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

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exr-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 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 August 2, 2021, was 133,807,322.

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			27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			37
ITEM 4. CONTROLS AND PROCEDURES			38

PART II. OTHER INFORMATION			39
ITEM 1. LEGAL PROCEEDINGS			39
ITEM 1A. RISK FACTORS			39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			39
ITEM 4. MINE SAFETY DISCLOSURES			39
ITEM 5. OTHER INFORMATION			39
ITEM 6. EXHIBITS			40
SIGNATURES			41

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)


	June 30, 2021		December 31, 2020
	(unaudited)
Assets:
Real estate assets, net	$	8,113,074	$	7,893,802
Real estate assets - operating lease right-of-use assets	233,929		252,172
Investments in unconsolidated real estate entities	361,228		397,444
Investments in debt securities and notes receivable	568,781		593,810
Cash and cash equivalents	56,006		109,124
Restricted cash	3,743		18,885
Other assets, net	126,331		130,611
Total assets	$	9,463,092	$	9,395,848
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	5,109,882	$	4,797,303

Revolving lines of credit	261,000		949,000
Operating lease liabilities	238,411		263,485
Cash distributions in unconsolidated real estate ventures	62,704		47,126
Accounts payable and accrued expenses	150,091		130,012
Other liabilities	280,049		272,798
Total liabilities	6,102,137		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, 133,791,109 and 131,357,961 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively	1,337		1,314
Additional paid-in capital	3,288,852		3,000,458
Accumulated other comprehensive loss	(71,830)		(99,093)
Accumulated deficit	(250,271)		(354,900)
Total Extra Space Storage Inc. stockholders' equity	2,968,088		2,547,779
Noncontrolling interest represented by Preferred Operating Partnership units, net	172,902		172,052
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	219,965		216,293
Total noncontrolling interests and equity	3,360,955		2,936,124
Total liabilities, noncontrolling interests and equity	$	9,463,092	$	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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Revenues:
Property rental	$	321,500	$	279,312	$	625,093	$	566,015
Tenant reinsurance	42,334		35,078		81,953		68,691
Management fees and other income	14,796		12,856		30,441		24,992
Total revenues	378,630		327,246		737,487		659,698
Expenses:
Property operations	89,155		89,040		181,522		179,337
Tenant reinsurance	6,735		6,858		13,896		13,536
General and administrative	26,341		25,337		49,881		48,348
Depreciation and amortization	59,570		56,018		118,169		111,293
Total expenses	181,801		177,253		363,468		352,514
Gain on real estate transactions	—		—		63,883		—
Income from operations	196,829		149,993		437,902		307,184
Interest expense	(40,240)		(41,039)		(80,935)		(85,397)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		(1,233)		—		(2,442)
Interest income	12,838		1,669		25,142		3,343
Income before equity in earnings and dividend income from unconsolidated real estate ventures and income tax expense	169,427		109,390		382,109		222,688
Equity in earnings and dividend income from unconsolidated real estate entities	8,322		5,044		15,278		10,087
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest	6,251		—		6,251		—
Income tax expense	(5,421)		(3,177)		(9,558)		(5,356)
Net income	178,579		111,257		394,080		227,419
Net income allocated to Preferred Operating Partnership noncontrolling interests	(3,438)		(3,139)		(7,118)		(6,250)
Net income allocated to Operating Partnership and other noncontrolling interests	(7,193)		(5,207)		(16,016)		(10,079)
Net income attributable to common stockholders	$	167,948	$	102,911	$	370,946	$	211,090
Earnings per common share
Basic	$	1.25	$	0.80	$	2.79	$	1.63
Diluted	$	1.25	$	0.80	$	2.79	$	1.63
Weighted average number of shares
Basic	133,756,610		128,932,152		132,886,933		129,110,131
Diluted	140,407,195		129,082,468		140,428,558		129,285,675
Cash dividends paid per common share	$	1.00	$	0.90	$	2.00	$	1.80

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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	178,579	$	111,257	$	394,080	$	227,419
Other comprehensive income (loss):
Change in fair value of interest rate swaps	5,617		(5,728)		28,630		(94,972)
Total comprehensive income	184,196		105,529		422,710		132,447
Less: comprehensive income attributable to noncontrolling interests	10,898		8,034		24,501		11,647
Comprehensive income attributable to common stockholders	$	173,298	$	97,495	$	398,209	$	120,800

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

Issuance of common stock upon the exercise of options	—		—		—		13,610	—		726		—		—		726
Issuance of common stock in connection with share based compensation	—		—		—		60,032	1		4,883		—		—		4,884
Restricted stock grants cancelled	—		—		—		(889)	—		—		—		—		—
Buyback of common stock, net of offering costs	—		—		—		(172,600)	(1)		—		—		(15,614)		(15,615)

Redemption of Operating Partnership units for stock	—		(3,675)		—		100,000	1		3,674		—		—		—
Redemption of Preferred D Units in the Operating Partnership for Stock	(2,724)		—		—		30,495	—		2,724		—		—		—
Noncontrolling interest in consolidated joint venture	—		—		68		—	—		—		—		—		68

Net income (loss)	3,139		5,216		(9)		—	—		—		—		102,911		111,257
Other comprehensive loss	(41)		(271)		—		—	—		—		(5,416)		—		(5,728)
Distributions to Operating Partnership units held by noncontrolling interests	(3,151)		(5,235)		—		—	—		—		—		—		(8,386)
Dividends paid on common stock at $0.90 per share	—		—		—		—	—		—		—		(116,318)		(116,318)
Balances at June 30, 2020	$	172,542	$	196,867	$	419	129,069,555	$	1,291	$	2,884,940	$	(119,256)	$	(391,285)	$	2,745,518

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

Issuance of common stock in connection with share based compensation		—		—		—		44,990	—		4,983		—		—		4,983
Restricted stock grants cancelled		—		—		—		(4,972)	—		—		—		—		—
Offering costs associated with previous stock issuance		—		—		—		—	—		(211)		—		—		(211)
Redemption of Operating Partnership units for stock		—		(2,185)		—		58,429	1		2,184		—		—		—
Redemption of Operating Partnership units for cash		—		(113)		—		—	—		(359)		—		—		(472)
Repayment of receivable with Operating Partnership units pledged as collateral		—		411		—		—	—		—		—		—		411
Noncontrolling interest in consolidated joint venture		—		—		150		—	—		—		—		—		150
Net income		3,438		7,190		3		—	—		—		—		167,948		178,579
Other comprehensive income		35		232		—		—	—		—		5,350		—		5,617
Distributions to Operating Partnership units held by noncontrolling interests		(3,223)		(5,751)		—		—	—		—		—		—		(8,974)
Dividends paid on common stock at $1.00 per share		—		—		—		—	—		—		—		(133,777)		(133,777)
Balances at June 30, 2021		$	172,902	$	219,466	$	499	133,791,109	$	1,337	$	3,288,852	$	(71,830)	$	(250,271)	$	3,360,955

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 Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net income	$	394,080	$	227,419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	118,169		111,293
Amortization of deferred financing costs	4,869		4,946
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	—		2,442
Non-cash lease expense	945		430
Compensation expense related to stock-based awards	8,635		7,864
Accrual of interest income added to principal of debt securities and notes receivable	(17,312)		—

Gain on real estate transactions	(63,883)		—
Equity in earnings of unconsolidated real estate ventures - gain on sale of real estate assets and purchase of joint venture partner's interest	(6,251)		—
Distributions from unconsolidated real estate ventures in excess of earnings	3,026		4,254
Changes in operating assets and liabilities:

Other assets	5,519		(10,185)
Accounts payable and accrued expenses	19,063		19,963
Other liabilities	(3,172)		23,647
Net cash provided by operating activities	463,688		392,073
Cash flows from investing activities:
Acquisition of real estate assets	(375,209)		(45,246)
Development and redevelopment of real estate assets	(25,782)		(29,991)
Proceeds from sale of real estate assets	194,205		—
Investment in unconsolidated real estate entities	(7,174)		(9,541)
Return of investment in unconsolidated real estate ventures	31,534		—
Issuance and purchase of notes receivable	(68,523)		(24,325)
Principal payments received from notes receivable	20,426		—
Proceeds from sale of notes receivable	87,298		—
Purchase of equipment and fixtures	(2,077)		(2,765)
Net cash used in investing activities	(145,302)		(111,868)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	273,509		—
Proceeds from notes payable and revolving lines of credit	2,372,000		594,000
Principal payments on notes payable and revolving lines of credit	(3,193,025)		(566,689)
Proceeds from issuance of public bonds, net	446,396		—
Deferred financing costs	(5,403)		(12)

Net proceeds from exercise of stock options	4,254		1,670
Repurchase of common stock	—		(67,819)
Redemption of Operating Partnership units held by noncontrolling interests	(472)		—
Proceeds from principal payments on note receivable collateralized by OP Units	411		—
Contributions from noncontrolling interests	—		68
Dividends paid on common stock	(266,317)		(233,515)
Distributions to noncontrolling interests	(17,999)		(16,890)
Net cash used in financing activities	(386,646)		(289,187)
Net decrease in cash, cash equivalents, and restricted cash	(68,260)		(8,982)
Cash, cash equivalents, and restricted cash, beginning of the period	128,009		70,733
Cash, cash equivalents, and restricted cash, end of the period	$	59,749	$	61,751

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2021		2020
Supplemental schedule of cash flow information
Interest paid	$	76,289	$	81,950
Income taxes paid	16,749		1,792
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	$	(2,378)	$	(4,005)
Common stock and paid-in capital	2,378		4,005
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	2,493	$	6,779
Operating lease liabilities	(2,493)		(6,779)

Acquisitions of real estate assets
Real estate assets, net	$	2,673	$	—


Investment in unconsolidated real estate ventures	(2,673)		—


Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	1,016	$	912

Accounts payable and accrued expenses	(1,016)		(912)






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	$	8,514
Other liabilities	(40,993)		(8,514)



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

The Company invests in stores by acquiring wholly-owned stores or by acquiring an equity interest in real estate entities. At June 30, 2021, the Company had direct and indirect equity interests in 1,205 stores. In addition, the Company managed 768 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,973. These stores are located in 40 states and Washington, D.C. The Company also offers tenant reinsurance at its owned and managed stores that insures the value of goods in the storage units.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 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 Financial Accounting Standards Board ("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 June 30, 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 June 30, 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	$	—	$	69,551	$	—

The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of June 30, 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 June 30, 2021, the Company had 17 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 June 30, 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:


	June 30, 2021				December 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	100,458	$	101,900	$	102,333	$	102,311
Fixed rate notes receivable	$	107,454	$	104,000	$	114,145	$	104,000
Fixed rate notes payable	$	4,001,843	$	3,925,841	$	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 and six months ended June 30, 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 June 30, 2021 and 2020 was $149.81 and $92.95, respectively.

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


For the Three Months Ended June 30,		For the Six Months Ended June 30,
2021	2020	2021	2020
Equivalent Shares (if converted)