6. NOTES PAYABLE AND REVOLVING LINES OF CREDIT
The Credit Agreement is guaranteed by the Company and is not secured by any assets of the Company. We areThe Company is subject to certain restrictive covenants relating to ourits outstanding debt. As of December 31, 2017,2019, the Company was in compliance with all of its financial covenants.
Real estate assets are pledged as collateral for the secured loans. Of the Company’s $3,763,474$4,343,502 principal amount of notes payable outstanding at December 31, 2017, $2,545,2782019, $2,012,791 was recourse due to guarantees or other security provisions.
All of the Company’s lines of credit are guaranteed by the Company. The following table presents information on the Company’s lines of credit, the proceeds of which are used to repay debt and for general corporate purposes, for the periods indicated:
7. DERIVATIVES
The Company is exposed to certain risk 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 the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise 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.
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 this objective, 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 years ended December 31, 2017, 20162019, 2018 and 2015,2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. During 2018,2020, the Company estimates that $4,736$4,374 will be reclassified as a decreasean increase to interest expense.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets:
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the periods presented. No tax effect has been presented as the derivative instruments are held by the Company:
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.
8. NOTES PAYABLE TO TRUSTS
During July 2005, ESS Statutory Trust III (the “Trust III”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $40,000 of preferred securities which mature on July 31, 2035. In addition, the Trust III issued 1,238 of Trust common securities to the Operating Partnership for a purchase price of $1,238. On July 27, 2005, the proceeds from the sale of the preferred and common securities of $41,238 were loaned in the form of a note to the Operating Partnership (“Note 3”). Note 3 had a fixed rate of 6.91% through July 31, 2010, and then was payable at a variable rate equal to the three month LIBOR plus 2.4% per annum. Effective July 11, 2011, the Trust III entered into an interest rate swap that fixes the interest rate to be paid at 5.0% per annum and matures July 11, 2018. The interest on Note 3, payable quarterly, will be used by the Trust III to pay dividends on the trust preferred securities. The trust preferred securities became redeemable by the Trust III with no prepayment premium on July 27, 2010.
During May 2005, ESS Statutory Trust II (the “Trust II”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership of the Company, issued an aggregate of $41,000 of preferred securities which mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1,269. On May 24, 2005, the proceeds from the sale of the preferred and common securities of $42,269 were loaned in the form of a note to the Operating Partnership (“Note 2”). Note 2 had a fixed rate of 6.7% through June 30,
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
2010, and then was payable at a variable rate equal to the three month LIBOR plus 2.4% per annum. Effective July 11, 2011, the Trust II entered into an interest rate swap that fixes the interest rate to be paid at 5.0% per annum and matures July 11, 2018. The interest on Note 2, payable quarterly, will be used by the Trust II to pay dividends on the trust preferred securities. The trust preferred securities became redeemable by the Trust II with no prepayment premium on June 30, 2010.8. NOTES PAYABLE TO TRUSTS
During April 2005, the Company's Operating Partnership formed 3 wholly-owned unconsolidated subsidiaries: ESS Statutory Trust I (the “Trust”(“Trust"), a newly formed Delaware statutory trust ESS Statutory Trust II, (“Trust II”) and a wholly-owned, unconsolidated subsidiary ofESS Statutory Trust III (“Trust III,” and together with Trust and Trust II, the Operating Partnership of the Company"Trusts"). The Trusts issued an aggregate of $35,000 of trust preferred securities which mature on June 30, 2035. In addition, the Trust issued 1,083 of Trustto third parties and common securities to the Operating Partnership for a purchase price of $1,083. On April 8, 2005,Partnership. The Trust loaned the proceeds from the sale of the trust preferred and common securities of $36,083 were loanedto the Operating Partnership in the form of a note to the Operating Partnership (the “Note”).notes. The Note has a variable rate equal to the three month LIBOR plus 2.3% per annum. Effective June 30, 2010, the Trust entered into an interest rate swap that fixes the interest rate to be paid at 5.1% per annum and matures on June 30, 2018. The interest on the Note, payable quarterly, will be used by the Trust to pay dividends on the trust preferred securities. The trust preferred securities are redeemable by the Trust with no prepayment premium.
Trust, Trust II and Trust III (together, the “Trusts”) areTrusts were VIEs because the holders of the equity investment at risk (the trust(that is the Trusts' preferred securities) dodid not have the power to direct the activities of the entities that most significantly affectaffected the entities’ economic performance because ofdue to their lack of voting or similar rights. Because the Operating Partnership’s investment in the Trusts’ common securities was financed directly by the Trusts as a result of its loan of the proceeds to the Operating Partnership, that investment iswas not considered to be an equity investment at risk. The Operating Partnership’s investment in the Trusts iswas not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk, and therefore the Operating Partnership cannot bewas not the primary beneficiary of the Trusts. Since the Company iswas not the primary beneficiary of the Trusts, they havewere not been consolidated. A debt obligation has beenwas recorded in the form of notes for the proceeds as discussed above, for the proceeds, which arewere owed to the Trusts by the Company.Trusts. The Company hashad also recordedincluded its investment in the Trusts’ common securities asin other assets.assets on the Company's consolidated balance sheets.
During the year ended December 31, 2018, the Company repaid a total principal amount of $88,662 of the notes payable to Trusts, representing all of the notes payable to Trust III, all of the notes payable to Trust II, and all but $30,928 of the notes payable to Trust. The Trusts used the proceeds from these repayments to redeem their preferred and common securities. In January 2019, the Company hasrepaid the remaining balance of $30,928 of notes payable to Trust.
During the time they were outstanding, the Company did not providedprovide financing or other support during the periods presented to the Trusts that it was not previously contractually obligated to provide. The Company’s maximum exposure to loss as a result of its involvement with the Trusts iswas equal to the total amount of the notes discussed above less the amounts of the Company’s investments in the Trusts’ common securities. The net amount iswas equal to the notes payable that the Trusts oweowed to third parties for their investments in the Trusts’ preferred securities.
The notes payable to trusts are presented net of unamortized deferred financing costs of $2,146 and $2,269 as ofCompany had no consolidated VIEs during the years ended December 31, 2017 and 2016, respectively.
Following is a tabular comparison of the liabilities the Company has recorded as a result of its involvements with the Trusts to the maximum exposure to loss the Company is subject to related to the Trusts as of2019 or December 31, 2017:2018.
|
| | | | | | | | | | | | | | | |
| Notes payable to Trusts | | Investment Balance | | Maximum exposure to loss | | Difference |
Trust | $ | 36,083 |
| | $ | 1,083 |
| | $ | 35,000 |
| | $ | — |
|
Trust II | 42,269 |
| | 1,269 |
| | 41,000 |
| | — |
|
Trust III | 41,238 |
| | 1,238 |
| | 40,000 |
| | — |
|
Total | 119,590 |
| | 3,590 |
| | 116,000 |
| | — |
|
Unamortized debt issuance costs | (2,146 | ) | |
| |
| |
|
Total notes payable to trusts, net | $ | 117,444 |
| |
|
| |
|
| |
|
|
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 are being amortized as an adjustment to interest expense over five years, which represents the estimated term based on the first available redemption date, and are included in other assetsexchangeable senior notes, net, in the consolidated balance sheets. The 2015 Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on April 1 and October 1 of each year beginning April 1, 2016, until the maturity date of October 1, 2035. The Notes bear interest at 3.125% per annum and contain an exchange settlement feature, which provides that the 2015 Notes may, under certain circumstances, be 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. The exchange rate of the 2015 Notes as of December 31, 20172019 was approximately 10.6610.90 shares of the Company’s common stock per $1,000 principal amount of the 2015 Notes.
The Operating Partnership may redeem the 2015 Notes at any time to preserve the Company’s status as a REIT. In addition, on or after October 5, 2020, the Operating Partnership may redeem the 2015 Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to the holders of the 2015 Notes. The holders of the 2015 Notes have the right to require the Operating Partnership to repurchase the 2015 Notes for cash, in whole or in part, on October 1 of the years 2020, 2025 and 2030, (unless the Operating Partnership has called the 2015 Notes for redemption), and upon the occurrence of certain designated events, in each case for a repurchase price equal to 100% of the principal amount of the 2015 Notes plus accrued and unpaid interest. Certain events are considered “Events of Default,” as defined in the indenture governing the 2015 Notes, which may result in the accelerated maturity of the 2015 Notes.
On June 21, 2013, the Operating Partnership issued $250,000 of its 2.375% Exchangeable Senior Notes due 2033 at a 1.5% discount, or $3,750. Costs incurred to issue the 2013 Notes were approximately $1,672. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term based on the first available redemption date, and are included in other assets in the consolidated balance sheets. The 2013 Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on January 1 and July 1 of each year beginning January 1, 2014, until the maturity date of July 1, 2033. The 2013 Notes bear interest at 2.375% per annum and contain an exchange settlement feature, which provides that the 2013 Notes may, under certain circumstances, be exchangeable for cash (for the principal amount of the 2013 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. The exchange rate of the 2013 Notes as of December 31, 2017 was approximately 18.85 shares of the Company’s common stock per $1,000 principal amount of the 2013 Notes.
Additionally, the 2013 Notes and the 2015 Notes can be exchanged during any calendar quarter, if the last reported sale price of the common stock of the Company is greater than or equal to 130% of the exchange price for at least 20 trading days during a period of 30
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter. The price of the Company’s common stock exceeded 130% of the exchange price for the required time period for the 2013 Notes during the quarter ended December 31, 2017. Therefore, holders of the 2013 Notes may elect to exchange such notes during the quarter ending March 31, 2018. The price of the Company’s common stock did not exceed 130% of the exchange price for the required time period for the 2015 Notes during the quarter ended December 31, 2017.2019.
On June 21, 2013, the Operating Partnership issued $250,000 of its 2013 Notes at a 1.5% discount, or $3,750. Costs incurred to issue the 2013 Notes were approximately $1,672. 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. The 2013 Notes bore interest at 2.375% per annum and contained an exchange settlement feature. The Operating Partnership may redeem theredeemed all remaining outstanding 2013 Notes at any time to preserve the Company’s status as a REIT. In addition, on or after July 5, 2018, the Operating Partnership may redeem the 2013 Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to the holders of the 2013 Notes. The holders of the 2013 Notes have the right to require the Operating Partnership to repurchase the 2013 Notes for cash, in whole or in part, on July 1 of the years 2018, 2023 and 2028, and upon the occurrence of certain designated events, in each case for a repurchase price equal to 100% of the principal amount of the 2013 Notes plus accrued and unpaid interest. Certain events are considered “Events of Default,” as defined in the indenture governing the 2013 Notes, which may result in the accelerated maturity of the 2013 Notes.2018.
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 accounts for the liability and equity componentscomponent of the 2013 Notes and 2015 Notes separately. The equity components are included in paid-in capital in stockholders’ equity in the consolidated balance sheets, and
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
the value of the equity components are treated as original issue discount for purposes of accounting for the debt components. The discounts arediscount is being amortized as interest expense over the remaining period of the debt through its first redemption date, July 1, 2018 for the 2013 Notes and October 1, 2020 for the 2015 Notes. The effective interest rate on the liability components of both the 2013 Notes and the 2015 Notes is 4.0%, which approximates the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.
Information about the 2015 Notes, including the total carrying amountamounts of the equity component, the principal amount of the liability component, itsthe unamortized discount and its net carrying amount, werewas as follows for the periods indicated:
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Carrying amount of equity component | $ | 22,597 |
| | $ | 22,597 |
|
Principal amount of liability component | $ | 575,000 |
| | $ | 575,000 |
|
Unamortized discount - equity component | (3,675 | ) | | (8,417 | ) |
Unamortized debt issuance costs | (1,812 | ) | | (4,209 | ) |
Net carrying amount of liability component | $ | 569,513 |
| | $ | 562,374 |
|
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Carrying amount of equity component - 2013 Notes | $ | — |
| | $ | — |
|
Carrying amount of equity component - 2015 Notes | 22,597 |
| | 22,597 |
|
Carrying amount of equity components | $ | 22,597 |
| | $ | 22,597 |
|
Principal amount of liability component - 2013 Notes | $ | 49,259 |
| | $ | 63,170 |
|
Principal amount of liability component - 2015 Notes | 575,000 |
| | 575,000 |
|
Unamortized discount - equity component - 2013 Notes | (315 | ) | | (1,187 | ) |
Unamortized discount - equity component - 2015 Notes | (12,974 | ) | | (17,355 | ) |
Unamortized cash discount - 2013 Notes | (74 | ) | | (281 | ) |
Unamortized debt issuance costs | (6,620 | ) | | (9,033 | ) |
Net carrying amount of liability components | $ | 604,276 |
| | $ | 610,314 |
|
The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component for the 2013 Notes and 2015 Notes waswere as follows for the periods indicated:
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Contractual interest | $ | 17,968 |
| | $ | 18,106 |
| | $ | 19,303 |
|
Amortization of discount | 4,742 |
| | 4,687 |
| | 5,103 |
|
Total interest expense recognized | $ | 22,710 |
| | $ | 22,793 |
| | $ | 24,406 |
|
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Contractual interest | $ | 19,303 |
| | $ | 19,483 |
| | $ | 9,939 |
|
Amortization of discount | 5,103 |
| | 4,980 |
| | 3,310 |
|
Total interest expense recognized | $ | 24,406 |
| | $ | 24,463 |
| | $ | 13,249 |
|
Repurchase of 2013 Notes
During July, Augustthe year ended December 31, 2018, the Company repurchased a total principal amount of $49,259 of the 2013 Notes, which represented all of the remaining principal amount outstanding. The Company paid cash of $80,270 for the total of the principal amount and Octoberthe exchange value in excess of the principal amount.
During the year ended December 31, 2017, the Company repurchased a total principal amount of $13,911 of the 2013 Notes. The Company paid cash of $20,042 for the total of the principal amount and the exchange value in excess of the principal amount.
During April 2016, the Company repurchased a total principal amount of $2,555 of the 2013 Notes. The Company paid cash for the principal amount and issued a total of 18,031 shares of common stock valued at $1,686 for the exchange value in excess of the principal amount.
During February 2016, the Company repurchased a total principal amount of $19,639 of the 2013 Notes. The Company paid cash for the principal amount, and issued a total of 130,909 shares of common stock valued at $11,380 for the exchange value in excess of the principal amount.
As part of the 2015 Notes offering, the Company repurchased $164,636 of the 2013 Notes for $227,212 on September 15, 2015. The Company allocated the value of the consideration paid to repurchase the 2013 Notes (1) to the extinguishment of the liability component and (2) to the reacquisition of the equity component. The amount allocated to the extinguishment of the liability component is equal to the fair value of that component immediately prior to extinguishment. The difference between the consideration attributed to the extinguishment of the liability component and the sum of (a) the net carrying amount of the repurchased liability component, and (b) the related unamortized debt issuance costs, is recognized as a gain on debt
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
extinguishment. The remaining settlement consideration is allocated to the reacquisition of the equity component of the repurchased 2013 Notes and recognized as a reduction of stockholders’ equity.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Information about the repurchases is as follows:
|
| | | | | | | | |
| For the Year Ended December 31, |
| | 2018 | | 2017 |
Principal amount repurchased | | $ | 49,259 |
| | $ | 13,911 |
|
| | | | |
Amount allocated to: | | | | |
Extinguishment of liability component | | $ | 49,019 |
| | $ | 13,692 |
|
Reacquisition of equity component | | 31,251 |
| | 6,350 |
|
Total consideration paid for repurchase | | $ | 80,270 |
| | $ | 20,042 |
|
Exchangeable senior notes repurchased | | $ | 49,259 |
| | $ | 13,911 |
|
Extinguishment of liability component | | (49,019 | ) | | (13,692 | ) |
Discount on exchangeable senior notes | | (230 | ) | | (184 | ) |
Related debt issuance costs | | (10 | ) | | (35 | ) |
Gain/(loss) on repurchase | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Principal amount repurchased | $ | 13,911 |
| | $ | 22,194 |
| | $ | 164,636 |
|
| | | | | |
Amount allocated to: | | | | | |
Extinguishment of liability component | $ | 13,692 |
| | $ | 21,363 |
| | $ | 157,100 |
|
Reacquisition of equity component | 6,350 |
| | 13,898 |
| | 70,112 |
|
Total consideration paid for repurchase | $ | 20,042 |
| | $ | 35,261 |
| | $ | 227,212 |
|
Exchangeable senior notes repurchased | $ | 13,911 |
| | $ | 22,194 |
| | $ | 164,636 |
|
Extinguishment of liability component | (13,692 | ) | | (21,363 | ) | | (157,100 | ) |
Discount on exchangeable senior notes | (184 | ) | | (788 | ) | | (6,931 | ) |
Related debt issuance costs | (35 | ) | | (43 | ) | | (605 | ) |
Gain/(loss) on repurchase | $ | — |
| | $ | — |
| | $ | — |
|
Subsequent to year end, the Company has repurchased a total principal amount of $37,704 of the 2013 Notes. The Company paid cash for these repurchases totaling $58,465, which included the principal amount and the exchange value in excess of the principal amount.
10. RELATED PARTY AND AFFILIATED REAL ESTATE JOINT VENTURE TRANSACTIONS
The Company provides management services to certain joint ventures and third parties for a fee. Management fee revenues for related party and affiliated real estate joint ventures and other income are summarized as follows:
|
| | | | | | | | | | | | | | |
| | | | For the Year Ended December 31, |
Entity | | Type | | 2017 | | 2016 | | 2015 |
PRISA | | Affiliated real estate joint ventures | | $ | 6,303 |
| | $ | 6,117 |
| | $ | 5,809 |
|
SP I | | Affiliated real estate joint ventures | | 1,450 |
| | 1,397 |
| | 1,312 |
|
WCOT | | Affiliated real estate joint ventures | | 1,159 |
| | 1,819 |
| | 1,799 |
|
VRS | | Affiliated real estate joint ventures | | 1,038 |
| | 1,053 |
| | 1,398 |
|
ESNPS | | Affiliated real estate joint ventures | | 645 |
| | 620 |
| | 584 |
|
ESW | | Affiliated real estate joint ventures | | 590 |
| | 555 |
| | 515 |
|
ESW II | | Affiliated real estate joint ventures | | 502 |
| | 482 |
| | 452 |
|
PRISA II | | Affiliated real estate joint ventures | | — |
| | 3,469 |
| | 4,703 |
|
Other | | Franchisees, third parties and other | | 27,692 |
| | 24,330 |
| | 17,589 |
|
| | | | $ | 39,379 |
| | $ | 39,842 |
| | $ | 34,161 |
|
Receivables from related parties and affiliated real estate joint ventures balances are summarized as follows:
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Mortgage notes receivable | | $ | — |
| | $ | 15,860 |
|
Other receivables from stores | | 2,847 |
| | 751 |
|
| | $ | 2,847 |
| | $ | 16,611 |
|
Mortgage notes receivable consisted of short-term mortgage notes to joint ventures and one three-year revolving line of credit to a joint venture. These short-term mortgage notes had a maturity of less than a year and were repaid prior to December 31, 2017. Other receivables from stores consist of amounts due for management fees, asset management fees and expenses paid on behalf of the stores that the Company manages. The Company believes that all of these related party and affiliated real
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
estate joint venture receivables are fully collectible. The Company did not have any payables to related parties at December 31, 2017 or 2016.
The Company has entered into an annual aircraft dry lease and service and management agreement with SpenAero, L.C. (“SpenAero”), an affiliate of Spencer F. Kirk, who was the Company's Chief Executive Officer through December 31, 2016 and continues to serve as a member of the Company's Board of Directors. Under the terms of the agreement, the Company pays a defined hourly rate for use of the aircraft. During the years ended December 31, 2017, 2016 and 2015, the Company paid SpenAero $167, $1,180 and $1,163, respectively.
11. STOCKHOLDERS’ EQUITY
The Company’s charter provides that it can issue up to 500,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of December 31, 2017, 126,007,0912019, 129,534,407 shares of common stock were issued and outstanding, and no0 shares of preferred stock were issued or outstanding.
All holders of the Company's common stock are entitled to receive dividends and to one1 vote on all matters submitted to a vote of stockholders. The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company.
On August 28, 2015, the Company filed a $400,000 “at the market” equity program with the Securities and Exchange Commission, and entered into separate equity distribution agreements with five sales agents. On May 6, 2016,15, 2019, the Company filed its current $400,000$500,000 "at the market" equity program with the Securities and Exchange Commission using a new shelf registration statement on Form S-3, and entered into separate equity distribution agreements with five9 sales agents. Under the terms of the current equity distribution agreements, the Company may from time to time offer and sell shares of common stock, up to the aggregate offering price of $400,000,$500,000, through its sales agents. The current equity distribution agreements, dated May 6, 2016, replaced and superseded the previous equity distribution agreements, dated August 28, 2015.
During the year ended December 31, 2017,2019, the Company sold no1,779,200 shares of common stock under its "at the market" equity program.program at an average sales price of $113.19 per share, resulting in net proceeds of $198,827. At December 31, 2019, the Company had $298,621 available for issuance under the current equity distribution agreements.
During July 2016,the year ended December 31, 2018, the Company sold 550,000933,789 shares of common stock under its prior "at the current “at the market”market" equity program at an average sales price of $92.04$97.93 per share, resulting in net proceeds of $50,062. At December 31, 2017, the Company had $349,375 available for issuance under the existing equity distribution agreements.$90,531.
From January 1, 2016, through May 6, 2016, the Company sold 831,300 shares of common stock under the previous “at the market” equity program at an average sales price of $89.66 per share, resulting in net proceeds of $73,360.
During September 2015, the Company sold 410,000 shares of common stock under the previous “at the market” equity program at an average sales price of $75.17 per share, resulting in net proceeds of $30,266.
On June 22, 2015, the Company issued and sold 6,325,000 shares of its common stock in a public offering at a price of $68.15 per share. The Company received gross proceeds of $431,049. The underwriting discount and transaction costs were $14,438, resulting in net proceeds of $416,611.
12.11. 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.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
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 consolidated balance sheets. The
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 amount as permanent equity in the 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, or (2) its redemption value as of the end of the period in which the determination is made.
As of December 31, 2017, the noncontrolling interests represented by Operating Partnership preferred units consisted of the following:
•875,480 Series A Units;
•1,676,087 Series B Units;
•704,016 Series C Units; and
•3,682,521 Series D Units.
At December 31, 20172019 and 2016,2018, the noncontrolling interests represented by the Preferred Operating PartnershipOP Units qualified for classification as permanent equity on the Company's 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. Noncontrolling interests in Preferred OP Units were presented net of notes receivable from preferred Operating Partnership unit holders of $100,000 and $108,644 as of December 31, 2019 and 2018, respectively, as more fully described below.
Series A Participating Redeemable Preferred Units
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 common OP Units. The Series A Units became redeemable at the option of the holder on September 1, 2008, 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.$101,700 which represents 875,480 Series A Units. On April 18, 2017, the holder of the Series A Units and the Operating Partnership agreed to reduce the fixed priority return on the Series A Units from 5.0% to 2.3% in exchange for a reduction in the interest rate of the related loan, as more fully described below.
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.
On June 25, 2007, the Operating Partnership loaned the holders of the Series A Units $100,000. The note receivable bears interest at 2.1%. On April 18, 2017, a loan amendment was signed modifying the maturity date of the loan to the later of the death of the Series A Unit holder or his spouse and also lowering the interest rate of the loan from 4.9% to 2.1%. The loan amendment was determined to be a loan modification under GAAP, and therefore no change in value was recognized. The loan is secured by the borrower’s Series A Units. NoNaN 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 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 current fixed liquidation value of $41,902.$41,902 which represents 1,676,087 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 are redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligations may be satisfied at the Company’s option in cash or shares of its common stock. 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.
Series C Convertible Redeemable Preferred Units
The Partnership Agreement provides for the designation and issuance of the Series C Units. The Series C Units rank 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.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The Series C Units were issued in 2013 and 2014 and havehad a liquidation value of $42.10 per unit for a fixed liquidation value of $29,639.unit. From issuance to the fifth anniversary of issuance, each Series C Unit holder will receivereceived quarterly distributions equal to the quarterly distribution for
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
common OP Unit plus $0.18. Beginning on the fifth anniversary of issuance, each Series C Unit holder will receive a fixed quarterly distribution equal to the aggregate quarterly distribution payable in respect of such Series C Unit during the four quarters immediately preceding the fifth anniversary of issuance divided by four. These distributions arewere cumulative. The Series C Units will becomebecame redeemable at the option of the holder one year from the date of issuance, which redemption obligation maycould be satisfied at the Company’s option in cash or shares of its common stock. The Series C Units will also becomewere convertible into common OP Units at the option of the holder one year from the date of issuance, at a rate of 0.9145 common OP Units per Series C Unit converted. This conversion option expiresexpired upon the fifth anniversary of the date of issuance.
In December 2014, the Operating Partnership loaned holders of the Series C Units $20,230. The notesnote receivable, which arewas collateralized by the Series C Units, bearbears interest at 5.0% and maturematures on December 15, 2024. The Series C Units arewere shown on the balance sheet net of the $20,230 loan because the borrower under the loan receivable iswas 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 common OP Units, with a total of 407,996 Series C Units being converted into a total of 373,113 common OP Units. As part of this conversion, the holders of the Series C Units agreed to pledge the common OP Units received in the conversion as collateral on the loan receivable to replace the Series C Units that were converted. As of December 31, 2018, the total outstanding balance of the loan receivable was $19,735, of which $8,644 was shown as a reduction of the noncontrolling interests related to the Series C Units and $11,091 was shown as a reduction of the noncontrolling interests related to the common OP Units on the Company's consolidated balance sheets. 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 $18,524 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2019. 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 interest of the Operating Partnership with respect to distributions and liquidation.
The Series D Units have been issued at various times from 2014 to 2017.2019. During the year ended December 31, 2019, the Operating Partnership issued a total of 1,120,924 Series D Units valued at $28,023 in conjunction with joint venture acquisitions. During the year ended December 31, 2017, the Operating Partnership issued 446,420 Series D Units valued at $11,161 in conjunction with wholly-owned and joint venture acquisitions. During the year ended December 31, 2016, the Operating Partnership issued a total of 2,687,711 Series D Units valued at $67,193 in conjunction with the acquisition of real estate assets.
The Series D Units have a liquidation value of $25.00 per unit, for a current fixed liquidation value of $92,064.$120,086 which represents 4,803,445 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 will 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 common OP Units until the tenth anniversary of the date of issuance, with the number of common 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.
13.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
| |
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 90.9%90.7% majority ownership interest therein as of December 31, 2017.2019. The remaining ownership interests in the Operating Partnership (including Preferred Operating Partnership units)OP Units) of 9.1%9.3% are held by certain former owners of assets acquired by the Operating Partnership.
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. Alternatively, the Company may, at its sole discretion, elect to acquire those OP Units in exchange for shares of its common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Operating Partnership agreement. The ten-day average closing stock price at December 31, 2017,2019, was $86.77$104.18 and there were 5,664,3705,924,778 OP Units outstanding.
Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on December 31, 20172019 and the Company elected to pay the OP Unit holders cash, the Company would have paid $491,497$617,243 in cash consideration to redeem the units.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 Year Ended December 31, |
| 2019 | 2018 | 2017 |
OP Units redeemed for common stock | 340,182 |
| 35,000 |
| — |
|
OP Units redeemed for cash | — |
| 30,000 |
| 33,896 |
|
Cash paid for OP Units redeemed | $ | — |
| $ | 2,558 |
| $ | 2,510 |
|
OP Units issued in conjunction with acquisitions | — |
| 21,768 |
| 90,228 |
|
Value of OP Units issued in conjunction with acquisitions | $ | — |
| $ | 1,877 |
| $ | 7,618 |
|
OP Units issued upon redemption of Series C Units | 270,709 |
| 373,113 |
| — |
|
|
| | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | 2016 | 2015 |
OP Units redeemed for common stock | — |
| 23,850 |
| 787,850 |
|
OP Units redeemed for cash | 33,896 |
| 6,760 |
| — |
|
Cash paid for OP Units redeemed | $ | 2,510 |
| $ | 506 |
| $ | — |
|
OP Units issued in conjunction with acquisitions | 90,228 |
| 93,569 |
| 2,043,613 |
|
Value of OP Units issued in conjunction with acquisitions | $ | 7,618 |
| $ | 7,247 |
| $ | 142,399 |
|
On December 1, 2018, 373,113 common OP Units were issued in the conversion of 407,996 Series C Units. These newly issued OP Units were pledged as collateral on the existing loan receivable to the Series C Unit holders. As a result, noncontrolling interests in the Operating Partnership was reported net of $11,091 of the loan receivable as of December 31, 2018, which represents the portion of the note receivable that is collateralized by the OP Units. The remaining 296,020 Series C Units were converted into 270,709 OP Units on April 25, 2019 and the remainder of the loan receivable was reported net with the OP Units. The remaining total outstanding balance of the loan receivable of $18,524 is shown as a reduction of the noncontrolling interests related to the OP Units as of December 31, 2019.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 common OP Units and classifies the noncontrolling interest represented by the common OP Units as stockholders’ equity in the accompanying 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 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, or (2) its redemption value as of the end of the period in which the determination is made.
14. OTHER NONCONTROLLING INTERESTS58
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Other Noncontrolling Interests
Other noncontrolling interests represent the ownership interest of third parties in two2 consolidated joint ventures as of December 31, 2017.2019. One joint venture owns an2 operating storestores in Texas and a development store in Texas. and a development store2 operating stores in Colorado, and the other owns an operating store in Pennsylvania and a development property in Pennsylvania.New Jersey. The voting interests of the third-party owners are between 5.0% and 20.0%.
15.
The Company adopted ASC 842, "Leases," effective January 1, 2019 on a modified retrospective basis as allowed under the standard and thus prior periods have not been restated. The Company elected the package of transition practical expedients, and has therefore (1) not reassessed whether any expired or existing contracts are or contain leases, (2) not reassessed the lease classification for any expired or existing leases, and (3) not reassessed initial direct costs for any expired or existing leases.
Lessee Accounting
The Company recognized right-of-use assets related to operating leases totaling $95,506 and lease liabilities of $104,863 as of the adoption date, January 1, 2019. These are presented as “Operating lease liabilities” and “Real estate assets-operating lease right-of-use assets” on the Company’s consolidated balance sheets.
In June and August 2019, the Company entered into new triple-net lease agreements to lease land and buildings at 22 and 5 operating stores, respectively. These leases are categorized as operating leases, and have contractual lease terms of 25 years, but have termination options after 10 years that result in lease terms of 10 years under ASC 842. The Company recorded new operating lease right-of-use assets and operating lease liabilities of $127,532 and $52,224, respectively, in conjunction with these new lease agreements.
The Company is lessee under several types of lease agreements. Generally, these leases fall into the following categories:
Leases of real estate at 49 stores classified as wholly-owned. These leases generally have original lease terms between 10-67 years. Under these leases, the Company typically has the option to extend the lease term for additional terms of 5-35 years.
Leases of its corporate offices and call center. These leases have original lease terms between 5.3 and 12.1 years, with no extension options.
Leases of 13 regional offices. These leases have original lease terms between three and five years. The Company has the option on 5 of these leases to extend the lease term for three additional years.
Leases of small district offices. These leases generally have terms of 12 months or less. The Company has made an election to account for these under the short-term lease exception outlined under ASC 842. Therefore, no lease assets or liabilities are recorded related to these leases.
The Company has included lease extension options in the lease term for calculations of its right-of-use assets and liabilities related to the real estate asset leases at its stores when it is reasonably certain that the Company plans to extend the lease terms as the options arise.
Several of the leases of real estate at the Company’s stores include escalation clauses based on an index or rate, such as the Consumer Price Index (CPI). The Company included these lease payments in its calculations of right-of-use assets and liabilities based on the prevailing index or rate as of the adoption date. The Company will recognize changes to these variable lease payments in earnings in the period of change.
One of the real estate leases includes variable lease payments that are based upon a percentage of gross revenues. Certain other leases include additional variable payments relating to a percentage of sales in excess of a specified amount, common area maintenance, property taxes, and similar items. These payments are variable lease payments that do not depend on an index or rate and are excluded from the measurement of the lease liabilities and right-of-use-assets for these leases. The Company will recognize costs from these variable lease payments in the period in which the obligation for those payments is incurred.
The Company has signed a lease agreement for a store in New Jersey. The store is currently under construction by the lessor, and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in early to mid-2020. The lease term is 75 years from the lease commencement date, with 3 10-year extension options. The Company has also signed a lease agreement for a store in California. The store is under construction by the lessor,
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in late 2020. The lease term is 15 years from the lease commencement date, with 3 10-year extension options and 1 5-year extension option. The Company has not recorded right-of-use assets or lease liabilities related to these leases as of December 31, 2019 as the lease term has not yet commenced for either lease. The lease commencement date will occur when the Company takes possession of the leased asset, and the Company will recognize a lease liability and right-of-use asset relating to the leases at that time.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s unsecured borrowing rates and implied secured spread at the lease commencement date in determining the present value of lease payments. These discount rates vary depending on the term of the specific leases.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Following is information on our total lease costs as of the period indicated:
|
| | | |
| For the Year Ended December 31, |
| 2019 |
| |
Finance lease cost: | |
Amortization of finance lease right-of-use assets | $ | 168 |
|
Interest expense related to finance lease liabilities | 290 |
|
Operating lease cost | 20,268 |
|
Variable lease cost | 5,068 |
|
Short-term lease cost | 164 |
|
Total lease cost | $ | 25,958 |
|
| |
| |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash outflows for finance lease payments | $ | 231 |
|
Operating cash outflows for operating lease payments | 19,226 |
|
Total cash flows for lease liability measurement | $ | 19,457 |
|
| |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 277,557 |
|
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 8,050 |
|
| |
Weighted average remaining lease term - finance leases (years) | 46.9 |
|
Weighted average remaining lease term - operating leases (years) | 14.7 |
|
Weighted average discount rate - finance leases | 6.07 | % |
Weighted average discount rate - operating leases | 3.65 | % |
The Company recorded lease expense of $8,229 and $6,898 related to operating leases in the years ended December 31, 2018 and 2017, respectively.
The following table presents information about the Company’s undiscounted cash flows on an annual basis for operating and finance leases, including a reconciliation of the undiscounted cash flows to the finance lease and operating lease liabilities recognized in the Company’s consolidated balance sheets:
|
| | | | | | | | | | | |
| Operating | | Finance | | Total |
2020 | $ | 28,369 |
| | $ | 232 |
| | $ | 28,601 |
|
2021 | 28,628 |
| | 237 |
| | 28,865 |
|
2022 | 28,651 |
| | 255 |
| | 28,906 |
|
2023 | 28,707 |
| | 255 |
| | 28,962 |
|
2024 | 29,198 |
| | 255 |
| | 29,453 |
|
Thereafter | 223,823 |
| | 16,522 |
| | 240,345 |
|
Total | $ | 367,376 |
| | $ | 17,756 |
| | $ | 385,132 |
|
Present value adjustments | (92,593 | ) | | (12,918 | ) | | (105,511 | ) |
Lease liabilities | $ | 274,783 |
| | $ | 4,838 |
| | $ | 279,621 |
|
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The Company elected the package of practical expedients upon adoption of ASC 842, which allows for the application of the standard solely to the transition period in 2019 and does not require application to prior fiscal comparative periods presented. Disclosures required under the previous leasing standard are presented for prior years. The following table summarizes future minimum lease payments required under operating leases as of December 31, 2018:
|
| | | |
2019 | $ | 8,203 |
|
2020 | 8,307 |
|
2021 | 8,137 |
|
2022 | 7,837 |
|
2023 | 7,021 |
|
Thereafter | 111,653 |
|
| $ | 151,158 |
|
Lessor Accounting
The Company's property rental revenue is primarily related to rents received from tenants at its operating stores. The Company's leases with its self-storage tenants are generally on month-to-month terms, include automatic monthly renewals, allow flexibility to increase rental rates over time as market conditions permit, and provide for the collection of contingent fees such as late fees. These leases do not include any terms or conditions that allow the tenants to purchase the leased space. All self-storage leases for which the Company acts as lessor have been classified as operating leases. The real estate assets related to the Company's stores are included in "Real estate assets, net" on the Company's condensed consolidated balance sheets and are presented at historical cost less accumulated depreciation and impairment, if any. Rental income related to these operating leases is included in Property rental revenue on the Company's condensed consolidated statements of operations, and is recognized each month during the month-to-month terms at the rental rate in place during each month.
14. STOCK-BASED COMPENSATION
As ofDecember 31, 20172019, 1,653,8551,438,073 shares were available for issuance under the Company’s 2015 Incentive Award Plan (the “Plan”).
Option grants are issued with an exercise price equal to the closing price of stock on the date of grant. Unless otherwise determined by the Compensation, Nominating and Governance Committee (“CNG Committee”) at the time of grant, options shall vest ratably over a four-year period beginning on the date of grant. Each option will be exercisable once it has vested. Options are exercisable at such times and subject to such terms as determined by the CNG Committee, but under no circumstances may be exercised if such exercise would cause a violation of the ownership limit in the Company’s charter. Options expire 10 years from the date of grant. Beginning in 2017, the CNG Committee decided to the replace stock options granted to executives with performance based stock units for executive compensation. See the "Performance-Based Stock Units" section below.
Also as defined under the terms of the Plan, restricted stock grants may be awarded. The stock grants are subject to a vesting period over which the restrictions are released and the stock certificates are given to the grantee. During the performance or vesting period, the grantee is not permitted to sell, transfer, pledge, encumber or assign shares of restricted stock granted under the Plan; however, the grantee has the ability to vote the shares and receive nonforfeitable dividends paid on shares. Unless otherwise determined by the CNG Committee at the time of grant, the forfeiture and transfer restrictions on the shares lapse over a four-year period beginning on the date of grant.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Option Grants
A summary of stock option activity is as follows:
|
| | | | | | | | | | |
Options | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value as of December 31, 2019 |
Outstanding at December 31, 2016 | 510,574 |
| | $ | 30.60 |
| | | | |
Exercised | (38,418 | ) | | 32.94 |
| | | | |
Outstanding at December 31, 2017 | 472,156 |
| | $ | 30.41 |
| | | | |
Exercised | (54,575 | ) | | 21.45 |
| | | | |
Outstanding at December 31, 2018 | 417,581 |
| | $ | 31.58 |
| | | | |
Exercised | (211,057 | ) | | 14.65 |
| | | | |
Outstanding at December 31, 2019 | 206,524 |
| | $ | 48.88 |
| | 3.43 | | $11,719 |
| | | | | | | |
Vested and Expected to Vest | 206,460 |
| | $ | 48.87 |
| | 3.43 | | $11,717 |
Ending Exercisable | 197,576 |
| | $ | 47.20 |
| | 3.30 | | $11,543 |
|
| | | | | | | | | | |
Options | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value as of December 31, 2017 |
Outstanding at December 31, 2014 | 568,727 |
| | $ | 16.62 |
| | | | |
Granted | 89,575 |
| | 69.93 |
| | | | |
Exercised | (79,974 | ) | | 18.79 |
| | | | |
Forfeited | (5,699 | ) | | 39.83 |
| | | | |
Outstanding at December 31, 2015 | 572,629 |
| | $ | 24.42 |
| | | | |
Granted | 35,800 |
| | 85.99 |
| | | | |
Exercised | (97,855 | ) | | 14.75 |
| | | | |
Forfeited | — |
| | — |
| | | | |
Outstanding at December 31, 2016 | 510,574 |
| | $ | 30.60 |
| | | | |
Exercised | (38,418 | ) | | 32.94 |
| | | | |
Outstanding at December 31, 2017 | 472,156 |
| | $ | 30.41 |
| | 3.71 | | $26,934 |
Vested and Expected to Vest | 468,601 |
| �� | $ | 30.05 |
| | 3.68 | | $26,897 |
Ending Exercisable | 394,363 |
| | $ | 21.86 |
| | 2.96 | | $25,864 |
The aggregate intrinsic value in the table above represents the total value (the difference between the Company’s closing stock price on the last trading day of 20172019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2017.2019. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.
The weighted average fairtotal intrinsic value of stockoptions exercised for the years ended December 31, 2019, 2018 and 2017 was $18,089, $3,693 and $1,786, respectively.
There have been 0 options granted in 2016 and 2015, was $20.30 and $16.89, respectively. There were no options granted in 2017.since 2016. The fair value of each option grant iswas estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
| | | | | |
| For the Year Ended December 31, |
| 2016 | | 2015 |
Expected volatility | 37.0 | % | | 38.0 | % |
Dividend yield | 3.6 | % | | 3.6 | % |
Risk-free interest rate | 1.3 | % | | 1.5 | % |
Average expected term (years) | 5 |
| | 5 |
|
model. The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility, dividend yield and average expected term. The forfeiture rate, which is estimated at a weighted-average of 7.4% of unvested options outstanding as of December 31, 2017,2019, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates.
A summary of stock options outstanding and exercisable as of December 31, 2019, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise Price | | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
$12.21 - $12.21 | | 77,400 |
| | 0.18 | | $ | 12.21 |
| | 77,400 |
| | $ | 12.21 |
|
$38.40 - $38.40 | | 8,085 |
| | 3.14 | | 38.40 |
| | 8,085 |
| | 38.40 |
|
$47.50 - $47.50 | | 9,800 |
| | 4.13 | | 47.50 |
| | 9,800 |
| | 47.50 |
|
$65.36 - $65.36 | | 15,647 |
| | 5.15 | | 65.36 |
| | 15,647 |
| | 65.36 |
|
$65.45 - $65.45 | | 11,960 |
| | 5.13 | | 65.45 |
| | 11,960 |
| | 64.45 |
|
$73.52 - $73.52 | | 50,000 |
| | 5.58 | | 73.52 |
| | 50,000 |
| | 73.52 |
|
$85.99 - $85.99 | | 33,632 |
| | 6.15 | | 85.99 |
| | 24,684 |
| | 85.99 |
|
| | 206,524 |
| | 3.42 | | $ | 48.88 |
| | 197,576 |
| | $ | 47.20 |
|
The Company recorded compensation expense relating to outstanding options of $364, $570 and $649 in general and administrative expense for the years ended December 31, 2019, 2018 and 2017, respectively. Net proceeds received for the years ended December 31, 2019, 2018 and 2017, related to option exercises was $3,063, $1,169 and $1,266, respectively. At December 31, 2019, there was 0 unrecognized compensation expense related to non-vested stock options under the Plan. The
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
A summary of stock options outstanding and exercisable as of December 31, 2017, is as follows:
|
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise Price | | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
$6.22 - $6.22 | | 157,750 |
| | 1.13 | | $ | 6.22 |
| | 157,750 |
| | $ | 6.22 |
|
$11.59 - $12.21 | | 105,480 |
| | 2.17 | | 12.04 |
| | 105,480 |
| | 12.04 |
|
$19.6 - $65.36 | | 105,986 |
| | 5.20 | | 39.89 |
| | 89,629 |
| | 36.47 |
|
$65.45 - $73.52 | | 67,140 |
| | 7.47 | | 71.46 |
| | 32,550 |
| | 71.65 |
|
$85.99 - $85.99 | | 35,800 |
| | 8.15 | | 85.99 |
| | 8,954 |
| | 85.99 |
|
$6.22-$85.99 | | 472,156 |
| | 3.71 | | $ | 30.41 |
| | 394,363 |
| | $ | 21.86 |
|
The Company recorded compensation expense relating to outstanding options of $649, $729 and $510 in general and administrative expense for the years ended December 31, 2017, 2016 and 2015, respectively. Total cash received for the years ended December 31, 2017, 2016 and 2015, related to option exercises was $1,265, $1,444 and $1,542, respectively. At December 31, 2017, there was $869 of total unrecognized compensation expense related to non-vested stock options under the Plan. That cost is expected to be recognized over a weighted-average period of 1.56 years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized compensation expense at December 31, 2017 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.
Common Stock Granted to Employees and Directors
The Company recorded $8,072, $7,316$9,173, $8,733 and $5,545$7,232 of expense in general and administrative expense in its statement of operations related to restricted stock awards granted to employees and directors for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The forfeiture rate, which is estimated at a weighted-average of 10.1%9.7% of unvested awards outstanding as of December 31, 2017,2019, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates. At December 31, 20172019 there was $12,913$11,712 of total unrecognized compensation expense related to non-vested restricted stock awards under the Plan. That cost is expected to be recognized over a weighted-average period of 2.142.17 years. The fair value of common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date.
A summary of the Company’s employee and director share grant activity is as follows:
|
| | | | | | |
Restricted Stock Grants | Shares | | Weighted-Average Grant-Date Fair Value |
Unreleased at December 31, 2016 | 299,585 |
| | $ | 70.57 |
|
Granted | 95,392 |
| | 74.49 |
|
Released | (120,323 | ) | | 63.95 |
|
Cancelled | (8,179 | ) | | 77.25 |
|
Unreleased at December 31, 2017 | 266,475 |
| | $ | 74.76 |
|
Granted | 85,066 |
| | 86.14 |
|
Released | (116,656 | ) | | 72.38 |
|
Cancelled | (11,771 | ) | | 80.96 |
|
Unreleased at December 31, 2018 | 223,114 |
| | $ | 80.02 |
|
Granted | 109,081 |
| | 101.52 |
|
Released | (110,724 | ) | | 79.58 |
|
Cancelled | (8,863 | ) | | 90.11 |
|
Unreleased at December 31, 2019 | 212,608 |
| | $ | 90.85 |
|
|
| | | | | | |
Restricted Stock Grants | Shares | | Weighted-Average Grant-Date Fair Value |
Unreleased at December 31, 2014 | 291,749 |
| | $ | 37.73 |
|
Granted | 174,558 |
| | 69.18 |
|
Released | (129,808 | ) | | 34.86 |
|
Cancelled | (18,090 | ) | | 44.54 |
|
Unreleased at December 31, 2015 | 318,409 |
| | $ | 55.75 |
|
Granted | 119,931 |
| | 87.61 |
|
Released | (128,808 | ) | | 50.05 |
|
Cancelled | (9,947 | ) | | 67.36 |
|
Unreleased at December 31, 2016 | 299,585 |
| | $ | 70.57 |
|
Granted | 95,392 |
| | 74.49 |
|
Released | (120,323 | ) | | 63.95 |
|
Cancelled | (8,179 | ) | | 77.25 |
|
Unreleased at December 31, 2017 | 266,475 |
| | $ | 74.76 |
|
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
Performance-based Stock Units
In 2017, the CNG Committee changed its compensation for executives to issue performance-based stock units (the "PSUs") as a replacement for stock option awards. The PSUs granted to executives in March 2017 represent the right to earn shares of the Company's common stock. These awards have two financial performance components: (1) the Company's core FFO performance ("FFO Target"), and (2) the Company's total stockholder return relative to the performance of a defined group of peers ("TSR Target"). Each of these performance components are weighted 50% and are measured over the performance period, which is defined as the three-year period ending December 31 2019.from the year of grant. At the end of the performance period, the financial performance components are reviewed to determine the number of shares actually granted to executives, which can be as low as zero0 shares and up to a maximum of two2 shares issued for each PSU. A summary of the PSU activity is as follows:
| | Performance-based Stock Units | | Units | | Weighted-Average Grant-Date Fair Value | |
Performance-Based Stock Units | | | Units | | Weighted-Average Grant-Date Fair Value |
Unvested at December 31, 2016 | | — |
| | $ | — |
| | — |
| | $ | — |
|
Granted | | 30,071 |
| | 83.84 |
| | 30,071 |
| | 83.84 |
|
Unvested at December 31, 2017 | | 30,071 |
| | 83.84 |
| | 30,071 |
| | $ | 83.84 |
|
| | | | | |
Granted | | | 28,735 |
| | 96.19 |
|
Unvested at December 31, 2018 | | | 58,806 |
| | $ | 89.87 |
|
Granted | | | 49,334 |
| | 103.18 |
|
Unvested at December 31, 2019 | | | 108,140 |
| | $ | 95.94 |
|
The Company recorded $3,514, $1,873 and $840 of expense in general and administrative expense in its statement of operations related to PSUs granted to employees and directors for the years ended December 31, 2019, 2018 and 2017, respectively. The Company estimated the fair value of the PSUs as of the grant date, using the closing trading price of the Company's common stock on the grant date to value the FFO Target portion. A Monte Carlo simulation model was used to calculate the fair value of the TSR Target portion of the PSUs, using an expected term of 2.8 years, a risk-free rate of 1.6%, and expected volatility of 21.4%. the following assumptions:
|
| | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Intrinsic value | | $6,211 | | $5,321 | | $2,630 |
Risk-free rate | | 2.53% | | 2.37% | | 1.62% |
Volatility | | 20.7% | | 22.6% | | 21.4% |
Expected term (in years) | | 2.8 | | 2.9 | | 2.8 |
Dividend yield | | —% | | —% | | —% |
Unrecognized compensation cost | | $4,315 | | $2,739 | | $1,681 |
Term over which compensation cost recognized | | 3 | | 3 | | 3 |
Under the terms of the PSUs, dividends for the entire measurement period are paid in cash when the shares are issued, so a dividend yield of zero0 was used. The Monte Carlo simulation model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the estimated life of the PSUs.
Compensation cost is recognized ratably over the period from the date of grant to the end of the related performance period. The Company recognized compensation expense of $840 during the year ended December 31, 2017 related to the PSUs, which is included in general and administrative expense in the Company's consolidated statements of operations. The intrinsic value of unvested PSUs as of December 31, 2017 was $2,630.
As of December 31, 2017, there was $1,681 of total unrecognized compensation expense related to the PSUs under the Plan. That cost is expected to be recognized over a period of two years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the probabilities associated with achieving the FFO Targets (categorized within Level 3 of the fair value hierarchy). Therefore, the amount of unrecognized compensation expense at December 31, 20172019 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.
16.15. EMPLOYEE BENEFIT PLAN
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code under which eligible employees can contribute up to 60% of their annual salary, subject to a statutory prescribed annual limit. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the Company made matching contributions to the plan of $2,212, $1,944$3,355, $2,833 and $1,680,$2,212, respectively, based on 100% of the first 3% and up to 50% of the next 2% of an employee’s compensation.
17.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
16. INCOME TAXES
As a REIT, the Company is generally not subject to federal income tax with respect to that portion of its income which is distributed annually to its stockholders. However, the Company has elected to treat one1 of its corporate subsidiaries, Extra Space Management, Inc., as a taxable REIT subsidiary.TRS. In general, the Company’s TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate related business. A TRS is subject to federal corporate income tax. The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes.” Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. The Company has elected to use the Tax-Law-Ordering approach to determine when excess tax benefits will be realized.
EXTRA SPACE STORAGE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in thousands, except store and share data, unless otherwise stated
The income tax provision for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, is comprised of the following components:
| | | For the Year Ended December 31, 2017 | For the Year Ended December 31, 2019 |
| Federal | | State | | Total | Federal | | State | | Total |
Current expense | $ | 5,677 |
| | $ | 1,662 |
| | $ | 7,339 |
| $ | 10,164 |
| | $ | 2,936 |
| | $ | 13,100 |
|
Tax credits/true-up | (5,573 | ) | | (383 | ) | | (5,956 | ) | (3,633 | ) | | (30 | ) | | (3,663 | ) |
Change in deferred expense | 1,700 |
| | 542 |
| | 2,242 |
| |
Change in deferred expense/(benefit) | | 1,787 |
| | 84 |
| | 1,871 |
|
Total tax expense | $ | 1,804 |
| | $ | 1,821 |
| | $ | 3,625 |
| $ | 8,318 |
| | $ | 2,990 |
| | $ | 11,308 |
|