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

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exr-20210331

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 March 31, 2021


☐			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 ☒ No ☐

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 23, 2021, was 133,728,460.

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 (unaudited)			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			35
ITEM 4. CONTROLS AND PROCEDURES			36

PART II. OTHER INFORMATION			37
ITEM 1. LEGAL PROCEEDINGS			37
ITEM 1A. RISK FACTORS			37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			37
ITEM 4. MINE SAFETY DISCLOSURES			37
ITEM 5. OTHER INFORMATION			37
ITEM 6. EXHIBITS			38
SIGNATURES			39

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;

•impacts from the COVID-19 pandemic or the future outbreak of other highly infectious or contagious diseases, including reduced demand for self-storage space and ancillary products and services such as tenant reinsurance, and potential decreases in occupancy and rental rates and staffing levels, which could adversely affect our results;

•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)


	March 31, 2021		December 31, 2020
	(unaudited)
Assets:
Real estate assets, net	$	7,944,395	$	7,893,802
Real estate assets - operating lease right-of-use assets	238,927		252,172
Investments in unconsolidated real estate entities	413,503		397,444
Investments in debt securities and notes receivable	543,725		593,810
Cash and cash equivalents	60,330		109,124
Restricted cash	2,465		18,885
Other assets, net	133,267		130,611
Total assets	$	9,336,612	$	9,395,848
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,947,417	$	4,797,303
Revolving lines of credit	353,000		949,000
Operating lease liabilities	242,952		263,485
Cash distributions in unconsolidated real estate ventures	62,089		47,126
Accounts payable and accrued expenses	129,044		130,012
Other liabilities	287,461		272,798
Total liabilities	6,021,963		6,459,724
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, 133,692,662 and 131,357,961 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	1,336		1,314
Additional paid-in capital	3,282,255		3,000,458
Accumulated other comprehensive loss	(77,180)		(99,093)
Accumulated deficit	(284,442)		(354,900)
Total Extra Space Storage Inc. stockholders' equity	2,921,969		2,547,779
Noncontrolling interest represented by Preferred Operating Partnership units, net	172,652		172,052
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	220,028		216,293
Total noncontrolling interests and equity	3,314,649		2,936,124
Total liabilities, noncontrolling interests and equity	$	9,336,612	$	9,395,848

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)


	For the Three Months Ended March 31,
		2021		2020
Revenues:
Property rental		$	303,593	$	286,703
Tenant reinsurance		39,619		33,613
Management fees and other income		15,645		12,136
Total revenues		358,857		332,452
Expenses:
Property operations		92,367		90,297
Tenant reinsurance		7,161		6,678
General and administrative		23,540		23,011
Depreciation and amortization		58,599		55,275
Total expenses		181,667		175,261
Gain on real estate transactions		63,883		—
Income from operations		241,073		157,191
Interest expense		(40,695)		(44,358)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes		—		(1,209)
Interest income		12,304		1,674
Income before equity in earnings and dividend income from unconsolidated real estate ventures and income tax expense		212,682		113,298
Equity in earnings and dividend income from unconsolidated real estate entities		6,956		5,043
Income tax expense		(4,137)		(2,179)
Net income		215,501		116,162
Net income allocated to Preferred Operating Partnership noncontrolling interests		(3,680)		(3,111)
Net income allocated to Operating Partnership and other noncontrolling interests		(8,823)		(4,872)
Net income attributable to common stockholders		$	202,998	$	108,179
Earnings per common share
Basic		$	1.54	$	0.84
Diluted		$	1.53	$	0.83
Weighted average number of shares
Basic		132,007,556		129,288,629
Diluted		139,676,548		137,139,560
Cash dividends paid per common share		$	1.00	$	0.90

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
		2021		2020
Net income		$	215,501	$	116,162
Other comprehensive income (loss):
Change in fair value of interest rate swaps		23,013		(89,244)
Total comprehensive income		238,514		26,918
Less: comprehensive income attributable to noncontrolling interests		13,603		3,613
Comprehensive income attributable to common stockholders		$	224,911	$	23,305

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 Loss		Accumulated Deficit		Total Noncontrolling Interests and Equity
Balances at December 31, 2019	$	175,948	$	205,419	$	366	129,534,407	$	1,295	$	2,868,681	$	(28,966)	$	(301,049)	$	2,921,694
Issuance of common stock upon the exercise of options	—		—		—		77,400	1		943		—		—		944
Issuance of common stock in connection with share based compensation	—		—		—		73,602	1		2,979		—		—		2,980
Restricted stock grants cancelled	—		—		—		(1,767)	—		—		—		—		—
Buyback of common stock, net of offering costs	—		—		—		(653,597)	(7)		—		—		(52,197)		(52,204)





Redemption of Operating Partnership units for stock	—		(330)		—		8,862	—		330		—		—		—





Net income (loss)	3,112		4,877		(6)		—	—		—		—		108,179		116,162
Other comprehensive loss	(563)		(3,807)		—		—	—		—		(84,874)		—		(89,244)
Distributions to Operating Partnership units held by noncontrolling interests	(3,178)		(5,327)		—		—	—		—		—		—		(8,505)
Dividends paid on common stock at $0.90 per share	—		—		—		—	—		—		—		(117,197)		(117,197)
Balances at March 31, 2020	$	175,319	$	200,832	$	360	129,038,907	$	1,290	$	2,872,933	$	(113,840)	$	(362,264)	$	2,774,630

Extra Space Storage Inc.

Condensed Consolidated Statement of Noncontrolling Interests and Equity

(amounts in thousands, except share data)

(unaudited)


	Noncontrolling Interest							Extra Space Storage Inc. Stockholders' Equity
		Preferred Operating Partnership		Operating Partnership		Other		Shares	Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Noncontrolling Interests and Equity
Balances at December 31, 2020		$	172,052	$	215,892	$	401	131,357,961	$	1,314	$	3,000,458	$	(99,093)	$	(354,900)	$	2,936,124
Issuance of common stock upon the exercise of options		—		—		—		56,722	—		4,254		—		—		4,254
Issuance of common stock in connection with share based compensation		—		—		—		89,793	—		3,652		—		—		3,652
Restricted stock grants cancelled		—		—		—		(2,499)	—		—		—		—		—
Issuance of common stock, net of offering costs		—		—		—		2,185,685	22		273,698		—		—		273,720
Redemption of Operating Partnership units for stock		—		(193)		—		5,000	—		193		—		—		—
Noncontrolling interest in consolidated joint venture		—		—		(50)		—	—		—		—		—		(50)
Net income (loss)		3,680		8,828		(5)		—	—		—		—		202,998		215,501
Other comprehensive income		144		956		—		—	—		—		21,913		—		23,013
Distributions to Operating Partnership units held by noncontrolling interests		(3,224)		(5,801)		—		—	—		—		—		—		(9,025)
Dividends paid on common stock at $1.00 per share		—		—		—		—	—		—		—		(132,540)		(132,540)
Balances at March 31, 2021		$	172,652	$	219,682	$	346	133,692,662	$	1,336	$	3,282,255	$	(77,180)	$	(284,442)	$	3,314,649

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	215,501	$	116,162
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	58,599		55,275
Amortization of deferred financing costs	2,286		2,830
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		1,209
Non-cash lease expense	487		353
Compensation expense related to stock-based awards	3,652		2,980
Accrual of interest income added to principal of debt securities and notes receivable	(8,533)		—

Gain on real estate transactions	(63,883)		—
Distributions from unconsolidated real estate ventures in excess of earnings	1,863		2,539
Changes in operating assets and liabilities:

Other assets	(2,737)		2,490
Accounts payable and accrued expenses	(2,691)		3,727
Other liabilities	(664)		1,691
Net cash provided by operating activities	203,880		189,256
Cash flows from investing activities:
Acquisition of real estate assets	(161,752)		(30,164)
Development and redevelopment of real estate assets	(14,086)		(15,373)
Proceeds from sale of real estate assets	132,733		—

Investment in unconsolidated real estate entities	(250)		(6,441)
Return of investment in unconsolidated real estate ventures	31,169		—
Issuance and purchase of notes receivable	(25,772)		(7,500)

Proceeds from sale of notes receivable	81,250		—
Purchase of equipment and fixtures	(697)		(1,095)
Net cash provided by (used in) investing activities	42,595		(60,573)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	273,720		—
Proceeds from notes payable and revolving lines of credit	1,747,000		268,000
Principal payments on notes payable and revolving lines of credit	(2,193,409)		(192,508)
Deferred financing costs	(1,689)		(16)

Net proceeds from exercise of stock options	4,254		944
Repurchase of common stock	—		(52,204)



Dividends paid on common stock	(132,540)		(117,197)
Distributions to noncontrolling interests	(9,025)		(8,505)
Net cash used in financing activities	(311,689)		(101,486)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(65,214)		27,197
Cash, cash equivalents, and restricted cash, beginning of the period	128,009		70,733
Cash, cash equivalents, and restricted cash, end of the period	$	62,795	$	97,930

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2021		2020
Supplemental schedule of cash flow information
Interest paid	$	44,887	$	41,013
Income taxes paid	1,047		976
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	$	(4,005)	$	(330)
Common stock and paid-in capital	4,005		330
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	2,369	$	—
Operating lease liabilities	(2,369)		—

Acquisitions of real estate assets
Real estate assets, net	$	(41,491)	$	—




Finance lease liability	41,491		—
Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	1,723	$	960

Accounts payable and accrued expenses	(1,723)		(960)






Redemption of Preferred Operating Partnership units for common stock
Preferred Operating Partnership units	$	(2,724)	$	—
Additional paid-in capital	2,724		—
Establishment of finance lease assets and lease liabilities
Real estate assets, net	$	40,993	$	—
Other liabilities	(40,993)		—



Investment in unconsolidated real estate ventures received on sale of stores to joint venture
Investment in unconsolidated real estate ventures	$	33,878	$	—
Real estate assets	(33,878)		—

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 March 31, 2021, the Company had direct and indirect equity interests in 1,206 stores. In addition, the Company managed 763 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,969. 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 months ended March 31, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. The condensed consolidated balance sheet as of December 31, 2020 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, 2020, as filed with the Securities and Exchange Commission.

Recently Issued Accounting Standards

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." ASU 2020-04 and subsequent amendments contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur through December 31, 2022. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In August 2020, the FASB issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)." ASU 2020-06 simplifies the accounting for convertible instruments and contracts in an entity's own equity, and amended related earnings per share guidance. The guidance in ASU 2020-06 becomes effective for fiscal years beginning after December 15, 2021. Early adoption is permitted no earlier than the fiscal years beginning after December 15, 2020. The guidance may be adopted on a modified or fully retrospective basis. The Company is currently assessing the impact of the adoption of ASU 2020-06 on its consolidated financial statements.

EXTRA SPACE STORAGE INC.

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

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

3. FAIR VALUE DISCLOSURES

Derivative Financial Instruments

Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate forward curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2021, 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	$	—	$	—	$	—
Other liabilities - Cash flow hedge swap agreements	$	—	$	75,240	$	—

The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of March 31, 2021 or December 31, 2020.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Long-lived assets held for use are evaluated for impairment when events or circumstances indicate there may be impairment. The Company reviews each store at least annually to determine if any such events or circumstances have occurred or exist. The Company focuses on stores where occupancy and/or rental income have decreased by a significant amount. For these stores, the Company determines whether the decrease is temporary or permanent, and whether the store will likely recover the lost occupancy and/or revenue in the short term. In addition, the Company reviews stores in the lease-up stage and compares actual operating results to original projections.

When the Company determines that an event that may indicate impairment has occurred, the Company compares the carrying value of the related long-lived assets to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the assets exceeds the undiscounted future net operating cash flows attributable to the assets. The impairment loss recognized equals the excess of net carrying value over the related fair value of the assets.

EXTRA SPACE STORAGE INC.

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

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

When real estate assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the fair value of the assets, net of selling costs. If the estimated fair value, net of selling costs, of the assets that have been identified as held for sale is less than the net carrying value of the assets, the Company would recognize an impairment loss on the assets held for sale. The operations of assets held for sale or sold during the period is presented as part of normal operations for all periods presented. As of March 31, 2021, the Company had no operating stores classified as held for sale which are included in real estate assets, net.

The Company assesses annually whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired 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.

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 March 31, 2021 and December 31, 2020 approximate fair value. Restricted cash is comprised of funds deposited with financial institutions located throughout the United States primarily relating to earnest money deposits on potential acquisitions.

The fair values of the Company’s notes receivable from Preferred and Common Operating Partnership unit holders and other fixed rate notes receivable were based on the discounted estimated future cash flows of the notes (categorized within Level 3 of the fair value hierarchy); the discount rate used approximated the current market rate for loans with similar maturities and credit quality. The fair values of the Company’s fixed-rate notes payable were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximated current market rates for loans, or groups of loans, with similar maturities and credit quality.

The fair values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:


	March 31, 2021				December 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	100,511	$	102,311	$	102,333	$	102,311
Fixed rate notes receivable	$	107,964	$	104,000	$	114,145	$	104,000
Fixed rate notes payable	$	3,640,531	$	3,563,435	$	3,816,530	$	3,637,220

EXTRA SPACE STORAGE INC.

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

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

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 D Redeemable Preferred Units (“Series D Units” and, together with the Series A Units and Series B Units, the “Preferred OP Units”) and common Operating Partnership units (“OP Units”)) that do not have a current right to participate in earnings of the Company but could do so in the future by virtue of their option, redemption or conversion right.

In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per common share, only potential common shares that are dilutive (i.e. those that reduce earnings per common share) are included. For the three months ended March 31, 2021 and 2020, there were no anti-dilutive options.

For the purposes of computing the diluted impact of the potential exchange of the Preferred Operating Partnership units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, the Company divided the total value of the Preferred Operating Partnership units by the average share price for the period presented. The average share price for the three months ended March 31, 2021 and 2020 was $121.07 and $104.13, 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 March 31,
		2021	2020
		Equivalent Shares (if converted)	Equivalent Shares (if converted)


Series B Units		337,839	402,403

Series D Units		—	1,153,233
		337,839	1,555,636

As of March 31, 2021, the Operating Partnership had no exchangeable senior notes issued or outstanding. The Operating Partnership had $575,000 of its 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) issued and outstanding as of March 31, 2020. In October and November 2020, a portion of the 2015 Notes were exchanged for cash and shares of the Company’s common stock and the remaining 2015 Notes were redeemed for cash. The 2015 Notes could potentially have had a dilutive impact on the Company’s earnings per share calculations. The 2015 Notes were 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 Company had 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 had retained the right to satisfy the exchange obligation in excess of the accreted principal amount of the 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

EXTRA SPACE STORAGE INC.

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

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

earnings per share computation. For the three months ended March 31, 2021 and 2020, zero and 764,703 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.

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


	For the Three Months Ended March 31,
		2021		2020
Net income attributable to common stockholders		$	202,998	$	108,179
Earnings and dividends allocated to participating securities		(312)		(163)
Earnings for basic computations		202,686		108,016
Earnings and dividends allocated to participating securities		—		163
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units		11,894		6,171
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)		(572)		(572)
Net income for diluted computations		$	214,008	$	113,778

Weighted average common shares outstanding:
Average number of common shares outstanding - basic		132,007,556		129,288,629
OP Units		5,800,729		5,919,705
Series A Units		875,480		875,480

Series D Units		969,374		—
Unvested restricted stock awards included for treasury stock method		—		211,602
Shares related to exchangeable senior notes and dilutive stock options		23,409		844,144
Average number of common shares outstanding - diluted		139,676,548		137,139,560
Earnings per common share
Basic		$	1.54	$	0.84
Diluted		$	1.53	$	0.83

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 months ended March 31, 2021 and 2020. 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			Net Liabilities/ (Assets) Assumed		Real estate assets



Q1 2021	9	$	151,884	$	148,940		$	2,944	$	151,884





Q1 2020	2	$	19,399	$	19,354		$	45	$	19,399

Store Dispositions

On March 1, 2021, the Company sold 16 stores that had been classified as held for sale to a newly established unconsolidated joint venture. The Company received cash of $132,759 and an interest in the new joint venture valued at $33,878. The Company recognized a gain of $64,424 related to the sale of these properties.

6. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

Investments in unconsolidated real estate entities and cash distributions in unconsolidated real estate ventures represent the Company's interest in preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop") and the Company's noncontrolling interest in real estate joint ventures that own stores. The Company accounts for its investment in SmartStop preferred stock, which does not have a readily determinable fair value, at the transaction price less impairment, if any. The Company accounts for its investments in joint ventures using the equity method of accounting. The Company initially records these investments at cost and subsequently adjusts for cash contributions, distributions and net equity in income or loss, which is allocated in accordance with the provisions of the applicable partnership or joint venture agreement.

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

The Company separately reports investments with net equity less than zero in cash distributions in unconsolidated real estate ventures in the condensed consolidated balance sheets. The net equity of certain joint ventures is less than zero because distributions have exceeded the Company's investment in and share of income from these joint ventures. This is generally the result of financing distributions, capital events or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization while distributions do not.

EXTRA SPACE STORAGE INC.

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

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

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


	Number of Stores	Equity Ownership %	Excess Profit % (1)	March 31,		December 31,
				2021		2020
PR EXR Self Storage, LLC	5	25%	40%	$	60,120	$	60,092
WICNN JV LLC	10	10%	35%	35,915		36,032
ESS-CA TIVS JV LP (2)	16	55%	60%	33,960		—
GFN JV, LLC	7	10%	30%	18,358		18,397
ESS-NYFL JV LP	11	16%	26%	12,250		12,211
PRISA Self Storage LLC	85	4%	4%	8,732		8,815
Alan Jathoo JV LLC	9	10%	10%	7,752		7,780
Storage Portfolio III JV LLC	5	10%	30%	5,686		5,726
ESS Bristol Investments LLC	8	10%	30%	2,770		2,810
Extra Space Northern Properties Six LLC	10	10%	35%	(2,666)		(2,541)
Storage Portfolio II JV LLC	36	10%	30%	(5,531)		(5,441)
VRS Self Storage, LLC	16	45%	54%	(14,362)		17,186
Storage Portfolio I LLC	24	34%	49%	(39,530)		(39,144)
Other minority owned stores	21	10-50%	19-50%	27,960		28,395
SmartStop Self Storage REIT, Inc. Preferred Stock (3)	n/a	n/a	n/a	200,000		200,000
Net Investments in and Cash distributions in unconsolidated real estate entities	263			$	351,414	$	350,318

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

(2) The Company sold 16 operating stores to this newly formed joint venture in March 2021. The Company received cash of $132,759 and an interest in the new joint venture valued at $33,878. This joint venture is unconsolidated and the Company accounts for its investment under the equity method of accounting as the Company does not have voting control but does exercise significant influence over the joint venture.

(3) The Company invested in shares of convertible preferred stock of SmartStop. The dividend rate for the preferred shares is 6.25% per annum, subject to increase after five years. The preferred shares are generally not redeemable for five years, except in the case of a change of control or initial listing of SmartStop. Dividend income from this investment is included on the equity in earnings and dividend income from unconsolidated real estate entities line on the Company's condensed consolidated statements of operations.

7. INVESTMENTS IN DEBT SECURITIES AND NOTES RECEIVABLE

Investments in debt securities and notes receivable consists of the Company's investment in mandatorily redeemable preferred stock of Jernigan Capital, Inc. ("JCAP") in connection with JCAP's acquisition by affiliates of NexPoint Advisors, L.P. ("NexPoint Investment") and receivables due to the Company under its bridge loan program. Information about these balances is as follows:


	March 31, 2021		December 31, 2020
Debt securities - NexPoint Series A Preferred Stock	$	200,000	$	200,000
Debt securities - NexPoint Series B Preferred Stock	100,000		100,000
Notes Receivable-Bridge Loans	129,119		187,368
Notes Receivable-Senior Mezzanine Loan	101,636		101,553
Dividends Receivable	12,970		4,889
	$	543,725	$	593,810

EXTRA SPACE STORAGE INC.

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

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

In November 2020, the Company invested $300,000 in the preferred stock of JCAP in connection with the acquisition of JCAP by affiliates of NexPoint Advisors, L.P. This investment consists of 200,000 Series A Preferred Shares valued at a total of $200,000, and 100,000 Series B Preferred Shares valued at a total of $100,000. The JCAP preferred stock is mandatorily redeemable after five years, with two one-year extension options. NexPoint may redeem the Preferred Shares at any time, subject to certain prepayment penalties. The Company accounts for the JCAP preferred stock as a held to maturity debt security at amortized cost. The Series A Preferred Shares and the Series B Preferred Shares have initial dividend rates of 10.0% and 12.0%, respectively. If the investment is not retired after five years, the preferred dividends increase annually.

The Company provides bridge loan financing to third-party self-storage operators. These notes receivable consist of primary mortgage and mezzanine loans receivable, collateralized by self-storage properties. These notes receivable typically have a term of three years with two one year extensions, and have variable interest rates. The Company intends to sell the majority of the mortgage receivables and keep the mezzanine receivables to maturity. During the three months ended March 31, 2021, the Company sold a total principal amount of $81,764 of its mortgage bridge loans receivable to third parties for a total of $81,250 in cash and closed on $25,772 in new mortgage and mezzanine bridge loans.

In July 2020, the Company purchased a senior mezzanine note receivable with a principal amount of $103,000. This note receivable bears interest at 5.5%, and matures in December 2023. The Company paid cash of $101,142 for the loan receivable and accounts for the discount at amortized cost. The discount is being amortized over the term of the loan receivable.

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 months ended March 31, 2021 and 2020, 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 $35,059 will be reclassified and increase interest expense.

The Company held 22 derivative financial instruments which had a total combined notional amount of $2,087,311 as of March 31, 2021.

EXTRA SPACE STORAGE INC.

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

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

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
	March 31, 2021		December 31, 2020
Derivatives designated as hedging instruments:	Fair Value
Other assets	$	—	$	—
Other liabilities	$	75,240	$	98,325

Effect of Derivative Instruments

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


	Gain (loss) recognized in OCI For the Three Months Ended March 31,				Location of amounts reclassified from OCI into income	Gain (loss) reclassified from OCI For the Three Months Ended March 31,
Type	2021		2020			2021		2020
Swap Agreements	$	14,176	$	(89,710)	Interest expense	$	(8,845)	$	(563)

Credit-risk-related Contingent Features

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

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

As of March 31, 2021, 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 $78,042. As of March 31, 2021, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2021, it could have been required to cash settle its obligations under the agreements at their termination value of $78,042, including accrued interest.

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 were amortized as an adjustment to interest expense over five years, which represented the estimated term based on the first available redemption date, and are included in exchangeable senior notes, net, in the condensed consolidated balance sheets. Prior to the full redemption of the 2015 Notes in November 2020 as described below, the 2015 Notes were general unsecured senior obligations of the Operating Partnership and were fully guaranteed by the Company. Interest was 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 bore interest at 3.125% per annum and contained an exchange settlement feature, which provided that the 2015 Notes could have been, under certain circumstances, 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.

EXTRA SPACE STORAGE INC.

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

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

GAAP requires 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 accounted for the liability and equity components of the 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 were amortized as interest expense over the remaining period of the debt through its first redemption date of October 1, 2020. The effective interest rate on the liability components of the 2015 Notes was 4.0%, which approximated the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

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: