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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-32269

EXTRA SPACE STORAGE INC.
(Exact name of registrant as specified in its charter) 
Maryland 20-1076777
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

2795 East Cottonwood Parkway, Suite 300
Salt Lake City, Utah 84121
(Address of principal executive offices)

Registrant’s telephone number, including area code: (801365-4600

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each classTrading symbolName of each exchange on which registered
Common Stock, $0.01 par valueEXRNew 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

1


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

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

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.
2

Table of Contents
EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS
 

3


STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information presented in this report contains “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.

All forward-looking statements, including without limitation, management’s examination of historical operating trends and estimates of future earnings, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in “Part II. Item 1A. Risk Factors” below and in “Part I. Item 1A. Risk Factors” included in our most recent Annual Report on Form 10-K. Such factors include, but are not limited to:
 
adverse changes in general economic conditions, the real estate industry and the markets in which we operate;
failure to close pending acquisitions and developments on expected terms, or at all;
the effect of competition from new and existing stores or other storage alternatives, which could cause rents and occupancy rates to decline;
potential liability for uninsured losses and environmental contamination;
the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts (“REITs”), tenant reinsurance and other aspects of our business, which could adversely affect our results;
disruptions in credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates or at all, which could impede our ability to grow;
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.
4


PART I.     FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
 
June 30, 2021December 31, 2020
(unaudited)
Assets:
Real estate assets, net$8,113,074 $7,893,802 
Real estate assets - operating lease right-of-use assets233,929 252,172 
Investments in unconsolidated real estate entities361,228 397,444 
Investments in debt securities and notes receivable568,781 593,810 
Cash and cash equivalents56,006 109,124 
Restricted cash3,743 18,885 
Other assets, net126,331 130,611 
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 credit261,000 949,000 
Operating lease liabilities238,411 263,485 
Cash distributions in unconsolidated real estate ventures62,704 47,126 
Accounts payable and accrued expenses150,091 130,012 
Other liabilities280,049 272,798 
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 capital3,288,852 3,000,458 
Accumulated other comprehensive loss(71,830)(99,093)
Accumulated deficit(250,271)(354,900)
Total Extra Space Storage Inc. stockholders' equity2,968,088 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 interests219,965 216,293 
Total noncontrolling interests and equity3,360,955 2,936,124 
Total liabilities, noncontrolling interests and equity$9,463,092 $9,395,848 

See accompanying notes to unaudited condensed consolidated financial statements.
5


Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
(unaudited)
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2021202020212020
Revenues:
Property rental$321,500 $279,312 $625,093 $566,015 
Tenant reinsurance42,334 35,078 81,953 68,691 
Management fees and other income14,796 12,856 30,441 24,992 
Total revenues378,630 327,246 737,487 659,698 
Expenses:
Property operations89,155 89,040 181,522 179,337 
Tenant reinsurance 6,735 6,858 13,896 13,536 
General and administrative26,341 25,337 49,881 48,348 
Depreciation and amortization59,570 56,018 118,169 111,293 
Total expenses181,801 177,253 363,468 352,514 
Gain on real estate transactions  63,883  
Income from operations196,829 149,993 437,902 307,184 
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 income12,838 1,669 25,142 3,343 
Income before equity in earnings and dividend income from unconsolidated real estate ventures and income tax expense169,427 109,390 382,109 222,688 
Equity in earnings and dividend income from unconsolidated real estate entities8,322 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 interest6,251  6,251  
Income tax expense(5,421)(3,177)(9,558)(5,356)
Net income178,579 111,257 394,080 227,419 
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
Basic133,756,610 128,932,152 132,886,933 129,110,131 
Diluted140,407,195 129,082,468 140,428,558 129,285,675 
Cash dividends paid per common share$1.00 $0.90 $2.00 $1.80 

See accompanying notes to unaudited condensed consolidated financial statements.
6

Extra Space Storage Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
(unaudited)
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2021202020212020
Net income$178,579 $111,257 $394,080 $227,419 
Other comprehensive income (loss):
   Change in fair value of interest rate swaps5,617 (5,728)28,630 (94,972)
Total comprehensive income184,196 105,529 422,710 132,447 
   Less: comprehensive income attributable to noncontrolling interests10,898 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.
7

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

 Noncontrolling InterestsExtra Space Storage Inc. Stockholders' Equity 
Preferred Operating PartnershipOperating PartnershipOtherSharesPar ValueAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal 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 




8

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


Noncontrolling InterestExtra Space Storage Inc. Stockholders' Equity
Preferred Operating PartnershipOperating PartnershipOtherSharesPar ValueAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal 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 income144 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 income3,438 7,190 3 — — — — 167,948 178,579 
Other comprehensive income35 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.
9


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

 For the Six Months Ended June 30,
 20212020
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 amortization118,169 111,293 
Amortization of deferred financing costs4,869 4,946 
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes 2,442 
Non-cash lease expense945 430 
Compensation expense related to stock-based awards8,635 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 earnings3,026 4,254 
Changes in operating assets and liabilities:
Other assets5,519 (10,185)
Accounts payable and accrued expenses19,063 19,963 
Other liabilities(3,172)23,647 
Net cash provided by operating activities463,688 392,073 
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 assets194,205  
Investment in unconsolidated real estate entities(7,174)(9,541)
Return of investment in unconsolidated real estate ventures31,534  
Issuance and purchase of notes receivable(68,523)(24,325)
Principal payments received from notes receivable20,426  
Proceeds from sale of notes receivable87,298  
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 costs273,509  
Proceeds from notes payable and revolving lines of credit2,372,000 594,000 
Principal payments on notes payable and revolving lines of credit(3,193,025)(566,689)
Proceeds from issuance of public bonds, net446,396  
Deferred financing costs(5,403)(12)
Net proceeds from exercise of stock options4,254 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 Units411  
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 period128,009 70,733 
Cash, cash equivalents, and restricted cash, end of the period$59,749 $61,751 
10


Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 For the Six Months Ended June 30,
 20212020
Supplemental schedule of cash flow information
Interest paid$76,289 $81,950 
Income taxes paid16,749 1,792 
Supplemental schedule of noncash investing and financing activities:
Redemption of Operating Partnership units held by noncontrolling interests for common stock
Noncontrolling interests in Operating Partnership$(2,378)$(4,005)
Common stock and paid-in capital2,378 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.

11


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


 
1.    ORGANIZATION
Extra Space Storage Inc. (the “Company”) is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”), formed as a Maryland corporation on April 30, 2004, to own, operate, manage, acquire, develop and redevelop 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.

12


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
DescriptionQuoted 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.

13


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, 2021December 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 

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.    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,
2021202020212020
Equivalent Shares (if converted)Equivalent Shares (if converted)Equivalent Shares (if converted)Equivalent Shares (if converted)
Common OP Units 5,876,356  5,898,029 
Series A Units (Variable Only) 875,480  875,480 
Series B Units273,027 450,803 301,483 425,446 
Series D Units783,406 1,282,322  1,214,732 
1,056,433 8,484,961 301,483 8,413,687 


As of June 30, 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 June 30, 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
15


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
that those shares be included in the Company’s calculation of weighted average common shares outstanding for the diluted earnings per share computation. For the three and six months ended June 30, 2021 and 2020, zero and 121,283 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.