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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 March 31, 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: (801) 365-4600

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934
Title of each class Trading symbol Name of each exchange on which registered
Common Stock, $0.01 par value EXR New York Stock Exchange

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐

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

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

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 April 23, 2021, was 133,728,460.
2

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)
 
March 31, 2021 December 31, 2020
(unaudited)
Assets:
Real estate assets, net $ 7,944,395  $ 7,893,802 
Real estate assets - operating lease right-of-use assets 238,927  252,172 
Investments in unconsolidated real estate entities 413,503  397,444 
Investments in debt securities and notes receivable 543,725  593,810 
Cash and cash equivalents 60,330  109,124 
Restricted cash 2,465  18,885 
Other assets, net 133,267  130,611 
Total assets $ 9,336,612  $ 9,395,848 
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net $ 4,947,417  $ 4,797,303 
Revolving lines of credit 353,000  949,000 
Operating lease liabilities 242,952  263,485 
Cash distributions in unconsolidated real estate ventures 62,089  47,126 
Accounts payable and accrued expenses 129,044  130,012 
Other liabilities 287,461  272,798 
Total liabilities 6,021,963  6,459,724 
Commitments and contingencies
Noncontrolling Interests and Equity:
Extra Space Storage Inc. stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued or outstanding
—  — 
Common stock, $0.01 par value, 500,000,000 shares authorized, 133,692,662 and 131,357,961 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
1,336  1,314 
Additional paid-in capital 3,282,255  3,000,458 
Accumulated other comprehensive loss (77,180) (99,093)
Accumulated deficit (284,442) (354,900)
Total Extra Space Storage Inc. stockholders' equity 2,921,969  2,547,779 
Noncontrolling interest represented by Preferred Operating Partnership units, net 172,652  172,052 
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests 220,028  216,293 
Total noncontrolling interests and equity 3,314,649  2,936,124 
Total liabilities, noncontrolling interests and equity $ 9,336,612  $ 9,395,848 

See accompanying notes to unaudited condensed consolidated financial statements.
5


Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
(unaudited)

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

See accompanying notes to unaudited condensed consolidated financial statements.
6

Extra Space Storage Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
(unaudited)

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


See accompanying notes to unaudited condensed consolidated financial statements.
7

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


  Noncontrolling Interests Extra Space Storage Inc. Stockholders' Equity  
Preferred Operating Partnership Operating Partnership Other Shares Par Value Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Noncontrolling Interests and Equity
Balances at December 31, 2019 $ 175,948  $ 205,419  $ 366  129,534,407  $ 1,295  $ 2,868,681  $ (28,966) $ (301,049) $ 2,921,694 
Issuance of common stock upon the exercise of options —  —  —  77,400  943  —  —  944 
Issuance of common stock in connection with share based compensation —  —  —  73,602  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 
















8

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

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


See accompanying notes to unaudited condensed consolidated financial statements.
9


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


  For the Three Months Ended March 31,
  2021 2020
Cash flows from operating activities:
Net income $ 215,501  $ 116,162 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 58,599  55,275 
Amortization of deferred financing costs 2,286  2,830 
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes —  1,209 
Non-cash lease expense 487  353 
Compensation expense related to stock-based awards 3,652  2,980 
Accrual of interest income added to principal of debt securities and notes receivable (8,533) — 
Gain on real estate transactions (63,883) — 
Distributions from unconsolidated real estate ventures in excess of earnings 1,863  2,539 
Changes in operating assets and liabilities:
Other assets (2,737) 2,490 
Accounts payable and accrued expenses (2,691) 3,727 
Other liabilities (664) 1,691 
Net cash provided by operating activities 203,880  189,256 
Cash flows from investing activities:
Acquisition of real estate assets (161,752) (30,164)
Development and redevelopment of real estate assets (14,086) (15,373)
Proceeds from sale of real estate assets 132,733  — 
Investment in unconsolidated real estate entities (250) (6,441)
Return of investment in unconsolidated real estate ventures 31,169  — 
Issuance and purchase of notes receivable (25,772) (7,500)
Proceeds from sale of notes receivable 81,250  — 
Purchase of equipment and fixtures (697) (1,095)
Net cash provided by (used in) investing activities 42,595  (60,573)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs 273,720  — 
Proceeds from notes payable and revolving lines of credit 1,747,000  268,000 
Principal payments on notes payable and revolving lines of credit (2,193,409) (192,508)
Deferred financing costs (1,689) (16)
Net proceeds from exercise of stock options 4,254  944 
Repurchase of common stock —  (52,204)
Dividends paid on common stock (132,540) (117,197)
Distributions to noncontrolling interests (9,025) (8,505)
Net cash used in financing activities (311,689) (101,486)
Net increase (decrease) in cash, cash equivalents, and restricted cash (65,214) 27,197 
Cash, cash equivalents, and restricted cash, beginning of the period 128,009  70,733 
Cash, cash equivalents, and restricted cash, end of the period $ 62,795  $ 97,930 
10


Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
  For the Three Months Ended March 31,
  2021 2020
Supplemental schedule of cash flow information
Interest paid $ 44,887  $ 41,013 
Income taxes paid 1,047  976 
Supplemental schedule of noncash investing and financing activities:
Redemption of Operating Partnership units held by noncontrolling interests for common stock
Noncontrolling interests in Operating Partnership $ (4,005) $ (330)
Common stock and paid-in capital 4,005  330 
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets $ 2,369  $ — 
Operating lease liabilities (2,369) — 
Acquisitions of real estate assets
Real estate assets, net $ (41,491) $ — 
Finance lease liability 41,491  — 
Accrued construction costs and capital expenditures
Acquisition of real estate assets $ 1,723  $ 960 
Accounts payable and accrued expenses (1,723) (960)
Redemption of Preferred Operating Partnership units for common stock
Preferred Operating Partnership units $ (2,724) $ — 
Additional paid-in capital 2,724  — 
Establishment of finance lease assets and lease liabilities
Real estate assets, net $ 40,993  $ — 
Other liabilities (40,993) — 
Investment in unconsolidated real estate ventures received on sale of stores to joint venture
Investment in unconsolidated real estate ventures $ 33,878  $ — 
Real estate assets (33,878) — 

See accompanying notes to unaudited condensed consolidated financial statements.

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

The Company invests in stores by acquiring wholly-owned stores or by acquiring an equity interest in real estate entities. At March 31, 2021, the Company had direct and indirect equity interests in 1,206 stores. In addition, the Company managed 763 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,969. These stores are located in 40 states, Washington, D.C. and Puerto Rico. The Company also offers tenant reinsurance at its owned and managed stores that insures the value of goods in the storage units.
2.    BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. The condensed consolidated balance sheet as of December 31, 2020 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission.

Recently Issued Accounting Standards

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

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

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 March 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall. 

Fair Value Measurements at Reporting Date Using
Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Other assets - Cash flow hedge swap agreements $ —  $ —  $ — 
Other liabilities - Cash flow hedge swap agreements $ —  $ 75,240  $ — 

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

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

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

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 March 31, 2021, the Company had no operating stores classified as held for sale which are included in real estate assets, net.

The Company assesses annually whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired annually and when events or circumstances indicate that there may be impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment.

In connection with the Company’s acquisition of stores, the purchase price is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values, which are estimated using significant unobservable inputs. The value of the tangible assets, consisting of land and buildings, is determined as if vacant. Intangible assets, which represent the value of existing tenant relationships, are recorded at their fair values based on the avoided cost to replace the current leases. The Company measures the value of tenant relationships based on the rent lost due to the amount of time required to replace existing customers, which is based on the Company’s historical experience with turnover in its stores. Any debt assumed as part of an acquisition is recorded at fair value based on current interest rates compared to contractual rates. Acquisition-related transaction costs are capitalized as part of the purchase price.

Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable-rate notes payable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020 approximate fair value. Restricted cash is comprised of funds deposited with financial institutions located throughout the United States primarily relating to earnest money deposits on potential acquisitions.

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

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

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

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 months ended March 31, 2021 and 2020, there were no anti-dilutive options.

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

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

For the Three Months Ended March 31,
2021 2020
Equivalent Shares (if converted) Equivalent Shares (if converted)
Series B Units 337,839  402,403 
Series D Units —  1,153,233 
337,839  1,555,636 


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

Although the Company had retained the right to satisfy the exchange obligation in excess of the accreted principal amount of the 2015 Notes in cash and/or common stock, Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” requires an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and requires that those shares be included in the Company’s calculation of weighted average common shares outstanding for the diluted
15


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
earnings per share computation. For the three months ended March 31, 2021 and 2020, zero and 764,703 shares, respectively, related to the 2015 Notes were included in the computation for diluted earnings per share.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series A Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the positive intent and ability to settle at least $101,700 of the instrument in cash (or net settle a portion of the Series A Units against the related outstanding note receivable), only the amount of the instrument in excess of $101,700 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by ASC 260-10-45-46. Accordingly, the number of shares included in the computation for diluted earnings per share related to the Series A Units is equal to the number of Series A Units outstanding, with no additional shares included related to the fixed $101,700 amount.

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


For the Three Months Ended March 31,
2021 2020
Net income attributable to common stockholders $ 202,998  $ 108,179 
Earnings and dividends allocated to participating securities (312) (163)
Earnings for basic computations 202,686  108,016 
Earnings and dividends allocated to participating securities —  163 
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units 11,894  6,171 
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units) (572) (572)
Net income for diluted computations $ 214,008  $ 113,778 
Weighted average common shares outstanding:
Average number of common shares outstanding - basic 132,007,556  129,288,629 
OP Units 5,800,729  5,919,705 
Series A Units 875,480  875,480 
Series D Units 969,374  — 
Unvested restricted stock awards included for treasury stock method —  211,602 
Shares related to exchangeable senior notes and dilutive stock options 23,409  844,144 
Average number of common shares outstanding - diluted 139,676,548  137,139,560 
Earnings per common share
Basic $ 1.54  $ 0.84 
Diluted $ 1.53  $ 0.83 

16


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

Store Acquisitions

The following table shows the Company’s acquisitions of stores for the three months ended March 31, 2021 and 2020. The table excludes purchases of raw land and improvements made to existing assets. All acquisitions are considered asset acquisitions under ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business."
Consideration Paid Total
Quarter Number of Stores Total Cash Paid Net Liabilities/ (Assets) Assumed Real estate assets
Q1 2021 9 $ 151,884  $ 148,940  $ 2,944  $ 151,884 
Q1 2020 2 $ 19,399  $ 19,354  $ 45  $ 19,399 

Store Dispositions

On March 1, 2021, the Company sold 16 stores that had been classified as held for sale to a newly established unconsolidated joint venture. The Company received cash of $132,759 and an interest in the new joint venture valued at $33,878. The Company recognized a gain of $64,424 related to the sale of these properties.
6.    INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES
Investments in unconsolidated real estate entities and cash distributions in unconsolidated real estate ventures represent the Company's interest in preferred stock of SmartStop Self Storage REIT, Inc. ("SmartStop") and the Company's noncontrolling interest in real estate joint ventures that own stores. The Company accounts for its investment in SmartStop preferred stock, which does not have a readily determinable fair value, at the transaction price less impairment, if any. The Company accounts for its investments in joint ventures using the equity method of accounting. The Company initially records these investments at cost and subsequently adjusts for cash contributions, distributions and net equity in income or loss, which is allocated in accordance with the provisions of the applicable partnership or joint venture agreement.
In these joint ventures, the Company and the joint venture partner generally receive a preferred return on their invested capital. To the extent that cash or profits in excess of these preferred returns are generated through operations or capital transactions, the Company would receive a higher percentage of the excess cash or profits than its equity interest.

The Company separately reports investments with net equity less than zero in cash distributions in unconsolidated real estate ventures in the condensed consolidated balance sheets. The net equity of certain joint ventures is less than zero because distributions have exceeded the Company's investment in and share of income from these joint ventures. This is generally the result of financing distributions, capital events or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization while distributions do not.
17


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Net investments in unconsolidated real estate ventures and cash distributions in unconsolidated real estate ventures consist of the following:
  Number of Stores Equity Ownership %
Excess Profit % (1)
March 31, December 31,
  2021 2020
PR EXR Self Storage, LLC 5 25% 40% $ 60,120  $ 60,092 
WICNN JV LLC 10 10% 35% 35,915  36,032 
ESS-CA TIVS JV LP (2)
16 55% 60% 33,960  — 
GFN JV, LLC 7 10% 30% 18,358  18,397 
ESS-NYFL JV LP 11 16% 26% 12,250  12,211 
PRISA Self Storage LLC 85 4% 4% 8,732  8,815 
Alan Jathoo JV LLC 9 10% 10% 7,752  7,780 
Storage Portfolio III JV LLC 5 10% 30% 5,686  5,726 
ESS Bristol Investments LLC 8 10% 30% 2,770  2,810 
Extra Space Northern Properties Six LLC 10 10% 35% (2,666) (2,541)
Storage Portfolio II JV LLC 36 10% 30% (5,531) (5,441)
VRS Self Storage, LLC 16 45% 54% (14,362) 17,186 
Storage Portfolio I LLC 24 34% 49% (39,530) (39,144)
Other minority owned stores 21
10-50%
19-50%
27,960  28,395 
SmartStop Self Storage REIT, Inc. Preferred Stock (3)
n/a n/a n/a 200,000  200,000 
Net Investments in and Cash distributions in unconsolidated real estate entities 263 $ 351,414  $ 350,318 
(1) Includes pro-rata equity ownership share and maximum potential promoted interest.
(2) The Company sold 16 operating stores to this newly formed joint venture in March 2021. The Company received cash of $132,759 and an interest in the new joint venture valued at $33,878. This joint venture is unconsolidated and the Company accounts for its investment under the equity method of accounting as the Company does not have voting control but does exercise significant influence over the joint venture.
(3) The Company invested in shares of convertible preferred stock of SmartStop. The dividend rate for the preferred shares is 6.25% per annum, subject to increase after five years. The preferred shares are generally not redeemable for five years, except in the case of a change of control or initial listing of SmartStop. Dividend income from this investment is included on the equity in earnings and dividend income from unconsolidated real estate entities line on the Company's condensed consolidated statements of operations.
7.     INVESTMENTS IN DEBT SECURITIES AND NOTES RECEIVABLE
Investments in debt securities and notes receivable consists of the Company's investment in mandatorily redeemable preferred stock of Jernigan Capital, Inc. ("JCAP") in connection with JCAP's acquisition by affiliates of NexPoint Advisors, L.P. ("NexPoint Investment") and receivables due to the Company under its bridge loan program. Information about these balances is as follows:
March 31, 2021 December 31, 2020
Debt securities - NexPoint Series A Preferred Stock $ 200,000  $ 200,000 
Debt securities - NexPoint Series B Preferred Stock 100,000  100,000 
Notes Receivable-Bridge Loans 129,119  187,368 
Notes Receivable-Senior Mezzanine Loan 101,636  101,553 
Dividends Receivable 12,970  4,889 
$ 543,725  $ 593,810 
18


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
In November 2020, the Company invested $300,000 in the preferred stock of JCAP in connection with the acquisition of JCAP by affiliates of NexPoint Advisors, L.P. This investment consists of 200,000 Series A Preferred Shares valued at a total of $200,000, and 100,000 Series B Preferred Shares valued at a total of $100,000. The JCAP preferred stock is mandatorily redeemable after five years, with two one-year extension options. NexPoint may redeem the Preferred Shares at any time, subject to certain prepayment penalties. The Company accounts for the JCAP preferred stock as a held to maturity debt security at amortized cost. The Series A Preferred Shares and the Series B Preferred Shares have initial dividend rates of 10.0% and 12.0%, respectively. If the investment is not retired after five years, the preferred dividends increase annually.
The Company provides bridge loan financing to third-party self-storage operators. These notes receivable consist of primary mortgage and mezzanine loans receivable, collateralized by self-storage properties. These notes receivable typically have a term of three years with two one year extensions, and have variable interest rates. The Company intends to sell the majority of the mortgage receivables and keep the mezzanine receivables to maturity. During the three months ended March 31, 2021, the Company sold a total principal amount of $81,764 of its mortgage bridge loans receivable to third parties for a total of $81,250 in cash and closed on $25,772 in new mortgage and mezzanine bridge loans.
In July 2020, the Company purchased a senior mezzanine note receivable with a principal amount of $103,000. This note receivable bears interest at 5.5%, and matures in December 2023. The Company paid cash of $101,142 for the loan receivable and accounts for the discount at amortized cost. The discount is being amortized over the term of the loan receivable.
8.    DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposure that arises from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. A portion of these changes is excluded from accumulated other comprehensive income as it is allocated to noncontrolling interests. During the three months ended March 31, 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. In the coming 12 months, the Company estimates that $35,059 will be reclassified and increase interest expense.

The Company held 22 derivative financial instruments which had a total combined notional amount of $2,087,311 as of March 31, 2021.
19


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

Fair Values of Derivative Instruments
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets:
  Asset / Liability Derivatives
  March 31, 2021 December 31, 2020
Derivatives designated as hedging instruments: Fair Value
Other assets $ —  $ — 
Other liabilities $ 75,240  $ 98,325 

Effect of Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the periods presented. No tax effect has been presented as the derivative instruments are held by the Company:
Gain (loss) recognized in OCI For the Three Months Ended March 31, Location of amounts reclassified from OCI into income Gain (loss) reclassified from OCI For the Three Months Ended March 31,
Type 2021 2020 2021 2020
Swap Agreements $ 14,176  $ (89,710) Interest expense $ (8,845) $ (563)


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

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

As of March 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $78,042. As of March 31, 2021, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2021, it could have been required to cash settle its obligations under the agreements at their termination value of $78,042, including accrued interest.
9.    EXCHANGEABLE SENIOR NOTES

In September 2015, the Operating Partnership issued $575,000 of its 3.125% Exchangeable Senior Notes due 2035. Costs incurred to issue the 2015 Notes were approximately $11,992, consisting primarily of a 2.0% underwriting fee. These costs were amortized as an adjustment to interest expense over five years, which represented the estimated term based on the first available redemption date, and are included in exchangeable senior notes, net, in the condensed consolidated balance sheets. Prior to the full redemption of the 2015 Notes in November 2020 as described below, the 2015 Notes were general unsecured senior obligations of the Operating Partnership and were fully guaranteed by the Company. Interest was payable on April 1 and October 1 of each year beginning April 1, 2016, until the maturity date of October 1, 2035. The 2015 Notes bore interest at 3.125% per annum and contained an exchange settlement feature, which provided that the 2015 Notes could have been, under certain circumstances, exchangeable for cash (for the principal amount of the 2015 Notes) and, with respect to any excess exchange value, for cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option.

20


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
GAAP requires entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The Company therefore accounted for the liability and equity components of the 2015 Notes separately. The equity components are included in paid-in capital in stockholders’ equity in the condensed consolidated balance sheets, and the value of the equity components are treated as original issue discount for purposes of accounting for the debt components. The discounts were amortized as interest expense over the remaining period of the debt through its first redemption date of October 1, 2020. The effective interest rate on the liability components of the 2015 Notes was 4.0%, which approximated the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component of the Notes were as follows for the periods indicated:
  For the Three Months Ended March 31,
  2021 2020
Contractual interest $ —  $ 4,492 
Amortization of discount —  1,209 
Total interest expense recognized $ —  $ 5,701 

On October 1, 2020, the holders of $71,513 principal amount of the 2015 Notes exchanged their Notes. The Company paid cash of $71,513 for the principal amount and issued 124,819 shares of common stock with a value of $13,495 for the exchange value in excess of the principal amount. On November 2, 2020, the holders of an additional $503,432 principal amount of the 2015 Notes exchanged their Notes. The Company paid cash of $503,432 for the principal amount and issued 1,198,962 shares of common stock with a value of $138,900 for the exchange value in excess of the principal amount. Also on November 2, 2020, the Company redeemed the remaining $55 of outstanding principal amount of the 2015 Notes for cash.
10.    STOCKHOLDERS’ EQUITY

On May 15, 2019, the Company filed its $500,000 "at the market" equity program with the Securities and Exchange Commission using a shelf registration statement on Form S-3, and entered into separate equity distribution agreements with nine sales agents.

During the three months ended March 31, 2021, the Company sold 585,685 shares of common stock under its "at the market" equity program resulting in net proceeds of $67,147. As of March 12, 2021, the Company does not have any shares available for issuance under its ATM program, and anticipates filing a new plan in the second quarter of 2021. On March 23, 2021, the Company sold 1,600,000 shares of its common stock in a registered offering structured as a bought deal at a price of $129.13 per share resulting in net proceeds of $206,573.

On October 15, 2020, the Company's board of directors authorized a new share repurchase program allowing for the repurchase of shares with an aggregate value up to $400,000. No shares were repurchased during the three months ended March 31, 2021.
11.    NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

Classification of Noncontrolling Interests
GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the Operating Partnership’s preferred units and classifies the noncontrolling interest represented by such preferred units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The
21


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

At March 31, 2021 and December 31, 2020, the noncontrolling interests represented by the Preferred OP Units qualified for classification as permanent equity on the Company's condensed consolidated balance sheets. The partnership agreement of the Operating Partnership (as amended, the "Partnership Agreement") provides for the designation and issuance of the OP Units. As of March 31, 2021 and December 31, 2020, noncontrolling interests in Preferred OP Units were presented net of notes receivable from Preferred OP Unit holders of $100,000 as more fully described below. The balances for each of the specific Preferred OP Units as presented in the Statement of Noncontrolling Interests and Equity as of the periods indicated is as follows:


March 31, 2021 December 31, 2020
Series A Units $ 14,388  $ 13,788 
Series B Units 40,902  40,902 
Series D Units 117,362  117,362 
$ 172,652  $ 172,052 


Series A Participating Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series A Units. The Series A Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.
The Series A Units were issued in June 2007. Series A Units in the amount of $101,700 bear a fixed priority return of 2.3% and originally had a fixed liquidation value of $115,000. The remaining balance participates in distributions with, and has a liquidation value equal to that of the OP Units. The Series A Units are redeemable at the option of the holder, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock. As a result of the redemption of 114,500 Series A Units in October 2014, the remaining fixed liquidation value was reduced to $101,700, which represents 875,480 Series A Units.

On June 25, 2007, the Operating Partnership loaned the holder of the Series A Units $100,000. The loan bears interest at 2.1%. The loan is secured by the borrower’s Series A Units. No future redemption of Series A Units can be made unless the loan secured by the Series A Units is also repaid. The Series A Units are shown on the balance sheet net of the $100,000 loan because the borrower under the loan receivable is also the holder of the Series A Units.

Series B Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series B Units. The Series B Units rank junior to the Series A Units, on parity with the Series C Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series B Units were issued in 2013 and 2014 and have a liquidation value of $25.00 per unit for a fixed liquidation value of $40,902, which represents 1,636,087 Series B Units. Holders of the Series B Units receive distributions at an annual rate of 6.0%. These distributions are cumulative. The Series B Units became redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock.

Series C Convertible Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series C Units. The Series C Units ranked junior to the Series A Units, on parity with the Series B Units and Series D Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.
22


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

The Series C Units were issued in 2013 and 2014 and had a liquidation value of $42.10 per unit. The Series C Units became redeemable at the option of the holder one year from the date of issuance, which redemption obligation could be satisfied at the Company’s option in cash or shares of its common stock. The Series C Units were convertible into OP Units at the option of the holder at a rate of 0.9145 OP Units per Series C Unit converted. This conversion option expired upon the fifth anniversary of the date of issuance.

In December 2014, the Operating Partnership loaned certain holders of the Series C Units $20,230. The loan receivable, which was collateralized by the Series C Units, bears interest at 5.0% per annum and matures on December 15, 2024. The Series C Units were shown on the balance sheet net of the loan balance because the borrower under the loan receivable was also the holder of the Series C Units.

On December 1, 2018, certain holders of the Series C Units converted their Series C Units into OP Units, with a total of 407,996 Series C Units being converted into a total of 373,113 OP Units. On April 25, 2019, the remaining 296,020 Series C Units were converted into 270,709 OP Units. The remaining outstanding balance of the loan receivable of $2,311 is shown as a reduction of the noncontrolling interests related to the OP Units as of March 31, 2021 and December 31, 2020. See footnote 12 for further discussion of noncontrolling interests.

Series D Redeemable Preferred Units

The Partnership Agreement provides for the designation and issuance of the Series D Units. The Series D Units rank junior to the Series A Units, on parity with the Series B Units and Series C Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.
The Series D Units have been issued at various times from 2014 to 2019. During the six months ended June 30, 2019, the Operating Partnership issued 1,120,924 Series D Units valued at $28,022 in conjunction with joint venture acquisitions.
The Series D Units have a liquidation value of $25.00 per unit, for a fixed liquidation value of $117,362, which represents 4,694,485 Series D Units. Holders of the Series D Units receive distributions at an annual rate between 3.0% and 5.0%. These distributions are cumulative. The Series D Units become redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock. In addition, certain of the Series D Units are exchangeable for OP Units at the option of the holder until the tenth anniversary of the date of issuance, with the number of OP Units to be issued equal to $25.00 per Series D Unit, divided by the value of a share of common stock as of the exchange date.
12.    NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS

Noncontrolling Interest in Operating Partnership

The Company’s interest in its stores is held through the Operating Partnership. Between its general partner and limited partner interests, the Company held a 94.4% ownership interest in the Operating Partnership as of March 31, 2021. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 5.6% are held by certain former owners of assets acquired by the Operating Partnership. As of March 31, 2021 and December 31, 2020, the noncontrolling interests in the Operating Partnership are shown on the balance sheet net of notes receivable of $2,311 because the borrowers under the loan receivable are also holders of OP Units (Note 11). This loan receivable bears interest at 5.0% per annum and matures on December 15, 2024.

The noncontrolling interest in the Operating Partnership represents OP Units that are not owned by the Company. OP Units are redeemable at the option of the holder, which redemption may be satisfied at the Company's option in cash, based upon the fair market value of an equivalent number of shares of the Company’s common stock (based on the ten-day average trading price) at the time of the redemption, or shares of the Company's common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Partnership Agreement. As of March 31, 2021, the ten-day average closing price of the Company's common stock was $131.03 and there were 5,795,785 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on March 31, 2021 and the Company elected to pay the OP Unit holders cash, the Company would have paid $759,422 in cash consideration to redeem the units.
23


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

OP Unit activity is summarized as follows for the periods presented:
For the Three Months Ended March 31,
2021 2020
OP Units redeemed for common stock 5,000 8,862

GAAP requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section, but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations, and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.

The Company has evaluated the terms of the OP Units and classifies the noncontrolling interest represented by the OP Units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

Other Noncontrolling Interests

Other noncontrolling interests represent the ownership interests of third parties in two consolidated joint ventures as of March 31, 2021. One joint venture owns four operating stores, and the other joint venture owns two operating stores. The voting interests of the third-party owners are between 5.0% and 20.0%.
13.    SEGMENT INFORMATION

The Company’s segment disclosures present the measure used by the chief operating decision makers ("CODMs") for purposes of assessing each segment’s performance. The Company’s CODMs are comprised of several members of its executive management team who use net operating income ("NOI") to assess the performance of the business for the Company’s reportable operating segments. NOI for the Company's self-storage operations represents total property revenue less direct property operating expenses. NOI for the Company's tenant reinsurance segment represents tenant reinsurance revenues less tenant reinsurance expense.

The Company has two reportable segments: (1) self-storage operations and (2) tenant reinsurance. The self-storage operations activities include rental operations of wholly-owned stores. The Company's consolidated revenues equal total segment revenues plus property management fees and other income. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the stores operated by the Company. Excluded from segment revenues and net operating income is property management fees and other income.

For all periods presented, substantially all of the Company's real estate assets, intangible assets, other assets, and accrued and other liabilities are associated with the self-storage operations segment. Financial information for the Company’s business segments is set forth below:

For the Three Months Ended March 31,
2021 2020
Revenues:
Self-Storage Operations $ 303,593  $ 286,703 
Tenant Reinsurance 39,619  33,613 
Total segment revenues $ 343,212  $ 320,316 
Operating expenses:
Self-Storage Operations $ 92,367  $ 90,297 
Tenant Reinsurance 7,161  6,678 
Total segment operating expenses $ 99,528  $ 96,975 
Net operating income:
Self-Storage Operations $ 211,226  $ 196,406 
Tenant Reinsurance 32,458  26,935 
Total segment net operating income: $ 243,684  $ 223,341 
Other components of net income (loss):
Management fees and other income $ 15,645  $ 12,136 
General and administrative expense (23,540) (23,011)
Depreciation and amortization expense (58,599) (55,275)
Gain on real estate transactions 63,883  — 
Interest expense (40,695) (44,358)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes —  (1,209)
Interest income 12,304  1,674 
Equity in earnings and dividend income from unconsolidated real estate entities 6,956  5,043 
Income tax expense (4,137) (2,179)
Net income $ 215,501  $ 116,162 

14.    COMMITMENTS AND CONTINGENCIES

As of March 31, 2021, the Company was involved in various legal proceedings and was subject to various claims and complaints arising in the ordinary course of business. Because litigation is inherently unpredictable, the outcome of these matters cannot presently be determined with any degree of certainty. In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. The Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period, notwithstanding the fact that the Company is currently vigorously defending any legal proceedings against it.

24


EXTRA SPACE STORAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Amounts in thousands, except store and share data, unless otherwise stated
As of March 31, 2021, the Company was under agreement to acquire six stores at a total purchase price of $66,300. All six stores are scheduled to close in 2021. Additionally, the Company is under agreement to acquire three stores with joint venture partners, for a total investment of $4,213. These stores are also expected to close in 2021.

Although there can be no assurance, the Company is not aware of any material environmental liability, for which it believes it will be ultimately responsible, that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s stores, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to its stores could result in future material environmental liabilities.
25


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ended December 31, 2020. 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 ended December 31, 2020 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.

CURRENT MATERIAL DEVELOPMENT - THE COVID 19 PANDEMIC

The United States and other countries around the world continue to be impacted by the COVID-19 pandemic, which has created considerable instability and disruption in the U.S. and world economies. Governmental authorities in impacted regions have taken various actions in an effort to slow the spread of COVID-19, including issuance of varying forms of states of emergency orders. In response to these evolving orders and the COVID-19 pandemic, we have implemented a wide range of practices to protect and support our employees and customers. Such measures include instituting “work from home” measures at our corporate offices and call center, instituting a contactless rental process that allows our on-site employees to continue to rent storage units without physical interaction, and providing personal protective equipment to on-site employees providing essential functions so that hygiene and “social distancing” standards can be effectively managed and applied. Although we have started to see certain governmental restrictions lifted and certain work practices return to normal, our customers may continue to be impacted by the COVID-19 pandemic and related governmental responses, including through unemployment, which may impact their ability to pay rent or renew their leases.
26


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 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 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 of January 1 of the current year, or has been open for three years prior to January 1 of the current year.

PROPERTIES

As of March 31, 2021, we owned or had ownership interests in 1,206 operating stores. Of these stores, 937 are wholly-owned, six are in consolidated joint ventures, and 263 are in unconsolidated joint ventures. In addition, we managed an additional 763 stores for third parties bringing the total number of stores which we own and/or manage to 1,969. These stores are located in 40 states, Washington, D.C. and Puerto Rico. 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 of March 31, 2021, approximately 1,180,000 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 of March 31, 2021, the average length of stay was approximately 15.4 months.

The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was $16.35 for the three months ended March 31, 2021, compared to $16.11 for the three months ended March 31, 2020. Average annual rent per square foot for new leases was $16.57 for the three months ended March 31, 2021, compared to $14.65 for the three months ended March 31, 2020. The average discounts, as a percentage of rental revenues, at all stabilized properties during these periods were 2.8% and 3.3%, 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.
27



March 31, 2021
REIT Owned Joint Venture Owned Managed Total
Location
Property Count(1)
Net Rentable Square Feet Property Count Net Rentable Square Feet Property Count Net Rentable Square Feet Property Count Net Rentable Square Feet
Alabama 10  688,190  75,801  13  926,479  24  1,690,470 
Arizona 23  1,623,081  468,871  16  1,312,131  46  3,404,083 
California 162  12,492,497  47  3,435,923  69  6,709,746  278  22,638,166 
Colorado 17  1,153,191  186,273  25  1,834,676  44  3,174,140 
Connecticut 531,198  629,770  507,310  21  1,668,278 
Delaware —  —  76,645  138,539  215,184 
Florida 93  7,160,599  32  2,753,827  116  9,141,020  241  19,055,446 
Georgia 66  5,147,190  510,922  27  1,966,782  99  7,624,894 
Hawaii 13  862,785  —  —  211,874  17  1,074,659 
Idaho —  —  —  —  712,402  712,402 
Illinois 35  3,139,054  11  872,907  27  1,993,845  73  6,005,806 
Indiana 15  950,020  58,166  14  877,329  30  1,885,515 
Kansas 50,209  108,920  466,455  625,584 
Kentucky 11  931,505  51,148  507,223  18  1,489,876 
Louisiana 164,114  —  —  612,419  776,533 
Maryland 31  2,592,942  549,029  36  2,664,241  75  5,806,212 
Massachusetts 46  2,968,004  10  640,979  14  902,213  70  4,511,196 
Michigan 561,629  308,936  340,993  15  1,211,558 
Minnesota 477,327  306,101  14  1,081,012  24  1,864,440 
Mississippi 221,222  —  —  —  —  221,222 
Missouri 332,695  119,275  10  690,476  17  1,142,446 
Nebraska —  —  —  —  390,565  390,565 
Nevada 14  1,040,105  473,751  709,158  25  2,223,014 
New Hampshire 135,835  84,165  190,839  410,839 
New Jersey 60  4,824,846  17  1,246,749  23  1,758,063  100  7,829,658 
New Mexico 11  718,681  354,485  12  890,640  29  1,963,806 
New York 28  2,029,374  18  1,512,482  24  1,470,466  70  5,012,322 
North Carolina 20  1,505,208  373,794  19  1,435,429  44  3,314,431 
Ohio 17  1,316,166  325,713  492,451  28  2,134,330 
Oklahoma —  —  —  —  20  1,620,263  20  1,620,263 
Oregon 400,193  281,646  664,815  19  1,346,654 
Pennsylvania 20  1,491,417  513,495  29  2,110,283  56  4,115,195 
Rhode Island 133,566  —  —  166,551  300,117 
South Carolina 23  1,808,905  537,319  17  1,419,242  48  3,765,466 
Tennessee 21  1,776,016  12  807,246  12  836,054  45  3,419,316 
Texas 101  8,673,544  14  1,077,661  74  5,974,222  189  15,725,427 
Utah 10  710,637  —  —  23  1,811,428  33  2,522,065 
Virginia 46  3,710,029  627,413  24  1,858,140  78  6,195,582 
Washington 622,052  57,290  13  1,054,372  22  1,733,714 
Washington, DC 100,039  103,766  484,475  688,280 
Wisconsin —  —  523,574  430,313  10  953,887 
 Puerto Rico —  —  —  —  918,757  918,757 
Totals 943  73,044,065  263  20,054,042  763  60,283,691  1,969  153,381,798 

(1)    Includes six consolidated joint venture stores.

28


RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2021 and 2020

Overview
Results for the three months ended March 31, 2021 included the operations of 1,206 stores (937 wholly-owned, six in consolidated joint ventures, and 263 in joint ventures accounted for using the equity method) compared to the results for the three months ended March 31, 2020, which included the operations of 1,176 stores (927 wholly-owned, five in consolidated joint ventures, and 244 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,
2021 2020 $ Change % Change
Revenues:
Property rental $ 303,593  $ 286,703  $ 16,890  5.9  %
Tenant reinsurance 39,619  33,613  6,006  17.9  %
Management fees and other income 15,645  12,136  3,509  28.9  %
Total revenues $ 358,857  $ 332,452  $ 26,405  7.9  %

Property Rental—The increase in property rental revenues for the three months ended March 31, 2021 was primarily the result of an increase of $11,575 related to higher occupancy at our stabilized stores. An additional increase of $5,596 was attributable to store acquisitions completed in 2021 and 2020. We acquired nine wholly-owned stores during the three months ended March 31, 2021 and a total of 23 stores during the year ended December 31, 2020.

Tenant Reinsurance—The increase in our tenant reinsurance revenues was due primarily to an increase in the number of stores operated and higher occupancy . We operated 1,969 stores at March 31, 2021 compared to 1,852 stores at March 31, 2020.

Management Fees and Other Income—Management fees and other income primarily represent the fee 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 ended March 31, 2021 was primarily due to an increase in the number of stores managed and other transaction fee income. As of March 31, 2021, we managed 1,032 stores for joint ventures and third parties, compared to 925 stores as of March 31, 2020.

Expenses
The following table presents information on expenses for the periods indicated:
For the Three Months Ended March 31,
2021 2020 $ Change % Change
Expenses:
Property operations $ 92,367  $ 90,297  $ 2,070  2.3  %
Tenant reinsurance 7,161  6,678  483  7.2  %
General and administrative 23,540  23,011  529  2.3  %
Depreciation and amortization 58,599  55,275  3,324  6.0  %
Total expenses $ 181,667  $ 175,261  $ 6,406  3.7  %

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Property Operations—The increase in property operations expense during the three months ended March 31, 2021 was due primarily to an increase of $2,627 attributable to store acquisitions completed in 2021 and 2020. We acquired nine wholly-owned stores during the three months ended March 31, 2021 and a total of 23 stores during the year ended December 31, 2020. This increase was partially offset by a decrease in expenses at stabilized stores.

Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The increase in tenant reinsurance expense for the three months ended March 31, 2021 was due primarily to an increase in the number of stores operated and higher occupancy. We operated 1,969 stores at March 31, 2021 compared to 1,852 stores at March 31, 2020.

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. We did not observe any material trends in specific payroll, travel or other expenses apart from the increase due to the management of additional stores.

Depreciation and Amortization—Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired nine wholly-owned stores during the three months ended March 31, 2021 and a total of 23 stores during the year ended December 31, 2020.

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,
2021 2020 $ Change % Change
Gain on real estate transactions $ 63,883  $ —  $ 63,883  100.0 
Interest expense $ (40,695) $ (44,358) $ 3,663  (8.3) %
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes —  (1,209) 1,209  (100.0) %
Interest income 12,304  1,674  10,630  635.0  %
Equity in earnings and dividend income from unconsolidated real estate entities 6,956  5,043  1,913  37.9  %
Income tax expense (4,137) (2,179) (1,958) 89.9  %
Total other revenues & expenses, net $ 38,311  $ (41,029) $ 79,340  (193.4) %

Gain on Real Estate Transactions - During the three months ended March 31, 2021, we sold 16 stores to a newly established unconsolidated joint venture. We recognized a total gain of $64,424 related to this transaction. This gain was partially offset by losses related to the sale of notes receivable and solar assets.

Interest Expense—The decrease in interest expense during the three months ended March 31, 2021 was primarily the result of a lower average variable interest rates compared to the same period in the prior year. The average interest rate for the three months ended March 31, 2021 was 2.7%, compared to an average interest rate of 3.3% for the three months ended March 31, 2020.

Non-cash Interest Expense Related to Amortization of Discount on Equity Component of Exchangeable Senior Notes—Represents the amortization of the discounts related to the equity components of the exchangeable senior notes issued by our Operating Partnership. The 2015 Notes had an effective interest rate of 4.0% relative to the carrying amount of the liability. The exchangeable senior notes were paid off in full during October and November 2020.

Interest Income—Interest income represents interest earned on bridge loans and debt securities and income earned on notes receivable from Common and Preferred Operating Partnership unit holders. In late 2018 we began to provide bridge financing on completed properties owned by third parties that we manage. We also purchased a senior mezzanine note receivable with a principal amount of $103,000 in July 2020. The increase in interest income during the three months ended March 31, 2021 was primarily the result of interest earned on these loans as well as interest earned from our investment in preferred stock of JCAP, which was purchased in November 2020 for $300,000. The interest related to this investment accrues quarterly. A portion of the interest accrued will be paid out each quarter beginning on the first anniversary of the issuance date, with the remainder to be received upon maturity.
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Equity in Earnings and Dividend Income from Unconsolidated 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 investment in preferred stock of SmartStop, which was purchased in October 2019 for $150,000 with another $50,000 invested in October 2020. The increase for the three months ended March 31, 2021 related primarily to the dividend income related to the SmartStop preferred stock.

Income Tax Expense—For the three months ended March 31, 2021, the increase in income tax expense was the result of an increase in income earned by our taxable REIT subsidiary when compared to the same period in the prior year.

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 the National 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,
  2021 2020
Net income attributable to common stockholders $ 202,998  $ 108,179 
Adjustments:
Real estate depreciation 55,815  52,926 
Amortization of intangibles 693  617 
Gain on real estate transactions
(63,883) — 
Unconsolidated joint venture real estate depreciation and amortization 2,505  2,164 
Distributions paid on Series A Preferred Operating Partnership units (572) (572)
Income allocated to Operating Partnership noncontrolling interests 12,503  7,983 
Funds from operations attributable to common stockholders and unit holders $ 210,059  $ 171,297 

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SAME-STORE RESULTS

Our same-store pool for the periods presented consists of 860 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.
  For the Three Months Ended March 31, Percent
  2021 2020 Change
Same-store rental revenues $ 278,881  $ 266,733  4.6  %
Same-store operating expenses 77,889  78,008  (0.2) %
Same-store net operating income $ 200,992  $ 188,725  6.5  %
Same-store square foot occupancy as of quarter end 95.7% 90.9%
Properties included in same-store 860 860
Same-store revenues for the three months ended March 31, 2021 increased due to higher average occupancy and higher average rates to customers for the quarter, partially offset by lower late fees. Same-store expenses were lower for the three months ended March 31, 2021 primarily due to decreases in payroll and marketing expenses partially offset by an increase in property taxes and repairs and maintenance due to elevated snow removal expense.

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,
2021 2020
Net Income $ 215,501  $ 116,162 
Adjusted to exclude:
Gain on real estate transactions (63,883) — 
Equity in earnings and dividend income from unconsolidated real estate entities (6,956) (5,043)
Interest expense 40,695  45,567 
Depreciation and amortization 58,599  55,275 
Income tax expense 4,137  2,179 
General and administrative 23,540  23,011 
Management fees, other income and interest income (27,949) (13,810)
Net tenant insurance (32,458) (26,935)
Non-same store rental revenue (24,712) (19,970)
Non-same store operating expense 14,478  12,289 
Total Same-store net operating income $ 200,992  $ 188,725 
Same-store rental revenues $ 278,881  $ 266,733 
Same-store operating expenses 77,889  78,008 
Same-store net operating income $ 200,992  $ 188,725 

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CASH FLOWS

Cash flows from operating activities for the three months ended March 31, 2021 increased when compared to the same period in the prior year as a result of our continued total revenue growth. This growth was due to an increase in the number of stores we own and operate and higher average occupancy at our stores. 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:
For the Three Months Ended March 31,
2021 2020
Net cash provided by operating activities $ 203,880  $ 189,256 
Net cash provided by (used in) investing activities 42,595  (60,573)
Net cash used in financing activities (311,689) (101,486)
Significant components of net cash flow included:
Net income $ 215,501  $ 116,162 
Depreciation and amortization 58,599  55,275 
Acquisition and development of real estate assets (175,838) (45,537)
Proceeds from sale of real estate assets 132,733  — 
Issuance and purchase of notes receivable (25,772) (7,500)