Extra Space Storage Inc. - Quarter Report: 2024 March (Form 10-Q)

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statement of Noncontrolling Interests and Equity

(amounts in thousands, except share data)

(unaudited)

Noncontrolling Interest

Extra Space Storage Inc. Stockholders' Equity

Preferred Operating Partnership

Operating Partnership

Other

Par Value

Additional Paid-in Capital

Accumulated Other Comprehensive Income (Loss)

Accumulated Deficit

Total Noncontrolling Interests and Equity

Balances at December 31, 2022

()

Issuance of common stock in connection with share based compensation

—

Taxes paid upon net settlement of share based compensation

—

()

—

()

—

()

Restricted stock grants cancelled

—

()

—

Redemption of Preferred A Units in the Operating Partnership for stock and cash

()

—

()

Redemption of Preferred D Units in the Operating Partnership for stock

()

—

Noncontrolling interest in consolidated joint venture

—

Net income (loss)

()

—

Other comprehensive income

—

()

—

()

—

()

Distributions to Operating Partnership units held by noncontrolling interests

()

—

()

Dividends paid on common stock at $ per share

—

()

Balances at March 31, 2023

()

Balances at December 31, 2023

()

Issuance of common stock for share based compensation, exercise of options and taxes paid upon net settlement

—

()

—

()

Issuance of common stock, net of offering costs

—

Redemption of Operating Partnership units for stock

()

—

Noncontrolling interest in consolidated joint ventures

—

Net income

—

Other comprehensive loss

—

Distributions to Operating Partnership units held by noncontrolling interests

()

—

()

Dividends paid on common stock at $ per share

—

()

Balances at March 31, 2024

()

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2024	2023
Cash flows from operating activities:
Net income	$	$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs
Non-cash interest expense related to amortization of discount on Life Storage unsecured senior notes

Compensation expense related to share-based awards
Accrual of interest income added to principal of debt securities and notes receivable	()	()



Distributions from unconsolidated real estate ventures
Changes in operating assets and liabilities:

Other assets		()
Accounts payable and accrued expenses
Other liabilities		()
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of real estate assets and improvements	()	()


Development and redevelopment of real estate assets	()	()

Investment in unconsolidated real estate entities	()	()


Issuance and purchase of notes receivable	()	()
Principal payments received from notes receivable
Proceeds from sale of notes receivable
Purchase of equipment and fixtures	()	()
Net cash used in investing activities	()	()
Cash flows from financing activities:

Proceeds from unsecured term loans and senior notes and revolving lines of credit
Principal payments on unsecured term loans and senior notes and revolving lines of credit	()	()
Proceeds from issuance of public bonds, net
Deferred financing costs	()	()

Proceeds from share issuances and redemption of stock options for cash, net

Redemption of Preferred OP units for cash		()



Dividends paid on common stock	()	()
Distributions to noncontrolling interests	()	()
Net cash used in financing activities	()	()
Net decrease in cash, cash equivalents, and restricted cash	()	()
Cash, cash equivalents, and restricted cash, beginning of the period
Cash, cash equivalents, and restricted cash, end of the period	$	$

Cash and equivalents, including restricted cash at the beginning of the period:
Cash and equivalents	$	$
Restricted cash included in other assets
	$	$
Cash and equivalents, including restricted cash at the end of the period:
Cash and equivalents	$	$
Restricted cash included in other assets
	$	$

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2024		2023
Supplemental schedule of cash flow information
Interest paid	$		$
Income taxes paid
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	$		$
Common stock and paid-in capital	()		()
Noncontrolling interests in Operating Partnership Note Receivable Payoff			()
OP Unit Redemption - Cash Proceeds			()



























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

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, or (2) its redemption value as of the end of the period in which the determination is made.

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interest of partners in consolidated joint ventures as of March 31, 2024. joint ventures each own one operating store and the other joint ventures each have a property under development. The voting interest of each partner is between % and %.

Based on the facts and circumstances of each of the Company’s joint ventures, the Company has determined that one of the joint ventures at March 31, 2024 was a variable interest entity (“VIE”) in accordance with ASC 810, “Consolidation.” The Company has consolidated that joint venture as it was determined that the Company has the power to direct the activities of the joint venture and is the primary beneficiary of the joint venture.

EXTRA SPACE STORAGE INC.

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

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

15.

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.

$ Tenant Reinsurance Total segment revenues$ $ Operating expenses:Self-Storage Operations$ $ Tenant Reinsurance Total segment operating expenses$ $ Net operating income:Self-Storage Operations$ $ Tenant Reinsurance Total segment net operating income:$ $ Other components of net income:Management fees and other income$ $ General and administrative expense()()Depreciation and amortization expense()()Interest expense ()()Non-cash interest expense related to amortization of discount on Life Storage unsecured senior notes() Interest income Equity in earnings and dividend income from unconsolidated real estate entities Income tax expense()()Net income $ $

EXTRA SPACE STORAGE INC.

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

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

16.

stores at a total purchase price of $. All stores are scheduled to close in 2024. Additionally, the Company is under agreement to acquire store with joint venture partners, for a total investment of $ which is scheduled to close in 2024.

As of March 31, 2024, 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.

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.

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

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, 2023. 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 U.S. generally accepted accounting principles (“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, 2023 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. 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 by our management team, 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 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 industry leading technology 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.

PROPERTIES

As of March 31, 2024, we owned or had ownership interests in 2,384 operating stores. Of these stores, 1,909 are wholly-owned, three in consolidated joint ventures and 472 are in unconsolidated joint ventures. In addition, we managed an additional 1,409 stores for third parties bringing the total number of stores which we own and/or manage to 3,793. These stores are located in 42 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 March 31, 2024, approximately 2,155,000 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 March 31, 2024, the average length of stay was approximately 17.4 months.

The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was $20.36 for the three months ended March 31, 2024, compared to $20.41 for the three months ended March 31, 2023. Average annual rent per square foot for new leases was $13.60 for the three months ended March 31, 2024, compared to $16.00 for the three months ended March 31, 2023. The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 2.2% and 2.5%, 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.


	March 31, 2024
	REIT Owned		Joint Venture Owned		Managed		Total
Location	Property Count(1)	Net Rentable Square Feet	Property Count	Net Rentable Square Feet	Property Count	Net Rentable Square Feet	Property Count	Net Rentable Square Feet
Alabama	38	2,947,166	2	150,859	13	808,111	53	3,906,136

Arizona	47	3,513,908	26	2,092,735	45	3,617,066	118	9,223,709

California	218	17,841,007	50	3,715,765	128	12,013,135	396	33,569,907
Colorado	27	1,891,044	13	938,440	32	2,410,876	72	5,240,360
Connecticut	23	1,755,094	8	713,977	12	821,289	43	3,290,360
Delaware	—	—	2	143,640	4	307,281	6	450,921
Florida	246	18,491,634	56	4,651,374	175	13,501,590	477	36,644,598
Georgia	119	9,126,390	23	1,926,107	53	4,036,519	195	15,089,016
Hawaii	14	941,707	—	—	4	259,012	18	1,200,719
Idaho	2	131,569	—	—	3	290,407	5	421,976
Illinois	106	7,698,254	12	940,002	48	3,653,165	166	12,291,421
Indiana	92	4,053,979	1	57,765	27	1,994,992	120	6,106,736
Iowa	—	—	—	—	1	86,949	1	86,949
Kansas	1	50,224	2	108,921	4	289,704	7	448,849
Kentucky	15	1,065,353	1	51,801	15	1,180,063	31	2,297,217
Louisiana	10	772,138	—	—	26	1,861,092	36	2,633,230
Maine	5	353,687	—	—	12	750,771	17	1,104,458
Maryland	44	3,473,237	11	899,763	47	3,382,656	102	7,755,656
Massachusetts	64	4,059,406	16	984,794	36	2,390,598	116	7,434,798
Michigan	8	675,039	4	309,052	12	910,629	24	1,894,720
Minnesota	8	709,814	8	646,689	15	1,113,028	31	2,469,531
Mississippi	7	561,154	—	—	14	1,128,583	21	1,689,737
Missouri	28	2,240,093	7	508,850	20	1,573,103	55	4,322,046

Nebraska	—	—	—	—	4	372,210	4	372,210
Nevada	32	2,844,476	9	839,617	11	1,059,690	52	4,743,783
New Hampshire	17	1,276,768	2	84,165	20	867,695	39	2,228,628
New Jersey	88	7,035,203	33	2,611,839	57	4,455,314	178	14,102,356
New Mexico	12	762,225	10	681,770	15	1,084,075	37	2,528,070
New York	79	5,691,946	28	2,316,289	88	6,187,255	195	14,195,490
North Carolina	52	3,734,453	8	620,667	37	2,793,720	97	7,148,840

Ohio	50	3,424,784	5	325,467	19	1,444,508	74	5,194,759
Oklahoma	4	268,388	—	—	22	1,435,578	26	1,703,966
Oregon	8	550,140	2	166,608	7	467,224	17	1,183,972
Pennsylvania	31	2,369,176	12	941,276	53	3,940,276	96	7,250,728
Rhode Island	6	351,421	1	95,844	6	473,149	13	920,414
South Carolina	40	2,974,322	11	709,302	41	3,363,581	92	7,047,205

Tennessee	29	2,410,994	16	1,091,876	26	1,831,891	71	5,334,761
Texas	243	20,052,750	71	5,496,514	150	12,371,140	464	37,920,404
Utah	10	734,036	—	—	34	2,629,878	44	3,363,914

Virginia	73	5,945,497	10	759,216	34	2,367,956	117	9,072,669
Washington	14	1,091,024	2	199,745	17	1,321,836	33	2,612,605
Washington, DC	1	100,203	1	104,230	6	532,962	8	737,395

Wisconsin	1	97,638	9	883,127	16	1,317,947	26	2,298,712


Totals	1,912	144,067,341	472	36,768,086	1,409	108,698,504	3,793	289,533,931

(1) Includes three consolidated joint ventures and excludes approximately 18,000 units related to Bargold.

RESULTS OF OPERATIONS

Amounts in thousands, except store and share data

Comparison of the three months ended March 31, 2024 and 2023

Overview

Results for the three months ended March 31, 2024 included the operations of 2,384 stores (1,909 wholly-owned, three in consolidated joint ventures, and 472 in joint ventures accounted for using the equity method) compared to the results for the three months ended March 31, 2023, which included the operations of 1,457 stores (1,133 wholly-owned, one in a consolidated joint venture, and 323 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 March 31,
	2024		2023		$ Change		% Change
Revenues:
Property rental	$	688,044	$	433,962	$	254,082	58.5	%
Tenant reinsurance	81,347		47,704		33,643		70.5	%
Management fees and other income	30,148		21,384		8,764		41.0	%
Total revenues	$	799,539	$	503,050	$	296,489	58.9	%

Property Rental—The increase in property rental revenues for the three months ended March 31, 2024 was primarily the result of an increase of $248,455 associated with the merger of Life Storage, other acquisitions completed in 2023, and acquisitions completed in the first quarter of 2024. We acquired 771 wholly-owned stores in 2023 and an additional six wholly-owned stores during the three months ended March 31, 2024.

Tenant Reinsurance—The increase in tenant reinsurance revenues was due primarily to an increase in the number of stores operated. We operated 3,793 stores at March 31, 2024 compared to 2,388 stores at March 31, 2023.

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 months ended March 31, 2024 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 March 31, 2024, we managed 1,884 stores for joint ventures and third parties, compared to 1,255 stores as of March 31, 2023.

Expenses

The following table presents information on expenses for the periods indicated:


	For the Three Months Ended March 31,
	2024		2023		$ Change		% Change
Expenses:
Property operations	$	204,518	$	117,166	$	87,352	74.6	%
Tenant reinsurance	18,505		9,089		9,416		103.6	%
General and administrative	43,722		34,763		8,959		25.8	%
Depreciation and amortization	196,966		78,490		118,476		150.9	%
Total expenses	$	463,711	$	239,508	$	224,203	93.6	%

Property Operations—The increase in property operations expense during the three months ended March 31, 2024 consists primarily of an increase of $79,051 related to the Life Storage Merger, other acquisitions completed in 2023, and acquisitions completed in the first quarter of 2024. We acquired 771 wholly-owned stores in 2023 and an additional six wholly-owned stores during the three months ended March 31, 2024. Additionally, for the three months ended March 31, 2024 there was an increase of $8,451 at our stabilized stores primarily due to payroll, marketing and insurance, partially offset by utilities.

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. We operated 3,793 stores at March 31, 2024 compared to 2,388 stores at March 31, 2023.

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. These expenses are recognized as incurred. Our overall expense has increased primarily as a result of our increased size through acquisitions, business combinations and growth through our joint venture partners and managed portfolio.

Depreciation and Amortization—Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired 771 wholly-owned stores in 2023 and an additional six wholly-owned stores during the three months ended March 31, 2024. Additionally, the increase relates to the amortization of intangibles recorded as part of the Life Storage Merger.

Other Revenues and Expenses

The following table presents information on other revenues and expenses for the periods indicated:


	For the Three Months Ended March 31,
	2024		2023		$ Change		% Change
Interest expense	(132,887)		(80,099)		(52,788)		65.9	%
Non-cash interest expense related to amortization of discount on Life Storage unsecured senior notes	(10,705)		—		(10,705)		100.0	%
Interest income	23,573		19,438		4,135		21.3	%
Equity in earnings and dividend income from unconsolidated real estate entities	15,007		10,305		4,702		45.6	%
Income tax expense	(6,742)		(4,308)		(2,434)		56.5	%
Total other revenues & expenses, net	$	(111,754)	$	(54,664)	$	(57,090)	104.4	%

Interest Expense—The increase in interest expense during the three months ended March 31, 2024 was primarily the result of a higher debt balance and higher weighted average interest rate compared to the same period in the prior year. As of March 31, 2024, we had approximately $11.5 billion in total face value of debt, compared to approximately $7.4 billion at March 31, 2023. The increase in the face value of debt is due to the Life Storage Merger. The weighted average interest rate of the total of fixed- and variable-rate debt was 4.5% at March 31, 2024, compared to 4.3% at March 31, 2023.

Non-cash Interest Expense Related to Amortization of Discount on Life Storage Unsecured Senior Notes—Represents the amortization of the discount assigned in order to present the fair value of the Life Storage unsecured senior notes assumed as part of the Life Storage Merger.

Interest Income—Interest income represents interest earned on variable interest rate bridge loans, debt securities and on notes receivable from Common and Preferred Operating Partnership unit holders. The increase in interest income during the three months ended March 31, 2024 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 $752,336 as of March 31, 2024, compared to $507,885 as of March 31, 2023.

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

cash or profits. We added a total of 154 stores to new and existing joint ventures (145 stores from the Life Storage Merger) during 2023. These additional joint ventures have contributed to the increase. Dividend income represents dividends from our investment in preferred stock of SmartStop Self Storage REIT, Inc. and Strategic Storage Trust VI, Inc.

Income Tax Expense—The increase in income tax expense for the three months ended March 31, 2024 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:


	2024		2023
Net income attributable to common stockholders	$	213,112	$	196,304

Adjustments:
Real estate depreciation	154,372		71,248
Amortization of intangibles	29,284		4,170

Unconsolidated joint venture real estate depreciation and amortization	7,840		4,939

Distributions paid on Series A Preferred Operating Partnership units	—		(159)
Income allocated to Operating Partnership noncontrolling interests	10,962		12,574
Funds from operations attributable to common stockholders and unit holders	$	415,570	$	289,076

SAME-STORE RESULTS

Our same-store pool for the periods presented consists of 1,078 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 portfolio.


	For the Three Months Ended March 31,				Percent
	2024		2023		Change
Same-store rental revenues
Net rental income	$	398,792	$	395,259	0.9	%
Other operating income	15,865		15,320		3.6	%
Total same-store rental revenues	414,657		410,579		1.0	%

Same-store operating expenses
Payroll and benefits	24,506		22,526		8.8	%
Marketing	8,853		7,173		23.4	%
Office expense	13,415		13,057		2.7	%
Property operating expense	10,287		11,012		(6.6)	%
Repairs and maintenance	7,470		7,085		5.4	%
Property taxes	38,057		37,416		1.7	%
Insurance	5,262		3,921		34.2	%
Total same-store operating expenses	107,850		102,190		5.5	%

Same-store net operating income	$	306,807	$	308,389	(0.5)	%

Same-store square foot occupancy as of year end	93.2%		92.7%
Properties included in same-store	1,078		1,078

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:


	2024		2023
Net Income	$	224,074	$	208,878
Adjusted to exclude:

Equity in earnings and dividend income from unconsolidated real estate entities	(15,007)		(10,305)

Interest expense	132,887		80,099
Non-cash interest expense related to amortization of discount on Life Storage unsecured senior notes	10,705		—
Depreciation and amortization	196,966		78,490
Income tax expense	6,742		4,308


General and administrative	43,722		34,763
Management fees, other income and interest income	(53,721)		(40,822)
Net tenant insurance	(62,842)		(38,615)
Non same-store rental revenue	(273,387)		(23,383)
Non same-store operating expense	96,668		14,976
Total same-store net operating income	$	306,807	$	308,389

Same-store rental revenues	$	414,657	$	410,579
Same-store operating expenses	107,850		102,190
Same-store net operating income	$	306,807	$	308,389

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 twelve months. These cash needs include operating expenses, monthly debt service payments, recurring capital expenditures, acquisitions, funding for the bridge loan program, building 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 2024, and we consider 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 March 31, 2024, we had $50,816 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 2024 and 2023, 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 March 31, 2024, we had $11,479,914 face value of debt, resulting in a debt to total enterprise value ratio of 27.0%. As of March 31, 2024, the ratio of total fixed-rate debt and other instruments to total debt was 77.2% ($8,858,252 total fixed-rate debt including $1,384,038 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 March 31, 2024 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 March 31, 2024.

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 was upgraded from BBB/Stable in July 2023 in connection with the Life Storage Merger, 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 March 31, 2024, we had a total of 1,677 unencumbered stores as defined by our public bonds. Our unencumbered asset value was calculated as $32,023,434 and our total asset value was calculated as $37,860,700 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 March 31, 2024, we had approximately $11.5 billion in total face value of debt, of which approximately $2.6 billion was subject to variable interest rates (excluding debt with interest rate swaps). If SOFR was 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 $26.2 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.

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.

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, 2023, which could materially affect our business, financial condition and results of operations. 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, 2023. The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q 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.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

During the three months ended March 31, 2024, none of our officers or directors , modified or 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.”

ITEM 6. EXHIBITS

Exhibit

Number

Exhibit Description

Incorporated by Reference

Filed Herewith

Form

Date

Number

2.1

Agreement and Plan of Merger, dated as of April 2, 2023, by and among Extra Space Storage Inc., Extra Space Storage LP, Eros Merger Sub, LLC, Eros OP Merger Sub, LLC, Life Storage, Inc. and Life Storage LP

8-K

April 3, 2023

2.1

2.2

Amendment to Agreement and Plan of Merger, dated as of May 18, 2023, by and among Extra Space Storage Inc., Extra Space Storage LP, Eros Merger Sub, LLC, Eros OP Merger Sub, LLC, Life Storage, Inc. and Life Storage LP

8-K

July 20, 2023

2.2

3.1

Amended and Restated Articles of Incorporation of Extra Space Storage Inc.

S-11

August 10, 2004

3.1

3.2

Articles of Amendment of Extra Space Storage Inc., dated September 28, 2007.

8-K

October 3, 2007

3.1

3.3

Articles of Amendment of Extra Space Storage Inc., dated August 29, 2013.

8-K

August 29, 2013

3.1

3.4

Articles of Amendment of Extra Space Storage Inc., dated May 21, 2014.

8-K

May 28, 2014

3.1

3.5

Second Amended and Restated Bylaws of Extra Space Storage Inc.

8-K

January 17, 2018

3.1

3.6

Fourth Amended and Restated Agreement of Limited Partnership of Extra Space Storage LP.

8-K

December 6, 2013

10.1

4.1

Junior Subordinated Note

10-K

February 26, 2010

4.3

4.2

Description of Securities

10-K

February 25, 2020

4.6

4.3

Indenture, dated as of May 11, 2021, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Wells Fargo Bank, National Association, as trustee.

8-K

May 11, 2021

4.1

4.4

First Supplemental Indenture, dated as of May 11, 2021, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Wells Fargo Bank, National Association, as trustee, including the form of the Notes and the Guarantee.

8-K

May 11, 2021

4.2

4.5

Second Supplemental Indenture, dated as of September 22, 2021, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Wells Fargo Bank, National Association, as trustee, including the form of the Notes and the Guarantee.

8-K

September 22, 2021

4.2

4.6

Third Supplemental Indenture, dated as of March 31, 2022, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

March 31, 2022

4.2

4.7

Fourth Supplemental Indenture, dated as of March 28, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

March 28, 2023

4.2

4.8

Fifth Supplemental Indenture, dated as of June 16, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

June 16, 2023

4.2

4.9

Sixth Supplemental Indenture, dated as of July 25, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

July 25, 2023

4.4

4.10

Seventh Supplemental Indenture, dated as of July 25, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

July 25, 2023

4.5

4.11

Eighth Supplemental Indenture, dated as of July 25, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

July 25, 2023

4.6

4.12

Ninth Supplemental Indenture, dated as of July 25, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

July 25, 2023

4.7

4.13

Tenth Supplemental Indenture, dated as of July 25, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

July 25, 2023

4.8

4.14

Eleventh Supplemental Indenture, dated as of December 1, 2023, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

December 1, 2023

4.2

4.15

Twelfth Supplemental Indenture, dated as of January 19, 2024, among Extra Space Storage LP, as issuer, Extra Space Storage Inc., ESS Holdings Business Trust I and ESS Holdings Business Trust II, as guarantors, and Computershare Trust Company, N.A., as trustee, including the form of the Notes and the Guarantee.

8-K

January 19, 2024

4.2

4.16

Base Indenture, dated as of June 20, 2016, among Life Storage, Inc., Life Storage LP and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Current Report on Form 10-K filed by Life Storage Inc. on February 24, 2023).

8-K

July 25, 2023

4.1

4.17

Sixth Supplemental Indenture, dated as of July 25, 2023, among Life Storage LP, as issuer, Life Storage LLC, as parent guarantor, and Computershare Trust Company, N.A., as trustee.

8-K

July 25, 2023

4.2

22.1

Issuer and Guarantors of Guaranteed Securities

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials from Extra Space Storage Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, 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.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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: May 3, 2024						/s/ Joseph D. Margolis
						Joseph D. Margolis
						Chief Executive Officer (Principal Executive Officer)

Date: May 3, 2024						/s/ P. Scott Stubbs
						P. Scott Stubbs
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)

Extra Space Storage Inc. - Quarter Report: 2024 March (Form 10-Q)

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