Amounts in thousands, except store and share data
CAUTIONARY LANGUAGE
The following discussion and analysis should be read in conjunction with our unaudited "Condensed Consolidated Financial Statements" and the "Notes to Condensed Consolidated Financial Statements (unaudited)" appearing elsewhere in this report and the "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Form 10-K for the year endedDecember 31, 2022 . We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Statement on Forward-Looking Information."
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year endedDecember 31, 2022 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.
OVERVIEW
We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT"), formed to own, operate, manage, acquire, develop and redevelop self-storage properties ("stores"). We derive substantially all of our revenues from our two segments: storage operations and tenant reinsurance. Primary sources of revenue for our storage operations segment include rents received from tenants under leases at each of our wholly-owned stores. Our operating results depend materially on our ability to lease available self-storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. Consequently, management spends a significant portion of their time maximizing cash flows from our diverse portfolio of stores. Revenue from our tenant reinsurance segment consists of insurance revenues from the reinsurance of risks relating to the loss of goods stored by tenants in our stores. Our stores are generally situated in highly visible locations clustered around large population centers. These areas typically enjoy above average population growth and income levels. The clustering of our assets around these population centers enables us to reduce our operating costs through economies of scale. To maximize the performance of our stores, we employ industry-leading revenue management systems. Developed internally, these systems enable us to analyze, set and adjust rental rates in real time across our portfolio in order to respond to changing market conditions. We believe our systems and processes allow us to more pro-actively manage revenues. We operate in competitive markets, often where consumers have multiple stores from which to choose. Competition has impacted, and will continue to impact, our store results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. We believe that we are able to 29 -------------------------------------------------------------------------------- respond quickly and effectively to changes in local, regional and national economic conditions by adjusting rental rates through the combination of our revenue management team and our proprietary pricing systems. We consider a store to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a store to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as ofJanuary 1 of the current year, or has been open for three years prior toJanuary 1 of the current year. OnApril 3, 2023 , we entered into a definitive merger agreement for an all-stock transaction with Life Storage, Inc. ("Life Storage"),Life Storage LP (the "Operating Partnership"),Extra Space Storage LP ("Extra Space OP"),Eros Merger Sub, LLC ("Eros Merger Sub") andEros OP Merger Sub, LLC ("Eros OP Merger Sub"), pursuant to which Eros Merger Sub will merge with and into Life Storage (the "company merger"), with Life Storage surviving the company merger as our wholly owned subsidiary and (b) following certain conversion and contributions transactions, Eros OP Merger Sub will merge with and into theOperating Partnership (the "partnership merger" and together with the company merger, the "mergers"), with theOperating Partnership surviving the partnership merger and becoming a wholly owned subsidiary of Extra Space OP. Under the terms of the merger agreement, Life Storage stockholders will receive 0.895 of an Extra Space common share for each Life Storage share they own for estimated total consideration of$12.7 billion , based on Life Storage's closing share price onMarch 31, 2023 . The combined company will own and/or manage over 3,500 locations and over 264.0 million net rentable square feet. The transaction is currently expected to close in the second half of 2023, subject to the approval of our stockholders and Life Storage stockholders and satisfaction of other customary closing conditions. PROPERTIES As ofMarch 31, 2023 , we owned or had ownership interests in 1,457 operating stores. Of these stores, 1,133 are wholly-owned, and 323 are in unconsolidated joint ventures. In addition, we managed an additional 931 stores for third parties bringing the total number of stores which we own and/or manage to 2,388. These stores are located in 41 states andWashington, D.C. The majority of our stores are clustered around large population centers. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. Our acquisitions have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence. As ofMarch 31, 2023 , approximately 1,380,000 tenants were leasing storage units at the operating stores that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. Although leases are short-term in duration, the typical tenant tends to remain at our stores for an extended period of time. For stores that were stabilized as ofMarch 31, 2023 , the average length of stay was approximately 16.6 months. The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was$21.05 for the three months endedMarch 31, 2023 , compared to$19.47 for the three months endedMarch 31, 2022 . Average annual rent per square foot for new leases was$17.00 for the three months endedMarch 31, 2023 , compared to$19.23 for the three months endedMarch 31, 2022 . The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 2.4% and 3.0%, respectively. Our store portfolio is made up of different types of construction and building configurations. Most often sites are what we consider "hybrid" stores, a mix of drive-up and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of stores featuring ground-floor access only.
The following table presents additional information regarding net rentable square feet and the number of stores by state.
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March 31, 2023 REIT Owned Joint Venture Owned Managed Total Net Rentable Square Net Rentable Square Location Property Count(1) Feet Property Count Net Rentable Square Feet Property Count Feet Property Count Net Rentable Square FeetAlabama 9 679,423 2 150,808 5 331,376 16 1,161,607Arizona 25 1,782,842 11 838,314 22 1,886,960 58 4,508,116California 177 13,674,825 49 3,593,534 103 9,438,394 329 26,706,753Colorado 17 1,149,673 9 664,192 26 1,883,566 52 3,697,431Connecticut 7 538,516 7 575,936 9 565,783 23 1,680,235Delaware - - 2 143,615 3 229,006 5 372,621Florida 112 8,676,790 45 3,780,667 113 8,775,945 270 21,233,402Georgia 68 5,270,188 15 1,216,731 25 1,916,018 108 8,402,937Hawaii 14 943,023 - - 3 159,393 17 1,102,416Idaho 2 131,444 - - 2 144,965 4 276,409Illinois 60 3,761,398 10 740,804 32 2,323,422 102 6,825,624Indiana 91 3,947,901 1 57,786 21 1,511,350 113 5,517,037Kansas 1 50,209 2 108,920 3 229,403 6 388,532Kentucky 13 961,009 1 51,771 9 784,596 23 1,797,376Louisiana 5 386,884 - - 13 968,790 18 1,355,674Maine - - - - 8 572,816 8 572,816Maryland 35 2,953,703 11 898,245 43 3,137,011 89 6,988,959Massachusetts 47 3,001,958 9 614,539 29 1,819,757 85 5,436,254Michigan 8 667,804 4 309,126 11 831,784 23 1,808,714Minnesota 7 584,539 4 304,397 16 1,171,915 27 2,060,851Mississippi 3 234,295 - - 1 65,368 4 299,663Missouri 6 431,181 2 119,600 13 986,582 21 1,537,363Nebraska - - - - 3 278,106 3 278,106Nevada 14 1,039,847 4 474,001 8 817,803 26 2,331,651New Hampshire 2 134,764 2 84,165 9 483,879 13 702,808New Jersey 64 5,116,539 17 1,228,585 40 3,028,054 121 9,373,178New Mexico 11 712,687 10 683,410 13 955,943 34 2,352,040New York 28 2,050,035 18 1,512,084 37 2,274,036 83 5,836,155North Carolina 23 1,728,522 5 401,432 21 1,642,836 49 3,772,790Ohio 24 1,464,162 5 325,295 10 766,260 39 2,555,717Oklahoma 1 61,503 - - 20 1,550,456 21 1,611,959Oregon 8 550,177 1 65,245 10 738,443 19 1,353,865Pennsylvania 21 1,547,250 9 680,007 38 2,767,209 68 4,994,466Rhode Island 2 138,252 - - 5 425,653 7 563,905South Carolina 23 1,718,988 11 708,356 28 2,358,398 62 4,785,742Tennessee 22 1,855,601 13 880,881 12 890,194 47 3,626,676Texas 111 9,109,526 30 2,369,336 87 7,617,215 228 19,096,077Utah 10 729,132 - - 24 1,951,598 34 2,680,730Virginia 53 4,271,375 9 703,437 27 1,814,830 89 6,789,642Washington 9 685,706 - - 13 1,057,123 22 1,742,829Washington, DC 1 100,019 1 103,618 4 311,337 6 514,974Wisconsin - - 4 371,423 12 921,101 16 1,292,524 Totals 1,134 82,841,690 323 24,760,260 931 72,384,674 2,388 179,986,624
(1) Excludes 17,000 units related to the Bargold transaction. See Note 7 in the Notes to the Condensed Consolidated Financial Statements.
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RESULTS OF OPERATIONS
Comparison of the three months ended
Overview
Results for the three months endedMarch 31, 2023 included the operations of 1,457 stores (1,133 wholly-owned, one in a consolidated joint venture, and 323 in joint ventures accounted for using the equity method) compared to the results for the three months endedMarch 31, 2022 , which included the operations of 1,283 stores (995 wholly-owned, zero in consolidated joint ventures, and 288 in joint ventures accounted for using the equity method).
Revenues
The following table presents information on revenues earned for the periods indicated: For the Three Months Ended March 31, 2023 2022 $ Change % Change Revenues: Property rental$ 433,962 $ 379,808 $ 54,154 14.3 % Tenant reinsurance 47,704 43,797 3,907 8.9 % Management fees and other income 21,384 19,957 1,427 7.2 % Total revenues$ 503,050 $ 443,562 $ 59,488 13.4 % Property Rental-The increase in property rental revenues for the three months endedMarch 31, 2023 was primarily the result of an increase of$26,692 at our stabilized stores related primarily to higher average rates to existing customers. Property rental revenue also increased by$21,109 associated with acquisitions completed in 2023 and 2022. We acquired one wholly-owned store during the three months endedMarch 31, 2023 and a total of 153 stores during the year endedDecember 31, 2022 .
Tenant Reinsurance-The increase in our tenant reinsurance revenues was due
primarily to an increase in the number of stores operated. We operated 2,388
stores at
Management Fees and Other Income-Management fees and other income primarily represent the fees collected for our management of stores owned by third parties and unconsolidated joint ventures and other transaction fee income. The increase for the three months endedMarch 31, 2023 was due to both an increase in the number of stores managed and an increase in the overall revenue of stores under management when compared to the same period last year. As ofMarch 31, 2023 , we managed 1,255 stores for joint ventures and third parties, compared to 1,135 stores as ofMarch 31, 2022 .
Expenses
The following table presents information on expenses for the periods indicated: For the Three Months Ended March 31, 2023 2022 $ Change % Change Expenses: Property operations$ 117,166 $ 103,542 $ 13,624 13.2 % Tenant reinsurance 9,089 7,042 2,047 29.1 % General and administrative 34,763 29,762 5,001 16.8 % Depreciation and amortization 78,490 67,906 10,584 15.6 % Total expenses$ 239,508 $ 208,252 $ 31,256 15.0 % 32
-------------------------------------------------------------------------------- Property Operations-The increase in property operations expense during the three months endedMarch 31, 2023 consists primarily of an increase of$7,006 related to acquisitions completed in 2023 and 2022. We acquired one wholly-owned store during the three months endedMarch 31, 2023 and a total of 153 stores during the year endedDecember 31, 2022 . Additionally, for the three months endedMarch 31, 2023 there was an increase of$4,394 at our stabilized stores primarily due to payroll, marketing, credit card processing fees, utilities and insurance, partially offset by repairs and maintenance and property taxes.
Tenant Reinsurance-Tenant reinsurance expense represents the costs that are
incurred to provide tenant reinsurance. We operated 2,388 stores at
General and Administrative-General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, office expense, office rent, travel and professional fees. Payroll has continued to increase as a result of outsized inflation. We did not observe any material trends in specific travel or other expenses apart from inflationary pressures and from the increase due to the management of additional stores. Also, during the three months endedMarch 31, 2023 increases relate in part to the acquisition of Bargold inJune 2022 and 106 stores added with the Storage Express acquisition inSeptember 2022 compared to the same period last year. Depreciation and Amortization-Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired one wholly-owned store during the three months endedMarch 31, 2023 and a total of 153 stores during the year endedDecember 31, 2022 .
Other Revenues and Expenses
The following table presents information about other revenues and expenses for the periods indicated: For the Three Months Ended March 31, 2023 2022 $ Change % Change Interest expense (80,099) (42,538) (37,561) 88.3 % Interest income 19,438 18,989 449 2.4 % Equity in earnings and dividend income from 10,305 9,097 1,208 13.3 %
unconsolidated real estate entities
Income tax expense (4,308) (3,141) (1,167) 37.2 % Total other revenues & expenses, net$ (54,664) $ (17,593) $ (37,071) 210.7 % Interest Expense-The increase in interest expense during the three months endedMarch 31, 2023 was primarily the result of a higher weighted average interest rate and debt balance compared to the same period in the prior year. Interest Income-Interest income represents interest earned on bridge loans, notes receivable and debt securities and income earned on notes receivable fromCommon and Preferred Operating Partnership unit holders. The increase in interest income during the three months endedMarch 31, 2023 was primarily the result of an increase in the notes receivable for our bridge loan program along with an increase in interest rates. Equity in Earnings and Dividend Income fromUnconsolidated Real Estate Entities-Equity in earnings of unconsolidated real estate entities represents the income earned through our ownership interests in unconsolidated joint ventures. In these joint ventures, we and our joint venture partners generally receive a preferred return on our invested capital. To the extent that cash or profits in excess of these preferred returns are generated, we receive a higher percentage of the excess cash or profits. Dividend income represents dividends from our$200,000 investment in preferred stock of SmartStop.
Income Tax Expense-The increase in income tax expense for the three months ended
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FUNDS FROM OPERATIONS
Funds from operations ("FFO") provides relevant and meaningful information about our operating performance that is necessary, along with net income and cash flows, for an understanding of our operating results. We believe FFO is a meaningful disclosure as a supplement to net earnings. Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets. FFO is defined by theNational Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income computed in accordance with GAAP, excluding gains or losses on sales of operating stores and impairment write downs of depreciable real estate assets, plus real estate related depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in our condensed consolidated financial statements. FFO should not be considered a replacement of net income computed in accordance with GAAP. The computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income as an indication of our performance, as an alternative to net cash flow from operating activities, as a measure of our liquidity, or as an indicator of our ability to make cash distributions.
The following table presents the calculation of FFO for the periods indicated:
For the Three Months Ended March
31, 2023 2022 Net income attributable to common stockholders$ 196,304 $ 203,579 Adjustments: Real estate depreciation 71,248 62,692 Amortization of intangibles 4,170 2,766
Unconsolidated joint venture real estate depreciation and amortization
4,939 3,853
Distributions paid on
(159) (572)
Income allocated to
12,574 14,138
Funds from operations attributable to common stockholders and unit holders
SAME-STORE RESULTS Our same-store pool for the periods presented consists of 914 stores that are wholly-owned and operated and that were stabilized by the first day of the earliest calendar year presented. We consider a store to be stabilized once it has been open for three years or has sustained average square foot occupancy of 80% or more for one calendar year. We believe that by providing same-store results from a stabilized pool of stores, with accompanying operating metrics including, but not limited to: occupancy, rental revenue growth, operating expense growth, net operating income growth, etc., stockholders and potential investors are able to evaluate operating performance without the effects of non-stabilized occupancy levels, rent levels, expense levels, acquisitions or completed developments. Same-store results should not be used as a basis for future same-store performance or for the performance of our stores as a whole. The following table presents operating data for our same-store portfolio. 34 --------------------------------------------------------------------------------
For the Three Months Ended March 31, Percent 2023 2022 Change Same-store rental revenues Net rental income$ 370,630 $ 345,875 7.2 % Other operating income 13,462 11,748 14.6 % Total same-store rental revenues 384,092 357,623 7.4 % Same-store operating expenses Payroll and benefits 20,842 20,060 3.9 % Marketing 6,172 5,560 11.0 % Office expense 11,979 10,679 12.2 % Property operating expense 9,863 8,828 11.7 % Repairs and maintenance 6,417 7,486 (14.3) % Property taxes 34,346 34,790 (1.3) % Insurance 3,622 2,713 33.5 % Total same-store operating expenses 93,241 90,116 3.5 % Same-store net operating income$ 290,851 $ 267,507 8.7 % Same-store square foot occupancy as of quarter end 93.5% 94.3% Properties included in same-store 914 914 Same-store revenues for the three months endedMarch 31, 2023 increased compared to the same period in 2022 due to higher average rates to existing customers and higher other operating income partially offset by lower occupancy. Same-store expenses increased for the three months endedMarch 31, 2023 compared to the same period in 2022 due to increases in payroll, marketing, credit card processing fees, utilities and insurance, partially offset by saving in repairs and maintenance and property taxes. 35 --------------------------------------------------------------------------------
The following table presents a reconciliation of same-store net operating income to net income as presented on our condensed consolidated statements of operations for the periods indicated:
For the Three Months Ended March 31, 2023 2022 Net Income$ 208,878 $ 217,717 Adjusted to exclude: Equity in earnings and dividend income from unconsolidated real estate entities (10,305) (9,097) Interest expense 80,099 42,538 Depreciation and amortization 78,490 67,906 Income tax expense 4,308 3,141 General and administrative 34,763 29,762 Management fees, other income and interest income (40,822) (38,946) Net tenant insurance (38,615) (36,755) Non same-store rental revenue (49,870) (22,185) Non same-store operating expense 23,925 13,426 Total same-store net operating income $
290,851
Same-store rental revenues$ 384,092 $ 357,623 Same-store operating expenses 93,241 90,116 Same-store net operating income$ 290,851 $ 267,507 CASH FLOWS Cash flows from operating activities for the three months endedMarch 31, 2023 decreased when compared to the same period in the prior year. Cash flows used in investing activities relates primarily to our acquisition and development of REIT and joint venture assets, as well as activity on our bridge loan program. Cash flows from financing activities depend primarily on our debt and equity financing activities. A summary of cash flows along with significant components are as follows: 36
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