SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

incorporation or organization)



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 x 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 x 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

☐

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 x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of ~~October 30, 2019,~~July 31, 2020, was ~~129,510,514.~~129,069,911.

•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.

ITEM 1. FINANCIAL STATEMENTS

(amounts in thousands, except share data)


	June 30, 2020		December 31, 2019
	(unaudited)
Assets:
Real estate assets, net	$	7,673,724	$	7,696,864
Real estate assets - operating lease right-of-use assets	261,304		264,643
Investments in unconsolidated real estate entities	344,177		338,054
Cash and cash equivalents	56,397		65,746
Restricted cash	5,354		4,987

Other assets, net	188,938		162,083
Total assets	$	8,529,894	$	8,532,377
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,300,744	$	4,318,973
Exchangeable senior notes, net	573,154		569,513

Revolving lines of credit	207,000		158,000
Operating lease liabilities	271,875		274,783
Cash distributions in unconsolidated real estate ventures	46,100		45,264
Accounts payable and accrued expenses	132,257		111,382
Other liabilities	253,246		132,768
Total liabilities	5,784,376		5,610,683
Commitments and contingencies
Noncontrolling Interests and Equity:
Extra Space Storage Inc. stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 0 shares issued or outstanding	—		—
Common stock, $0.01 par value, 500,000,000 shares authorized, 129,069,555 and 129,534,407 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	1,291		1,295
Additional paid-in capital	2,884,940		2,868,681
Accumulated other comprehensive loss	(119,256)		(28,966)
Accumulated deficit	(391,285)		(301,049)
Total Extra Space Storage Inc. stockholders' equity	2,375,690		2,539,961
Noncontrolling interest represented by Preferred Operating Partnership units, net	172,542		175,948
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	197,286		205,785
Total noncontrolling interests and equity	2,745,518		2,921,694
Total liabilities, noncontrolling interests and equity	$	8,529,894	$	8,532,377

September 30, 2019 December 31, 2018
(Unaudited)
Assets:
Real estate assets, net $ 7,665,567
$ 7,491,831
Real estate assets - operating lease right-of-use assets 269,318
—
Investments in unconsolidated real estate ventures 175,442
125,326
Cash and cash equivalents 62,277
57,496
Restricted cash 4,438
15,194
Other assets, net 141,388
158,131
Total assets $ 8,318,430
$ 7,847,978
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net $ 4,085,295
$ 4,137,213
Exchangeable senior notes, net 567,705
562,374
Notes payable to trusts —
30,928
Revolving lines of credit 159,000
81,000
Operating lease liabilities 279,049
—
Cash distributions in unconsolidated real estate ventures 45,143
45,197
Accounts payable and accrued expenses 122,658
101,461
Other liabilities 151,591
104,383
Total liabilities 5,410,441
5,062,556
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, 129,410,093 and 127,103,750 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 1,294
1,271
Additional paid-in capital 2,861,611
2,640,705
Accumulated other comprehensive income (loss) (43,439 ) 34,650
Accumulated deficit (296,752 ) (262,902 )
Total Extra Space Storage Inc. stockholders' equity 2,522,714
2,413,724
Noncontrolling interest represented by Preferred Operating Partnership units, net 175,918
153,096
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests 209,357
218,602
Total noncontrolling interests and equity 2,907,989
2,785,422
Total liabilities, noncontrolling interests and equity $ 8,318,430
$ 7,847,978

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Revenues:
Property rental $ 290,917
$ 266,728
$ 841,504
$ 772,742
Tenant reinsurance 33,588
30,105
95,086
85,660
Management fees and other income 13,000
10,120
36,063
30,849
Total revenues 337,505
306,953
972,653
889,251
Expenses:
Property operations 88,653
73,652
248,288
219,488
Tenant reinsurance 7,644
7,720
21,593
18,798
General and administrative 22,519
19,707
68,548
62,822
Depreciation and amortization 56,051
52,283
165,116
155,924
Total expenses 174,867
153,362
503,545
457,032
Gain on real estate transactions —
30,807
1,205
30,807
Income from operations 162,638
184,398
470,313
463,026
Interest expense (46,908 ) (45,926 ) (141,716 ) (130,239 )
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes (1,186 ) (1,140 ) (3,533 ) (3,525 )
Interest income 2,799
1,371
5,905
3,997
Income before equity in earnings of unconsolidated real estate ventures and income tax expense 117,343
138,703
330,969
333,259
Equity in earnings of unconsolidated real estate ventures 2,704
3,622
8,455
10,648
Income tax expense (4,052 ) (2,638 ) (8,580 ) (6,077 )
Net income 115,995
139,687
330,844
337,830
Net income allocated to Preferred Operating Partnership noncontrolling interests (3,088 ) (3,723 ) (9,379 ) (10,605 )
Net income allocated to Operating Partnership and other noncontrolling interests (4,820 ) (5,546 ) (13,780 ) (13,398 )
Net income attributable to common stockholders $ 108,087
$ 130,418
$ 307,685
$ 313,827
Earnings per common share
Basic $ 0.84
$ 1.03
$ 2.40
$ 2.49
Diluted $ 0.83
$ 1.02
$ 2.37
$ 2.48
Weighted average number of shares
Basic 128,776,549
126,466,837
127,830,272
125,959,926
Diluted 137,318,475
134,240,290
136,164,299
133,015,690
Cash dividends paid per common share $ 0.90
$ 0.86
$ 2.66
$ 2.50


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Revenues:
Property rental	$	279,312	$	279,584	$	566,015	$	550,587
Tenant reinsurance	35,078		31,701		68,691		61,498
Management fees and other income	12,856		12,317		24,992		23,063
Total revenues	327,246		323,602		659,698		635,148
Expenses:
Property operations	89,040		80,870		179,337		159,635
Tenant reinsurance	6,858		6,982		13,536		13,949
General and administrative	25,337		23,351		48,348		46,029
Depreciation and amortization	56,018		54,406		111,293		109,065
Total expenses	177,253		165,609		352,514		328,678
Gain on real estate transactions	—		1,205		—		1,205
Income from operations	149,993		159,198		307,184		307,675
Interest expense	(41,039)		(47,448)		(85,397)		(94,808)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(1,233)		(1,185)		(2,442)		(2,347)
Interest income	1,669		1,718		3,343		3,106
Income before equity in earnings of unconsolidated real estate ventures and income tax expense	109,390		112,283		222,688		213,626
Equity in earnings and dividend income from unconsolidated real estate entities	5,044		3,121		10,087		5,751
Income tax expense	(3,177)		(2,715)		(5,356)		(4,528)
Net income	111,257		112,689		227,419		214,849
Net income allocated to Preferred Operating Partnership noncontrolling interests	(3,139)		(3,128)		(6,250)		(6,291)
Net income allocated to Operating Partnership and other noncontrolling interests	(5,207)		(4,733)		(10,079)		(8,960)
Net income attributable to common stockholders	$	102,911	$	104,828	$	211,090	$	199,598
Earnings per common share
Basic	$	0.80	$	0.82	$	1.63	$	1.56
Diluted	$	0.80	$	0.81	$	1.63	$	1.55
Weighted average number of shares
Basic	128,932,152		127,585,436		129,110,131		127,349,299
Diluted	129,082,468		135,654,761		129,285,675		135,166,456
Cash dividends paid per common share	$	0.90	$	0.90	$	1.80	$	1.76

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands)

(unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Net income $ 115,995
$ 139,687
$ 330,844
$ 337,830
Other comprehensive income (loss):
Change in fair value of interest rate swaps (16,762 ) 5,716
(82,057 ) 36,812
Total comprehensive income 99,233
145,403
248,787
374,642
Less: comprehensive income attributable to noncontrolling interests 7,109
9,553
19,191
25,743
Comprehensive income attributable to common stockholders $ 92,124
$ 135,850
$ 229,596
$ 348,899


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	111,257	$	112,689	$	227,419	$	214,849
Other comprehensive income (loss):
Change in fair value of interest rate swaps	(5,728)		(41,302)		(94,972)		(65,295)
Total comprehensive income	105,529		71,387		132,447		149,554
Less: comprehensive income attributable to noncontrolling interests	8,034		5,842		11,647		12,082
Comprehensive income attributable to common stockholders	$	97,495	$	65,545	$	120,800	$	137,472

See accompanying notes to unaudited condensed consolidated financial statements.

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 Income		Accumulated Deficit		Total Noncontrolling Interests and Equity
Balances at December 31, 2018	$	153,096	$	218,362	$	240	127,103,750	$	1,271	$	2,640,705	$	34,650	$	(262,902)	$	2,785,422
Issuance of common stock upon the exercise of options	—		—		—		169,021	3		1,754		—		—		1,757
Restricted stock grants issued	—		—		—		35,022	—		—		—		—		—
Restricted stock grants cancelled	—		—		—		(1,244)	—		—		—		—		—

Compensation expense related to stock-based awards	—		—		—		—	—		2,954		—		—		2,954




Redemption of Operating Partnership units for stock	—		(3,310)		—		85,501	—		3,310		—		—		—


Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions	23,447		—		—		—	—		—		—		—		23,447


Net income (loss)	3,164		4,235		(9)		—	—		—		—		94,770		102,160
Other comprehensive loss	(147)		(1,003)		—		—	—		—		(22,843)		—		(23,993)
Distributions to Operating Partnership units held by noncontrolling interests	(3,296)		(5,116)		—		—	—		—		—		—		(8,412)
Dividends paid on common stock at $0.86 per share	—		—		—		—	—		—		—		(109,523)		(109,523)
Balances at March 31, 2019	$	176,264	$	213,168	$	231	127,392,050	$	1,274	$	2,648,723	$	11,807	$	(277,655)	$	2,773,812

Noncontrolling Interests Extra Space Storage Inc. Stockholders' Equity

Preferred Operating Partnership Operating Partnership Other Shares Par Value Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Noncontrolling Interests and Equity
Balances at December 31, 2017 $ 159,636
$ 213,301
$ 119
126,007,091
$ 1,260
$ 2,569,485
$ 33,290
$ (253,284 ) $ 2,723,807
Issuance of common stock upon the exercise of options —
—
—
31,525
—
799
—
—
799
Restricted stock grants issued —
—
—
31,136
—
—
—
—
—
Restricted stock grants cancelled —
—
—
(770 ) —
—
—
—
—
Compensation expense related to stock-based awards —
—
—
—
—
2,726
—
—
2,726
Repayment of receivable for preferred operating units pledged as collateral on loan 495
—
—
—
—
—
—
—
495
Redemption of Operating Partnership units for cash —
(1,126 ) —
—
—
(1,432 ) —
—
(2,558 )
Noncontrolling interest in consolidated joint venture —
—
122
—
—
—
—
—
122
Repurchase of equity portion of 2013 exchangeable senior notes —
—
—
—
—
(21,000 ) —
—
(21,000 )
Net income 3,390
3,784
—
—
—
—
—
88,256
95,430
Other comprehensive income 144
938
—
—
—
—
21,981
—
23,063
Distributions to Operating Partnership units held by noncontrolling interests (3,488 ) (4,421 ) —
—
—
—
—
—
(7,909 )
Dividends paid on common stock at $0.78 per share —
—
—
—
—
—
—
(98,327 ) (98,327 )
Balances at March 31, 2018 $ 160,177
$ 212,476
$ 241
126,068,982
$ 1,260
$ 2,550,578
$ 55,271
$ (263,355 ) $ 2,716,648
Issuance of common stock upon the exercise of options —
—
—
23,050
1
370
—
—
371
Restricted stock grants issued —
—
—
50,334
—
—
—
—
—
Restricted stock grants cancelled —
—
—
(6,311 ) —
—
—
—
—
Compensation expense related to stock-based awards —
—
—
—
—
3,116
—
—
3,116
Issuance of Operating Partnership units in conjunction with acquisitions —
1,877
—
—
—
—
—
—
1,877
Redemption of Operating Partnership units for stock —
(383 ) —
10,000
—
383
—
—
—
Net income 3,492
4,068
—
—
—
—
—
95,153
102,713
Other comprehensive income 50
324
—
—
—
—
7,659
—
8,033
Distributions to Operating Partnership units held by noncontrolling interests (3,615 ) (4,853 ) —
—
—
—
—
—
(8,468 )
Dividends paid on common stock at $0.86 per share —
—
—
—
—
—
—
(108,486 ) (108,486 )
Balances at June 30, 2018 $ 160,104
$ 213,509
$ 241
126,146,055
$ 1,261
$ 2,554,447
$ 62,930
$ (276,688 ) $ 2,715,804

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 Income		Accumulated Deficit		Total Noncontrolling Interests and Equity
Balances at March 31, 2019	$	176,264	$	213,168	$	231	127,392,050	$	1,274	$	2,648,723	$	11,807	$	(277,655)	$	2,773,812
Issuance of common stock upon the exercise of options	—		—		—		17,042	—		468		—		—		468
Restricted stock grants issued	—		—		—		53,789	2		—		—		—		2
Restricted stock grants cancelled	—		—		—		(4,786)	—		—		—		—		—
Issuance of common stock, net of offering costs	—		—		—		930,000	9		98,787		—		—		98,796
Compensation expense related to stock-based awards	—		—		—		—	—		3,998		—		—		3,998
Redemption of Operating Partnership units for stock	—		(4,823)		—		125,000	—		4,823		—		—		—
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions	4,575		—		—		—	—		—		—		—		4,575
Noncontrolling interest in consolidated joint venture	—		—		50		—	—		—		—		—		50
Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units	(4,374)		4,374		—		—	—		—		—		—		—
Net income (loss)	3,129		4,754		(22)		—	—		—		—		104,828		112,689
Other comprehensive loss	(254)		(1,765)		—		—	—		—		(39,283)				(41,302)
Distributions to Operating Partnership units held by noncontrolling interests	(3,232)		(5,473)		—		—	—		—		—		—		(8,705)
Dividends paid on common stock at $0.90 per share	—		—		—		—	—		—		—		(115,572)		(115,572)
Balances at June 30, 2019	$	176,108	$	210,235	$	259	128,513,095	$	1,285	$	2,756,799	$	(27,476)	$	(288,399)	$	2,828,811

Extra Space Storage Inc.

Condensed Consolidated Statement of Noncontrolling Interests and Equity

(amounts in thousands, except share data)

(unaudited)


	Noncontrolling Interest												Extra Space Storage Inc. Stockholders' Equity

		Preferred Operating Partnership		Operating Partnership		Other		Shares	Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Income		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	1		943			—		—		944
Issuance of common stock in connection with share based compensation		—		—		—		73,602	1		2,979			—		—		2,980
Restricted stock grants cancelled		—		—		—		(1,767)	—		—			—		—		—
Buyback of common stock, net of offering costs		—		—		—		(653,597)	(7)		—			—		(52,197)		(52,204)





Redemption of Operating Partnership units for stock		—		(330)		—		8,862	—		330			—		—		—





Net income (loss)		3,112		4,877		(6)		—	—		—			—		108,179		116,162
Other comprehensive loss		(563)		(3,807)		—		—	—		—			(84,874)		—		(89,244)
Distributions to Operating Partnership units held by noncontrolling interests		(3,178)		(5,327)		—		—	—		—			—		—		(8,505)
Dividends paid on common stock at $0.90 per share		—		—		—		—	—		—			—		(117,197)		(117,197)
Balances at March 31, 2020		$	175,319	$	200,832	$	360	129,038,907	$	1,290	$	2,872,933		$	(113,840)	$	(362,264)	$	2,774,630
Issuance of common stock upon the exercise of options		—		—		—		13,610	—		726			—		—		726
Issuance of common stock in connection with share based compensation		—		—		—		60,032	1		4,883			—		—		4,884
Restricted stock grants cancelled		—		—		—		(889)	—		—			—		—		—
Buyback of common stock, net of offering costs		—		—		—		(172,600)	(1)		—			—		(15,614)		(15,615)

Redemption of Operating Partnership units for stock		—		(3,675)		—		100,000	1		3,674			—		—		—
Redemption of Preferred D Units in the Operating Partnership for Stock		(2,724)		—		—		30,495	—		2,724			—		—		—
Noncontrolling interest in consolidated joint venture		—		—		68		—	—		—			—		—		68

Net income (loss)		3,139		5,216		(9)		—	—		—			—		102,911		111,257
Other comprehensive loss		(41)		(271)		—		—	—		—			(5,416)		—		(5,728)
Distributions to Operating Partnership units held by noncontrolling interests		(3,151)		(5,235)		—		—	—		—			—		—		(8,386)
Dividends paid on common stock at $0.90 per share		—		—		—		—	—		—			—		(116,318)		(116,318)
Balances at June 30, 2020		$	172,542	$	196,867	$	419	129,069,555	$	1,291	$	2,884,940		$	(119,256)	$	(391,285)	$	2,745,518

Noncontrolling Interests Extra Space Storage Inc. Stockholders' Equity

Preferred Operating Partnership Operating Partnership Other Shares Par Value Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Noncontrolling Interests and Equity
Balances at December 31, 2018 $ 153,096
$ 218,362
$ 240
127,103,750
$ 1,271
$ 2,640,705
$ 34,650
$ (262,902 ) $ 2,785,422
Issuance of common stock upon the exercise of options —
—
—
169,021
3
1,754
—
—
1,757
Restricted stock grants issued —
—
—
35,022
—
—
—
—
—
Restricted stock grants cancelled —
—
—
(1,244 ) —
—
—
—
—
Compensation expense related to stock-based awards —
—
—
—
—
2,954
—
—
2,954
Redemption of Operating Partnership units for stock —
(3,310 ) —
85,501
—
3,310
—
—
—
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions 23,447
—
—
—
—
—
—
—
23,447
Net income (loss) 3,164
4,235
(9 ) —
—
—
—
94,770
102,160
Other comprehensive loss (147 ) (1,003 ) —
—
—
—
(22,843 ) —
(23,993 )
Distributions to Operating Partnership units held by noncontrolling interests (3,296 ) (5,116 ) —
—
—
—
—
—
(8,412 )
Dividends paid on common stock at $0.86 per share —
—
—
—
—
—
—
(109,523 ) (109,523 )
Balances at March 31, 2019 $ 176,264
$ 213,168
$ 231
127,392,050
$ 1,274
$ 2,648,723
$ 11,807
$ (277,655 ) $ 2,773,812
Issuance of common stock upon the exercise of options —
—
—
17,042
—
468
—
—
468
Restricted stock grants issued —
—
—
53,789
2
—
—
—
2
Restricted stock grants cancelled —
—
—
(4,786 ) —
—
—
—
—
Issuance of common stock, net of offering costs —
—
—
930,000
9
98,787
—
—
98,796
Compensation expense related to stock-based awards —
—
—
—
—
3,998
—
—
3,998
Redemption of Operating Partnership units for stock —
(4,823 ) —
125,000
—
4,823
—
—
—
Issuance of Preferred D Units in the Operating Partnership in conjunction with acquisitions 4,575
—
—
—
—
—
—
—
4,575
Noncontrolling interest in consolidated joint venture —
—
50
—
—
—
—
—
50
Conversion of Preferred C Units in the Operating Partnership for Common Operating Partnership Units (4,374 ) 4,374
—
—
—
—
—
—
—
Net income (loss) 3,129
4,754
(22 ) —
—
—
—
104,828
112,689
Other comprehensive loss (254 ) (1,765 ) —
—
—
—
(39,283 ) (41,302 )
Distributions to Operating Partnership units held by noncontrolling interests (3,232 ) (5,473 ) —
—
—
—
—
—
(8,705 )
Dividends paid on common stock at $0.90 per share —
—
—
—
—
—
—
(115,572 ) (115,572 )
Balances at June 30, 2019 $ 176,108
$ 210,235
$ 259
128,513,095
$ 1,285
$ 2,756,799
$ (27,476 ) $ (288,399 ) $ 2,828,811

~~Extra Space Storage Inc.~~

~~Condensed Consolidated Statement of Noncontrolling Interests and Equity~~

~~(amounts in thousands, except share data)~~

~~(unaudited)~~

See accompanying notes to unaudited condensed consolidated financial statements.

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	227,419	$	214,849
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	111,293		109,065
Amortization of deferred financing costs	4,946		6,006
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	2,442		2,347
Non-cash lease expense	430		—
Compensation expense related to stock-based awards	7,864		6,952


Gain on real estate transactions	—		(1,205)
Distributions from unconsolidated real estate ventures in excess of earnings	4,254		3,334
Changes in operating assets and liabilities:

Other assets	(10,185)		1,890
Accounts payable and accrued expenses	19,963		21,632
Other liabilities	23,647		(1,463)
Net cash provided by operating activities	392,073		363,407
Cash flows from investing activities:
Acquisition of real estate assets	(45,246)		(248,808)
Development and redevelopment of real estate assets	(29,991)		(20,891)
Proceeds from sale of real estate assets	—		11,254

Investment in unconsolidated real estate entities	(9,541)		(31,344)
Return of investment in unconsolidated real estate ventures	—		3,982
Issuance of notes receivable	(24,325)		(152,599)

Purchase of equipment and fixtures	(2,765)		(2,023)
Net cash used in investing activities	(111,868)		(440,429)
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs	—		98,796
Proceeds from notes payable and revolving lines of credit	594,000		757,000
Principal payments on notes payable and revolving lines of credit	(566,689)		(524,370)
Principal payments on notes payable to trusts	—		(30,928)
Deferred financing costs	(12)		(587)

Net proceeds from exercise of stock options	1,670		2,227
Repurchase of common stock	(67,819)		—

Contributions from noncontrolling interests	68		50
Dividends paid on common stock	(233,515)		(225,095)
Distributions to noncontrolling interests	(16,890)		(17,117)
Net cash provided by (used in) financing activities	(289,187)		59,976
Net decrease in cash, cash equivalents, and restricted cash	(8,982)		(17,046)
Cash, cash equivalents, and restricted cash, beginning of the period	70,733		72,690
Cash, cash equivalents, and restricted cash, end of the period	$	61,751	$	55,644

For the Nine Months Ended September 30,
2019 2018
Cash flows from operating activities:
Net income $ 330,844
$ 337,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 165,116
155,924
Amortization of deferred financing costs 8,912
9,230
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes 3,533
3,525
Compensation expense related to stock-based awards 9,987
8,455
Gain on real estate transactions (1,205 ) (30,807 )
Distributions from unconsolidated real estate ventures in excess of earnings 4,752
5,235
Changes in operating assets and liabilities:
Other assets (11,153 ) (639 )
Accounts payable and accrued expenses 29,310
27,677
Other liabilities 4,370
12,597
Net cash provided by operating activities 544,466
529,027
Cash flows from investing activities:
Acquisition of real estate assets (287,114 ) (327,011 )
Development and redevelopment of real estate assets (34,413 ) (45,376 )
Proceeds from sale of real estate assets, investments in real estate ventures and other assets 11,254
51,889
Investment in unconsolidated real estate ventures (33,661 ) (52,806 )
Return of investment in unconsolidated real estate ventures 3,982
47,964
Issuance of notes receivable (162,677 ) (13,889 )
Principal payments received from notes receivable 151,211
25,226
Purchase of equipment and fixtures (4,959 ) (3,026 )
Net cash used in investing activities (356,377 ) (317,029 )
Cash flows from financing activities:
Proceeds from the sale of common stock, net of offering costs 198,852
33,780
Proceeds from notes payable and revolving lines of credit 1,508,000
973,386
Principal payments on notes payable and revolving lines of credit (1,503,686 ) (787,939 )
Principal payments on notes payable to trusts (30,928 ) (21,650 )
Deferred financing costs (2,008 ) (7,055 )
Repurchase of exchangeable senior notes —
(80,270 )
Net proceeds from exercise of stock options 2,830
1,170
Redemption of Operating Partnership units held by noncontrolling interests —
(2,558 )
Contributions from noncontrolling interests 146
122
Dividends paid on common stock (341,535 ) (315,608 )
Distributions to noncontrolling interests (25,735 ) (24,837 )
Net cash used in financing activities (194,064 ) (231,459 )
Net decrease in cash, cash equivalents, and restricted cash (5,975 ) (19,461 )
Cash, cash equivalents, and restricted cash, beginning of the period 72,690
86,044
Cash, cash equivalents, and restricted cash, end of the period $ 66,715
$ 66,583

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2020		2019
Supplemental schedule of cash flow information
Interest paid	$	81,950	$	88,455
Income taxes paid	1,792		4,095
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)	$	(8,133)
Common stock and paid-in capital	4,005		8,133
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets	$	6,779	$	225,017
Operating lease liabilities	(6,779)		(234,374)
Accounts payable and accrued expenses	—		9,357
Acquisitions of real estate assets
Real estate assets, net	$	—	$	19,937

Notes payable assumed	—		(17,157)
Investment in unconsolidated real estate ventures	—		(2,780)


Accrued construction costs and capital expenditures
Acquisition of real estate assets	$	912	$	1,368

Accounts payable and accrued expenses	(912)		(1,368)
Contribution of Preferred OP Units to unconsolidated real estate venture
Investments in unconsolidated real estate ventures	$	—	$	(28,022)
Value of Preferred Operating Partnership units issued	—		28,022



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	$	8,514	$	—
Other liabilities	(8,514)		—
Conversion of Preferred OP Units to Common OP Units
Preferred OP Units	$	—	$	(4,374)
Common OP Units	—		(4,374)

For the Nine Months Ended September 30,
2019 2018
Supplemental schedule of cash flow information
Interest paid $ 136,563
$ 117,627
Income taxes paid 6,197
803
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 $ (9,258 ) $ (955 )
Common stock and paid-in capital 9,258
955
Establishment of operating lease right of use assets and lease liabilities
Real estate assets - operating lease right-of-use assets $ 277,430
$ —
Operating lease liabilities (286,787 ) —
Accounts payable and accrued expenses 9,357
—
Acquisitions of real estate assets

Real estate assets, net $ 19,937
$ 88,842
Value of Operating Partnership units issued —
(1,877 )
Notes payable assumed (17,157 ) (87,500 )
Investment in unconsolidated real estate ventures (2,780 ) 535
Accrued construction costs and capital expenditures

Acquisition of real estate assets $ 1,292
$ 275
Accounts payable and accrued expenses (1,292 ) (275 )
Contribution of Preferred OP Units to unconsolidated real estate venture

Investments in unconsolidated real estate ventures $ (28,022 ) $ —
Value of Preferred Operating Partnership units issued 28,022
—
Conversion of Preferred OP Units to common OP Units
Preferred OP Units $ 4,374
$ —
Common OP Units (4,374 ) —

See accompanying notes to unaudited condensed consolidated financial statements.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Amounts in thousands, except store and share data, unless otherwise stated


1.	~~ORGANIZATION~~

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 ~~September~~June 30, ~~2019,~~2020, the Company had direct and indirect equity interests in ~~1,167~~1,178 stores. In addition, the Company managed ~~630~~700 stores for third parties, bringing the total number of stores which it owns and/or manages to ~~1,797.~~1,878. 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~~

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of results that may be expected for the year ending December 31, ~~2019.~~2020. The condensed consolidated balance sheet as of December 31, ~~2018~~2019 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, ~~2018,~~2019, as filed with the Securities and Exchange Commission.

Recently Issued Accounting Standards

In ~~February~~June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ~~2016-02,~~ ~~“Leases (Topic 842),”~~ which modifies the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. ASU 2016-02 requires entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are measured at their present value and accounted for using the effective interest method. The accounting for the leased asset differs slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and is recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. ASU 2016-02 requires that assets and liabilities be presented or disclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to these lease agreements. ASU 2016-02 became effective for annual and interim periods beginning after December 15, 2018. The Company adopted the standard using the modified retrospective approach as of January 1, 2019. The Company elected the package of practical expedients upon adoption, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and nonlease components. The Company did not record a significant cumulative catch-up adjustment to retained earnings upon adoption of ASU 2016-02. The primary impact was related to the Company's 21 operating ground leases and 2 corporate facility leases under which it served as lessee at the time of adoption. The Company recognized lease liabilities of $104,863 and right-of-use assets related to operating leases totaling $95,506 as of the adoption date. Refer to footnote 13 for further discussion of the Company's leases.

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~"Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract."~~ ASU 2018-15 amends the accounting for implementation costs incurred in a hosting arrangement that is a service contract, and aligns them with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 also requires that entities amortize the capitalized implementation costs over the term of the hosting arrangement. ASU 2018-15 is effective for annual periods beginning after December 15, 2020, with early adoption permitted, including early adoption in any interim period. The Company adopted this standard on a prospective basis as of October 1, 2018. The adoption of this standard did not have a material impact on the Company's financial statements.

~~In June 2016, the FASB issued ASU~~ 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes how entities measure credit losses for most financial assets. This standard requires an entity to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which clarified that receivables arising from operating leases are within the scope of the leasing standard (ASU 2016-02), and not within the scope of ASU 2016-13. This new standard ~~will be~~became effective for the Company on January 1, 2020. The adoption of this standard by the Company ~~is evaluating the impact this new standard will have and does~~did not ~~expect this new standard to~~ have a material impact on the Company's consolidated financial statements.


3.	~~FAIR VALUE DISCLOSURES~~

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." ASU 2020-04 contains 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. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

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 ~~September~~June 30, ~~2019,~~2020, 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.

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2019,~~2020, 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 $ —
$ 3,141
$ —
Other liabilities - Cash flow hedge swap agreements $ —
$ 43,880
$ —


	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	$	—	$	119,658	$	—

The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of ~~September~~June 30, ~~2019~~2020 or December 31, ~~2018.~~2019.

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.

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 are presented as part of normal operations for all periods presented. As of ~~September~~June 30, ~~2019,~~2020, the Company had 1 parcel of land classified as held for sale which is included in real estate assets, net. The estimated fair ~~value~~values less selling costs for ~~this asset~~these assets is greater than the carrying ~~value~~values of the ~~asset,~~assets, and therefore no loss has been recorded.

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.

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 approximate fair value. Restricted cash is comprised of escrowed funds deposited with financial institutions located throughout the United States relating to earnest money deposits on potential acquisitions, real estate taxes, loan collateral, operating reserves, insurance and capital expenditures.

The fair values of the Company’s notes receivable from Preferred and Common Operating Partnership unit holders, 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 ~~and notes payable to trusts~~ 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 value of the Company’s exchangeable senior notes was estimated using an average market price for similar securities obtained from a third party.

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


	June 30, 2020						December 31, 2019
	Fair Value		Carrying Value		Fair Value		Carrying Value
Notes receivable from Preferred and Common Operating Partnership unit holders	$	119,976	$	118,524	$	116,184	$	118,524

Fixed rate notes payable	$	3,613,096	$	3,454,701	$	3,511,151	$	3,417,928
Exchangeable senior notes	$	620,281	$	575,000	$	673,831	$	575,000

September 30, 2019 December 31, 2018
Fair
Value Carrying
Value Fair
Value Carrying
Value
Notes receivable from Preferred and Common Operating Partnership unit holders $ 118,756
$ 118,524
$ 115,467
$ 119,735
Fixed rate notes payable and notes payable to trusts $ 3,296,231
$ 3,166,208
$ 2,985,731
$ 3,022,414
Exchangeable senior notes $ 724,500
$ 575,000
$ 620,149
$ 575,000


4.	~~EARNINGS PER COMMON SHARE~~

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 ~~C Convertible Redeemable Preferred Units (“Series C Units”), Series~~ D Redeemable Preferred Units (“Series D Units” and, together with the Series A Units ~~Series B Units~~ and Series CB Units, the “Preferred OP Units”) and common Operating Partnership units (“OP Units”)) that do not have a current right to participate in earnings of the Company but could do so in the future by virtue of their option, redemption or conversion right.

In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per common share, only potential common shares that are dilutive (i.e. those that reduce earnings per common share) are included. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, and ~~for the three months ended September 30, 2018,~~2019, there were 0 anti-dilutive options. For the nine months ended September 30, 2018, options to purchase an aggregate of approximately 36,404 shares of common stock were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

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 ~~September~~June 30, 2020 and 2019 was $92.95 and ~~2018 was $115.63 and $92.83,~~$105.06, respectively. The average share price for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was $98.49 and ~~2018 was $105.74 and $90.09,~~$100.63, respectively.

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


	For the Three Months Ended June 30,			For the Six Months Ended June 30,
	2020	2019	2020	2019
	Equivalent Shares (if converted)	Equivalent Shares (if converted)	Equivalent Shares (if converted)	Equivalent Shares (if converted)
Common OP Units	5,876,356	—	5,898,029	—
Series A Units (Variable Only)	875,480	—	875,480	—
Series B Units	450,803	398,840	425,446	416,398

Series D Units	1,282,322	1,109,048	1,214,732	1,096,259
	8,484,961	1,507,888	8,413,687	1,512,657

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Equivalent Shares (if converted) Equivalent Shares (if converted) Equivalent Shares (if converted) Equivalent Shares (if converted)
Series B Units 362,382
451,386
396,276
465,115
Series C Units (1) —
319,283
—
328,994
Series D Units 1,038,538
—
1,074,417
1,021,901
1,400,920
770,669
1,470,693
1,816,010

~~(1) The remainder of the Series C Units were converted to OP Units on April 25, 2019.~~

In July 2018, the Operating Partnership redeemed the remaining balance of its 2.375% Exchangeable Senior Notes due 2033 (the “2013 Notes”). Prior to their redemption, the 2013 Notes could potentially have had a dilutive impact on the Company’s earnings per share calculations. The 2013 Notes were exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the 2013 Notes. The Company had irrevocably agreed to pay only cash for the accreted principal amount of the 2013 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.

The Operating Partnership had $575,000 of its 3.125% Exchangeable Senior Notes due 2035 (the “2015 Notes”) issued and outstanding as of ~~September~~June 30, ~~2019.~~2020. The 2015 Notes could potentially have a dilutive impact on the Company’s earnings per share calculations. The 2015 Notes are 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 exchange price of the 2015 Notes was ~~$92.04~~$91.16 per share as of ~~September~~June 30, ~~2019,~~2020, and could change over time as described in the indenture. The Company has 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 has retained the right to satisfy the exchange obligation in excess of the accreted principal amount of the ~~2013 Notes and~~ 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

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 and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, 121,283 and 2018, 0 shares related to the 2013 Notes were included in the computation for diluted earnings per share, as the Company had repaid all outstanding 2013 Notes in July 2018. For the three and nine months ended September 30, 2019 and 2018, 1,274,675 and 0757,811 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 June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Net income attributable to common stockholders	$	102,911	$	104,828	$	211,090	$	199,598
Earnings and dividends allocated to participating securities	(173)		(176)		(336)		(343)
Earnings for basic computations	102,738		104,652		210,754		199,255
Earnings and dividends allocated to participating securities	—		176		—		—
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units	—		6,010		—		11,439
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units)	—		(572)		—		(1,144)
Net income for diluted computations	$	102,738	$	110,266	$	210,754	$	209,550

Weighted average common shares outstanding:
Average number of common shares outstanding - basic	128,932,152		127,585,436		129,110,131		127,349,299
OP Units	—		6,085,976		—		6,023,822
Series A Units	—		875,480		—		875,480


Unvested restricted stock awards included for treasury stock method	—		218,686		—		—
Shares related to exchangeable senior notes and dilutive stock options	150,316		889,183		175,544		917,855
Average number of common shares outstanding - diluted	129,082,468		135,654,761		129,285,675		135,166,456
Earnings per common share
Basic	$	0.80	$	0.82	$	1.63	$	1.56
Diluted	$	0.80	$	0.81	$	1.63	$	1.55

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

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Net income attributable to common stockholders $ 108,087
$ 130,418
$ 307,685
$ 313,827
Earnings and dividends allocated to participating securities (165 ) (219 ) (508 ) (550 )
Earnings for basic computations 107,922
130,199
307,177
313,277
Earnings and dividends allocated to participating securities 165
—
—
550
Income allocated to noncontrolling interest - Preferred Operating Partnership Units and Operating Partnership Units 6,100
7,336
17,539
17,191
Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership (Series A Units) (572 ) (572 ) (1,716 ) (1,716 )
Net income for diluted computations $ 113,615
$ 136,963
$ 323,000
$ 329,302

Weighted average common shares outstanding:
Average number of common shares outstanding - basic 128,776,549
126,466,837
127,830,272
125,959,926
OP Units 6,050,028
5,636,845
6,032,656
5,650,599
Series A Units 875,480
875,480
875,480
875,480
Series D Units —
991,738
—
—
Unvested restricted stock awards included for treasury stock method 209,963
—
—
250,630
Shares related to exchangeable senior notes and dilutive stock options 1,406,455
269,390
1,425,891
279,055
Average number of common shares outstanding - diluted 137,318,475
134,240,290
136,164,299
133,015,690
Earnings per common share

Basic $ 0.84
$ 1.03
$ 2.40
$ 2.49
Diluted $ 0.83
$ 1.02
$ 2.37
$ 2.48

~~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 and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. 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		Loan Assumed		Investments in Real Estate Ventures		Net Liabilities/ (Assets) Assumed		Real estate assets


Q2 2020	—		$	—	$	—	$	—	$	—	$	—	$	—
Q1 2020	2		19,399		19,354		—		—		45		19,399
	2		$	19,399	$	19,354	$	—	$	—	$	45	$	19,399



Q2 2019	1		$	8,424	$	8,424	$	—	$	—	$	—	$	8,424
Q1 2019	14	(1)	223,740		202,890		17,157		2,780		913		223,740
	15		$	232,164	$	211,314	$	17,157	$	2,780	$	913	$	232,164

Consideration Paid Total
Quarter Number of Stores Total Cash Paid Loan Assumed Investments in Real Estate Ventures Net Liabilities/ (Assets) Assumed Value of OP Units Issued Number of OP Units Issued Real estate assets
Q3 2019 1 $ 16,937
$ 16,941
$ —
$ —
$ (4 ) $ —
—
$ 16,937
Q2 2019 1 8,424
8,424
—
—
—
—
—
8,424
Q1 2019 14
⁽¹⁾
223,740
202,890
17,157
2,780
913
—
—
223,740
16 $ 249,101
$ 228,255
$ 17,157
$ 2,780
$ 909
$ —
—
$ 249,101

Q3 2018 6 $ 74,694
$ 71,989
$ —
$ —
$ 2,705
$ —
—
$ 74,694
Q2 2018 17
⁽²⁾
237,284
148,650
87,500
(1,024 ) 281
1,877
21,768
237,284
Q1 2018 5
⁽²⁾
70,787
70,171
—
489
127
—
—
70,787
28 $ 382,765
$ 290,810
$ 87,500
$ (535 ) $ 3,113
$ 1,877
21,768
$ 382,765

⁽¹⁾ Store acquisitions during the three months ended March 31, 2019 include the ~~purchase~~acquisition of 12 stores previously held in joint ventures where the Company held a noncontrolling interest. The Company purchased its partners' remaining equity interests in the joint ventures, and the properties owned by the joint ventures became wholly owned by the Company. No gain or loss was recognized as a result of these acquisitions.

⁽²⁾ ~~Store acquisitions during the six months ended June 30, 2018 include the acquisition of 15 stores that had been owned by a joint venture~~6. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

Investments in ~~which the Company held a noncontrolling interest. No gain or loss was recognized as a result of these acquisitions.~~

~~Store Dispositions~~

~~On April 11, 2019, the Company closed on the sale of a store located in New York that had been classified as held for sale for~~ ~~$11,272~~ ~~in cash. The Company recorded a gain on the sale of~~ ~~$1,205~~.

~~On August 16, 2018, the Company closed on the sale of a store located in California that had been classified as held for sale for $40,235 in cash. The Company recorded a gain on the sale of $30,671.~~


6.	~~INVESTMENTS IN UNCONSOLIDATED REAL ESTATE VENTURES~~

~~Investments~~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 ~~interests~~interest in ~~properties.~~real estate joint ventures that own stores. The Company accounts for ~~these~~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.

During the six months ended June 30, 2020, the Company contributed a total of $9,541 to its joint ventures for the purchase of 1 operating store and 3 stores acquired at the issuance of certificate of occupancy.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

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.

During May 2019, the Company entered into a new joint venture, ESS-NYFL JV LP with 2 joint venture partners. The Company contributed a total of $13,936 to this joint venture for the purchase of 11 operating stores and 4 annex sites and received a 16.0% interest in the joint venture.

During the nine months ended September 30, 2019, the Company contributed a total of $56,799 to its joint ventures for the purchase of 19 operating stores and 6 stores acquired at the issuance of certificate of occupancy.

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) September 30, December 31,
2019 2018
PRISA Self Storage LLC 85 4% 4% $ 9,182
$ 9,334
Storage Portfolio II JV LLC 36 10% 30% (4,754 ) (4,233 )
Storage Portfolio I LLC 24 34% 49% (38,406 ) (38,129 )
VRS Self Storage, LLC 16 45% 54% 17,560
18,281
ESS-NYFL JV LP 15 16% 24% 13,931
—
Extra Space Northern Properties Six LLC 10 10% 35% (1,969 ) (1,700 )
WICNN JV LLC 9 10% 25% 32,428
26,885
Alan Jathoo JV LLC 9 10% 10% 8,021
8,180
ESS Bristol Investments LLC 8 10% 28% 3,065
2,331
GFN JV, LLC 5 10% 25% 12,238
10,586
Extra Space West Two LLC (2) — 5% 40% —
3,818
Extra Space West One LLC (2) — 5% 40% —
(1,038 )
Other minority owned stores 25 10-50% 19-50% 79,003
45,814
Net Investments in and Cash distributions in unconsolidated real estate ventures 242 $ 130,299
$ 80,129


	Number of Stores	Equity Ownership %	Excess Profit % (1)	June 30,		December 31,
								2020	2019
PR EXR Self Storage, LLC	5	25%	40%	$	58,921	$	59,391
WICNN JV LLC	10	10%	25%	36,291		36,552
VRS Self Storage, LLC	16	45%	54%	17,103		17,639
ESS-NYFL JV LP	11	16%	24%	12,470		13,320
GFN JV, LLC	7	10%	30%	18,563		12,168
PRISA Self Storage LLC	85	4%	4%	8,925		9,133
Alan Jathoo JV LLC	9	10%	10%	7,870		7,977
Storage Portfolio III JV LLC	5	10%	30%	5,799		3,995
ESS Bristol Investments LLC	8	10%	28%	2,855		3,046


Extra Space Northern Properties Six LLC	10	10%	35%	(2,314)		(2,091)
Storage Portfolio II JV LLC	36	10%	30%	(5,089)		(4,827)
Storage Portfolio I LLC	24	34%	49%	(38,698)		(38,345)
Other minority owned stores	19	10-50%	19-50%	25,381		24,832
SmartStop Self Storage REIT, Inc. Preferred Stock (2)	n/a	n/a	n/a	150,000		150,000
Net Investments in and Cash distributions in unconsolidated real estate entities	245			$	298,077	$	292,790

⁽¹⁾ Includes pro-rata equity ownership share and promoted interest.

⁽²⁾ In ~~January~~October 2019, the Company ~~purchased its joint venture partners' 95% interests~~invested $150,000 in shares of newly issued convertible preferred stock of SmartStop,with an additional commitment to purchase up to $50,000 of the preferred shares over the 12 months after the original purchase. 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 ~~Extra Space West One LLC and Extra Space West Two LLC joint ventures, which owned~~case of a ~~total~~change of ~~12 stores. The Company paid $172,505~~control or initial listing of ~~cash to acquire~~SmartStop. Dividend income from this investment is included on the equity ~~interests,~~in earnings and ~~subsequent to this acquisition,~~dividend income from unconsolidated real estate entities line on the ~~Company owned 100%~~Company's condensed consolidated statements of ~~the joint ventures and the related stores.~~operations.

~~EXTRA SPACE STORAGE INC.~~7. VARIABLE INTERESTS

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~


7.	~~VARIABLE INTERESTS~~

The Operating Partnership had 3 wholly-owned unconsolidated subsidiaries (“Trust,” “Trust II” and “Trust III,” together, the “Trusts”) that had issued trust preferred securities to third parties and common securities to the Operating ~~Partnership.~~Partnership during 2005. The proceeds from the sale of the preferred and common securities were loaned in the form of notes to the Operating Partnership. The Trusts were variable interest entities ("VIEs") because the holders of the equity investment at risk (the trust preferred securities) did not have the power to direct the activities of the entities that most significantly affect the entities’ economic performance because of 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 was not considered an equity investment at risk. The Operating Partnership’s investment in the Trusts was 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 be the primary beneficiary of the Trusts. Since the Company was not the primary beneficiary of the Trusts, they were not consolidated. A debt obligation was recorded in the form of notes for the proceeds as discussed above, which were owed to the Trusts. The Company had also included its investment in the Trusts’ common securities in other assets on the condensed consolidated balance sheets.

During the year ended December 31, 2018, the Company repaid a total principal amount of $88,662, 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 repaid the remaining balance of $30,928 of notes payable to Trust.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

During the time they were outstanding, the Company did not provide 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 was 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 was equal to the notes payable that the Trusts owed to third parties for their investments in the Trusts’ preferred securities.

The Company had 0 consolidated VIEs during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.


8.	~~DERIVATIVES~~

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 and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, 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 ~~$3,296~~$35,790 will be reclassified and increase interest expense.

The Company held 25 derivative financial instruments which had a total combined notional amount of $2,391,806 as of June 30, 2020.

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
	June 30, 2020		December 31, 2019
Derivatives designated as hedging instruments:	Fair Value
Other assets	$	—	$	6,214
Other liabilities	$	119,658	$	31,400

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

~~The Company held 25 derivative financial instruments which had a total combined notional amount of $2,402,883 as of September 30, 2019.~~

~~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
September 30, 2019 December 31, 2018
Derivatives designated as hedging instruments: Fair Value
Other assets $ 3,141
$ 42,324
Other liabilities $ 43,880
$ 2,131

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 September 30, Location of amounts reclassified from OCI into income Gain (loss) reclassified from OCI For the Three Months Ended September 30,
Type 2019 2018 2019 2018
Swap Agreements $ (14,517 ) $ 8,325
Interest expense $ 2,992
$ 2,561

Gain (loss) recognized in OCI For the Nine Months Ended September 30, Location of amounts reclassified from OCI into income Gain reclassified from OCI For the Nine Months Ended September 30,
Type 2019 2018 2019 2018
Swap Agreements $ (70,387 ) $ 41,610
Interest expense $ 11,792
$ 4,684


	Gain (loss) recognized in OCI For the Three Months Ended June 30,					Location of amounts reclassified from OCI into income		Gain (loss) reclassified from OCI For the Three Months Ended June 30,
Type	2020		2019					2020		2019
Swap Agreements	$	(13,350)	$	(36,294)	Interest expense	$	(7,639)	$	4,338


	Gain (loss) recognized in OCI For the Six Months Ended June 30,					Location of amounts reclassified from OCI into income		Gain (loss) reclassified from OCI For the Six Months Ended June 30,
Type	2020		2019					2020		2019
Swap Agreements	$	(103,060)	$	(55,870)	Interest expense	$	(8,202)	$	8,799

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 ~~September~~June 30, ~~2019,~~2020, 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 ~~$44,985.~~$123,251. As of ~~September~~June 30, ~~2019,~~2020, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of ~~September~~June 30, ~~2019,~~2020, it could have been required to cash settle its obligations under the agreements at their termination value of ~~$45,120,~~$123,251, including accrued interest.

~~EXTRA SPACE STORAGE INC.~~9. EXCHANGEABLE SENIOR NOTES

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited) (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 exchangeable senior notes, net, in the condensed 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 2015 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 ~~September~~June 30, ~~2019~~2020 was approximately ~~10.87~~10.97 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

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

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.

Additionally, 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 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter. 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 ~~September~~June 30, ~~2019.~~2020.

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, and 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. During the three months ended March 31, 2018, the Company repurchased a total principal amount of $37,709 of the 2013 Notes. The Company paid cash of $58,469 for the total of the principal amount and the exchange value in excess of the principal amount. The Operating Partnership redeemed all remaining outstanding 2013 Notes on July 5, 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 components of the ~~2013 Notes and~~ 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 are amortized as interest expense over the remaining period of the debt through its first redemption ~~date: July 1, 2018 for the 2013 Notes, and~~date of October 1, ~~2020 for the 2015 Notes.~~2020. The effective interest rate on the liability components of ~~the 2013 Notes and~~ the 2015 Notes is 4.0%, which approximated the market rate of interest of similar debt without exchange features (i.e. nonconvertible debt) at the time of issuance.

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

Information about the Company’s 2015 Notes, including the total carrying amount of the equity component, the principal amount of the liability component, the unamortized discount and the net carrying amount was as follows for the periods indicated:


	June 30, 2020		December 31, 2019
Carrying amount of equity component	$	22,597	$	22,597


Principal amount of liability component	$	575,000	$	575,000

Unamortized discount - equity component	(1,233)		(3,675)


Unamortized debt issuance costs	(613)		(1,812)
Net carrying amount of liability component	$	573,154	$	569,513

September 30, 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 (4,884 ) (8,417 )
Unamortized debt issuance costs (2,411 ) (4,209 )
Net carrying amount of liability components $ 567,705
$ 562,374

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 June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Contractual interest	$	4,492	$	4,492	$	8,984	$	8,984
Amortization of discount	1,233		1,185		2,442		2,347
Total interest expense recognized	$	5,725	$	5,677	$	11,426	$	11,331

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Contractual interest $ 4,492
$ 4,492
$ 13,476
$ 13,614
Amortization of discount 1,186
1,140
3,533
3,525
Total interest expense recognized $ 5,678
$ 5,632
$ 17,009
$ 17,139

10. STOCKHOLDERS’ EQUITY

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

Operating Partnership (as amended, the "Partnership Agreement") provides for the designation and issuance of the OP Units. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, noncontrolling interests in Preferred OP Units were presented net of notes receivable from Preferred OP Unit holders of $100,000 ~~and $108,644, respectfully,~~ 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 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 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.

Series B Redeemable Preferred Units

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

Series C Convertible Redeemable Preferred Units

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

Units agreed to pledge the 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 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 ~~September~~December 31, 2019 and June 30, ~~2019.~~2020. See footnote 12 for further discussion of noncontrolling interests.

Series D Redeemable Preferred Units

The Series D Units have been issued at various times from 2014 to 2019. ~~In addition, during~~During the ~~nine~~six months ended ~~September~~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 ~~$120,086,~~$117,362, which represents ~~4,803,445~~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.

During the six months ended June 30, 2020, 108,960 Series D Units were redeemed for 30,495 shares of the Company's common stock.

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (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

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~


	For the Six Months Ended June 30,
	2020	2019
OP Units redeemed for common stock	108,862	210,501




OP Units issued upon redemption of Series C Units	—	270,709

For the Nine Months Ended September 30,
2019 2018
OP Units redeemed for common stock 239,619
25,000
OP Units redeemed for cash —
30,000
Cash paid for OP Units redeemed $ —
$ 2,558
OP Units issued in conjunction with acquisitions —
21,768
Value of OP Units issued in conjunction with acquisitions $ —
$ 1,877
OP Units issued upon redemption of Series C Units 270,709
—

Other Noncontrolling Interests

13. SEGMENT INFORMATION

~~The Company adopted ASC 842,~~ ~~"Leases,"~~ effective January 1, 2019 on a modified retrospective basis as allowed under the standard and 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:~~

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

The Company 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, etc. 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 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, and the Company will take possession of the leased asset upon completion of construction, which is estimated to be completed in mid-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 September 30, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

~~Following is information on our total lease costs as of the period(s) indicated:~~

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2019 2019

Finance lease cost:

     Amortization of finance lease right-of-use assets $ 42
$ 126
     Interest expense related to finance lease liabilities 73
216
Operating lease cost 7,060
12,737
Variable lease cost 1,624
3,426
Short-term lease cost 28
138
          Total lease cost $ 8,827
$ 16,643

Cash paid for amounts included in the measurement of lease liabilities

    Operating cash outflows for finance lease payments $ 58
$ 173
    Operating cash outflows for operating lease payments 6,573
12,122
Total cash flows for lease liability measurement $ 6,631
$ 12,295

Right-of-use assets obtained in exchange for new operating lease liabilities $ 52,413
$ 277,430
Right-of-use assets obtained in exchange for new finance lease liabilities $ —
$ 8,050

Weighted average remaining lease term - finance leases (years) 47.1

Weighted average remaining lease term - operating leases (years) 14.9

Weighted average discount rate - finance leases 6.07 %
Weighted average discount rate - operating leases 3.65 %

Following is 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
2019 $ 6,982
$ 57
$ 7,039
2020 28,331
232
28,563
2021 28,586
237
28,823
2022 28,611
255
28,866
2023 28,698
255
28,953
Thereafter 252,832
16,777
269,609
Total $ 374,040
$ 17,813
$ 391,853
Present value adjustments (94,991 ) (12,990 ) (107,981 )
Lease liabilities $ 279,049
$ 4,823
$ 283,872

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

~~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.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2019 2018 2019 2018
Revenues:

     Self-Storage Operations $ 290,917
$ 266,728
$ 841,504
$ 772,742
     Tenant Reinsurance 33,588
30,105
95,086
85,660
          Total segment revenues $ 324,505
$ 296,833
$ 936,590
$ 858,402

Operating expenses:

     Self-Storage Operations $ 88,653
$ 73,652
$ 248,288
$ 219,488
     Tenant Reinsurance 7,644
7,720
21,593
18,798
          Total segment operating expenses $ 96,297
$ 81,372
$ 269,881
$ 238,286

Net operating income:

     Self-Storage Operations $ 202,264
$ 193,076
$ 593,216
$ 553,254
     Tenant Reinsurance 25,944
22,385
73,493
66,862
          Total segment net operating income: $ 228,208
$ 215,461
$ 666,709
$ 620,116

Other components of net income (loss):

Property management fees and other income $ 13,000
$ 10,120
$ 36,063
$ 30,849
General and administrative expense (22,519 ) (19,707 ) (68,548 ) (62,822 )
Depreciation and amortization expense (56,051 ) (52,283 ) (165,116 ) (155,924 )
Gain on real estate transactions —
30,807
1,205
30,807
     Interest expense (46,908 ) (45,926 ) (141,716 ) (130,239 )
Non-cash interest expense related to the amortization of discount on equity component of exchangeable senior notes (1,186 ) (1,140 ) (3,533 ) (3,525 )
     Interest income 2,799
1,371
5,905
3,997
     Equity in earnings of unconsolidated real estate ventures 2,704
3,622
8,455
10,648
     Income tax expense (4,052 ) (2,638 ) (8,580 ) (6,077 )
          Net income $ 115,995
$ 139,687
$ 330,844
$ 337,830


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Revenues:
Self-Storage Operations	$	279,312	$	279,584	$	566,015	$	550,587
Tenant Reinsurance	35,078		31,701		68,691		61,498
Total segment revenues	$	314,390	$	311,285	$	634,706	$	612,085

Operating expenses:
Self-Storage Operations	$	89,040	$	80,870	$	179,337	$	159,635
Tenant Reinsurance	6,858		6,982		13,536		13,949
Total segment operating expenses	$	95,898	$	87,852	$	192,873	$	173,584

Net operating income:
Self-Storage Operations	$	190,272	$	198,714	$	386,678	$	390,952
Tenant Reinsurance	28,220		24,719		55,155		47,549
Total segment net operating income:	$	218,492	$	223,433	$	441,833	$	438,501

Other components of net income (loss):
Management fees and other income	$	12,856	$	12,317	$	24,992	$	23,063
General and administrative expense	(25,337)		(23,351)		(48,348)		(46,029)
Depreciation and amortization expense	(56,018)		(54,406)		(111,293)		(109,065)
Gain on real estate transactions	—		1,205		—		1,205
Interest expense	(41,039)		(47,448)		(85,397)		(94,808)
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(1,233)		(1,185)		(2,442)		(2,347)
Interest income	1,669		1,718		3,343		3,106

Equity in earnings and dividend income from unconsolidated real estate entities	5,044		3,121		10,087		5,751
Income tax expense	(3,177)		(2,715)		(5,356)		(4,528)
Net income	$	111,257	$	112,689	$	227,419	$	214,849

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

Amounts in thousands, except store and share data, unless otherwise stated

14. COMMITMENTS AND CONTINGENCIES

~~EXTRA SPACE STORAGE INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(unaudited) (continued)~~

~~Amounts in thousands, except store and share data, unless otherwise stated~~

~~On October 29, 2019,~~15. SUBSEQUENT EVENTS

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

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, ~~2018.~~2019. 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.”

CURRENT MATERIAL DEVELOPMENT – THE COVID-19 PANDEMIC

The United States and other countries around the world are experiencing a major health pandemic related to COVID-19, which has created considerable instability and disruption in the U.S. and world economies. Governmental authorities in impacted regions are taking increasingly dramatic action in an effort to slow the spread of COVID-19. Federal, state and local jurisdictions have issued varying forms of states of emergency orders. We are working to comply within the framework of local, county, state and federal laws as they evolve. In that regard, 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. We have transitioned many of our interactions between customers and leasing and support staff to on-line and telephonic communications. Due to the COVID-19 pandemic, our customers may be impacted, including through unemployment, which may impact their ability to pay rent or renew their leases.

Our business has been impacted by COVID-19 in several ways, including reductions in new rentals and vacates due to stay-at-home orders and other restrictions, lower achieved rental rates from new customers, fewer existing customer rent increases, reduced late fee collection and impaired ability to hold auctions resulting in higher accounts receivable and bad debt.We have continued operations at all of our properties and have installed plexiglass partitions in all of our offices, and have also implemented no-contact rental processes.We also experienced limited rental office closures for temporary staffing adjustments or to satisfy local government orders.

Although the self-storage has historically been resilient to ordinary market downturns, the impact of the COVID-19 pandemic on the U.S. and world economies generally, and on our future results in particular, could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted. This includes new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19 and reactions by consumers, companies, governmental entities and capital markets.

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.

The following table presents additional information regarding net rentable square feet and the number of stores by state.


	June 30, 2020
	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	8	557,478	1	75,811	15	1,057,032	24	1,690,321

Arizona	23	1,623,306	7	468,027	18	1,474,777	48	3,566,110

California	166	12,710,988	41	3,009,314	68	6,385,924	275	22,106,226
Colorado	17	1,154,356	2	186,258	23	1,739,419	42	3,080,033
Connecticut	7	531,445	7	629,955	5	356,969	19	1,518,369
Delaware	—	—	1	76,645	2	137,618	3	214,263
Florida	91	6,984,896	32	2,659,491	97	7,499,948	220	17,144,335
Georgia	63	4,870,029	6	511,067	23	1,725,793	92	7,106,889
Hawaii	13	848,098	—	—	4	211,634	17	1,059,732
Idaho	—	—	—	—	7	712,786	7	712,786
Illinois	37	2,809,563	7	568,672	27	1,990,521	71	5,368,756
Indiana	15	950,671	1	58,166	14	803,501	30	1,812,338

Kansas	1	83,011	2	108,860	3	223,250	6	415,121
Kentucky	11	930,058	1	51,118	4	339,723	16	1,320,899
Louisiana	2	142,525	—	—	5	470,590	7	613,115

Maryland	31	2,591,242	8	618,458	30	2,201,633	69	5,411,333
Massachusetts	46	2,973,595	10	641,219	7	543,304	63	4,158,118
Michigan	7	563,417	4	313,376	3	248,329	14	1,125,122
Minnesota	5	382,697	2	150,661	10	752,792	17	1,286,150
Mississippi	3	219,822	—	—	3	205,750	6	425,572
Missouri	5	332,765	2	119,275	8	539,626	15	991,666

Nebraska	—	—	—	—	3	307,333	3	307,333
Nevada	14	1,039,969	4	473,641	5	533,545	23	2,047,155
New Hampshire	2	135,835	2	84,165	1	61,490	5	281,490
New Jersey	60	4,741,837	17	1,247,203	14	1,099,204	91	7,088,244
New Mexico	11	721,690	6	350,960	12	893,160	29	1,965,810
New York	27	1,969,524	18	1,514,281	20	1,188,871	65	4,672,676
North Carolina	19	1,409,644	5	373,784	18	1,355,295	42	3,138,723

Ohio	17	1,315,091	5	325,963	6	493,967	28	2,135,021
Oklahoma	—	—	—	—	21	1,733,798	21	1,733,798
Oregon	6	400,153	4	281,674	13	971,654	23	1,653,481
Pennsylvania	18	1,351,315	7	513,058	25	1,847,853	50	3,712,226
Rhode Island	2	134,616	—	—	2	166,511	4	301,127
South Carolina	24	1,843,740	7	497,708	17	1,349,535	48	3,690,983

Tennessee	17	1,445,166	12	803,176	17	1,227,376	46	3,475,718
Texas	100	8,603,489	10	708,200	83	6,751,845	193	16,063,534
Utah	10	710,357	—	—	20	1,615,741	30	2,326,098

Virginia	46	3,689,066	7	566,703	18	1,365,607	71	5,621,376
Washington	8	590,030	1	57,390	11	846,098	20	1,493,518
Washington, DC	1	100,039	1	103,766	5	483,028	7	686,833

Wisconsin	—	—	5	520,845	5	428,480	10	949,325

Puerto Rico	—	—	—	—	8	917,129	8	917,129
Totals	933	71,461,523	245	18,668,890	700	55,258,439	1,878	145,388,852

September 30, 2019
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 8
557,143
1
75,801
13
866,846
22
1,499,790
Arizona 23
1,623,112
7
467,460
17
1,359,605
47
3,450,177
California 165
12,663,924
41
3,021,681
59
5,646,172
265
21,331,777
Colorado 16
1,075,157
2
186,293
27
1,958,876
45
3,220,326
Connecticut 7
529,455
7
626,227
4
284,432
18
1,440,114
Delaware —
—
1
76,945
1
70,653
2
147,598
Florida 91
6,969,378
34
2,543,565
82
6,361,651
207
15,874,594
Georgia 59
4,563,704
5
431,477
17
1,283,478
81
6,278,659
Hawaii 13
843,974
—
—
4
209,215
17
1,053,189
Idaho —
—
—
—
7
711,074
7
711,074
Illinois 36
2,725,286
7
570,172
30
2,121,546
73
5,417,004
Indiana 15
950,359
1
58,086
13
850,080
29
1,858,525
Kansas 1
50,142
2
108,770
1
70,420
4
229,332
Kentucky 11
928,307
1
51,128
4
311,138
16
1,290,573
Louisiana 2
150,555
—
—
3
299,802
5
450,357
Maryland 32
2,587,910
8
618,640
26
1,807,234
66
5,013,784
Massachusetts 46
2,972,797
10
641,063
8
605,365
64
4,219,225
Michigan 7
561,966
4
314,331
1
102,147
12
978,444
Minnesota 5
382,301
—
—
9
615,894
14
998,195
Mississippi 3
215,812
—
—
4
256,550
7
472,362
Missouri 5
333,580
2
119,275
9
608,303
16
1,061,158
Nebraska —
—
—
—
2
164,494
2
164,494
Nevada 14
1,035,845
4
472,981
5
533,505
23
2,042,331
New Hampshire 2
136,135
2
84,325
1
61,535
5
281,995
New Jersey 59
4,658,053
17
1,246,731
10
825,939
86
6,730,723
New Mexico 11
722,310
6
349,860
12
891,950
29
1,964,120
New York 27
1,968,598
16
1,404,529
19
1,122,883
62
4,496,010
North Carolina 19
1,411,295
5
374,010
21
1,586,691
45
3,371,996
Ohio 17
1,314,894
5
327,053
6
398,956
28
2,040,903
Oklahoma —
—
—
—
19
1,577,962
19
1,577,962
Oregon 6
399,941
4
281,689
9
598,810
19
1,280,440
Pennsylvania 18
1,350,092
7
510,446
19
1,369,890
44
3,230,428
Rhode Island 2
130,846
—
—
1
84,665
3
215,511
South Carolina 23
1,757,606
7
497,578
19
1,399,429
49
3,654,613
Tennessee 17
1,403,456
12
804,121
16
1,150,636
45
3,358,213
Texas 100
8,605,464
10
706,854
78
6,281,835
188
15,594,153
Utah 10
710,204
—
—
17
1,272,392
27
1,982,596
Virginia 46
3,681,166
7
565,118
14
1,003,892
67
5,250,176
Washington 8
589,997
1
57,340
7
480,838
16
1,128,175
Washington, DC 1
100,039
1
104,058
3
186,048
5
390,145
Wisconsin —
—
5
505,806
5
445,529
10
951,335
Puerto Rico —
—
—
—
8
916,616
8
916,616
Totals 925
70,660,803
242
18,203,413
630
48,754,976
1,797
137,619,192

(1) Includes ~~five~~six consolidated joint venture stores.

RESULTS OF OPERATIONS

Comparison of the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Overview

Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 included the operations of ~~1,167~~1,178 stores ~~(920~~(927 wholly-owned, ~~five~~six in consolidated joint ventures, and ~~242~~245 in joint ventures accounted for using the equity method) compared to the results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, which included the operations of ~~1,099~~1,157 stores ~~(872~~(914 wholly-owned, four in consolidated joint ventures, and ~~223~~239 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 June 30,										For the Six Months Ended June 30,
	2020		2019		$ Change		% Change		2020		2019		$ Change		% Change
Revenues:
Property rental	$	279,312	$	279,584	$	(272)	(0.1)	%	$	566,015	$	550,587	$	15,428	2.8	%
Tenant reinsurance	35,078		31,701		3,377		10.7	%	68,691		61,498		7,193		11.7	%
Management fees and other income	12,856		12,317		539		4.4	%	24,992		23,063		1,929		8.4	%
Total revenues	$	327,246	$	323,602	$	3,644	1.1	%	$	659,698	$	635,148	$	24,550	3.9	%

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2019 2018 $ Change
% Change 2019 2018 $ Change
% Change
Revenues:
Property rental $ 290,917
$ 266,728
$ 24,189
9.1 % $ 841,504
$ 772,742
$ 68,762
8.9 %
Tenant reinsurance 33,588
30,105
3,483
11.6 % 95,086
85,660
9,426
11.0 %
Management fees and other income 13,000
10,120
2,880
28.5 % 36,063
30,849
5,214
16.9 %
Total revenues $ 337,505
$ 306,953
$ 30,552
10.0 % $ 972,653
$ 889,251
$ 83,402
9.4 %

Property Rental—The ~~increase~~decrease in property rental revenues for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 was primarily the result of ~~revenues from newly-acquired stores and increases in rental rates at our stabilized stores. Increases~~an increase of ~~$15,173 and~~ ~~$38,542, respectively, were~~$7,496 attributable to store acquisitions completed in 2020 and 2019 which was offset by a decrease of $8,420 related to decreases in rental rates and ~~2018.~~other fee income at our stabilized stores. We acquired 16two wholly-owned stores and added one leased property during the six months ended June 30, 2020. We acquired 21 stores and added 27 leased properties (as part of a new net lease ~~agreement signed) during the nine months ended September 30, 2019. We acquired 34 stores~~agreement) during the year ended December 31, ~~2018. Increases of $8,253 and $27,400~~2019. The increase in property rental revenues for the ~~three and nine~~six months ended ~~September~~June 30, ~~2019, respectively, were~~2020 was due to ~~higher net~~increases of $17,150 attributable to store acquisitions completed in 2020 and 2019 and $1,892 attributable to revenue increases at our lease-up stores. These increases were offset by a decrease of $3,386 related to decreases in rental rates ~~for new~~ and ~~existing customers~~other fee income at our stabilized stores.

Tenant Reinsurance—The increase in our tenant reinsurance revenues was due primarily to an increase in the number of stores operated. We operated ~~1,797~~1,878 stores at ~~September~~June 30, ~~2019~~2020 compared to ~~1,606~~1,752 stores at ~~September~~June 30, ~~2018.~~2019.

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 and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily due to an increase in the number of stores managed. As of ~~September~~June 30, ~~2019,~~2020, we managed ~~630~~951 stores for joint ventures and third parties, compared to ~~507~~838 stores as of ~~September~~June 30, ~~2018, and we also managed 247 stores for joint ventures as of September 30, 2019, compared to 227 as of September 30, 2018.~~2019.

Expenses

The following table presents information on expenses for the periods indicated:


	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2020		2019		$ Change		% Change		2020		2019		$ Change		% Change
Expenses:
Property operations	$	89,040	$	80,870	$	8,170	10.1	%	$	179,337	$	159,635	$	19,702	12.3	%
Tenant reinsurance	6,858		6,982		(124)		(1.8)	%	13,536		13,949		(413)		(3.0)	%
General and administrative	25,337		23,351		1,986		8.5	%	48,348		46,029		2,319		5.0	%
Depreciation and amortization	56,018		54,406		1,612		3.0	%	111,293		109,065		2,228		2.0	%
Total expenses	$	177,253	$	165,609	$	11,644	7.0	%	$	352,514	$	328,678	$	23,836	7.3	%

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2019 2018 $ Change % Change 2019 2018 $ Change
% Change
Expenses:
Property operations $ 88,653
$ 73,652
$ 15,001
20.4 % $ 248,288
$ 219,488
$ 28,800
13.1 %
Tenant reinsurance 7,644
7,720
(76 ) (1.0 )% 21,593
18,798
2,795
14.9 %
General and administrative 22,519
19,707
2,812
14.3 % 68,548
62,822
5,726
9.1 %
Depreciation and amortization 56,051
52,283
3,768
7.2 % 165,116
155,924
9,192
5.9 %
Total expenses $ 174,867
$ 153,362
$ 21,505
14.0 % $ 503,545
$ 457,032
$ 46,513
10.2 %

Property Operations—The ~~increases~~increase in property operations expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019 were~~2020 was due primarily to increases of ~~$9,872~~$6,817 and ~~$18,588,~~$15,793, respectively, attributable to store acquisitions completed in ~~2019~~2020 and ~~2018.~~2019. We acquired 16two wholly-owned stores and added one leased store during the six months ended June 30, 2020. We acquired 21 stores and added 27 leased properties (as part of a new net lease ~~agreement signed) during the nine months ended September 30, 2019. We acquired 34 stores~~agreement) during the year ended December 31, ~~2018.~~2019. Additional increases of ~~$4,748~~$1,210 and ~~$9,098~~$3,584 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively were related to an increase in expenses from property taxes, payroll and benefits, and marketing at our stabilized stores.

Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The ~~increase~~decrease in tenant reinsurance expense for ~~nine~~the three and six months ended ~~September~~June 30, ~~2019~~2020 was due primarily to ~~an increase~~a reduction in the number of ~~stores we owned and/or managed and an increase~~claims as well as a decrease in the overall average payout on individual claims when compared to the ~~nine~~three and six months ended ~~September~~June 30, ~~2018.~~2019.

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. During the three months ended June 30, 2020, we recorded an additional $1,823 in compensation expense as a result of modifications to the terms of the stock-based awards related to the retirement of an executive in June 2020. We did not observe any other 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 16two stores during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. We acquired 3421 stores during the year ended December 31, ~~2018.~~2019.

Other Revenues and Expenses

The following table presents information about other revenues and expenses for the periods indicated:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2019 2018 $ Change % Change 2019 2018 $ Change
% Change

Gain on real estate transactions $ —
$ 30,807
$ (30,807 ) (100.0 )% $ 1,205
$ 30,807
$ (29,602 ) (96.1 )%
Interest expense (46,908 ) (45,926 ) (982 ) 2.1 % (141,716 ) (130,239 ) (11,477 ) 8.8 %
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes (1,186 ) (1,140 ) (46 ) 4.0 % (3,533 ) (3,525 ) (8 ) 0.2 %
Interest income 2,799
1,371
1,428
104.2 % 5,905
3,997
1,908
47.7 %
Equity in earnings of unconsolidated real estate ventures 2,704
3,622
(918 ) (25.3 )% 8,455
10,648
(2,193 ) (20.6 )%
Income tax expense (4,052 ) (2,638 ) (1,414 ) 53.6 % (8,580 ) (6,077 ) (2,503 ) 41.2 %

$ (46,643 ) $ (13,904 ) $ (32,739 ) 235.5 % $ (138,264 ) $ (94,389 ) $ (43,875 ) 46.5 %


	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2020		2019		$ Change		% Change		2020		2019		$ Change		% Change


Interest expense	$	(41,039)	$	(47,448)	$	6,409	(13.5)	%	(85,397)		(94,808)		9,411		(9.9)	%
Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes	(1,233)		(1,185)		(48)		4.1	%	(2,442)		(2,347)		(95)		4.0	%
Interest income	1,669		1,718		(49)		(2.9)	%	3,343		3,106		237		7.6	%

Equity in earnings and dividend income from unconsolidated real estate entities	5,044		3,121		1,923		61.6	%	10,087		5,751		4,336		75.4	%

Income tax expense	(3,177)		(2,715)		(462)		17.0	%	(5,356)		(4,528)		(828)		18.3	%
	$	(38,736)	$	(45,304)	$	6,568	(14.5)	%	$	(79,765)	$	(91,621)	$	11,856	(12.9)	%

~~Gain on Real Estate Transactions—~~ ~~The gain of~~ ~~$1,205~~ for the nine months ended September 30, 2019 was a result of the sale of one property in New York for $11,781. During the three and nine months ended September 30, 2018, we recorded a $30,671 gain on the sale of one property in California.

Interest Expense—The ~~increase~~decrease in interest expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily the result of a ~~higher~~lower average ~~debt balance when~~variable interest rates compared to the same ~~periods~~period in the prior year. ~~Information on the total face value of debt and~~The average variable interest rate for ~~each quarter during~~ the ~~nine~~three months ended ~~September~~June 30, ~~2019 and 2018 follows:~~2020 was 1.7%, compared to an average variable interest rate of 3.7% for the three months ended June 30, 2019.

For the Three Months Ended September 30, For the Three Months Ended June 30, For the Three Months Ended March 31,
2019 2018 2019 2018 2019 2018
Total face value of debt $4,844,620 $4,803,360 $5,072,936 $4,809,483 $5,039,286 $4,557,414
Average interest rate of debt 3.4% 3.5% 3.5% 3.4% 3.5% 3.4%

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 ~~2013 Notes and~~ 2015 Notes ~~both~~ had an effective interest rate of 4.0% relative to the carrying amount of the liability.

Interest Income—Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions, interest earned on bridge loans and income earned on ~~note~~notes receivable from Common and Preferred Operating Partnership unit holders. ~~In late 2018 we began to provide bridge financing on completed, including recently completed properties, owned by third parties that we manage.~~ The increase in interest income during the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily the result of higher average balances for bridge loans receivable. During the six months ended June 30, 2020, issued $26,050 principal in new bridge loans. The decrease for the three months ended June 30, 2020 was primarily the result of lower interest ~~earned~~rates on these variable-rate bridge loans.

Equity in Earnings ofand Dividend Income from Unconsolidated Real Estate ~~Ventures—~~Entities—Equity in earnings of unconsolidated real estate ~~ventures~~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. The ~~decrease in earnings~~increase for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 related primarily to ~~12 properties that we purchased from joint ventures in January 2019.~~the dividend income related to the SmartStop preferred stock.

Income Tax Expense—For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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 September 30,						For the Nine Months Ended September 30,							For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018				2020		2019		2020		2019
Net income attributable to common stockholders	$	108,087		$	130,418		$	307,685		$	313,827		Net income attributable to common stockholders	$	102,911	$	104,828	$	211,090	$	199,598

Adjustments:													Adjustments:
Real estate depreciation	51,828			48,673			153,745			144,018			Real estate depreciation	53,367		51,144		106,293		101,917
Amortization of intangibles	1,184			1,835			5,281			6,427			Amortization of intangibles	538		1,809		1,155		4,097
Gain on real estate transactions	—			(30,807		)	(1,205		)	(30,807		)	Gain on real estate transactions	—		(1,205)		—		(1,205)
Unconsolidated joint venture real estate depreciation and amortization	2,160			1,781			5,944			4,931			Unconsolidated joint venture real estate depreciation and amortization	2,224		1,912		4,388		3,784

Distributions paid on Series A Preferred Operating Partnership units	(572		)	(572		)	(1,716		)	(1,716		)	Distributions paid on Series A Preferred Operating Partnership units	(572)		(572)		(1,144)		(1,144)
Income allocated to Operating Partnership noncontrolling interests	7,908			9,269			23,159			24,003			Income allocated to Operating Partnership noncontrolling interests	8,346		7,861		16,329		15,251
Funds from operations attributable to common stockholders and unit holders	$	170,595		$	160,597		$	492,893		$	460,683		Funds from operations attributable to common stockholders and unit holders	$	166,814	$	165,777	$	338,111	$	322,298

For the Three Months Ended September 30, Percent For the Nine Months Ended September 30, Percent
2019 2018 Change 2019 2018 Change
Same-store rental revenues $ 262,739
$ 254,351
3.3 % $ 773,323
$ 745,146
3.8 %
Same-store operating expenses 73,731
69,191
6.6 % 217,579
208,569
4.3 %
Same-store net operating income $ 189,008
$ 185,160
2.1 % $ 555,744
$ 536,577
3.6 %
Same-store square foot occupancy as of quarter end 93.8 % 93.8 %
93.8% 93.8%
Properties included in same-store 821
821

821 821


	For the Three Months Ended June 30,						Percent		For the Six Months Ended June 30,				Percent
	2020		2019		Change		2020		2019		Change
Same-store rental revenues	$	262,690	$	271,178	(3.1)	%	$	532,752	$	536,083	(0.6)	%
Same-store operating expenses	77,162		76,633		0.7	%	155,565		152,132		2.3	%
Same-store net operating income	$	185,528	$	194,545	(4.6)	%	$	377,187	$	383,951	(1.8)	%
Same-store square foot occupancy as of quarter end	94.5%		93.5%				94.5%		93.5%
Properties included in same-store	863		863				863		863


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Net Income	$	111,257	$	112,689	$	227,419	$	214,849
Adjusted to exclude:
Gain on real estate transactions	—		(1,205)		—		(1,205)
Equity in earnings of unconsolidated joint ventures	(5,044)		(3,121)		(10,087)		(5,751)
Interest expense	42,272		48,633		87,839		97,155
Depreciation and amortization	56,018		54,406		111,293		109,065
Income tax expense	3,177		2,715		5,356		4,528
General and administrative	25,337		23,351		48,348		46,029
Management fees, other income and interest income	(14,525)		(14,035)		(28,335)		(26,169)
Net tenant insurance	(28,220)		(24,719)		(55,155)		(47,549)
Non-same store rental revenue	(16,622)		(8,406)		(33,263)		(14,504)
Non-same store operating expense	11,878		4,237		23,772		7,503
Total Same-store net operating income	$	185,528	$	194,545	$	377,187	$	383,951

Same-store rental revenues	$	262,690	$	271,178	$	532,752	$	536,083
Same-store operating expenses	77,162		76,633		155,565		152,132
Same-store net operating income	$	185,528	$	194,545	$	377,187	$	383,951

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Net Income $ 115,995
$ 139,687
$ 330,844
$ 337,830
Adjusted to exclude:
Gain on real estate transactions —
(30,807 ) (1,205 ) (30,807 )
Equity in earnings of unconsolidated joint ventures (2,704 ) (3,622 ) (8,455 ) (10,648 )
Interest expense 48,094
47,066
145,249
133,764
Depreciation and amortization 56,051
52,283
165,116
155,924
Income tax expense 4,052
2,638
8,580
6,077
General and administrative 22,519
19,707
68,548
62,822
Management fees, other income and interest income (15,799 ) (11,491 ) (41,968 ) (34,846 )
Net tenant insurance (25,944 ) (22,385 ) (73,493 ) (66,862 )
Non same store revenue (28,178 ) (12,377 ) (68,181 ) (27,596 )
Non same store expense 14,922
4,461
30,709
10,919
Total Same Store NOI $ 189,008
$ 185,160
$ 555,744
$ 536,577

Same-store rental revenues $ 262,739
$ 254,351
$ 773,323
$ 745,146
Same-store operating expenses 73,731
69,191
217,579
208,569
Same-store net operating income $ 189,008
$ 185,160
$ 555,744
$ 536,577


	For the Six Months Ended June 30,
	2020		2019
Net cash provided by operating activities	$	392,073	$	363,407
Net cash used in investing activities	(111,868)		(440,429)
Net cash provided by (used in) financing activities	(289,187)		59,976

Significant components of net cash flow included:
Net income	$	227,419	$	214,849

Acquisition and development of real estate assets	(75,237)		(269,699)


Issuance of notes receivable	(24,325)		(152,599)
Repurchase of common stock	(67,819)		—
Proceeds from the sale of common stock, net of offering costs	—		98,796
Net proceeds from debt financing	27,311		201,702

For the Nine Months Ended September 30,
2019 2018
Net cash provided by operating activities $ 544,466
$ 529,027
Net cash used in investing activities (356,377 ) (317,029 )
Net cash used in financing activities (194,064 ) (231,459 )

Significant components of net cash flow included:
Net income $ 330,844
$ 337,830
Depreciation and amortization 165,116
155,924
Acquisition and development of new stores (321,527 ) (372,387 )
Gain on real estate transactions (1,205 ) (30,807 )
Proceeds from sale of real estate assets, investments in real estate ventures and other assets 11,254
51,889
Issuance of notes receivable, net of principal payments received (11,466 ) 11,337
Proceeds from the sale of common stock, net of offering costs 198,852
33,780
Net proceeds (payments) from our debt financing (26,614 ) 83,527
Dividends paid on common stock (341,535 ) (315,608 )

As of ~~September~~June 30, ~~2019,~~2020, we had ~~$62,277~~$56,397 available in cash and cash equivalents. Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. During ~~2019~~2020 and ~~2018,~~2019, we experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

Our liquidity needs consist primarily of operating expenses, monthly debt service payments, recurring capital expenditures, dividends to stockholders and distributions to unit holders necessary to maintain our REIT qualification. We may from time to time seek to repurchase our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds. We may also use Operating Partnership units as currency to fund acquisitions from self-storage owners.

The COVID-19 pandemic has had negative impacts on capital markets and may continue to do so or such negative impacts could intensify. Based upon the current availability of our credit facility and our credit rating, we do not expect such capital market dislocations to have a material impact upon our ability to satisfy obligations and maturities or our growth plans during the year. However, there can be no assurance of the impact on our future plans if these negative trends were to persist for a long period of time or intensify.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows and fair values of financial instruments are dependent upon prevailing market interest rates.

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

As of ~~September~~June 30, ~~2019,~~2020, we had approximately ~~$4.8~~$5.1 billion in total face value of debt, of which approximately $1.1 billion was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt would increase or decrease future earnings and cash flows by approximately ~~$11.0~~$10.7 million annually.

Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

ITEM 4. CONTROLS AND PROCEDURES

(1)Disclosure Controls and Procedures

(2)Changes in internal control over financial reporting

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

The current COVID-19 pandemic, or the future outbreak of other highly infectious or contagious diseases, could materially and adversely affect our financial condition, operating results and cash flows.

The outbreak of COVID-19, which has rapidly spread to a growing number of countries, including the United States and the specific regions in which our stores are located, has created considerable instability and disruption in the U.S. and world economies. Considerable uncertainty still surrounds COVID-19 and its potential effects, as well as the extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of COVID-19, including “social distancing” and other restrictions on travel, congregation and business operations have already resulted in significant negative economic impacts. The long-term impact of COVID-19 on the U.S. and world economies remains uncertain, but is likely to result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted. Our business has been impacted by COVID-19 in several ways, including reductions in new rentals and vacates due to stay-at-home orders and other restrictions, lower achieved rental rates from new customers, fewer existing customer rent increases, reduced late fee collection and impaired ability to hold auctions resulting in higher accounts receivable and bad debt. The extent to which our financial condition or reoperating results will continue to be affected by the COVID-19 pandemic will largely depend on future developments, which are highly uncertain and cannot be accurately predicted.

Our operating results depend, in large part, on revenues derived from the demand for self-storage space. If the outbreak causes further weakness in national, regional and local economies that negatively impacts the demand for self-storage space, our financial condition, operating results and cash flows could be adversely impacted. The spread of COVID-19 could also result in further increases in unemployment, and customers that experience deteriorating financing conditions as a result of the pandemic may be unwilling or unable to pay rent on a timely basis, or at all. Additionally, certain states and cities, including where we own or operate stores, have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “stay-at-home” orders and business shutdowns, which could result in the Company being required to close access at some stores to customers. Certain states have also put into effect state of emergency orders which may restrict our ability to increase rent or evict delinquent tenants. In addition, we typically conduct many aspects of our leasing activity on-site at our stores, as well as offer various ancillary products, including moving and packing supplies, and other services, such as tenant reinsurance.Accordingly, reductions in the ability and willingness of customers to visit our facilities due to the COVID-19 pandemic could reduce rental revenue and ancillary operating revenue produced by our facilities.Concerns relating to the COVID-19 pandemic could also cause our on-site personnel to avoid reporting for work at our facilities, which could adversely affect our ability to adequately manage our facilities. Such restrictions may reduce demand for self-storage facilities which could negatively impact occupancy and rental rates and therefore our results of operations and cash flows.

Additionally, market fluctuations as a result of the COVID-19 pandemic may affect our ability to obtain necessary funds for our operations from current lenders or new borrowings. We may be unable to obtain financing for the acquisition of investments on satisfactory terms, or at all. In addition, moratoriums on construction and macro-economic factors may cause construction contractors to be unable to perform, which may delay the start or completion of certain development projects by us or our joint venture partners.Further, while we carry comprehensive property and casualty insurance along with other insurance policies that may provide some coverage for any losses or costs incurred in connection with the COVID-19 pandemic, given the novelty of the issue and the scale of losses incurred throughout the world, there can be no assurance that we will be able to recover all or any portion of our losses and costs under these policies. The occurrence of any of the foregoing events or any other related matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.

The global impact of the COVID-19 pandemic continues to evolve rapidly, and the extent of its effect on our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others. Accordingly, the COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, operating results and cash flows. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, if in the future there is an outbreak of another highly infectious or contagious disease or other health concern, we and our properties may be subject to similar risks as posed by COVID-19.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2020, we repurchased 172,600 shares of common stock for approximately $15.6 million under our stock repurchase program approved by our board of directors. See Note 10, Stockholders' Equity, to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report for additional details.

The following table presents information regarding repurchases by us of common stock during the three months ended June 30, 2020 under the stock repurchase program.

ISSUER PURCHASES OF EQUITY SECURITIES


	Total Number of Shares Purchase	Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs			Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands)
April 1 - April 30, 2020	-	$	-	-		$	347,796
May 1 – May 31, 2020	-	$	-	-		$	347,796
June 1 – June 30, 2020	172,600	$	90.47	172,600		$	332,181
Total	172,600	$	90.47	172,600		$	332,181

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. MINE SAFETY DISCLOSURES

ITEM 5. OTHER INFORMATION

101 The following materials from Extra Space Storage Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, are formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (4) the Condensed Consolidated Statement of Noncontrolling Interests and Equity, (5) the Condensed Consolidated Statements of Cash Flows and (6) notes to these financial statements.

104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		EXTRA SPACE STORAGE INC.
		Registrant

Date: August 6, 2020		~~EXTRA SPACE STORAGE INC.~~
	~~Registrant~~

~~Date: November 5, 2019~~	/s/ Joseph D. Margolis
		Joseph D. Margolis
		Chief Executive Officer (Principal Executive Officer)

Date: ~~November 5, 2019~~August 6, 2020		/s/ P. Scott Stubbs
		P. Scott Stubbs
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

	~~20-1076777~~
Maryland		20-1076777
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


STATEMENT ON FORWARD-LOOKING INFORMATION		4

~~STATEMENT ON FORWARD-LOOKING INFORMATION~~		4

PART I. FINANCIAL INFORMATION	5
ITEM 1. FINANCIAL STATEMENTS (unaudited)		5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(unaudited)~~		1413
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3328
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4237
ITEM 4. CONTROLS AND PROCEDURES		4237

PART II. OTHER INFORMATION		4339
ITEM 1. LEGAL PROCEEDINGS		4339
ITEM 1A. RISK FACTORS		4339
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		4340
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		4340
ITEM 4. MINE SAFETY DISCLOSURES		4340
ITEM 5. OTHER INFORMATION		4340
ITEM 6. EXHIBITS		4442
SIGNATURES		4543



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	September 30, 2019			December 31, 2018
	(Unaudited)
Assets:
Real estate assets, net	$	7,665,567		$	7,491,831
Real estate assets - operating lease right-of-use assets	269,318			—
Investments in unconsolidated real estate ventures	175,442			125,326
Cash and cash equivalents	62,277			57,496
Restricted cash	4,438			15,194
Other assets, net	141,388			158,131
Total assets	$	8,318,430		$	7,847,978
Liabilities, Noncontrolling Interests and Equity:
Notes payable, net	$	4,085,295		$	4,137,213
Exchangeable senior notes, net	567,705			562,374
Notes payable to trusts	—			30,928
Revolving lines of credit	159,000			81,000
Operating lease liabilities	279,049			—
Cash distributions in unconsolidated real estate ventures	45,143			45,197
Accounts payable and accrued expenses	122,658			101,461
Other liabilities	151,591			104,383
Total liabilities	5,410,441			5,062,556
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, 129,410,093 and 127,103,750 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	1,294			1,271
Additional paid-in capital	2,861,611			2,640,705
Accumulated other comprehensive income (loss)	(43,439		)	34,650
Accumulated deficit	(296,752		)	(262,902		)
Total Extra Space Storage Inc. stockholders' equity	2,522,714			2,413,724
Noncontrolling interest represented by Preferred Operating Partnership units, net	175,918			153,096
Noncontrolling interests in Operating Partnership, net and other noncontrolling interests	209,357			218,602
Total noncontrolling interests and equity	2,907,989			2,785,422
Total liabilities, noncontrolling interests and equity	$	8,318,430		$	7,847,978



	Gain (loss) recognized in OCI For the Nine Months Ended September 30,					Location of amounts reclassified from OCI into income	Gain reclassified from OCI For the Nine Months Ended September 30,
Type	2019			2018		Location of amounts reclassified from OCI into income	2019		2018
Swap Agreements	$	(70,387	)	$	41,610	Interest expense	$	11,792	$	4,684


~~11.~~	~~NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS~~


~~12.~~	~~NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP AND OTHER NONCONTROLLING INTERESTS~~



	Operating			Finance			Total
2019	$	6,982		$	57		$	7,039
2020	28,331			232			28,563
2021	28,586			237			28,823
2022	28,611			255			28,866
2023	28,698			255			28,953
Thereafter	252,832			16,777			269,609
Total	$	374,040		$	17,813		$	391,853
Present value adjustments	(94,991		)	(12,990		)	(107,981		)
Lease liabilities	$	279,049		$	4,823		$	283,872


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



	For the Three Months Ended September 30,		For the Three Months Ended June 30,		For the Three Months Ended March 31,
	2019	2018	2019	2018	2019	2018
Total face value of debt	$4,844,620	$4,803,360	$5,072,936	$4,809,483	$5,039,286	$4,557,414
Average interest rate of debt	3.4%	3.5%	3.5%	3.4%	3.5%	3.4%


~~ITEM 3.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~


~~(2)~~	~~Changes in internal control over financial reporting~~



~~Maryland~~


~~31.1~~	~~Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~


~~31.2~~	~~Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~


~~32.1~~	~~Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~