SEC Filing (NYSE:EXR) | Extra Space Storage Inc.

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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 September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-32269

EXTRA SPACE STORAGE INC.

(Exact name of registrant as specified in its charter)



Maryland		20-1076777
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2795 East Cottonwood Parkway, Suite 300

Salt Lake City, Utah 84121

(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934



Title of each 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:

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 October 30, 2019, was 129,510,514.

Table of Contents

EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS



STATEMENT ON FORWARD-LOOKING INFORMATION	4

PART I. FINANCIAL INFORMATION	5
ITEM 1. FINANCIAL STATEMENTS	5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)	14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 4. CONTROLS AND PROCEDURES	42

PART II. OTHER INFORMATION	43
ITEM 1. LEGAL PROCEEDINGS	43
ITEM 1A. RISK FACTORS	43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4. MINE SAFETY DISCLOSURES	43
ITEM 5. OTHER INFORMATION	43
ITEM 6. EXHIBITS	44
SIGNATURES	45

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.

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share data)



	September 30, 2019			December 31, 2018
	(Unaudited)
Assets:
Real estate assets, net	$	7,665,567		$	7,491,831
Real estate assets - operating lease right-of-use assets	269,318			—
Investments in unconsolidated real estate ventures	175,442			125,326
Cash and cash equivalents	62,277			57,496
Restricted cash	4,438			15,194
Other assets, net	141,388			158,131
Total assets	$	8,318,430		$	7,847,978
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,085,295		$	4,137,213
Exchangeable senior notes, net	567,705			562,374
Notes payable to trusts	—			30,928
Revolving lines of credit	159,000			81,000
Operating lease liabilities	279,049			—
Cash distributions in unconsolidated real estate ventures	45,143			45,197
Accounts payable and accrued expenses	122,658			101,461
Other liabilities	151,591			104,383
Total liabilities	5,410,441			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, 129,410,093 and 127,103,750 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	1,294			1,271
Additional paid-in capital	2,861,611			2,640,705
Accumulated other comprehensive income (loss)	(43,439		)	34,650
Accumulated deficit	(296,752		)	(262,902		)
Total Extra Space Storage Inc. stockholders' equity	2,522,714			2,413,724
Noncontrolling interest represented by Preferred Operating Partnership units, net	175,918			153,096
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	209,357			218,602
Total noncontrolling interests and equity	2,907,989			2,785,422
Total liabilities, noncontrolling interests and equity	$	8,318,430		$	7,847,978

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues:
Property rental	$	290,917		$	266,728		$	841,504		$	772,742
Tenant reinsurance	33,588			30,105			95,086			85,660
Management fees and other income	13,000			10,120			36,063			30,849
Total revenues	337,505			306,953			972,653			889,251
Expenses:
Property operations	88,653			73,652			248,288			219,488
Tenant reinsurance	7,644			7,720			21,593			18,798
General and administrative	22,519			19,707			68,548			62,822
Depreciation and amortization	56,051			52,283			165,116			155,924
Total expenses	174,867			153,362			503,545			457,032
Gain on real estate transactions	—			30,807			1,205			30,807
Income from operations	162,638			184,398			470,313			463,026
Interest expense	(46,908		)	(45,926		)	(141,716		)	(130,239		)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(1,186		)	(1,140		)	(3,533		)	(3,525		)
Interest income	2,799			1,371			5,905			3,997
Income before equity in earnings of unconsolidated real estate ventures and income tax expense	117,343			138,703			330,969			333,259
Equity in earnings of unconsolidated real estate ventures	2,704			3,622			8,455			10,648
Income tax expense	(4,052		)	(2,638		)	(8,580		)	(6,077		)
Net income	115,995			139,687			330,844			337,830
Net income allocated to Preferred Operating Partnership noncontrolling interests	(3,088		)	(3,723		)	(9,379		)	(10,605		)
Net income allocated to Operating Partnership and other noncontrolling interests	(4,820		)	(5,546		)	(13,780		)	(13,398		)
Net income attributable to common stockholders	$	108,087		$	130,418		$	307,685		$	313,827
Earnings per common share
Basic	$	0.84		$	1.03		$	2.40		$	2.49
Diluted	$	0.83		$	1.02		$	2.37		$	2.48
Weighted average number of shares
Basic	128,776,549			126,466,837			127,830,272			125,959,926
Diluted	137,318,475			134,240,290			136,164,299			133,015,690
Cash dividends paid per common share	$	0.90		$	0.86		$	2.66		$	2.50

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands)

(unaudited)



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2019			2018		2019			2018
Net income	$	115,995		$	139,687	$	330,844		$	337,830
Other comprehensive income (loss):
Change in fair value of interest rate swaps	(16,762		)	5,716		(82,057		)	36,812
Total comprehensive income	99,233			145,403		248,787			374,642
Less: comprehensive income attributable to noncontrolling interests	7,109			9,553		19,191			25,743
Comprehensive income attributable to common stockholders	$	92,124		$	135,850	$	229,596		$	348,899

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statement of Noncontrolling Interests and Equity

(amounts in thousands, except share data)

(unaudited)



	Noncontrolling Interests									Extra Space Storage Inc. Stockholders' Equity

		Preferred Operating Partnership			Operating Partnership			Other		Shares		Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive 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		—			—			122		—		—		—			—		—			122
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		$	241	126,068,982		$	1,260	$	2,550,578		$	55,271	$	(263,355	)	$	2,716,648
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		$	241	126,146,055		$	1,261	$	2,554,447		$	62,930	$	(276,688	)	$	2,715,804

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
Restricted stock grants issued		—			—			—			2,794		—		—			—		—			—
Restricted stock grants cancelled		—			—			—			(2,298	)	—		—			—		—			—
Issuance of common stock, net of offering costs		—			—			—			343,251		3		33,777			—		—			33,780
Compensation expense related to stock-based awards		—			—			—			—		—		2,613			—		—			2,613
Redemption of Operating Partnership units for stock		—			(572		)	—			15,000		—		572			—		—			—
Repurchase of equity portion of 2013 exchangeable senior notes		—			—			—			—		—		(10,251		)	—		—			(10,251		)
Net income (loss)		3,723			5,547			(1		)	—		—		—			—		130,418			139,687
Other comprehensive income		39			245			—			—		—		—			5,432		—			5,716
Distributions to Operating Partnership units held by noncontrolling interests		(3,616		)	(4,844		)	—			—		—		—			—		—			(8,460		)
Dividends paid on common stock at $0.86 per share					—			—			—		—		—			—		(108,795		)	(108,795		)
Balances at September 30, 2018		$	160,250		$	213,885		$	240		126,504,802		$	1,264	$	2,581,158		$	68,362	$	(255,065	)	$	2,770,094

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

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
Issuance of common stock upon the exercise of options	—			—			—			14,850		—		605		—			—			605
Restricted stock grants issued	—			—			—			5,099		—		—		—			—			—
Restricted stock grants cancelled	—			—			—			(1,269	)	—		—		—			—			—
Issuance of common stock, net of offering costs	—			—			—			849,200		9		100,047		—			—			100,056
Compensation expense related to stock-based awards	—			—			—			—		—		3,035		—			—			3,035
Repayment of receivable for preferred operating units pledged as collateral on loan	—			1,211			—			—		—		—		—			—			1,211
Redemption of Operating Partnership units for stock	—			(1,125		)	—			29,118		—		1,125		—			—			—
Noncontrolling interest in consolidated joint venture	—			—			96			—		—		—		—			—			96
Net income (loss)	3,089			4,828			(9		)	—		—		—		—			108,087			115,995
Other comprehensive loss	(101		)	(698		)	—			—		—		—		(15,963		)	—			(16,762		)
Distributions to Operating Partnership units held by noncontrolling interests	(3,178		)	(5,440		)	—			—		—		—		—			—			(8,618		)
Dividends paid on common stock at $0.90 per share	—			—			—			—		—		—		—			(116,440		)	(116,440		)
Balances at September 30, 2019	$	175,918		$	209,011		$	346		129,410,093		$	1,294	$	2,861,611	$	(43,439	)	$	(296,752	)	$	2,907,989

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	330,844		$	337,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	165,116			155,924
Amortization of deferred financing costs	8,912			9,230
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	3,533			3,525
Compensation expense related to stock-based awards	9,987			8,455
Gain on real estate transactions	(1,205		)	(30,807		)
Distributions from unconsolidated real estate ventures in excess of earnings	4,752			5,235
Changes in operating assets and liabilities:
Other assets	(11,153		)	(639		)
Accounts payable and accrued expenses	29,310			27,677
Other liabilities	4,370			12,597
Net cash provided by operating activities	544,466			529,027
Cash flows from investing activities:
Acquisition of real estate assets	(287,114		)	(327,011		)
Development and redevelopment of real estate assets	(34,413		)	(45,376		)
Proceeds from sale of real estate assets, investments in real estate ventures and other assets	11,254			51,889
Investment in unconsolidated real estate ventures	(33,661		)	(52,806		)
Return of investment in unconsolidated real estate ventures	3,982			47,964
Issuance of notes receivable	(162,677		)	(13,889		)
Principal payments received from notes receivable	151,211			25,226
Purchase of equipment and fixtures	(4,959		)	(3,026		)
Net cash used in investing activities	(356,377		)	(317,029		)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	198,852			33,780
Proceeds from notes payable and revolving lines of credit	1,508,000			973,386
Principal payments on notes payable and revolving lines of credit	(1,503,686		)	(787,939		)
Principal payments on notes payable to trusts	(30,928		)	(21,650		)
Deferred financing costs	(2,008		)	(7,055		)
Repurchase of exchangeable senior notes	—			(80,270		)
Net proceeds from exercise of stock options	2,830			1,170
Redemption of Operating Partnership units held by noncontrolling interests	—			(2,558		)
Contributions from noncontrolling interests	146			122
Dividends paid on common stock	(341,535		)	(315,608		)
Distributions to noncontrolling interests	(25,735		)	(24,837		)
Net cash used in financing activities	(194,064		)	(231,459		)
Net decrease in cash, cash equivalents, and restricted cash	(5,975		)	(19,461		)
Cash, cash equivalents, and restricted cash, beginning of the period	72,690			86,044
Cash, cash equivalents, and restricted cash, end of the period	$	66,715		$	66,583

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Supplemental schedule of cash flow information
Interest paid	$	136,563		$	117,627
Income taxes paid	6,197			803
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	$	(9,258	)	$	(955	)
Common stock and paid-in capital	9,258			955
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	277,430		$	—
Operating lease liabilities	(286,787		)	—
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	$	1,292		$	275
Accounts payable and accrued expenses	(1,292		)	(275		)
Contribution of Preferred OP 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 OP Units to common OP Units
Preferred OP Units	$	4,374		$	—
Common OP Units	(4,374		)	—

See accompanying notes to unaudited condensed consolidated financial statements.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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


1.	ORGANIZATION

Extra Space Storage Inc. (the “Company”) is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”), formed as a Maryland corporation on April 30, 2004, to own, operate, manage, acquire, develop and redevelop 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 September 30, 2019, the Company had direct and indirect equity interests in 1,167 stores. In addition, the Company managed 630 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,797. 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 nine months ended September 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 served as lessee at the time of adoption. 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.

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. 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), and not within the scope of ASU 2016-13. This new standard will be effective for the Company on January 1, 2020. The Company is evaluating the impact this new standard will have and does not expect this new standard to have a material impact on the Company's 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 September 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.

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 September 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	$	—	$	3,141	$	—
Other liabilities - Cash flow hedge swap agreements	$	—	$	43,880	$	—

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

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 September 30, 2019 and December 31, 2018 approximate fair value. Restricted cash is comprised of 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 and Common Operating Partnership unit holders, 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:



	September 30, 2019				December 31, 2018
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	118,756	$	118,524	$	115,467	$	119,735
Fixed rate notes payable and notes payable to trusts	$	3,296,231	$	3,166,208	$	2,985,731	$	3,022,414
Exchangeable senior notes	$	724,500	$	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 nine months ended September 30, 2019, and for the three months ended September 30, 2018, there were no anti-dilutive options. For the nine months ended September 30, 2018, options to purchase an aggregate of approximately 36,404 shares of common stock were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

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 September 30, 2019 and 2018 was $115.63 and $92.83, respectively. The average share price for the nine months ended September 30, 2019 and 2018 was $105.74 and $90.09, respectively.

The following table presents the number of Preferred Operating Partnership units, and the potential common shares, that were excluded from the computation of earnings per share as their effect would have been anti-dilutive.



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018
	Equivalent Shares (if converted)	Equivalent Shares (if converted)	Equivalent Shares (if converted)	Equivalent Shares (if converted)
Series B Units	362,382	451,386	396,276	465,115
Series C Units (1)	—	319,283	—	328,994
Series D Units	1,038,538	—	1,074,417	1,021,901
	1,400,920	770,669	1,470,693	1,816,010

(1) The remainder of the Series C Units were converted to OP Units on April 25, 2019.

In July 2018, the Operating Partnership redeemed the remaining balance of its 2.375% Exchangeable Senior Notes due 2033 (the “2013 Notes”). Prior to their redemption, the 2013 Notes could potentially have had a dilutive impact on the Company’s earnings per share calculations. The 2013 Notes were exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the 2013 Notes. The Company had irrevocably agreed to pay only cash for the accreted principal amount of the 2013 Notes relative to its exchange obligations, but retained the right to satisfy the exchange obligation in excess of the accreted principal amount in cash and/or common stock.

The Operating Partnership had $575,000 of its 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) issued and outstanding as of September 30, 2019. The 2015 Notes could potentially have a dilutive impact on the Company’s earnings per share calculations. The 2015 Notes are exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the 2015 Notes. The exchange price of the 2015 Notes was $92.04 per share as of September 30, 2019, and could change over time as described in the indenture. The Company has irrevocably agreed to pay only cash for the accreted principal amount of the 2015 Notes relative to its exchange obligations, but retained the right to satisfy the exchange obligation in excess of the accreted principal amount in cash and/or common stock.

Although the Company has retained the right to satisfy the exchange obligation in excess of the accreted principal amount of the 2013 Notes and 2015 Notes in cash and/or common stock, Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” requires an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and requires that those shares be included in the Company’s calculation of weighted average common shares outstanding for the diluted earnings per share computation. For the three and nine months ended September 30, 2019 and 2018, zero shares related to the 2013 Notes were included in the computation for diluted earnings per share, as the Company had repaid all outstanding 2013 Notes in July 2018. For the three and nine months ended September 30, 2019 and 2018, 1,274,675 and zero shares, respectively, related to the 2015 Notes were included in the computation for diluted earnings per share.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series A Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the positive intent and ability to settle at least $101,700 of the instrument in cash (or net settle a portion of the Series A Units against the related outstanding note receivable), only the amount of the instrument in excess of $101,700 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by ASC 260-10-45-46. Accordingly, the number of shares included in the computation for diluted earnings per share related to the Series A Units is equal to the number of Series A Units outstanding, with no additional shares included related to the fixed $101,700 amount.

EXTRA SPACE STORAGE INC.

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

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

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income attributable to common stockholders	$	108,087		$	130,418		$	307,685		$	313,827
Earnings and dividends allocated to participating securities	(165		)	(219		)	(508		)	(550		)
Earnings for basic computations	107,922			130,199			307,177			313,277
Earnings and dividends allocated to participating securities	165			—			—			550
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	6,100			7,336			17,539			17,191
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	(572		)	(572		)	(1,716		)	(1,716		)
Net income for diluted computations	$	113,615		$	136,963		$	323,000		$	329,302

Weighted average common shares outstanding:
Average number of common shares outstanding - basic	128,776,549			126,466,837			127,830,272			125,959,926
OP Units	6,050,028			5,636,845			6,032,656			5,650,599
Series A Units	875,480			875,480			875,480			875,480
Series D Units	—			991,738			—			—
Unvested restricted stock awards included for treasury stock method	209,963			—			—			250,630
Shares related to exchangeable senior notes and dilutive stock options	1,406,455			269,390			1,425,891			279,055
Average number of common shares outstanding - diluted	137,318,475			134,240,290			136,164,299			133,015,690
Earnings per common share
Basic	$	0.84		$	1.03		$	2.40		$	2.49
Diluted	$	0.83		$	1.02		$	2.37		$	2.48

EXTRA SPACE STORAGE INC.

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

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


5.	STORE ACQUISITIONS AND DISPOSITIONS

Store Acquisitions

The following table shows the Company’s acquisitions of stores for the three and nine months ended September 30, 2019 and 2018. The table excludes purchases of raw land and improvements made to existing assets. All acquisitions are considered asset acquisitions under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."



			Consideration Paid															Total
Quarter	Number of Stores		Total		Cash Paid		Loan Assumed		Investments in Real Estate Ventures			Net Liabilities/ (Assets) Assumed			Value of OP Units Issued		Number of OP Units Issued	Real estate assets
Q3 2019	1		$	16,937	$	16,941	$	—	$	—		$	(4	)	$	—	—	$	16,937
Q2 2019	1		8,424		8,424		—		—			—			—		—	8,424
Q1 2019	14	⁽¹⁾	223,740		202,890		17,157		2,780			913			—		—	223,740
	16		$	249,101	$	228,255	$	17,157	$	2,780		$	909		$	—	—	$	249,101

Q3 2018	6		$	74,694	$	71,989	$	—	$	—		$	2,705		$	—	—	$	74,694
Q2 2018	17	⁽²⁾	237,284		148,650		87,500		(1,024		)	281			1,877		21,768	237,284
Q1 2018	5	⁽²⁾	70,787		70,171		—		489			127			—		—	70,787
	28		$	382,765	$	290,810	$	87,500	$	(535	)	$	3,113		$	1,877	21,768	$	382,765

⁽¹⁾ Store acquisitions during the three months ended March 31, 2019 include the purchase of 12 stores previously held in joint ventures where the Company held a noncontrolling interest. The Company purchased its partners' remaining equity interests in the joint ventures, and the properties owned by the joint ventures became wholly owned by the Company. No gain or loss was recognized as a result of these acquisitions.

⁽²⁾ Store acquisitions during the six months ended June 30, 2018 include the acquisition of 15 stores that had been owned by a joint venture in which the Company held a noncontrolling interest. No gain or loss was recognized as a result of these acquisitions.

Store Dispositions

On April 11, 2019, the Company closed on the sale of a store located in New York that had been classified as held for sale for $11,272 in cash. The Company recorded a gain on the sale of $1,205.

On August 16, 2018, the Company closed on the sale of a store located in California that had been classified as held for sale for $40,235 in cash. The Company recorded a gain on the sale of $30,671.


6.	INVESTMENTS IN UNCONSOLIDATED REAL ESTATE VENTURES

Investments in unconsolidated real estate ventures represent the Company's noncontrolling interests in properties. The Company accounts for these investments using the equity method of accounting. The Company initially records these investments at cost and subsequently adjusts for cash contributions, distributions and net equity in income or loss, which is allocated in accordance with the provisions of the applicable partnership or joint venture agreement.

In these joint ventures, the Company and the joint venture partner generally receive a preferred return on their invested capital. To the extent that cash or profits in excess of these preferred returns are generated through operations or capital transactions, the Company would receive a higher percentage of the excess cash or profits than its equity interest.

The Company separately reports investments with net equity less than zero in cash distributions in unconsolidated real estate ventures in the condensed consolidated balance sheets. The net equity of certain joint ventures is less than zero because distributions have exceeded the Company's investment in and share of income from these joint ventures. This is generally the

EXTRA SPACE STORAGE INC.

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

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

result of financing distributions, capital events or operating distributions that are usually greater than net income, as net income includes non‑cash charges for depreciation and amortization while distributions do not.

During May 2019, the Company entered into a new joint venture, ESS-NYFL JV LP with two joint venture partners. The Company contributed a total of $13,936 to this joint venture for the purchase of 11 operating stores and four annex sites and received a 16.0% interest in the joint venture.

During the nine months ended September 30, 2019, the Company contributed a total of $56,799 to its joint ventures for the purchase of 19 operating stores and six stores acquired at the issuance of certificate of occupancy.

Net investments in unconsolidated real estate ventures and cash distributions in unconsolidated real estate ventures consist of the following:



	Number of Stores	Equity Ownership %	Excess Profit % (1)	September 30,			December 31,
	Number of Stores	Equity Ownership %	Excess Profit % (1)	2019			2018
PRISA Self Storage LLC	85	4%	4%	$	9,182		$	9,334
Storage Portfolio II JV LLC	36	10%	30%	(4,754		)	(4,233		)
Storage Portfolio I LLC	24	34%	49%	(38,406		)	(38,129		)
VRS Self Storage, LLC	16	45%	54%	17,560			18,281
ESS-NYFL JV LP	15	16%	24%	13,931			—
Extra Space Northern Properties Six LLC	10	10%	35%	(1,969		)	(1,700		)
WICNN JV LLC	9	10%	25%	32,428			26,885
Alan Jathoo JV LLC	9	10%	10%	8,021			8,180
ESS Bristol Investments LLC	8	10%	28%	3,065			2,331
GFN JV, LLC	5	10%	25%	12,238			10,586
Extra Space West Two LLC (2)	—	5%	40%	—			3,818
Extra Space West One LLC (2)	—	5%	40%	—			(1,038		)
Other minority owned stores	25	10-50%	19-50%	79,003			45,814
Net Investments in and Cash distributions in unconsolidated real estate ventures	242			$	130,299		$	80,129

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

⁽²⁾ In January 2019, the Company purchased its joint venture partners' 95% interests in the Extra Space West One LLC and Extra Space West Two LLC joint ventures, which owned a total of 12 stores. The Company paid $172,505 of cash to acquire the equity interests, and subsequent to this acquisition, the Company owned 100% of the joint ventures and the related stores.

EXTRA SPACE STORAGE INC.

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

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


7.	VARIABLE INTERESTS

The Operating Partnership had three wholly-owned unconsolidated subsidiaries (“Trust,” “Trust II” and “Trust III,” together, the “Trusts”) that had issued trust preferred securities to third parties and common securities to the Operating Partnership. The proceeds from the sale of the preferred and common securities were loaned in the form of notes to the Operating Partnership. The Trusts were variable interest entities ("VIEs") because the holders of the equity investment at risk (the trust preferred securities) did not have the power to direct the activities of the entities that most significantly affect the entities’ economic performance because of their lack of voting or similar rights. Because the Operating Partnership’s investment in the Trusts’ common securities was financed directly by the Trusts as a result of its loan of the proceeds to the Operating Partnership, that investment was not considered an equity investment at risk. The Operating Partnership’s investment in the Trusts was not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk, and therefore the Operating Partnership cannot be the primary beneficiary of the Trusts. Since the Company was not the primary beneficiary of the Trusts, they were not consolidated. A debt obligation was recorded in the form of notes for the proceeds as discussed above, which were owed to the Trusts. The Company had also included its investment in the Trusts’ common securities in other assets on the condensed consolidated balance sheets.

During the year ended December 31, 2018, the Company repaid a total principal amount of $88,662, representing all of the notes payable to Trust III, all of the notes payable to Trust II, and all but $30,928 of the notes payable to Trust. The Trusts used the proceeds from these repayments to redeem their preferred and common securities. In January 2019, the Company repaid the remaining balance of $30,928 of notes payable to Trust.

During the time they were outstanding, the Company did not provide financing or other support during the periods presented to the Trusts that it was not previously contractually obligated to provide. The Company’s maximum exposure to loss as a result of its involvement with the Trusts was equal to the total amount of the notes discussed above less the amounts of the Company’s investments in the Trusts’ common securities. The net amount was equal to the notes payable that the Trusts owed to third parties for their investments in the Trusts’ preferred securities.

The Company had no consolidated VIEs during the three and nine months ended September 30, 2019.


8.	DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposure that arises from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. A portion of these changes is excluded from accumulated other comprehensive income as it is allocated to noncontrolling interests. During the three and nine months ended September 30, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. In the coming 12 months, the Company estimates that $3,296 will be reclassified and increase interest expense.

EXTRA SPACE STORAGE INC.

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

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

The Company held 25 derivative financial instruments which had a total combined notional amount of $2,402,883 as of September 30, 2019.

Fair Values of Derivative Instruments

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets:



	Asset / Liability Derivatives
	September 30, 2019		December 31, 2018
Derivatives designated as hedging instruments:	Fair Value
Other assets	$	3,141	$	42,324
Other liabilities	$	43,880	$	2,131

Effect of Derivative Instruments

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the periods presented. No tax effect has been presented as the derivative instruments are held by the Company:



	Gain (loss) recognized in OCI For the Three Months Ended September 30,					Location of amounts reclassified from OCI into income	Gain (loss) reclassified from OCI For the Three Months Ended September 30,
Type	2019			2018		Location of amounts reclassified from OCI into income	2019		2018
Swap Agreements	$	(14,517	)	$	8,325	Interest expense	$	2,992	$	2,561



	Gain (loss) recognized in OCI For the Nine Months Ended September 30,					Location of amounts reclassified from OCI into income	Gain reclassified from OCI For the Nine Months Ended September 30,
Type	2019			2018		Location of amounts reclassified from OCI into income	2019		2018
Swap Agreements	$	(70,387	)	$	41,610	Interest expense	$	11,792	$	4,684

Credit-risk-related Contingent Features

The Company has agreements with some of its derivative counterparties that contain provisions pursuant to which the Company could be declared in default of its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender.

The Company also has an agreement with some of its derivative counterparties that incorporates the loan covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

As of September 30, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $44,985. As of September 30, 2019, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of September 30, 2019, it could have been required to cash settle its obligations under the agreements at their termination value of $45,120, including accrued interest.

EXTRA SPACE STORAGE INC.

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

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


9.	EXCHANGEABLE SENIOR NOTES

In September 2015, the Operating Partnership issued $575,000 of its 3.125% Exchangeable Senior Notes due 2035. Costs incurred to issue the 2015 Notes were approximately $11,992, consisting primarily of a 2.0% underwriting fee. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term based on the first available redemption date, and are included in exchangeable senior notes, net, in the condensed consolidated balance sheets. The 2015 Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on April 1 and October 1 of each year beginning April 1, 2016, until the maturity date of October 1, 2035. The 2015 Notes bear interest at 3.125% per annum and contain an exchange settlement feature, which provides that the 2015 Notes may, under certain circumstances, be exchangeable for cash (for the principal amount of the 2015 Notes) and, with respect to any excess exchange value, for cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option. The exchange rate of the 2015 Notes as of September 30, 2019 was approximately 10.87 shares of the Company’s common stock per $1,000 principal amount of the 2015 Notes.

The Operating Partnership may redeem the 2015 Notes at any time to preserve the Company’s status as a REIT. In addition, on or after October 5, 2020, the Operating Partnership may redeem the 2015 Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to the holders of the 2015 Notes. The holders of the 2015 Notes have the right to require the Operating Partnership to repurchase the 2015 Notes for cash, in whole or in part, on October 1 of the years 2020, 2025 and 2030 (unless the Operating Partnership has called the 2015 Notes for redemption), and upon the occurrence of certain designated events, in each case for a repurchase price equal to 100% of the principal amount of the 2015 Notes plus accrued and unpaid interest. Certain events are considered “Events of Default,” as defined in the indenture governing the 2015 Notes, which may result in the accelerated maturity of

the 2015 Notes.

Additionally, the 2015 Notes can be exchanged during any calendar quarter, if the last reported sale price of the common stock of the Company is greater than or equal to 130% of the exchange price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter. The price of the Company’s common stock did not exceed 130% of the exchange price for the required time period for the 2015 Notes during the quarter ended September 30, 2019.

On June 21, 2013, the Operating Partnership issued $250,000 of its 2.375% Exchangeable Senior Notes due 2033 at a 1.5% discount, or $3,750, and costs incurred to issue the 2013 Notes were approximately $1,672. These costs were amortized as an adjustment to interest expense over five years, which represented the estimated term based on the first available redemption date. The 2013 Notes bore interest at 2.375% per annum and contained an exchange settlement feature. During the three months ended March 31, 2018, the Company repurchased a total principal amount of $37,709 of the 2013 Notes. The Company paid cash of $58,469 for the total of the principal amount and the exchange value in excess of the principal amount. The Operating Partnership redeemed all remaining outstanding 2013 Notes on July 5, 2018.

GAAP requires entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The Company therefore accounts for the liability and equity components of the 2013 Notes and 2015 Notes separately. The equity components are included in paid-in capital in stockholders’ equity in the condensed consolidated balance sheets, and the value of the equity components are treated as original issue discount for purposes of accounting for the debt components. The discounts are amortized as interest expense over the remaining period of the debt through its first redemption date: July 1, 2018 for the 2013 Notes, and October 1, 2020 for the 2015 Notes. The effective interest rate on the liability components of the 2013 Notes and the 2015 Notes is 4.0%, which approximated the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

EXTRA SPACE STORAGE INC.

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

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

Information about the Company’s 2015 Notes, including the total carrying amount of the equity component, the principal amount of the liability component, the unamortized discount and the net carrying amount was as follows for the periods indicated:



	September 30, 2019			December 31, 2018
Carrying amount of equity component	$	22,597		$	22,597
Principal amount of liability component	$	575,000		$	575,000
Unamortized discount - equity component	(4,884		)	(8,417		)
Unamortized debt issuance costs	(2,411		)	(4,209		)
Net carrying amount of liability components	$	567,705		$	562,374

The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component of the Notes were as follows for the periods indicated:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Contractual interest	$	4,492	$	4,492	$	13,476	$	13,614
Amortization of discount	1,186		1,140		3,533		3,525
Total interest expense recognized	$	5,678	$	5,632	$	17,009	$	17,139


10.	STOCKHOLDERS’ EQUITY

On May 15, 2019, the Company filed its $500,000 "at the market" equity program with the Securities and Exchange Commission using a shelf registration statement on Form S-3, and entered into separate equity distribution agreements with nine sales agents.

During the three months ended September 30, 2019, the Company sold 849,200 shares of common stock under its "at the market" equity program at an average sales price of $119.30 per share, resulting in net proceeds of $100,056. As of September 30, 2019, the Company had $298,621 available for issuance under the equity distribution agreements.


11.	NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

Classification of Noncontrolling Interests

GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the Operating Partnership’s preferred units and classifies the noncontrolling interest represented by such preferred units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

At September 30, 2019 and December 31, 2018, the noncontrolling interests represented by the Preferred OP Units qualified for classification as permanent equity on the Company's condensed consolidated balance sheets. The partnership agreement of the

EXTRA SPACE STORAGE INC.

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

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

Operating Partnership (as amended, the "Partnership Agreement") provides for the designation and issuance of the OP Units. As of September 30, 2019 and December 31, 2018, noncontrolling interests in Preferred OP Units were presented net of notes receivable from Preferred OP Unit holders of $100,000 and $108,644, respectfully, as more fully described below.

Series A Participating Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series A Units. The Series A Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series A Units were issued in June 2007. Series A Units in the amount of $101,700 bear a fixed priority return of 2.3% and originally had a fixed liquidation value of $115,000. The remaining balance participates in distributions with, and has a liquidation value equal to that of the OP Units. The Series A Units are redeemable at the option of the holder, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock. As a result of the redemption of 114,500 Series A Units in October 2014, the remaining fixed liquidation value was reduced to $101,700, which represents 875,480 Series A Units. On April 18, 2017, the holder of the Series A Units and the Operating Partnership agreed to reduce the fixed priority return on the Series A Units from 5.0% to 2.3% in exchange for a reduction in the interest rate of the related loan, as more fully described below.

On June 25, 2007, the Operating Partnership loaned the holder of the Series A Units $100,000. On April 18, 2017, a loan amendment was signed modifying the maturity date of the loan to the later of the death of the Series A Unit holder or his spouse and also lowering the interest rate of the loan from 4.9% to 2.1%. The loan amendment was determined to be a loan modification under GAAP, and therefore no change in value was recognized. The loan is secured by the borrower’s Series A Units. No future redemption of Series A Units can be made unless the loan secured by the Series A Units is also repaid. The Series A Units are shown on the balance sheet net of the $100,000 loan because the borrower under the loan receivable is also the holder of the Series A Units.

Series B Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series B Units. The Series B Units rank junior to the Series A Units, on parity with the Series C Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series B Units were issued in 2013 and 2014 and have a liquidation value of $25.00 per unit for a fixed liquidation value of $41,902, which represents 1,676,087 Series B Units. Holders of the Series B Units receive distributions at an annual rate of 6.0%. These distributions are cumulative. The Series B Units became redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock.

Series C Convertible Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series C Units. The Series C Units ranked junior to the Series A Units, on parity with the Series B Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series C Units were issued in 2013 and 2014 and had a liquidation value of $42.10 per unit. The Series C Units became redeemable at the option of the holder one year from the date of issuance, which redemption obligation could be satisfied at the Company’s option in cash or shares of its common stock. The Series C Units were convertible into OP Units at the option of the holder at a rate of 0.9145 OP Units per Series C Unit converted. This conversion option expired upon the fifth anniversary of the date of issuance.

In December 2014, the Operating Partnership loaned certain holders of the Series C Units $20,230. The loan receivable, which was collateralized by the Series C Units, bears interest at 5.0% per annum and matures on December 15, 2024. The Series C Units were shown on the balance sheet net of the loan balance because the borrower under the loan receivable was also the holder of the Series C Units.

On December 1, 2018, certain holders of the Series C Units converted their Series C Units into OP Units, with a total of 407,996 Series C Units being converted into a total of 373,113 OP Units. As part of this conversion, the holders of the Series C

EXTRA SPACE STORAGE INC.

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

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

Units agreed to pledge the OP Units received in the conversion as collateral on the loan receivable to replace the Series C Units that were converted. As of December 31, 2018, the total outstanding balance of the loan receivable was $19,735, of which $8,644 was shown as a reduction of the noncontrolling interests related to the Series C Units and $11,091 was shown as a reduction of the noncontrolling interests related to the OP Units on the Company's consolidated balance sheets. On April 25, 2019, the remaining 296,020 Series C Units were converted into 270,709 OP Units. The remaining outstanding balance of the loan receivable of $18,524 is shown as a reduction of the noncontrolling interests related to the OP Units as of September 30, 2019. See footnote 12 for further discussion of noncontrolling interests.

Series D Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series D Units. The Series D Units rank junior to the Series A Units, on parity with the Series B Units and Series C Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series D Units have been issued at various times from 2014 to 2019. In addition, during the nine months ended September 30, 2019, the Operating Partnership issued 1,120,924 Series D Units valued at $28,022 in conjunction with joint venture acquisitions.

The Series D Units have a liquidation value of $25.00 per unit, for a fixed liquidation value of $120,086, which represents 4,803,445 Series D Units. Holders of the Series D Units receive distributions at an annual rate between 3.0% and 5.0%. These distributions are cumulative. The Series D Units become redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock. In addition, certain of the Series D Units are exchangeable for OP Units at the option of the holder until the tenth anniversary of the date of issuance, with the number of OP Units to be issued equal to $25.00 per Series D Unit, divided by the value of a share of common stock as of the exchange date.


12.	NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS

Noncontrolling Interest in Operating Partnership

The Company’s interest in its stores is held through the Operating Partnership. Between its general partner and limited partner interests, the Company held a 90.6% ownership interest in the Operating Partnership as of September 30, 2019. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 9.4% are held by certain former owners of assets acquired by the Operating Partnership. As of September 30, 2019, and December 31, 2018 the noncontrolling interests in the Operating Partnership are shown on the balance sheet net of notes receivable of $18,524 and $11,091, respectively, because the borrowers under the loan receivable are also holders of OP Units. This loan receivable bears interest at 5.0% per annum and matures on December 15, 2024.

The noncontrolling interest in the Operating Partnership represents OP Units that are not owned by the Company. OP Units are redeemable at the option of the holder, which redemption may be satisfied at the Company's option in cash, based upon the fair market value of an equivalent number of shares of the Company’s common stock (based on the ten-day average trading price) at the time of the redemption, or shares of the Company's common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Partnership Agreement. As of September 30, 2019, the ten-day average closing price of the Company's common stock was $116.80 and there were 6,025,341 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on September 30, 2019 and the Company elected to pay the OP Unit holders cash, the Company would have paid $703,760 in cash consideration to redeem the units.

EXTRA SPACE STORAGE INC.

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

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

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



	For the Nine Months Ended September 30,
	2019		2018
OP Units redeemed for common stock	239,619		25,000
OP Units redeemed for cash	—		30,000
Cash paid for OP Units redeemed	$	—	$	2,558
OP Units issued in conjunction with acquisitions	—		21,768
Value of OP Units issued in conjunction with acquisitions	$	—	$	1,877
OP Units issued upon redemption of Series C Units	270,709		—

GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations, and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the OP Units and classifies the noncontrolling interest represented by the OP Units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interests of third parties in two consolidated joint ventures as of September 30, 2019. One joint venture owns two operating stores in Texas and two operating stores in Colorado, and the other joint venture owns one operating store in Pennsylvania and one development property in New Jersey. The voting interests of the third-party owners are between 5.0% and 20.0%.


13.	LEASES

The Company adopted ASC 842, "Leases," effective January 1, 2019 on a modified retrospective basis as allowed under the standard and prior periods have not been restated. The Company elected the package of transition practical expedients, and has therefore (1) not reassessed whether any expired or existing contracts are or contain leases, (2) not reassessed the lease classification for any expired or existing leases, and (3) not reassessed initial direct costs for any expired or existing leases.

Lessee Accounting

The Company recognized right-of-use assets related to operating leases totaling $95,506 and lease liabilities of $104,863 as of the adoption date, January 1, 2019. These are presented as “Operating lease liabilities” and “Real estate assets-operating lease right-of-use assets” on the Company’s consolidated balance sheets.

In June and August 2019, the Company entered into new triple-net lease agreements to lease land and buildings at 22 and five operating stores, respectively. These leases are categorized as operating leases, and have contractual lease terms of 25 years, but have termination options after 10 years that result in lease terms of 10 years under ASC 842. The Company recorded new operating lease right-of-use assets and operating lease liabilities of $127,532 and $52,224, respectively, in conjunction with these new lease agreements.

The Company is lessee under several types of lease agreements. Generally, these leases fall into the following categories:


•	Leases of real estate at 49 stores classified as wholly-owned. These leases generally have original lease terms between 10-67 years. Under these leases, the Company typically has the option to extend the lease term for additional terms of 5-35 years.

EXTRA SPACE STORAGE INC.

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

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


•	Leases of its corporate offices and call center. These leases have original lease terms between 5.3 and 12.1 years, with no extension options.


•	Leases of 13 regional offices. These leases have original lease terms between three and five years. The Company has the option on five of these leases to extend the lease term for three additional years.


•	Leases of small district offices. These leases generally have terms of 12 months or less. The Company has made an election to account for these under the short-term lease exception outlined under ASC 842. Therefore, no lease assets or liabilities are recorded related to these leases, and the Company will recognize lease payments as expense on a straight-line basis over the related lease terms.

The Company has included lease extension options in the lease term for calculations of its right-of-use assets and liabilities related to the real estate asset leases at its stores when it is reasonably certain that the Company plans to extend the lease terms as the options arise.

Several of the leases of real estate at the Company’s stores include escalation clauses based on an index or rate, such as the Consumer Price Index (CPI). The Company included these lease payments in its calculations of right-of-use assets and liabilities based on the prevailing index or rate as of the adoption date. The Company will recognize changes to these variable lease payments in earnings in the period of change.

One of the real estate leases includes variable lease payments that are based upon a percentage of gross revenues. Certain other leases include additional variable payments relating to a percentage of sales in excess of a specified amount, common area maintenance, property taxes, etc. These payments are variable lease payments that do not depend on an index or rate and are excluded from the measurement of the lease liabilities and right-of-use-assets for these leases. The Company will recognize costs from these variable lease payments in the period in which the obligation for those payments is incurred.

The Company has signed a lease agreement for a store in New Jersey. The store is currently under construction by the lessor, and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in early 2020. The lease term is 75 years from the lease commencement date, with three 10-year extension options. The Company has also signed a lease agreement for a store in California. The store is under construction by the lessor, and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in mid-2020. The lease term is 15 years from the lease commencement date, with three 10-year extension options and one 5-year extension option. The Company has not recorded right-of-use assets or lease liabilities related to these leases as of September 30, 2019 as the lease term has not yet commenced for either lease. The lease commencement date will occur when the Company takes possession of the leased asset, and the Company will recognize a lease liability and right-of-use asset relating to the leases at that time.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s unsecured borrowing rates and implied secured spread at the lease commencement date in determining the present value of lease payments. These discount rates vary depending on the term of the specific leases.

EXTRA SPACE STORAGE INC.

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

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

Following is information on our total lease costs as of the period(s) indicated:



	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2019			2019

Finance lease cost:
Amortization of finance lease right-of-use assets	$	42		$	126
Interest expense related to finance lease liabilities	73			216
Operating lease cost	7,060			12,737
Variable lease cost	1,624			3,426
Short-term lease cost	28			138
Total lease cost	$	8,827		$	16,643


Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows for finance lease payments	$	58		$	173
Operating cash outflows for operating lease payments	6,573			12,122
Total cash flows for lease liability measurement	$	6,631		$	12,295

Right-of-use assets obtained in exchange for new operating lease liabilities	$	52,413		$	277,430
Right-of-use assets obtained in exchange for new finance lease liabilities	$	—		$	8,050

Weighted average remaining lease term - finance leases (years)	47.1
Weighted average remaining lease term - operating leases (years)	14.9
Weighted average discount rate - finance leases	6.07		%
Weighted average discount rate - operating leases	3.65		%

Following is information about the Company’s undiscounted cash flows on an annual basis for operating and finance leases, including a reconciliation of the undiscounted cash flows to the finance lease and operating lease liabilities recognized in the Company’s consolidated balance sheets:



	Operating			Finance			Total
2019	$	6,982		$	57		$	7,039
2020	28,331			232			28,563
2021	28,586			237			28,823
2022	28,611			255			28,866
2023	28,698			255			28,953
Thereafter	252,832			16,777			269,609
Total	$	374,040		$	17,813		$	391,853
Present value adjustments	(94,991		)	(12,990		)	(107,981		)
Lease liabilities	$	279,049		$	4,823		$	283,872

EXTRA SPACE STORAGE INC.

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

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

Lessor Accounting

The Company's property rental revenue is primarily related to rents received from tenants at its operating stores. The Company's leases with its self-storage tenants are generally on month-to-month terms, include automatic monthly renewals, allow flexibility to increase rental rates over time as market conditions permit, and provide for the collection of contingent fees such as late fees. These leases do not include any terms or conditions that allow the tenants to purchase the leased space. All self-storage leases for which the Company acts as lessor have been classified as operating leases. The real estate assets related to the Company's stores are included in Real estate assets, net on the Company's condensed consolidated balance sheets and are presented at historical cost less accumulated depreciation and impairment, if any. Rental income related to these operating leases is included in Property rental revenue on the Company's condensed consolidated statements of operations, and is recognized each month during the month-to-month terms at the rental rate in place during each month.


14.	SEGMENT INFORMATION

The Company’s segment disclosures present the measure used by the chief operating decision makers ("CODMs") for purposes of assessing each segment’s performance. The Company’s CODMs are comprised of several members of its executive management team who use net operating income ("NOI") to assess the performance of the business for the Company’s reportable operating segments. NOI for the Company's self-storage operations represents total property revenue less direct property operating expenses. NOI for the Company's tenant reinsurance segment represents tenant reinsurance revenues less tenant reinsurance expense.

The Company has two reportable segments: (1) self-storage operations and (2) tenant reinsurance. The self-storage operations activities include rental operations of wholly-owned stores. The Company's consolidated revenues equal total segment revenues plus property management fees and other income. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the stores operated by the Company. Excluded from segment revenues and net operating income is property management fees and other income.

For all periods presented, substantially all of the Company's real estate assets, intangible assets, other assets, and accrued and other liabilities are associated with the self-storage operations segment. Financial information for the Company’s business segments is set forth below:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues:
Self-Storage Operations	$	290,917		$	266,728		$	841,504		$	772,742
Tenant Reinsurance	33,588			30,105			95,086			85,660
Total segment revenues	$	324,505		$	296,833		$	936,590		$	858,402

Operating expenses:
Self-Storage Operations	$	88,653		$	73,652		$	248,288		$	219,488
Tenant Reinsurance	7,644			7,720			21,593			18,798
Total segment operating expenses	$	96,297		$	81,372		$	269,881		$	238,286

Net operating income:
Self-Storage Operations	$	202,264		$	193,076		$	593,216		$	553,254
Tenant Reinsurance	25,944			22,385			73,493			66,862
Total segment net operating income:	$	228,208		$	215,461		$	666,709		$	620,116

Other components of net income (loss):
Property management fees and other income	$	13,000		$	10,120		$	36,063		$	30,849
General and administrative expense	(22,519		)	(19,707		)	(68,548		)	(62,822		)
Depreciation and amortization expense	(56,051		)	(52,283		)	(165,116		)	(155,924		)
Gain on real estate transactions	—			30,807			1,205			30,807
Interest expense	(46,908		)	(45,926		)	(141,716		)	(130,239		)
Non-cash interest expense related to the amortization of discount on equity component of exchangeable senior notes	(1,186		)	(1,140		)	(3,533		)	(3,525		)
Interest income	2,799			1,371			5,905			3,997
Equity in earnings of unconsolidated real estate ventures	2,704			3,622			8,455			10,648
Income tax expense	(4,052		)	(2,638		)	(8,580		)	(6,077		)
Net income	$	115,995		$	139,687		$	330,844		$	337,830


15.	COMMITMENTS AND CONTINGENCIES

As of September 30, 2019, 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.

EXTRA SPACE STORAGE INC.

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

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

As of September 30, 2019, the Company was under agreement to acquire four stores at a total purchase price of $41,828. These stores are scheduled to close in 2020. Additionally, the Company is under agreement to acquire five stores with joint venture partners, for a total investment of $31,384. Three of these stores are scheduled to close in 2019 and the remaining stores are expected to close in 2020.

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.


16.	SUBSEQUENT EVENTS

On October 29, 2019, the Company invested $150.0 million in shares of newly issued convertible preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop"), with an additional commitment to purchase up to $50.0 million of the preferred shares over the next 12 months. The dividend rate for the preferred shares is 6.25% per annum, subject to increase after five years. The preferred shares are generally not redeemable for five years, except in the case of a change of control or initial listing of SmartStop.


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

Amounts in thousands, except store and share data

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our unaudited “Condensed Consolidated Financial Statements” and the “Notes to Condensed Consolidated Financial Statements (unaudited)” appearing elsewhere in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2018. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.”

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2018 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

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

OVERVIEW

We are a fully integrated, self-administered and self-managed real estate investment trust (“REIT”), formed to own, operate, manage, acquire, develop and redevelop self-storage properties (“stores”). We derive substantially all of our revenues from our two segments: storage operations and tenant reinsurance. Primary sources of revenue for our storage operations segment include rents received from tenants under leases at each of our wholly-owned stores. Our operating results depend materially on our ability to lease available self-storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. Consequently, management spends a significant portion of their time maximizing cash flows from our diverse portfolio of stores. Revenue from our tenant reinsurance segment consists of insurance revenues from the reinsurance of risks relating to the loss of goods stored by tenants in our stores.

Our stores are generally situated in highly visible locations clustered around large population centers. These areas enjoy above average population growth and income levels. The clustering of our assets around these population centers enables us to reduce our operating costs through economies of scale. To maximize the performance of our stores, we employ industry-leading revenue management systems. Developed internally, these systems enable us to analyze, set and adjust rental rates in real time across our portfolio in order to respond to changing market conditions. We believe our systems and processes allow us to more pro-actively manage revenues.

We operate in competitive markets, often where consumers have multiple stores from which to choose. Competition has impacted, and will continue to impact, our store results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. We believe that we are able to respond quickly and effectively to changes in local, regional and national economic conditions by adjusting rental rates through

the combination of our revenue management team and our proprietary pricing systems. We consider a store to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a store to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1 of the current year, or has been open for three years prior to January 1 of the current year.

PROPERTIES

As of September 30, 2019, we owned or had ownership interests in 1,167 operating stores. Of these stores, 920 are wholly-owned, five are in consolidated joint ventures, and 242 are in unconsolidated joint ventures. In addition, we managed an additional 630 stores for third parties bringing the total number of stores which we own and/or manage to 1,797. These stores are located in 40 states, Washington, D.C. and Puerto Rico. 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 September 30, 2019, approximately 1,020,000 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 September 30, 2019, the average length of stay was approximately 15.6 months.

The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was $16.42 for the three months ended September 30, 2019, compared to $15.95 for the three months ended September 30, 2018. Average annual rent per square foot for new leases was $18.34 for the three months ended September 30, 2019, compared to $18.21 for the three months ended September 30, 2018. The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 3.6% and 4.5%, 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.



	September 30, 2019
	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	8	557,143	1	75,801	13	866,846	22	1,499,790
Arizona	23	1,623,112	7	467,460	17	1,359,605	47	3,450,177
California	165	12,663,924	41	3,021,681	59	5,646,172	265	21,331,777
Colorado	16	1,075,157	2	186,293	27	1,958,876	45	3,220,326
Connecticut	7	529,455	7	626,227	4	284,432	18	1,440,114
Delaware	—	—	1	76,945	1	70,653	2	147,598
Florida	91	6,969,378	34	2,543,565	82	6,361,651	207	15,874,594
Georgia	59	4,563,704	5	431,477	17	1,283,478	81	6,278,659
Hawaii	13	843,974	—	—	4	209,215	17	1,053,189
Idaho	—	—	—	—	7	711,074	7	711,074
Illinois	36	2,725,286	7	570,172	30	2,121,546	73	5,417,004
Indiana	15	950,359	1	58,086	13	850,080	29	1,858,525
Kansas	1	50,142	2	108,770	1	70,420	4	229,332
Kentucky	11	928,307	1	51,128	4	311,138	16	1,290,573
Louisiana	2	150,555	—	—	3	299,802	5	450,357
Maryland	32	2,587,910	8	618,640	26	1,807,234	66	5,013,784
Massachusetts	46	2,972,797	10	641,063	8	605,365	64	4,219,225
Michigan	7	561,966	4	314,331	1	102,147	12	978,444
Minnesota	5	382,301	—	—	9	615,894	14	998,195
Mississippi	3	215,812	—	—	4	256,550	7	472,362
Missouri	5	333,580	2	119,275	9	608,303	16	1,061,158
Nebraska	—	—	—	—	2	164,494	2	164,494
Nevada	14	1,035,845	4	472,981	5	533,505	23	2,042,331
New Hampshire	2	136,135	2	84,325	1	61,535	5	281,995
New Jersey	59	4,658,053	17	1,246,731	10	825,939	86	6,730,723
New Mexico	11	722,310	6	349,860	12	891,950	29	1,964,120
New York	27	1,968,598	16	1,404,529	19	1,122,883	62	4,496,010
North Carolina	19	1,411,295	5	374,010	21	1,586,691	45	3,371,996
Ohio	17	1,314,894	5	327,053	6	398,956	28	2,040,903
Oklahoma	—	—	—	—	19	1,577,962	19	1,577,962
Oregon	6	399,941	4	281,689	9	598,810	19	1,280,440
Pennsylvania	18	1,350,092	7	510,446	19	1,369,890	44	3,230,428
Rhode Island	2	130,846	—	—	1	84,665	3	215,511
South Carolina	23	1,757,606	7	497,578	19	1,399,429	49	3,654,613
Tennessee	17	1,403,456	12	804,121	16	1,150,636	45	3,358,213
Texas	100	8,605,464	10	706,854	78	6,281,835	188	15,594,153
Utah	10	710,204	—	—	17	1,272,392	27	1,982,596
Virginia	46	3,681,166	7	565,118	14	1,003,892	67	5,250,176
Washington	8	589,997	1	57,340	7	480,838	16	1,128,175
Washington, DC	1	100,039	1	104,058	3	186,048	5	390,145
Wisconsin	—	—	5	505,806	5	445,529	10	951,335
Puerto Rico	—	—	—	—	8	916,616	8	916,616
Totals	925	70,660,803	242	18,203,413	630	48,754,976	1,797	137,619,192

(1) Includes five consolidated joint venture stores.

RESULTS OF OPERATIONS

Comparison of the three and nine months ended September 30, 2019 and 2018

Overview

Results for the three and nine months ended September 30, 2019 included the operations of 1,167 stores (920 wholly-owned, five in consolidated joint ventures, and 242 in joint ventures accounted for using the equity method) compared to the results for the three and nine months ended September 30, 2018, which included the operations of 1,099 stores (872 wholly-owned, four in consolidated joint ventures, and 223 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 September 30,								For the Nine Months Ended September 30,
	2019		2018		$ Change		% Change		2019		2018		$ Change		% Change
Revenues:
Property rental	$	290,917	$	266,728	$	24,189	9.1	%	$	841,504	$	772,742	$	68,762	8.9	%
Tenant reinsurance	33,588		30,105		3,483		11.6	%	95,086		85,660		9,426		11.0	%
Management fees and other income	13,000		10,120		2,880		28.5	%	36,063		30,849		5,214		16.9	%
Total revenues	$	337,505	$	306,953	$	30,552	10.0	%	$	972,653	$	889,251	$	83,402	9.4	%

Property Rental—The increase in property rental revenues for the three and nine months ended September 30, 2019 was primarily the result of revenues from newly-acquired stores and increases in rental rates at our stabilized stores. Increases of $15,173 and $38,542, respectively, were attributable to store acquisitions completed in 2019 and 2018. We acquired 16 wholly-owned stores and 27 leased properties (as part of a new net lease agreement signed) during the nine months ended September 30, 2019. We acquired 34 stores during the year ended December 31, 2018. Increases of $8,253 and $27,400 for the three and nine months ended September 30, 2019, respectively, were due to higher net rental rates for new and existing customers at our stabilized stores.

Tenant Reinsurance—The increase in our tenant reinsurance revenues was due primarily to an increase in the number of stores operated. We operated 1,797 stores at September 30, 2019 compared to 1,606 stores at September 30, 2018.

Management Fees and Other Income—Management fees and other income primarily represent the fee collected for our management of stores owned by third parties and unconsolidated joint ventures and other transaction fee income. The increase for the three and nine months ended September 30, 2019 was primarily due to an increase in the number of stores managed. As of September 30, 2019, we managed 630 stores for third parties, compared to 507 stores as of September 30, 2018, and we also managed 247 stores for joint ventures as of September 30, 2019, compared to 227 as of September 30, 2018.

Expenses

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



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2019		2018		$ Change			% Change		2019		2018		$ Change		% Change
Expenses:
Property operations	$	88,653	$	73,652	$	15,001		20.4	%	$	248,288	$	219,488	$	28,800	13.1	%
Tenant reinsurance	7,644		7,720		(76		)	(1.0	)%	21,593		18,798		2,795		14.9	%
General and administrative	22,519		19,707		2,812			14.3	%	68,548		62,822		5,726		9.1	%
Depreciation and amortization	56,051		52,283		3,768			7.2	%	165,116		155,924		9,192		5.9	%
Total expenses	$	174,867	$	153,362	$	21,505		14.0	%	$	503,545	$	457,032	$	46,513	10.2	%

Property Operations—The increases in property operations expense during the three and nine months ended September 30, 2019 were due primarily to increases of $9,872 and $18,588, respectively, attributable to store acquisitions completed in 2019 and 2018. We acquired 16 wholly-owned stores and 27 leased properties (as part of a new net lease agreement signed) during the nine months ended September 30, 2019. We acquired 34 stores during the year ended December 31, 2018. Additional increases of $4,748 and $9,098 for the three and nine months ended September 30, 2019, respectively, were related to an increase in expenses from property taxes and marketing at stabilized stores.

Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The increase in tenant reinsurance expense for nine months ended September 30, 2019 was due primarily to an increase in the number of stores we owned and/or managed and an increase in the overall average payout on claims when compared to the nine months ended September 30, 2018.

General and Administrative—General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, office expense, office rent, travel and professional fees. We did not observe any material trends in specific payroll, travel or other expenses apart from the increase due to the management of additional stores.

Depreciation and Amortization—Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired 16 stores during the nine months ended September 30, 2019. We acquired 34 stores during the year ended December 31, 2018.

Other Revenues and Expenses

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



	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change

Gain on real estate transactions	$	—		$	30,807		$	(30,807	)	(100.0	)%	$	1,205		$	30,807		$	(29,602	)	(96.1	)%
Interest expense	(46,908		)	(45,926		)	(982		)	2.1	%	(141,716		)	(130,239		)	(11,477		)	8.8	%
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(1,186		)	(1,140		)	(46		)	4.0	%	(3,533		)	(3,525		)	(8		)	0.2	%
Interest income	2,799			1,371			1,428			104.2	%	5,905			3,997			1,908			47.7	%
Equity in earnings of unconsolidated real estate ventures	2,704			3,622			(918		)	(25.3	)%	8,455			10,648			(2,193		)	(20.6	)%
Income tax expense	(4,052		)	(2,638		)	(1,414		)	53.6	%	(8,580		)	(6,077		)	(2,503		)	41.2	%
	$	(46,643	)	$	(13,904	)	$	(32,739	)	235.5	%	$	(138,264	)	$	(94,389	)	$	(43,875	)	46.5	%

Gain on Real Estate Transactions— The gain of $1,205 for the nine months ended September 30, 2019 was a result of the sale of one property in New York for $11,781. During the three and nine months ended September 30, 2018, we recorded a $30,671 gain on the sale of one property in California.

Interest Expense—The increase in interest expense during the three and nine months ended September 30, 2019 was primarily the result of a higher average debt balance when compared to the same periods in the prior year. Information on the total face value of debt and average interest rate for each quarter during the nine months ended September 30, 2019 and 2018 follows:



	For the Three Months Ended September 30,		For the Three Months Ended June 30,		For the Three Months Ended March 31,
	2019	2018	2019	2018	2019	2018
Total face value of debt	$4,844,620	$4,803,360	$5,072,936	$4,809,483	$5,039,286	$4,557,414
Average interest rate of debt	3.4%	3.5%	3.5%	3.4%	3.5%	3.4%

Non-cash Interest Expense Related to Amortization of Discount on Equity Component of Exchangeable Senior Notes—Represents the amortization of the discounts related to the equity components of the exchangeable senior notes issued by our Operating Partnership. The 2013 Notes and 2015 Notes both had an effective interest rate of 4.0% relative to the carrying amount of the liability.

Interest Income—Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions, interest earned on bridge loans and income earned on note receivable from Common and Preferred Operating Partnership unit holders. In late 2018 we began to provide bridge financing on completed, including recently completed properties, owned by third parties that we manage. The increase in interest income during the three and nine months ended September 30, 2019 was primarily the result of interest earned on these bridge loans.

Equity in Earnings of Unconsolidated Real Estate Ventures—Equity in earnings of unconsolidated real estate ventures 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. The decrease in earnings for the three and nine months ended September 30, 2019 related primarily to 12 properties that we purchased from joint ventures in January 2019.

Income Tax Expense—For the three and nine months ended September 30, 2019, the increase in income tax expense was the result of an increase in income earned by our taxable REIT subsidiary when compared to the same period in the prior year.

FUNDS FROM OPERATIONS

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

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

The following table presents the calculation of FFO for the periods indicated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income attributable to common stockholders	$	108,087		$	130,418		$	307,685		$	313,827

Adjustments:
Real estate depreciation	51,828			48,673			153,745			144,018
Amortization of intangibles	1,184			1,835			5,281			6,427
Gain on real estate transactions	—			(30,807		)	(1,205		)	(30,807		)
Unconsolidated joint venture real estate depreciation and amortization	2,160			1,781			5,944			4,931
Distributions paid on Series A Preferred Operating Partnership units	(572		)	(572		)	(1,716		)	(1,716		)
Income allocated to Operating Partnership noncontrolling interests	7,908			9,269			23,159			24,003
Funds from operations attributable to common stockholders and unit holders	$	170,595		$	160,597		$	492,893		$	460,683

SAME-STORE RESULTS

Our same-store pool for the periods presented consists of 821 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 September 30,						Percent		For the Nine Months Ended September 30,				Percent
	2019			2018			Change		2019		2018		Change
Same-store rental revenues	$	262,739		$	254,351		3.3	%	$	773,323	$	745,146	3.8	%
Same-store operating expenses	73,731			69,191			6.6	%	217,579		208,569		4.3	%
Same-store net operating income	$	189,008		$	185,160		2.1	%	$	555,744	$	536,577	3.6	%
Same-store square foot occupancy as of quarter end	93.8		%	93.8		%			93.8%		93.8%
Properties included in same-store	821			821					821		821

Same-store revenues for the three and nine months ended September 30, 2019 increased due to higher net rental rates for both new and existing customers. Same-store expenses were higher for the three and nine months ended September 30, 2019 primarily due to increases in marketing, and property taxes. For the nine months ended September 30, 2019, the increase in same-store expenses was partially offset by decreases in payroll and benefits and utilities expense.

The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net Income	$	115,995		$	139,687		$	330,844		$	337,830
Adjusted to exclude:
Gain on real estate transactions	—			(30,807		)	(1,205		)	(30,807		)
Equity in earnings of unconsolidated joint ventures	(2,704		)	(3,622		)	(8,455		)	(10,648		)
Interest expense	48,094			47,066			145,249			133,764
Depreciation and amortization	56,051			52,283			165,116			155,924
Income tax expense	4,052			2,638			8,580			6,077
General and administrative	22,519			19,707			68,548			62,822
Management fees, other income and interest income	(15,799		)	(11,491		)	(41,968		)	(34,846		)
Net tenant insurance	(25,944		)	(22,385		)	(73,493		)	(66,862		)
Non same store revenue	(28,178		)	(12,377		)	(68,181		)	(27,596		)
Non same store expense	14,922			4,461			30,709			10,919
Total Same Store NOI	$	189,008		$	185,160		$	555,744		$	536,577

Same-store rental revenues	$	262,739		$	254,351		$	773,323		$	745,146
Same-store operating expenses	73,731			69,191			217,579			208,569
Same-store net operating income	$	189,008		$	185,160		$	555,744		$	536,577

CASH FLOWS

Cash flows from operating activities increased as a result of our continued revenue growth. This growth was due to increased rental rates and an increase in the number of stores we own and operate. Cash flows used in investing activities relates primarily to our acquisition and development of REIT and joint venture assets, as well as activity on our bridge loan program. Cash flows from financing activities depend primarily on our debt and equity financing activities. A summary of cash flows along with significant components are as follows:



	For the Nine Months Ended September 30,
	2019			2018
Net cash provided by operating activities	$	544,466		$	529,027
Net cash used in investing activities	(356,377		)	(317,029		)
Net cash used in financing activities	(194,064		)	(231,459		)

Significant components of net cash flow included:
Net income	$	330,844		$	337,830
Depreciation and amortization	165,116			155,924
Acquisition and development of new stores	(321,527		)	(372,387		)
Gain on real estate transactions	(1,205		)	(30,807		)
Proceeds from sale of real estate assets, investments in real estate ventures and other assets	11,254			51,889
Issuance of notes receivable, net of principal payments received	(11,466		)	11,337
Proceeds from the sale of common stock, net of offering costs	198,852			33,780
Net proceeds (payments) from our debt financing	(26,614		)	83,527
Dividends paid on common stock	(341,535		)	(315,608		)

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

We expect to generate positive cash flow from operations in 2019, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our tenants. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds under our existing lines of credit, curtail planned capital expenditures, or seek other additional sources of financing.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had $62,277 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 2019 and 2018, 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 September 30, 2019, we had $4,844,620 face value of debt, resulting in a debt to total enterprise value ratio of 23.0%. As of September 30, 2019, the ratio of total fixed-rate debt and other instruments to total debt was 77.2% (including $2,338,048 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 September 30, 2019 was 3.4%. 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 September 30, 2019.

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.

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 September 30, 2019, we had approximately $4.8 billion in total face value of debt, of which approximately $1.1 billion was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt would increase or decrease future earnings and cash flows by approximately $11.0 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, 2018, 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, 2018. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and results of operations.


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

None.


ITEM 6.	EXHIBITS

10.1

Amendment No. 1, dated as of July 1, 2019, to the Amended and Restated Credit Agreement, dated as of December 7, 2018, by and among Extra Space Storage Inc., Extra Space Storage LP, U.S. Bank National Association, as administrative agent, certain other financial institutions acting as syndication agents, documentation agents and lead arrangers and book runners, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed on July 8, 2019).


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 September 30, 2019, 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: November 5, 2019		/s/ Joseph D. Margolis
		Joseph D. Margolis
		Chief Executive Officer (Principal Executive Officer)

Date: November 5, 2019		/s/ P. Scott Stubbs
		P. Scott Stubbs
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

Exhibit

Exhibit 31.1

CERTIFICATION

I, Joseph D. Margolis, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Extra Space Storage Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: November 5, 2019	By:	/s/ Joseph D. Margolis
	Name:	Joseph D. Margolis
	Title:	Chief Executive Officer

Exhibit

Exhibit 31.2

CERTIFICATION

I, P. Scott Stubbs, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Extra Space Storage Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: November 5, 2019	By:	/s/ P. Scott Stubbs
	Name:	P. Scott Stubbs
	Title:	Executive Vice President and Chief Financial Officer

Exhibit

Exhibit 32.1

Certification of 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

The undersigned, the Chief Executive Officer of Extra Space Storage Inc. (the “Company”), hereby certifies to his knowledge on the date hereof, pursuant to 18 U.S.C. 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the “Form 10-Q”), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.



	By:	/s/ Joseph D. Margolis
	Name:	Joseph D. Margolis
	Title:	Chief Executive Officer
	Date:	November 5, 2019

The undersigned, the Chief Financial Officer of Extra Space Storage Inc. (the “Company”), hereby certifies to his knowledge on the date hereof, pursuant to 18 U.S.C. 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the “Form 10-Q”), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.



	By:	/s/ P. Scott Stubbs
	Name:	P. Scott Stubbs
	Title:	Executive Vice President and Chief Financial Officer
	Date:	November 5, 2019