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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, 2019
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: (801365-4600

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each class
Trading symbol
Name of each exchange on which registered
 
 
 
Common Stock, $0.01 par value
EXR
New 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  x    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  x    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
 
x
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 


1



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  x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 31, 2019, was 128,516,944.

2

Table of Contents

EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS
 
 
 
 
 


3



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 close pending acquisitions and developments on expected terms, or at all;
the effect of competition from new and existing stores or other storage alternatives, 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;
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;
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 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.

4



PART I.     FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
 
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets:
 
 
 
Real estate assets, net
$
7,667,033

 
$
7,491,831

Real estate assets - operating lease right-of-use assets
221,479

 

Investments in unconsolidated real estate ventures
174,480

 
125,326

Cash and cash equivalents
47,667

 
57,496

Restricted cash
7,977

 
15,194

Other assets, net
272,083

 
158,131

Total assets
$
8,390,719

 
$
7,847,978

Liabilities, Noncontrolling Interests and Equity:
 
 
 
Notes payable, net
$
4,090,278

 
$
4,137,213

Exchangeable senior notes, net
565,920

 
562,374

Notes payable to trusts

 
30,928

Revolving lines of credit
382,000

 
81,000

Operating lease liabilities
230,816

 

Cash distributions in unconsolidated real estate ventures
45,081

 
45,197

Accounts payable and accrued expenses
115,056

 
101,461

Other liabilities
132,757

 
104,383

Total liabilities
5,561,908

 
5,062,556

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, 128,513,095 and 127,103,750 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
1,285

 
1,271

Additional paid-in capital
2,756,799

 
2,640,705

Accumulated other comprehensive income (loss)
(27,476
)
 
34,650

Accumulated deficit
(288,399
)
 
(262,902
)
Total Extra Space Storage Inc. stockholders' equity
2,442,209

 
2,413,724

Noncontrolling interest represented by Preferred Operating Partnership units, net
176,108

 
153,096

Noncontrolling interests in Operating Partnership, net and other noncontrolling interests
210,494

 
218,602

Total noncontrolling interests and equity
2,828,811

 
2,785,422

Total liabilities, noncontrolling interests and equity
$
8,390,719

 
$
7,847,978


See accompanying notes to unaudited condensed consolidated financial statements.

5



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,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Property rental
$
279,584

 
$
258,128

 
$
550,587

 
$
506,014

Tenant reinsurance
31,701

 
28,521

 
61,498

 
55,555

Management fees and other income
12,317

 
10,164

 
23,063

 
20,729

Total revenues
323,602

 
296,813

 
635,148

 
582,298

Expenses:
 
 
 
 
 
 
 
Property operations
80,870

 
73,083

 
159,635

 
145,836

Tenant reinsurance
6,982

 
5,471

 
13,949

 
11,078

General and administrative
23,351

 
21,651

 
46,029

 
43,115

Depreciation and amortization
54,406

 
51,892

 
109,065

 
103,641

Total expenses
165,609

 
152,097

 
328,678

 
303,670

Gain on real estate transactions
1,205

 

 
1,205

 

Income from operations
159,198

 
144,716

 
307,675

 
278,628

Interest expense
(47,448
)
 
(43,347
)
 
(94,808
)
 
(84,313
)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes
(1,185
)
 
(1,176
)
 
(2,347
)
 
(2,385
)
Interest income
1,718

 
1,188

 
3,106

 
2,626

Income before equity in earnings of unconsolidated real estate ventures and income tax expense
112,283

 
101,381

 
213,626

 
194,556

Equity in earnings of unconsolidated real estate ventures
3,121

 
3,429

 
5,751

 
7,026

Income tax expense
(2,715
)
 
(2,097
)
 
(4,528
)
 
(3,439
)
Net income
112,689

 
102,713

 
214,849

 
198,143

Net income allocated to Preferred Operating Partnership noncontrolling interests
(3,128
)
 
(3,492
)
 
(6,291
)
 
(6,882
)
Net income allocated to Operating Partnership and other noncontrolling interests
(4,733
)
 
(4,068
)
 
(8,960
)
 
(7,852
)
Net income attributable to common stockholders
$
104,828

 
$
95,153

 
$
199,598

 
$
183,409

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.82

 
$
0.75

 
$
1.56

 
$
1.45

Diluted
$
0.81

 
$
0.75

 
$
1.55

 
$
1.45

Weighted average number of shares
 
 
 
 
 
 
 
Basic
127,585,436

 
125,874,130

 
127,349,299

 
125,823,581

Diluted
135,654,761

 
132,772,772

 
135,166,456

 
132,992,734

Cash dividends paid per common share
$
0.90

 
$
0.86

 
$
1.76

 
$
1.64


See accompanying notes to unaudited condensed consolidated financial statements.

6



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,
 
2019
 
2018
 
2019
 
2018
Net income
$
112,689

 
$
102,713

 
$
214,849

 
$
198,143

Other comprehensive income (loss):
 
 
 
 
 
 
 
   Change in fair value of interest rate swaps
(41,302
)
 
8,033

 
(65,295
)
 
31,096

Total comprehensive income
71,387

 
110,746

 
149,554

 
229,239

   Less: comprehensive income attributable to noncontrolling interests
5,842

 
7,934

 
12,082

 
16,190

Comprehensive income attributable to common stockholders
$
65,545

 
$
102,812

 
$
137,472

 
$
213,049



See accompanying notes to unaudited condensed consolidated financial statements.

7

Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
(amounts in thousands, except share data)
(unaudited)



 
Noncontrolling Interests
 
Extra Space Storage Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Operating Partnership
 
Operating Partnership
 
Other
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Noncontrolling Interests and Equity
Balances at December 31, 2017
 
$
159,636

 
$
213,301

 
$
119

 
126,007,091

 
$
1,260

 
$
2,569,485

 
$
33,290

 
$
(253,284
)
 
$
2,723,807

Issuance of common stock upon the exercise of options
 

 

 

 
31,525

 

 
799

 

 

 
799

Restricted stock grants issued
 

 

 

 
31,136

 

 

 

 

 

Restricted stock grants cancelled
 

 

 

 
(770
)
 

 

 

 

 

Compensation expense related to stock-based awards
 

 

 

 

 

 
2,726

 

 

 
2,726

Repayment of receivable for preferred operating units pledged as collateral on loan
 
495

 

 

 

 

 

 

 

 
495

Redemption of Operating Partnership units for cash
 

 
(1,126
)
 

 

 

 
(1,432
)
 

 

 
(2,558
)
Noncontrolling interest in consolidated joint venture
 

 

 
120

 

 

 

 

 

 
120

Repurchase of equity portion of 2013 exchangeable senior notes
 

 

 

 

 

 
(21,000
)
 

 

 
(21,000
)
Net income
 
3,390

 
3,784

 

 

 

 

 

 
88,256

 
95,430

Other comprehensive income
 
144

 
938

 

 

 

 

 
21,981

 

 
23,063

Distributions to Operating Partnership units held by noncontrolling interests
 
(3,488
)
 
(4,421
)
 

 

 

 

 

 

 
(7,909
)
Dividends paid on common stock at $0.78 per share
 

 

 

 

 

 

 

 
(98,327
)
 
(98,327
)
Balances at March 31, 2018
 
$
160,177

 
$
212,476

 
$
239

 
126,068,982

 
$
1,260

 
$
2,550,578

 
$
55,271

 
$
(263,355
)
 
$
2,716,646

Issuance of common stock upon the exercise of options
 

 

 

 
23,050

 
1

 
370

 

 

 
371

Restricted stock grants issued
 

 

 

 
50,334

 

 

 

 

 

Restricted stock grants cancelled
 

 

 

 
(6,311
)
 

 

 

 

 

Compensation expense related to stock-based awards
 

 

 

 

 

 
3,116

 

 

 
3,116

Issuance of Operating Partnership units in conjunction with acquisitions
 

 
1,877

 

 

 

 

 

 

 
1,877

Redemption of Operating Partnership units for stock
 

 
(383
)
 

 
10,000

 

 
383

 

 

 

Net income
 
3,492

 
4,068

 

 

 

 

 

 
95,153

 
102,713

Other comprehensive income
 
50

 
324

 

 

 

 

 
7,659

 

 
8,033

Distributions to Operating Partnership units held by noncontrolling interests
 
(3,615
)
 
(4,853
)
 

 

 

 

 

 

 
(8,468
)
Dividends paid on common stock at $0.86 per share
 

 

 

 

 

 

 

 
(108,486
)
 
(108,486
)
Balances at June 30, 2018
 
$
160,104

 
$
213,509

 
$
239

 
126,146,055

 
$
1,261

 
$
2,554,447

 
$
62,930

 
$
(276,688
)
 
$
2,715,802




8

Extra Space Storage Inc.
Condensed Consolidated Statement of Noncontrolling Interests and Equity
(amounts in thousands, except share data)
(unaudited)



 
Noncontrolling Interests
 
Extra Space Storage Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Operating Partnership
 
Operating Partnership
 
Other
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Noncontrolling Interests and Equity
Balances at December 31, 2018
$
153,096

 
$
218,362

 
$
240

 
127,103,750

 
$
1,271

 
$
2,640,705

 
$
34,650

 
$
(262,902
)
 
$
2,785,422

Issuance of common stock upon the exercise of options

 

 

 
169,021

 
3

 
1,754

 

 

 
1,757

Restricted stock grants issued

 

 

 
35,022

 

 

 

 

 

Restricted stock grants cancelled

 

 

 
(1,244
)
 

 

 

 

 

Compensation expense related to stock-based awards

 

 

 

 

 
2,954

 

 

 
2,954

Redemption of Operating Partnership units for stock

 
(3,310
)
 

 
85,501

 

 
3,310

 

 

 

Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions
23,447

 

 

 

 

 

 

 

 
23,447

Net income (loss)
3,164

 
4,235

 
(9
)
 

 

 

 

 
94,770

 
102,160

Other comprehensive loss
(147
)
 
(1,003
)
 

 

 

 

 
(22,843
)
 

 
(23,993
)
Distributions to Operating Partnership units held by noncontrolling interests
(3,296
)
 
(5,116
)
 

 

 

 

 

 

 
(8,412
)
Dividends paid on common stock at $0.86 per share

 

 

 

 

 

 

 
(109,523
)
 
(109,523
)
Balances at March 31, 2019
$
176,264

 
$
213,168

 
$
231

 
127,392,050

 
$
1,274

 
$
2,648,723

 
$
11,807

 
$
(277,655
)
 
$
2,773,812

Issuance of common stock upon the exercise of options

 

 

 
17,042

 

 
468

 

 

 
468

Restricted stock grants issued

 

 

 
53,789

 
2

 

 

 

 
2

Restricted stock grants cancelled

 

 

 
(4,786
)
 

 

 

 

 

Issuance of common stock, net of offering costs

 

 

 
930,000

 
9

 
98,787

 

 

 
98,796

Compensation expense related to stock-based awards

 

 

 

 

 
3,998

 

 

 
3,998

Redemption of Operating Partnership units for stock

 
(4,823
)
 

 
125,000

 

 
4,823

 

 

 

Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions
4,575

 

 

 

 

 

 

 

 
4,575

Noncontrolling interest in consolidated joint venture

 

 
50

 

 

 

 

 

 
50

Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units
(4,374
)
 
4,374

 

 

 

 

 

 

 

Net income (loss)
3,129

 
4,754

 
(22
)
 

 

 

 

 
104,828

 
112,689

Other comprehensive loss
(254
)
 
(1,765
)
 

 

 

 

 
(39,283
)
 
 
 
(41,302
)
Distributions to Operating Partnership units held by noncontrolling interests
(3,232
)
 
(5,473
)
 

 

 

 

 

 

 
(8,705
)
Dividends paid on common stock at $0.90 per share

 

 

 

 

 

 

 
(115,572
)
 
(115,572
)
Balances at June 30, 2019
$
176,108

 
$
210,235

 
$
259

 
128,513,095

 
$
1,285

 
$
2,756,799

 
$
(27,476
)
 
$
(288,399
)
 
$
2,828,811


See accompanying notes to unaudited condensed consolidated financial statements.

9



Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited) 

 
For the Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
214,849

 
$
198,143

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
109,065

 
103,641

Amortization of deferred financing costs
6,006

 
6,064

Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes
2,347

 
2,385

Compensation expense related to stock-based awards
6,952

 
5,842

Gain on real estate transactions
(1,205
)
 

Distributions from unconsolidated real estate ventures in excess of earnings
3,334

 
3,615

Changes in operating assets and liabilities:
 
 
 
Other assets, net
1,890

 
7,269

Accounts payable and accrued expenses
21,632

 
7,888

Other liabilities
(1,463
)
 
4,895

Net cash provided by operating activities
363,407

 
339,742

Cash flows from investing activities:
 
 
 
Acquisition of real estate assets
(248,808
)
 
(238,153
)
Development and redevelopment of real estate assets
(20,891
)
 
(27,893
)
Proceeds from sale of real estate assets, investments in real estate ventures and other assets
11,254

 
753

Investment in unconsolidated real estate ventures
(31,344
)
 
(34,752
)
Return of investment in unconsolidated real estate ventures
3,982

 
47,944

Issuance of notes receivable
(152,599
)
 

Principal payments received from notes receivable

 
25,226

Purchase of equipment and fixtures
(2,023
)
 
(2,220
)
Net cash used in investing activities
(440,429
)
 
(229,095
)
Cash flows from financing activities:
 
 
 
Proceeds from the sale of common stock, net of offering costs
98,796

 

Proceeds from notes payable and revolving lines of credit
757,000

 
645,386

Principal payments on notes payable and revolving lines of credit
(524,370
)
 
(487,016
)
Principal payments on notes payable to trusts
(30,928
)
 

Deferred financing costs
(587
)
 
(3,028
)
Repurchase of exchangeable senior notes

 
(58,469
)
Net proceeds from exercise of stock options
2,227

 
1,170

Redemption of Operating Partnership units held by noncontrolling interests

 
(2,558
)
Contributions from noncontrolling interests
50

 
120

Dividends paid on common stock
(225,095
)
 
(206,813
)
Distributions to noncontrolling interests
(17,117
)
 
(16,377
)
Net cash provided by (used in) financing activities
59,976

 
(127,585
)
Net decrease in cash, cash equivalents, and restricted cash
(17,046
)
 
(16,938
)
Cash, cash equivalents, and restricted cash, beginning of the period
72,690

 
86,044

Cash, cash equivalents, and restricted cash, end of the period
$
55,644

 
$
69,106


10



Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited) 

 
For the Six Months Ended June 30,
 
2019
 
2018
Supplemental schedule of cash flow information
 
 
 
Interest paid
$
88,455

 
$
78,602

Income taxes paid
4,095

 
1,836

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
$
(8,133
)
 
$
(383
)
Common stock and paid-in capital
8,133

 
383

Establishment of operating lease right of use assets and lease liabilities
 
 
 
Real estate assets - operating lease right-of-use assets
$
225,017

 
$

Operating lease liabilities
(234,374
)
 

Accounts payable and accrued expenses
9,357

 

Acquisitions of real estate assets


 


Real estate assets, net
$
19,937

 
$
88,842

Value of Operating Partnership units issued

 
(1,877
)
Notes payable assumed
(17,157
)
 
(87,500
)
Investment in unconsolidated real estate ventures
(2,780
)
 
535

Accrued construction costs and capital expenditures


 

Acquisition of real estate assets
$
1,368

 
$
1,184

Development and redevelopment of real estate assets

 
1,558

Accounts payable and accrued expenses
(1,368
)
 
(2,742
)
Contribution of Preferred Operating Partnership Units to unconsolidated real estate venture


 


Investments in unconsolidated real estate ventures
$
(28,022
)
 
$

Value of Preferred Operating Partnership units issued
28,022

 

Conversion of Preferred Operating Partnership Units to common Operating Partnership Units
 
 
 
Preferred Operating Partnership Units
$
4,374

 
$

Common Operating Partnership Units
(4,374
)
 


See accompanying notes to unaudited condensed consolidated financial statements.


11


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 professionally managed self-storage properties ("stores") located throughout the United States. The Company was formed to continue the business of Extra Space Storage LLC and its subsidiaries, which had engaged in the self-storage business since 1977. The Company’s interest in its stores is held through its operating partnership, Extra Space Storage LP (the “Operating Partnership”), which was formed on May 5, 2004. The Company’s primary assets are general partner and limited partner interests in the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

The Company invests in stores by acquiring wholly-owned stores or by acquiring an equity interest in real estate entities. At June 30, 2019, the Company had direct and indirect equity interests in 1,157 stores. In addition, the Company managed 595 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,752. These stores are located in 40 states, Washington, D.C. and Puerto Rico. 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, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. The condensed consolidated balance sheet as of December 31, 2018 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, 2018, as filed with the Securities and Exchange Commission.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases (Topic 842),” which modifies the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. ASU 2016-02 requires entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are measured at their present value and accounted for using the effective interest method. The accounting for the leased asset differs slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and is recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. ASU 2016-02 requires that assets and liabilities be presented or disclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to these lease agreements. ASU 2016-02 became effective for annual and interim periods beginning after December 15, 2018. The Company adopted the standard using the modified retrospective approach as of January 1, 2019. The Company elected the package of practical expedients upon adoption, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and nonlease components. The Company did not record a significant cumulative catch-up adjustment to retained earnings upon adoption of ASU 2016-02. The primary impact was related to the Company's 21 operating ground leases and two corporate facility leases under which it serves as lessee. The Company recognized lease liabilities of $104,863 and right-of-use assets related to operating leases totaling $95,506 as of the adoption date. Refer to footnote 13 for further discussion of the Company's leases.


12


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

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." ASU 2018-15 amends the accounting for implementation costs incurred in a hosting arrangement that is a service contract, and aligns them with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 also requires that entities amortize the capitalized implementation costs over the term of the hosting arrangement. ASU 2018-15 is effective for annual periods beginning after December 15, 2020, with early adoption permitted, including early adoption in any interim period. The Company adopted this standard on a prospective basis as of October 1, 2018. The adoption of this standard did not have a material impact on the Company's financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities measure credit losses for most financial assets. This standard requires an entity to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The Company is evaluating the impact this new standard will have on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which clarified that receivables arising from operating leases are within the scope of the leasing standard (ASU 2016-02). This new standard will be effective for the Company on January 1, 2020. The Company is evaluating the impact this new standard will have on its consolidated financial statements.
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, 2019, 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.


13


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

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall. 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Other assets - Cash flow hedge swap agreements
 
$

 
$
7,300

 
$

Other liabilities - Cash flow hedge swap agreements
 
$

 
$
30,894

 
$


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, 2019 or December 31, 2018.

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.

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 are presented as part of normal operations for all periods presented. As of June 30, 2019, the Company had one parcel of land classified as held for sale which is included in real estate assets, net. The estimated fair value less selling costs for this asset is greater than the carrying value of the asset, and therefore no loss has been recorded.

The Company assesses annually whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired annually and when events or circumstances indicate that there may be impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment.

In connection with the Company’s acquisition of stores, the purchase price is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values, which are estimated using significant unobservable inputs. The value of the tangible assets, consisting of land and buildings, is determined as if vacant. Intangible assets, which represent the value of existing tenant relationships, are recorded at their fair values based on the avoided cost to replace the current leases. The Company measures the value of tenant relationships based on the rent lost due to the amount of time required to replace existing customers, which is based on the Company’s historical experience with turnover in its stores. Any debt assumed as part of an acquisition is recorded at fair value based on current interest rates compared to contractual rates. Acquisition-related transaction costs are capitalized as part of the purchase price.

14


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


Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable-rate notes payable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at June 30, 2019 and December 31, 2018 approximate fair value. Restricted cash is comprised of letters of credit and escrowed funds deposited with financial institutions located throughout the United States relating to earnest money deposits on potential acquisitions, real estate taxes, insurance and capital expenditures.

The fair values of the Company’s notes receivable from Preferred Operating Partnership unit holders and other fixed rate notes receivable, which are recorded in other assets, net 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 and notes payable to trusts were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximated current market rates for loans, or groups of loans, with similar maturities and credit quality. The fair value of the Company’s exchangeable senior notes was estimated using an average market price for similar securities obtained from a third party.

The fair values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:
 
June 30, 2019
 
December 31, 2018
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes receivable from Preferred and Common Operating Partnership unit holders
$
118,997

 
$
119,735

 
$
115,467

 
$
119,735

Fixed rate notes payable and notes payable to trusts
$
3,323,109

 
$
3,252,865

 
$
2,985,731

 
$
3,022,414

Exchangeable senior notes
$
697,188

 
$
575,000

 
$
620,149

 
$
575,000


4.
EARNINGS PER COMMON SHARE

Basic earnings per common share is computed using the two-class method by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. All outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common stockholders; accordingly, they are considered participating securities that are included in the two-class method. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the weighted average number of basic shares and the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued, and is calculated using either the two-class, treasury stock or as if-converted method, whichever is most dilutive. Potential common shares are securities (such as options, convertible debt, Series A Participating Redeemable Preferred Units (“Series A Units”), Series B Redeemable Preferred Units (“Series B Units”), Series C Convertible Redeemable Preferred Units (“Series C Units”), Series D Redeemable Preferred Units (“Series D Units” and, together with
the Series A Units, Series B Units and Series C Units, the “Preferred OP Units”) and common Operating Partnership units (“OP Units”)) that do not have a current right to participate in earnings of the Company but could do so in the future by virtue of their option, redemption or conversion right.

In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per common share, only potential common shares that are dilutive (i.e. those that reduce earnings per common share) are included. For the three and six months ended June 30, 2019, and for the three months ended June 30, 2018, there were no anti-dilutive options. For the six months ended June 30, 2018, options to purchase an aggregate of approximately 37,113 shares of common stock were excluded from the computation of earnings per share as their effect would have been anti-dilutive.


15


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

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, 2019 and 2018 was $105.06 and $93.10, respectively. The average share price for the six months ended June 30, 2019 and 2018 was $100.63 and $88.71, respectively.

The following table presents the number of Preferred Operating Partnership units, and the potential common shares, that were excluded from the computation of earnings per share as their effect would have been anti-dilutive.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Equivalent Shares (if converted)
 
Equivalent Shares (if converted)
 
Equivalent Shares (if converted)
 
Equivalent Shares (if converted)
Series B Units
398,840

 
450,077

 
416,398