rentable Square Feet
Alabama679,649 150,809 414,558 18 1,245,016 
Arizona25 1,782,264 11 838,049 23 1,941,832 59 4,562,145 
California177 13,731,151 49 3,595,468 106 9,987,493 332 27,314,112 
Colorado17 1,149,321 663,467 26 1,877,909 52 3,690,697 
Connecticut538,516 575,866 565,352 23 1,679,734 
Delaware— — 143,615 228,606 372,221 
Florida114 8,810,535 45 3,863,695 122 9,429,320 281 22,103,550 
Georgia68 5,270,803 15 1,215,230 25 1,882,740 108 8,368,773 
Hawaii14 941,713 — — 159,174 17 1,100,887 
Idaho131,369 — — 145,045 276,414 
Illinois60 3,766,202 10 741,518 34 2,542,236 104 7,049,956 
Indiana91 3,911,998 57,787 23 1,681,541 115 5,651,326 
Kansas50,219 108,921 229,403 388,543 
Kentucky13 959,512 51,770 12 1,011,289 26 2,022,571 
Louisiana387,009 — — 13 1,013,377 18 1,400,386 
Maine— — — — 572,516 572,516 
Maryland35 2,940,475 11 898,167 43 3,137,284 89 6,975,926 
Massachusetts47 3,007,110 614,889 30 1,873,553 86 5,495,552 
Michigan670,531 309,133 10 751,917 22 1,731,581 
Minnesota585,109 304,344 14 1,009,116 25 1,898,569 
Mississippi234,266 — — 146,138 380,404 
Missouri430,026 119,750 13 985,731 21 1,535,507 
Nebraska— — — — 278,106 278,106 
Nevada14 1,039,720 473,756 933,193 27 2,446,669 
New Hampshire134,764 84,693 10 515,835 14 735,292 
New Jersey64 5,213,130 17 1,228,879 41 3,091,484 122 9,533,493 
New Mexico11 717,809 10 683,210 15 1,081,169 36 2,482,188 
New York28 2,049,490 18 1,512,505 38 2,420,093 84 5,982,088 
North Carolina24 1,770,821 401,280 22 1,738,074 51 3,910,175 
Ohio24 1,468,239 325,394 14 1,096,202 43 2,889,835 
Oklahoma61,588 — — 20 1,548,373 21 1,609,961 
Oregon549,715 65,245 10 737,298 19 1,352,258 
Pennsylvania21 1,597,995 680,246 40 2,917,965 70 5,196,206 
Rhode Island137,802 — — 420,300 558,102 
South Carolina23 1,721,101 11 707,978 30 2,519,377 64 4,948,456 
Tennessee22 1,855,267 13 880,463 18 1,226,956 53 3,962,686 
Texas111 9,156,853 30 2,370,219 89 7,730,522 230 19,257,594 
Utah10 733,305 — — 25 2,034,918 35 2,768,223 
Virginia53 4,272,270 703,762 27 1,812,938 89 6,788,970 
Washington681,056 — — 14 1,153,617 23 1,834,673 
Washington, DC100,203 103,558 311,082 514,843 
Wisconsin— — 371,423 13 1,072,344 17 1,443,767 
Totals1,137 83,238,906 323 24,845,089 978 76,225,976 2,438 184,309,971 

(1)    Excludes 17,000 units related to the Bargold transaction. See Note 7 in the Notes to the Condensed Consolidated Financial Statements.


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RESULTS OF OPERATIONS

Comparison of the three and six months ended June 30, 2023 and 2022

Overview
Results for the three and six months ended June 30, 2023 included the operations of 1,460 stores (1,136 wholly-owned, one in a consolidated joint venture, and 323 in joint ventures accounted for using the equity method) compared to the results for the three and six months ended June 30, 2022, which included the operations of 1,313 stores (1,009 wholly-owned, zero in consolidated joint ventures, and 304 in joint ventures accounted for using the equity method).

Revenues
The following table presents information on revenues earned for the periods indicated:
For the Three Months Ended June 30,For the Six Months Ended June 30,
20232022$ Change% Change20232022$ Change% Change
Revenues:
Property rental$440,747 $408,044 $32,703 8.0 %$874,709 $787,852 $86,857 11.0 %
Tenant reinsurance48,433 46,427 2,006 4.3 %96,137 90,224 5,913 6.6 %
Management fees and other income22,206 20,517 1,689 8.2 %43,590 40,474 3,116 7.7 %
Total revenues$511,386 $474,988 $36,398 7.7 %$1,014,436 $918,550 $95,886 10.4 %

Property Rental—The increase in property rental revenues for the three and six months ended June 30, 2023 was primarily the result of an increase of $18,189 and $39,298 associated with acquisitions completed in 2023 and 2022. We acquired four wholly-owned stores during the six months ended June 30, 2023 and a total of 153 stores during the year ended December 31, 2022. Property rental revenues also increased by $9,802 and $36,494 at our stabilized stores related primarily to higher average rates to existing customers.

Tenant Reinsurance—The increase in tenant reinsurance revenues was due primarily to an increase in the number of stores operated. We operated 2,438 stores at June 30, 2023 compared to 2,177 stores at June 30, 2022.

Management Fees and Other Income—Management fees and other income primarily represent the fees collected for our management of stores owned by third parties and unconsolidated joint ventures and other transaction fee income. The increase for the three and six months ended June 30, 2023 was due to both an increase in the number of stores managed and an increase in the overall revenue of stores under management when compared to the same period last year. As of June 30, 2023, we managed 1,302 stores for joint ventures and third parties, compared to 1,168 stores as of June 30, 2022.

Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended June 30,For the Six Months Ended June 30,
20232022$ Change% Change20232022$ Change% Change
Expenses:
Property operations$114,637 $104,252 $10,385 10.0 %$231,803 $207,794 $24,009 11.6 %
Tenant reinsurance 9,482 7,537 1,945 25.8 %18,571 14,579 3,992 27.4 %
Transaction related costs— 1,465 (1,465)(100.0)%— 1,465 (1,465)(100.0)%
General and administrative34,842 31,251 3,591 11.5 %69,605 61,013 8,592 14.1 %
Depreciation and amortization79,086 69,067 10,019 14.5 %157,576 136,973 20,603 15.0 %
Total expenses$238,047 $213,572 $24,475 11.5 %$477,555 $421,824 $55,731 13.2 %


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Property Operations—The increase in property operations expense during the three and six months ended June 30, 2023 consists primarily of an increase of $5,634 and $12,639 related to acquisitions completed in 2023 and 2022. We acquired four wholly-owned stores during the six months ended June 30, 2023 and a total of 153 stores during the year ended December 31, 2022. Additionally, for the three and six months ended June 30, 2023 there was an increase of $3,691 and $8,085 at our stabilized stores primarily due to payroll, marketing, credit card processing fees, utilities and insurance, partially offset by repairs and maintenance.

Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. These increases are primarily related to an increase in stores, along with an increase in claim service and administration charges. We operated 2,438 stores at June 30, 2023 compared to 2,177 stores at June 30, 2022.

General and Administrative—General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, office expense, office rent, travel and professional fees. We did not observe any material trends in specific travel or other expenses apart from inflationary pressures and from the increase due to the management of additional stores. Also, during the three and six months ended June 30, 2023 increases relate in part to the acquisition of Bargold in June 2022 and 106 stores added with the acquisition of acquisition of multiple entities doing business as Storage Express in September 2022 compared to the same period last year.

Depreciation and Amortization—Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired four wholly-owned stores during the six months ended June 30, 2023 and a total of 153 stores during the year ended December 31, 2022.

Other Revenues and Expenses
The following table presents information about other revenues and expenses for the periods indicated:
For the Three Months Ended June 30,For the Six Months Ended June 30,
20232022$ Change% Change20232022$ Change% Change
Gain on real estate transactions$— $14,249 $(14,249)— %$— $14,249 $(14,249)(100.0)%
Interest expense(86,372)(47,466)(38,906)82.0 %(166,471)(90,004)(76,467)85.0 %
Interest income21,077 15,060 6,017 40.0 %40,515 34,049 6,466 19.0 %
Equity in earnings and dividend income from unconsolidated real estate entities13,254 10,190 3,064 30.1 %23,559 19,287 4,272 22.1 %
Income tax expense(5,986)(5,615)(371)6.6 %(10,294)(8,756)(1,538)17.6 %
Total other revenues & expenses, net$(58,027)$(13,582)$(44,445)327.2 %$(112,691)$(31,175)$(81,516)261.5 %

Gain on Real Estate Transactions—During the three months ended June 30, 2022, we sold two stores. We recognized a total gain of $14,249 related to the sale of these assets.

Interest Expense—The increase in interest expense during the three and six months ended June 30, 2023 was primarily the result of a higher weighted average interest rate and debt balance compared to the same period in the prior year. The weighted average interest rate of the total of fixed- and variable-rate debt was 4.5% at June 30, 2023, compared to 3.1% at June 30, 2022.

Interest Income—Interest income represents interest earned on bridge loans, notes receivable and debt securities and income earned on notes receivable from Common and Preferred Operating Partnership unit holders. The increase in interest income during the three and six months ended June 30, 2023 was primarily the result of an increase in amount of bridge loans held combined with an increase in interest rates. The balance of bridge loans was $540,355 as of June 30, 2023, compared to $349,056 as of June 30, 2022.

Equity in Earnings and Dividend Income from Unconsolidated Real Estate Entities—Equity in earnings of unconsolidated real estate entities represents the income earned through our ownership interests in unconsolidated joint ventures. In these joint ventures, we and our joint venture partners generally receive a preferred return on our invested capital. To the extent that cash or profits in excess of these preferred returns are generated, we receive a higher percentage of the excess

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cash or profits. Dividend income represents dividends from our investment in preferred stock of SmartStop and Strategic Storage.

Income Tax Expense—The increase in income tax expense for the three and six months ended June 30, 2023 was primarily the result of an increase in book income and a decrease in permanent tax deductions related to stock awards.
FUNDS FROM OPERATIONS

Funds from operations (“FFO”) provides relevant and meaningful information about our operating performance that is necessary, along with net income and cash flows, for an understanding of our operating results. We believe FFO is a meaningful disclosure as a supplement to net earnings. Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets. FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) as net income computed in accordance with GAAP, excluding gains or losses on sales of operating stores and impairment write downs of depreciable real estate assets, plus real estate related depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in our condensed consolidated financial statements. FFO should not be considered a replacement of net income computed in accordance with GAAP.

The computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income as an indication of our performance, as an alternative to net cash flow from operating activities, as a measure of our liquidity, or as an indicator of our ability to make cash distributions.

The following table presents the calculation of FFO for the periods indicated:
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2023202220232022
Net income attributable to common stockholders$202,410 $232,130 $398,714 $435,709 
Adjustments:
Real estate depreciation72,385 63,765 143,633 126,457 
Amortization of intangibles3,609 2,696 7,779 5,462 
Gain on real estate transactions
— (14,249)— (14,249)
Unconsolidated joint venture real estate depreciation and amortization4,722 4,115 9,661 7,968 
Distributions paid on Series A Preferred Operating Partnership units— (572)(159)(1,144)
Income allocated to Operating Partnership noncontrolling interests 12,902 15,704 25,476 29,842 
Funds from operations attributable to common stockholders and unit holders$296,028 $303,589 $585,104 $590,045 

SAME-STORE RESULTS

Our same-store pool for the periods presented consists of 914 stores that are wholly-owned and operated and that were stabilized by the first day of the earliest calendar year presented. We consider a store to be stabilized once it has been open for three years or has sustained average square foot occupancy of 80% or more for one calendar year. We believe that by providing same-store results from a stabilized pool of stores, with accompanying operating metrics including, but not limited to: occupancy, rental revenue growth, operating expense growth, net operating income growth, etc., stockholders and potential investors are able to evaluate operating performance without the effects of non-stabilized occupancy levels, rent levels, expense levels, acquisitions or completed developments.  Same-store results should not be used as a basis for future same-store performance or for the performance of our stores as a whole. The following table presents operating data for our same-store

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portfolio.
 For the Three Months Ended June 30,PercentFor the Six Months Ended June 30,Percent
 20232022Change20232022Change
Same-store rental revenues
Net rental income$374,845 $366,195 2.4 %$745,474 $712,070 4.7 %
Other operating income14,609 13,204 10.6 %28,071 24,952 12.5 %
Total same-store rental revenues389,454 379,399 2.7 %773,545 737,022 5.0 %
Same-store operating expenses
Payroll and benefits20,785 20,657 0.6 %41,628 40,717 2.2 %
Marketing6,698 6,128 9.3 %12,870 11,688 10.1 %
Office expense11,969 11,233 6.6 %23,947 021,914 9.3 %
Property operating expense7,914 8,028 (1.4)%17,777 16,856 5.5 %
Repairs and maintenance5,774 6,254 (7.7)%12,191 13,740 (11.3)%
Property taxes34,269 33,576 2.1 %68,615 68,366 0.4 %
Insurance3,966 2,867 38.3 %7,588 5,580 36.0 %
Total same-store operating expenses91,375 88,743 3.0 %184,616 178,861 3.2 %
Same-store net operating income$298,079 $290,656 2.6 %$588,929 $558,161 5.5 %
Same-store square foot occupancy as of quarter end94.5%95.8%94.5%95.8%
Properties included in same-store914914914914
Same-store revenues for the three and six months ended June 30, 2023 increased compared to the same period in 2022 due to higher average rates to existing customers and higher other operating income partially offset by lower occupancy.

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The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Net Income$215,312 $247,834 $424,190 $465,551 
Adjusted to exclude:
Gain on real estate transactions— (14,249)— (14,249)
Equity in earnings and dividend income from unconsolidated real estate entities(13,254)(10,190)(23,559)(19,287)
Interest expense86,372 47,466 166,471 90,004 
Depreciation and amortization79,086 69,067 157,576 136,973 
Income tax expense5,986 5,615 10,294 8,756 
Transaction related costs — 1,465 — 1,465 
General and administrative34,842 31,251 69,605 61,013 
Management fees, other income and interest income(43,283)(35,577)(84,105)(74,523)
Net tenant insurance(38,951)(38,890)(77,566)(75,645)
Non same-store rental revenue(51,293)(28,645)(101,164)(50,830)
Non same-store operating expense23,262 15,509 47,187 28,933 
Total same-store net operating income$298,079 $290,656 $588,929 $558,161 
Same-store rental revenues$389,454 $379,399 $773,545 $737,022 
Same-store operating expenses91,375 88,743 184,616 178,861 
Same-store net operating income$298,079 $290,656 $588,929 $558,161 

CASH FLOWS

Cash flows from operating activities for the six months ended June 30, 2023 decreased when compared to the same period in the prior year. Cash flows used in investing activities relates primarily to our acquisition and development of REIT and joint venture assets, as well as activity on our bridge loan program. Cash flows from financing activities depend primarily on our debt and equity financing activities. A summary of cash flows along with significant components are as follows:

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For the Six Months Ended June 30,
20232022
Net cash provided by operating activities$629,527 $640,387 
Net cash used in investing activities(357,586)(570,028)
Net cash used in financing activities(316,763)(76,387)
Significant components of net cash flow included:
Net income$424,190 $465,551 
Depreciation and amortization157,576 136,973 
Gain on real estate transactions— (14,249)
Acquisition and development of real estate assets(164,660)(467,543)
Cash paid for business combination— (157,301)
Proceeds from sale of real estate assets and investments in real estate ventures— 39,367 
Investment in unconsolidated real estate entities(171,126)(76,339)
Issuance and purchase of notes receivable(124,103)(204,930)
Proceeds from sale of notes receivable60,696 82,115 
Principal payments received from notes receivable46,466 223,773 
Proceeds from notes payable and revolving lines of credit2,479,592 1,948,657 
Principal payments on notes payable and revolving lines of credit(3,246,378)(1,915,531)
Proceeds from issuance of public bonds, net950,000 400,000 
Repurchase of common stock— (63,008)
Dividends paid on common stock(438,783)(403,551)

We believe that cash flows generated by operations, along with our existing cash and cash equivalents, the availability of funds under our existing lines of credit, and our access to capital markets will be sufficient to meet all of our reasonably anticipated cash needs during the next 12 months. These cash needs include operating expenses, monthly debt service payments, recurring capital expenditures, acquisitions, redevelopments and expansions, distributions to unit holders and dividends to stockholders necessary to maintain our REIT qualification.

We expect to generate positive cash flow from operations in 2023, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our tenants. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds under our existing lines of credit, curtail planned capital expenditures, or seek other additional sources of financing.

LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2023, we had $50,644 available in cash and cash equivalents. Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. During 2023 and 2022, we experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

As of June 30, 2023, we had $7,547,638 face value of debt, resulting in a debt to total enterprise value ratio of 26.1%. As of June 30, 2023, the ratio of total fixed-rate debt and other instruments to total debt was 73.4% ($5,540,970 total fixed-rate debt including $2,006,668 on which we have interest rate swaps that have been included as fixed-rate debt). The weighted average interest rate of the total of fixed- and variable-rate debt at June 30, 2023 was 4.5%. Certain of our real estate assets are pledged as collateral for our debt. We are subject to certain restrictive covenants relating to our outstanding debt. We were in compliance with all financial covenants at June 30, 2023.


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We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of Operating Partnership units and interest on our outstanding indebtedness, out of our operating cash flow, cash on hand and borrowings under our revolving lines of credit. In addition, we are pursuing additional sources of financing based on anticipated funding needs and growth assumptions.

We hold a BBB/Stable rating from S&P, which has been upgraded to BBB+/Stable in July 2023, and a Baa2 rating from Moody's Investors Service. We intend to manage our balance sheet to maintain these ratings. Certain of our real estate assets are pledged as collateral for our debt. As of June 30, 2023, we had a total of 909 unencumbered stores as defined by our public bonds. Our unencumbered asset value was calculated as $17,521,761 and our total asset value was calculated as $22,702,422 according to the calculations as defined by our public bonds.

Our liquidity needs consist primarily of operating expenses, monthly debt service payments, recurring capital expenditures, dividends to stockholders and distributions to unit holders necessary to maintain our REIT qualification. We may from time to time seek to repurchase our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds. We may also use Operating Partnership units as currency to fund acquisitions from self-storage owners.

OFF-BALANCE SHEET ARRANGEMENTS

Except as disclosed in the notes to our consolidated financial statements of our most recently filed Annual Report on Form 10-K, we do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our condensed consolidated financial statements, we have not guaranteed any obligations of unconsolidated entities, nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

SEASONALITY

The self-storage business is subject to seasonal fluctuations. A greater portion of revenues and profits are realized from May through September. Historically, our highest level of occupancy has been at the end of July, while our lowest level of occupancy has been in late February and early March. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows and fair values of financial instruments are dependent upon prevailing market interest rates.

Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
As of June 30, 2023, we had approximately $7.5 billion in total face value of debt, of which approximately $2.0 billion was subject to variable interest rates (excluding debt with interest rate swaps). If SOFR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt would increase or decrease future earnings and cash flows by approximately $20.1 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

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ITEM 4.    CONTROLS AND PROCEDURES

(1)Disclosure Controls and Procedures

We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have a disclosure committee that is responsible for considering the materiality of information and determining our disclosure obligations on a timely basis. The disclosure committee meets quarterly and reports directly to our Chief Executive Officer and Chief Financial Officer.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

(2)Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II.     OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are involved in various legal proceedings and are 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. We could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period, notwithstanding the fact that we are currently vigorously defending any legal proceedings against us.

ITEM 1A.    RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition and results of operations. Other than as set forth below, there have been no material changes to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2022, and the risk factors described in the “Risk Factors” section in our Quarterly Report on Form 10-Q for the period ended March 31, 2023. The risks described below and in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and results of operations.

We may be unable to integrate the operations of Life Storage successfully with ours and realize the anticipated synergies and other benefits of the merger or do so within the anticipated time frame.
Until the completion of the merger, Life Storage and Extra Space operated as independent public companies with respective independent operating partnerships. We expect to benefit from the elimination of duplicative costs associated with supporting a public company platform and the leveraging of state-of-the-art technology and systems. However, we will be required to devote significant management attention and resources to integrating the operations of Life Storage with our own. Potential difficulties we may encounter in the integration process include the following:
the inability to successfully combine the operations of Life Storage, including the integration of employees, customer records and maintaining cybersecurity protections, in a manner that permits us to achieve the cost savings anticipated to result from the merger, which would result in the anticipated benefits of the merger not being realized in the time frame currently anticipated or at all;
the inability to dispose of former Life Storage assets or operations that we may desire to dispose of;
the complexities associated with managing the combined businesses out of different locations and integrating personnel from the two companies;
the failure to retain our key employees or the key employees of Life Storage;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and
performance shortfalls as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our operations, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the merger, or could otherwise adversely affect our business and financial results.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


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ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.    OTHER INFORMATION

During the three months ended June 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non Rule 10b5-1 trading arrangement.”


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ITEM 6.    EXHIBITS

Exhibit
Number
Exhibit DescriptionIncorporated by ReferenceFiled Herewith
FormDateNumber
2.18-KApril 3, 20232.1
2.28-KMay 19, 20232.1
4.18-KJune 16, 20234.2
4.28-KJuly 25, 20234.1
4.38-KJuly 25, 20234.2
4.48-KJuly 25, 20234.4
4.58-KJuly 25, 20234.5
4.68-KJuly 25, 20234.6
4.78-KJuly 25, 20234.7
4.88-KJuly 25, 20234.8
22.1X

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31.1X
31.2X
32.1X
101The following materials from Extra Space Storage Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, are formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (4) the Condensed Consolidated Statement of Noncontrolling Interests and Equity, (5) the Condensed Consolidated Statements of Cash Flows and (6) notes to these financial statements.X
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).X


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 EXTRA SPACE STORAGE INC.
 Registrant
Date: August 9, 2023 /s/ Joseph D. Margolis
 Joseph D. Margolis
 Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2023 /s/ P. Scott Stubbs
 P. Scott Stubbs
 Executive Vice President and Chief Financial Officer
 (Principal Financial Officer)


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