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, 2023
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File Number: 001-32269
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(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 | ||||||
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:
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
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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 May 1, 2023, was 135,049,531 .
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EXTRA SPACE STORAGE INC.
TABLE OF CONTENTS
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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;
•risks associated with our ability to consummate the mergers with Life Storage, Inc. (“Life Storage”) and the timing and closing of the mergers including, among other things, our ability to obtain stockholder approval required to consummate the mergers, the satisfaction or waiver of other conditions to closing in the merger agreement, unanticipated difficulties or expenditures relating to the mergers, potential difficulties in employee retention as a result of the mergers, the occurrence of any event, change or other circumstances that could give rise to the termination of the mergers and the outcome of legal proceedings instituted against us, our directors and others related to the mergers;
•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;
•our reliance on information technologies, which are vulnerable to, among other things, attack from computer viruses and malware, hacking, cyberattacks and other unauthorized access or misuse, any of which could adversely affect our business and 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;
•our ability to recover losses under our insurance policies;
•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.
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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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
| March 31, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets: | |||||||||||
| Real estate assets, net | $ | $ | |||||||||
| Real estate assets - operating lease right-of-use assets | |||||||||||
| Investments in unconsolidated real estate entities | |||||||||||
| Investments in debt securities and notes receivable | |||||||||||
| Cash and cash equivalents | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities, Noncontrolling Interests and Equity: | |||||||||||
| Notes payable, net | $ | $ | |||||||||
| Unsecured term loans, net | |||||||||||
| Unsecured senior notes, net | |||||||||||
| Revolving lines of credit | |||||||||||
| Operating lease liabilities | |||||||||||
| Cash distributions in unconsolidated real estate ventures | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Noncontrolling Interests and Equity: | |||||||||||
| Extra Space Storage Inc. stockholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total Extra Space Storage Inc. stockholders' equity | |||||||||||
| Noncontrolling interest represented by Preferred Operating Partnership units, net | |||||||||||
| Noncontrolling interests in Operating Partnership, net and other noncontrolling interests | |||||||||||
| Total noncontrolling interests and equity | |||||||||||
| Total liabilities, noncontrolling interests and equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
(unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues: | |||||||||||
| Property rental | $ | $ | |||||||||
| Tenant reinsurance | |||||||||||
| Management fees and other income | |||||||||||
| Total revenues | |||||||||||
| Expenses: | |||||||||||
| Property operations | |||||||||||
| Tenant reinsurance | |||||||||||
| General and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Total expenses | |||||||||||
| Income from operations | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Income before equity in earnings and dividend income from unconsolidated real estate entities and income tax expense | |||||||||||
| Equity in earnings and dividend income from unconsolidated real estate entities | |||||||||||
| Income tax expense | ( | ( | |||||||||
| Net income | |||||||||||
| Net income allocated to Preferred Operating Partnership noncontrolling interests | ( | ( | |||||||||
| Net income allocated to Operating Partnership and other noncontrolling interests | ( | ( | |||||||||
| Net income attributable to common stockholders | $ | $ | |||||||||
| Earnings per common share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average number of shares | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| Cash dividends paid per common share | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Extra Space Storage Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
(unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income: | |||||||||||
| Change in fair value of interest rate swaps | ( | ||||||||||
| Total comprehensive income | |||||||||||
| Less: comprehensive income attributable to noncontrolling interests | |||||||||||
| Comprehensive income attributable to common stockholders | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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 Income (Loss) | Accumulated Deficit | Total Noncontrolling Interests and Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units for cash | — | ( | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred B Units in the Operating Partnership for cash | ( | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with acquisitions | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | ( | ( | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid on common stock at $ | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with share based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid upon net settlement of share based compensation | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants cancelled | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred A Units in the Operating Partnership for stock | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred D Units in the Operating Partnership for stock | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated joint venture | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to Operating Partnership units held by noncontrolling interests | ( | ( | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid on common stock at $ | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Non-cash lease expense | |||||||||||
| Compensation expense related to stock-based awards | |||||||||||
| Accrual of interest income added to principal of debt securities and notes receivable | ( | ( | |||||||||
| Distributions from unconsolidated real estate ventures | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of real estate assets | ( | ( | |||||||||
| Development and redevelopment of real estate assets | ( | ( | |||||||||
| Investment in unconsolidated real estate entities | ( | ( | |||||||||
| Return of investment in unconsolidated real estate ventures | |||||||||||
| Issuance and purchase of notes receivable | ( | ( | |||||||||
| Principal payments received from notes receivable | |||||||||||
| Proceeds from sale of notes receivable | |||||||||||
| Purchase of equipment and fixtures | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from notes payable and revolving lines of credit | |||||||||||
| Principal payments on notes payable and revolving lines of credit | ( | ( | |||||||||
| Proceeds from issuance of public bonds, net | |||||||||||
| Deferred financing costs | ( | ( | |||||||||
| Redemption of Operating Partnership units held by noncontrolling interests | ( | ||||||||||
| Redemption of Preferred Units for cash | ( | ( | |||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of the period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of the period | $ | $ | |||||||||
| Cash and equivalents, including restricted cash at the beginning of the period: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Restricted cash included in other assets | |||||||||||
| $ | $ | ||||||||||
| Cash and equivalents, including restricted cash at the end of the period: | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Restricted cash included in other assets | |||||||||||
| $ | $ | ||||||||||
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Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental schedule of cash flow information | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid | |||||||||||
| Supplemental schedule of noncash investing and financing activities: | |||||||||||
| Acquisition and establishment of operating lease right of use assets and lease liabilities | |||||||||||
| Real estate assets - operating lease right-of-use assets | $ | $ | |||||||||
| Operating lease liabilities | ( | ||||||||||
| Acquisitions of real estate assets | |||||||||||
| Real estate assets, net | $ | $ | |||||||||
| Value of equity issued | ( | ||||||||||
| Net Liabilities Assumed | ( | ||||||||||
| Investment in unconsolidated real estate ventures | |||||||||||
| Accrued construction costs and capital expenditures | |||||||||||
| Acquisition of real estate assets | $ | $ | |||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Redemption of Preferred Operating Partnership units for common stock | |||||||||||
| Preferred Operating Partnership units | $ | $ | |||||||||
| Additional paid-in capital | ( | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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, which meets the definition of a variable interest entity and is consolidated. 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, 2023, the Company had direct and indirect equity interests in 1,457 stores. In addition, the Company managed 931 stores for third parties, bringing the total number of stores which it owns and/or manages to 2,388 . These stores are located in 41 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
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance that provides transition relief for reference rate reform, including optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The Company also elected to apply additional expedients related to contract modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes are made to applicable debt and derivative contracts. Application of these expedients preserves the presentation of derivatives and debt contracts consistent with past presentation. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope", which refines the scope of Topic 848 and clarifies some of its guidance. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. The Company has begun transitioning debt over to Secured Overnight Financing Rate ("SOFR") as part of the reference rate reform.
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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, 2023, 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, 2023, 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 | $ | $ | $ | |||||||||||||||||
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, 2023 or December 31, 2022.
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.
13
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The Company evaluates goodwill for impairment at least annually and whenever events, circumstances, and other related factors indicate that the fair value of the related reporting unit may be less than the carrying value. If the fair value of the reporting unit is determined to exceed the aggregate carrying amount, no impairment charge is recorded. Otherwise, an impairment charge is recorded to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.
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, 2023, 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 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. For acquisitions that meet the definition of a business, the Company estimates the fair value of the identifiable assets and liabilities of the acquired entity on the acquisition date. We measure goodwill as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Acquisition-related expenses arising from the transaction are expensed as incurred. The Company includes the results of operations of the businesses that it acquires beginning on the acquisition date.
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, investments in debt securities and notes receivable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at March 31, 2023 and December 31, 2022 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, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Notes receivable from Preferred and Common Operating Partnership unit holders | $ | $ | $ | $ | |||||||||||||||||||
| Fixed rate notes receivable | $ | $ | $ | $ | |||||||||||||||||||
| Fixed rate debt | $ | $ | $ | $ | |||||||||||||||||||
14
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
4. REAL ESTATE ASSETS
| March 31, 2023 | December 31, 2022 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings, improvements and other intangibles | |||||||||||
| Right of use asset - finance lease | |||||||||||
| Intangible assets - tenant relationships | |||||||||||
| Intangible lease rights | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Net operating real estate assets | |||||||||||
| Real estate under development/redevelopment | |||||||||||
| Real estate assets, net | $ | $ | |||||||||
5. OTHER ASSETS
The components of other assets are summarized as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Goodwill | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Prepaid expenses and deposits | |||||||||||
| Equipment and fixtures, net | |||||||||||
| Fair value of interest rate swaps | |||||||||||
| Deferred line of credit financing costs, net | |||||||||||
| Restricted cash | |||||||||||
| $ | $ | ||||||||||
6. 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
15
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 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, 2023 and 2022 was $157.15 and $198.83 , respectively.
The following table presents the number of Preferred Operating Partnership units as if converted into 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Equivalent Shares (if converted) | Equivalent Shares (if converted) | ||||||||||
| Series B Units | |||||||||||
| Series D Units | |||||||||||
On January 25, 2023, the remaining Series A Units were redeemed (see Note 13 below). 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 had the option to redeem in cash or shares and where the Company had 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 was 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 was equal to the number of Series A Units outstanding, with no additional shares included related to the fixed $101,700 amount.
16
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The computation of earnings per common share is as follows for the periods presented:
| For the Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income attributable to common stockholders | $ | $ | |||||||||
| Earnings and dividends allocated to participating securities | ( | ( | |||||||||
| Earnings for basic computations | |||||||||||
| Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units | |||||||||||
| Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units) | ( | ||||||||||
| Net income for diluted computations | $ | $ | |||||||||
| Weighted average common shares outstanding: | |||||||||||
| Average number of common shares outstanding - basic | |||||||||||
| OP Units | |||||||||||
| Series A Units | |||||||||||
| Series D Units | |||||||||||
| Shares related to dilutive stock options | |||||||||||
| Average number of common shares outstanding - diluted | |||||||||||
| Earnings per common share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
7. ACQUISITIONS AND DISPOSITIONS
Store Acquisitions
The following table shows the Company’s acquisitions of stores for the three months ended March 31, 2023 and 2022. The table excludes purchases of raw land and improvements made to existing assets. All store acquisitions are considered asset acquisitions under ASU 2017-01, " Business Combinations (Topic 805): Clarifying the Definition of a Business."
| Total | ||||||||||||||||||||||||||||||||
| Period | Number of Stores | Cash Paid | Finance Lease Liability | Investments in Real Estate Ventures | Net Liabilities/ (Assets) Assumed | Value of Equity Issued | Real estate assets | |||||||||||||||||||||||||
| Q1 2023 | ||||||||||||||||||||||||||||||||
| Q1 2022 | ||||||||||||||||||||||||||||||||
17
EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Other Investments
On June 1, 2022 the Company completed the acquisition of Bargold Storage Systems, LLC ("Bargold") for a purchase price of approximately $179.3 million. Bargold leases space in apartment buildings, primarily in New York City and its boroughs, builds out the space as storage units, and subleases the units to tenants. As of June 1, 2022, Bargold had approximately 17,000 storage units with an approximate occupancy of 97 %. This acquisition is considered a business combination under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.
| Cash and cash equivalents | $ | ||||
| Fixed assets | |||||
| Developed technology | |||||
| Trademarks | |||||
| Customer relationships | |||||
| Other a | |||||