UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

x

 

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

 

 

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

or

 

 

 

o

 

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

 

 

 

 

 

For the transition period from                     to                     .

 

Commission File Number: 001-32269

 

EXTRA SPACE STORAGE INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-1076777

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

2795 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(Address of principal executive offices)

 

Registrant’s telephone number, including area code:  (801) 562-5556

 

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  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

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

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 31, 2007 was 65,299,160.

 

 



 

EXTRA SPACE STORAGE INC.
TABLE OF CONTENTS

 

STATEMENT ON FORWARD-LOOKING INFORMATION

3

 

 

PART I. FINANCIAL INFORMATION

4

 

 

ITEM 1. FINANCIAL STATEMENTS

4

 

 

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

24

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

36

 

 

ITEM 4. CONTROLS AND PROCEDURES

37

 

 

PART II. OTHER INFORMATION

37

 

 

ITEM 1. LEGAL PROCEEDINGS

37

 

 

ITEM 1A. RISK FACTORS

37

 

 

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

37

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

38

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

38

 

 

ITEM 5. OTHER INFORMATION

38

 

 

ITEM 6. EXHIBITS

39

 

 

SIGNATURES

39

 

2



 

STATEMENT ON FORWARD-LOOKING INFORMATION

 

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

 

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

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in “Part II. Item 1A. Risk Factors” below and in “Part I. Item 1A. Risk Factors” included in our most recent Annual Report on Form 10-K. Such factors include, but are not limited to:

 

                  changes in general economic conditions and in the markets in which we operate;

 

                  the effect of competition from new self-storage facilities or other storage alternatives, which could cause rents and occupancy rates to decline;

 

                  potential liability for uninsured losses and environmental contamination;

 

                  difficulties in our ability to evaluate, finance and integrate acquired and developed properties into our existing operations and to lease up those properties, which could adversely affect our profitability;

 

                  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, which could increase our expenses and reduce our cash available for distribution;

 

                  difficulties in raising capital at reasonable rates, which could impede our ability to grow;

 

                  delays in the development and construction process, which could adversely affect our profitability; and

 

                  economic uncertainty due to the impact of war or terrorism, which could adversely affect our business plan.

 

3



 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Extra Space Storage Inc.
Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Net operating real estate assets

 

$

1,707,384

 

$

1,382,055

 

Real estate under development

 

49,943

 

35,336

 

Net real estate assets

 

1,757,327

 

1,417,391

 

 

 

 

 

 

 

Investments in real estate ventures

 

89,876

 

88,115

 

Cash and cash equivalents

 

41,830

 

70,801

 

Short-term investments

 

49,200

 

 

Restricted cash

 

36,642

 

44,282

 

Receivables from related parties and affiliated real estate joint ventures

 

9,447

 

15,880

 

Other assets, net

 

35,253

 

33,356

 

Total assets

 

$

2,019,575

 

$

1,669,825

 

 

 

 

 

 

 

Liabilities, Minority Interests and Stockholders’ Equity:

 

 

 

 

 

Notes payable

 

$

902,930

 

$

828,584

 

Notes payable to trusts

 

119,590

 

119,590

 

Exchangeable senior notes

 

250,000

 

 

Line of credit

 

 

 

Accounts payable and accrued expenses

 

33,951

 

25,704

 

Other liabilities

 

18,416

 

17,234

 

Total liabilities

 

1,324,887

 

991,112

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority interest represented by Preferred Operating Partnership units, net of $100,000 note receivable (Note 15)

 

30,427

 

 

Minority interest in Operating Partnership

 

36,807

 

34,841

 

Other minority interests

 

164

 

317

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock , $0.01 par value, 50,000,000 shares authorized, no shares issued or outstanding

 

 

 

Common Stock, $0.01 par value, 300,000,000 and 200,000,000 shares authorized at September 30,2007 and December 31, 2006, respectively, and 65,276,108 and 64,167,098 shares issued and outstanding at September 30, 2007 and December 31, 2006 respectively

 

653

 

642

 

Paid-in capital

 

825,130

 

822,181

 

Accumulated deficit

 

(198,493

)

(179,268

)

Total stockholders’ equity

 

627,290

 

643,555

 

 

 

 

 

 

 

Total liabilities, minority interests and stockholders’ equity

 

$

2,019,575

 

$

1,669,825

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



 

Extra Space Storage Inc.
Condensed Consolidated Statements of Operations

(in thousands, except share data)
(unaudited)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Property rental

 

$

55,209

 

$

44,682

 

$

149,832

 

$

125,877

 

Management and franchise fees

 

5,169

 

5,357

 

15,520

 

15,697

 

Tenant insurance

 

3,027

 

716

 

7,858

 

2,608

 

Development fees

 

97

 

47

 

334

 

272

 

Other income

 

324

 

386

 

608

 

635

 

Total revenues

 

63,826

 

51,188

 

174,152

 

145,089

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operations

 

19,607

 

16,613

 

53,855

 

46,603

 

Tenant insurance

 

1,397

 

284

 

3,587

 

1,506

 

Unrecovered development and acquisition costs

 

184

 

(87

)

593

 

255

 

General and administrative

 

9,326

 

8,598

 

27,534

 

26,590

 

Depreciation and amortization

 

10,598

 

9,253

 

28,517

 

27,586

 

Total expenses

 

41,112

 

34,661

 

114,086

 

102,540

 

 

 

 

 

 

 

 

 

 

 

Income before interest, Preferred Operating Partnership, minority interests and equity in earnings of real estate ventures

 

22,714

 

16,527

 

60,066

 

42,549

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(16,079

)

(13,429

)

(44,912

)

(38,198

)

Interest income

 

1,821

 

175

 

6,937

 

805

 

Interest income on note receivable from Preferred Unit holder

 

1,280

 

 

1,280

 

 

Equity in earnings of real estate ventures

 

1,304

 

1,340

 

3,693

 

3,566

 

Fair value adjustment of obligation associated with Preferred Operating Partnership units (Note 15)

 

1,054

 

 

1,054

 

 

Minority interest - Operating Partnership

 

(869

)

(306

)

(1,768

)

(585

)

Minority interests - other

 

113

 

 

153

 

 

Net income

 

11,338

 

4,307

 

26,503

 

8,137

 

Fixed distribution paid to Preferred Operating Partnership unit holder (Note 15)

 

(1,510

)

 

(1,510

)

 

Net income available to common stockholders

 

$

9,828

 

$

4,307

 

$

24,993

 

$

8,137

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.08

 

$

0.39

 

$

0.16

 

Diluted

 

$

0.15

 

$

0.08

 

$

0.38

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

Basic

 

64,901,249

 

52,501,864

 

64,461,353

 

51,929,336

 

Diluted

 

70,567,078

 

57,072,838

 

69,702,837

 

56,250,164

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.23

 

$

0.23

 

$

0.68

 

$

0.68

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



 

Extra Space Storage Inc.
Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except share data)
(unaudited)

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Total
Stockholders’

 

 

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Equity

 

Balances at December 31, 2006

 

64,167,098

 

642

 

822,181

 

(179,268

)

643,555

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon the exercise of options

 

99,290

 

1

 

1,338

 

 

1,339

 

Restricted stock grants issued

 

119,329

 

1

 

 

 

1

 

Restricted stock grants cancelled

 

(2,607

)

 

 

 

 

Conversion of Contingent Conversion Shares to common stock

 

892,998

 

9

 

 

 

9

 

Compensation expense related to stock-based awards

 

 

 

1,611

 

 

1,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed distribution paid to Preferred Operating Partnership unit holder

 

 

 

 

(1,510

)

(1,510

Net income

 

 

 

 

26,503

 

26,503

 

Dividends paid on common stock at $0.6825 per share

 

 

 

 

(44,218

)

(44,218

)

Balances at September 30, 2007

 

65,276,108

 

$

653

 

$

825,130

 

$

(198,493

)

$

627,290

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6



 

Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows

(in thousands)
(unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

26,503

 

$

8,137

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,517

 

27,586

 

Amortization of deferred financing costs

 

2,457

 

2,111

 

Fair value adjustment of obligation associated with Preferred Operating Partnership units (Note 15)

 

(1,054

)

 

Stock compensation expense

 

1,611

 

1,377

 

Income allocated to minority interests

 

1,615

 

585

 

Distributions from operations of real estate ventures in excess of earnings

 

3,454

 

3,423

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties

 

4,835

 

16,619

 

Other assets

 

5,045

 

3,607

 

Accounts payable and accrued expenses

 

8,247

 

(6,485

)

Other liabilities

 

(2,378

)

3,756

 

Net cash provided by operating activities

 

78,852

 

60,716

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(144,347

)

(127,826

)

Development and construction of real estate assets

 

(31,495

)

(26,301

)

Proceeds from sale of real estate assets

 

1,999

 

728

 

Investments in real estate ventures

 

(4,769

)

(5,104

)

Net purchases of short-term investments

 

(49,200

)

 

Change in restricted cash

 

7,640

 

1,451

 

Principal payments received on notes receivable

 

 

123

 

Purchase of equipment and fixtures

 

(835

)

(1,217

)

Net cash used in investing activities

 

(221,007

)

(158,146

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exchangeable senior notes

 

250,000

 

 

Proceeds from notes payable, notes payable to trusts and line of credit

 

50,102

 

129,126

 

Principal payments on notes payable and line of credit

 

(31,135

)

(65,213

)

Deferred financing costs

 

(7,740

)

(899

)

Loan to Preferred OP unit holder

 

(100,000

)

 

Redemption of Operating Partnership units held by minority interest

 

(775

)

 

Proceeds from issuance of common shares, net

 

 

194,901

 

Net proceeds from exercise of stock options

 

1,339

 

565

 

Dividends paid on common stock

 

(44,218

)

(35,407

)

Distributions to Operating Partnership units held by minority interest

 

(4,389

)

(2,610

)

Net cash provided by financing activities

 

113,184

 

220,463

 

Net increase (decrease) in cash and cash equivalents

 

(28,971

)

123,033

 

Cash and cash equivalents, beginning of the period

 

70,801

 

28,653

 

Cash and cash equivalents, end of the period

 

$

41,830

 

$

151,686

 

 

7



 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

Supplemental schedule of cash flow information

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

37,756

 

$

35,379

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Real estate assets acquired

 

$

190,185

 

$

27,091

 

Notes payable acquired

 

(54,350

)

(10,878

)

Notes receivable

 

 

(10,298

)

Preferred Operating Partnership units issued as consideration

 

(131,499

)

 

Investment in real estate ventures

 

(502

)

(2,785

)

Minority interest in Operating Partnership

 

(3,834

)

(3,130

)

Conversion of Operating Parntership Units held by minority interests for common stock

 

 

1,811

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8



 

Extra Space Storage Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Amounts in thousands, except share data

 

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 and develop self-storage facilities located throughout the United States. The Company continues 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 properties 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 has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To the extent the Company continues to qualify as a REIT, it will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to its stockholders.

 

The Company invests in self-storage facilities by acquiring or developing wholly-owned facilities or facilities held through joint ventures with third parties. At September 30, 2007, the Company had direct and indirect equity interests in 585 storage facilities located in 33 states and Washington, D.C.

 

The Company operates in two distinct segments: (1) property management, acquisition and development; and (2) rental operations. The Company’s property management, acquisition and development activities include managing, acquiring, developing and selling self-storage facilities. The rental operations activities include rental operations of self-storage facilities. No single tenant accounts for more than 5% of rental income.

 

2.                                      BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared 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 do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007. The Condensed Consolidated Balance Sheet as of December 31, 2006 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, 2006 as filed with the Securities and Exchange Commission (“SEC”).

 

Certain amounts in the 2006 financial statements and supporting note disclosures have been reclassified to conform to the current year presentation. Such reclassification did not impact previously reported net income or accumulated deficit.

 

Recently Issued Accounting Standards

 

Emerging Issues Task Force (“EITF”) Topic D-109, “Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133” (“Topic D-109”), discussed at the March 15, 2007 EITF meeting, is effective at the beginning of the first fiscal quarter beginning after June 15, 2007 (even if that period is other than the first fiscal quarter of the registrant’s fiscal year). Topic D-109 provides the SEC staff’s view as to how one must evaluate whether a preferred stock “host” contract is a debt host or an equity host. It states that the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC staff believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied substantive terms and features of the hybrid financial instrument. This may represent a change from the way these instruments were analyzed in the past.

 

The Company elected to early adopt Topic D-109 which specifically relates to the AAAAA Rent-A-Space acquisition that was completed during the quarter ended June 30, 2007. See Note 15.

 

9



 

3.                                      NET INCOME PER SHARE

 

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding, less non-vested restricted stock. 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 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 treasury stock or if converted method. Potential common shares are securities (such as options, warrants, convertible debt, Contingent Conversion Shares (“CCS”), Contingent Conversion Units (“CCU”), exchangeable Series A Participating Redeemable Preferred Operating Partnership units (“Preferred OP units”) and convertible Operating Partnership units ) (“OP units”) that do not have a current right to participate in earnings but could do so in the future by virtue of their option or conversion right. In computing the dilutive effect of convertible securities, net income or loss 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 share, only potential common shares that are dilutive, those that reduce earnings per share, are included.

 

The Company has $250.0 million of exchangeable senior notes issued and outstanding that also can potentially have a dilutive effect on its earnings per share calculations. The exchangeable senior notes are exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the exchangeable senior notes. The exchangeable senior notes are not exchangeable unless the price of the Company’s common stock is greater than or equal to 130% of the applicable exchange price for a specified period during a quarter, or unless certain other events occur. The exchange price was $23.48 per share at September 30, 2007, and could change over time as described in the indenture. The price of the Company’s common stock did not exceed 130% of the exchange price for the specified period of time during the third quarter of 2007, therefore holders of the exchangeable senior notes may not elect to convert them during the fourth quarter of 2007.

 

The Company has irrevocably agreed to pay only cash for the accreted principal amount of the exchangeable senior notes relative to its exchange obligations, but has retained the right to satisfy the exchange obligations in excess of the accreted principal amount in cash and/or common stock. Though the Company has retained that right, FAS 128, Earnings Per Share, requires an assumption that shares will be used to pay the exchange obligations 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 earnings per share computation. No shares were included in the computation at September 30, 2007 because there was no excess over the accreted principal for the period.

 

For the purposes of computing the diluted impact on earnings per share of the potential conversion of Preferred OP units into common shares, where the Company has the option to redeem in cash or shares as discussed in Note 15 and where the Company has stated the positive intent and ability to settle at least $115 million of the instrument in cash (or net settle a portion of the Preferred OP units against the related outstanding note receivable), only the amount of the instrument in excess of $115 million is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by paragraph 29 of FAS 128.

 

For the three months ended September 30, 2007 and 2006, options to purchase approximately 1,184,978 and 18,511 shares of common stock, and for the nine months ended September 30, 2007 and 2006, options to purchase approximately 256,506 and 66,560 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

 

The computation of net income per share is as follows:

 

10



 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income available to common stockholders

 

$

9,828

 

$

4,307

 

$

24,993

 

$

8,137

 

Add:

 

 

 

 

 

 

 

 

 

Income allocated to minority interest - Preferred and Common Operating Partnership

 

869

 

306

 

1,768

 

585

 

Net income for diluted computations

 

$

10,697

 

$

4,613

 

$

26,761

 

$

8,722

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares oustanding:

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding - basic

 

64,901,249

 

52,501,864

 

64,461,353

 

51,929,336

 

Operating Partnership units

 

4,025,332

 

3,737,579

 

4,025,332

 

3,796,384

 

Preferred Operating Partnership units

 

961,839

 

 

340,561

 

 

Dilutive stock options, restricted stock and CCS/CCU conversions

 

678,658

 

833,395

 

875,591

 

524,444

 

Average number of common shares outstanding - diluted

 

70,567,078

 

57,072,838

 

69,702,837

 

56,250,164

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.08

 

$

0.39

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.15

 

$

0.08

 

$

0.38

 

$

0.16

 

 

4.                                      REAL ESTATE ASSETS

 

The components of real estate assets are summarized as follows:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Land

 

$

442,882

 

$

361,569

 

Buildings and improvements

 

1,347,832

 

1,085,269

 

Intangible assets - tenant relationships

 

31,194

 

25,436

 

Intangible lease rights

 

6,150

 

3,400

 

 

 

1,828,058

 

1,475,674

 

Less: accumulated depreciation and amortization

 

(120,674

)

(93,619

)

Net operating real estate assets

 

1,707,384

 

1,382,055

 

Real estate under development

 

49,943

 

35,336

 

Net real estate assets

 

$

1,757,327

 

$

1,417,391

 

 

On August 3, 2007, the Company sold an undeveloped parcel of vacant land in Kendall, Florida for its book value of $1,999. There was no gain or loss recognized on the sale.

 

5.                                      PROPERTY ACQUISITIONS

 

The following table shows the Company’s acquisition of operating properties for the nine months ended September 30, 2007 and does not include purchases of raw land or improvements made to existing assets:

 

11



 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities /

 

 

 

Number of

 

 

 

 

 

 

 

Number of

 

Date of

 

Total

 

 

 

Loan

 

(Assets)

 

Value of OP

 

OP Units

 

 

 

 

 

Property Location(s)

 

Properties

 

Acquisition

 

Consideration

 

Cash Paid

 

Assumed

 

Assumed

 

Units Issued

 

Issued

 

Source of Acquisition

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama (1), Colorado(1), Indiana (1), Missouri (3),New Mexico (1)

 

7

 

8/31/07

 

$

36,510

 

$

13,558

 

$

23,340

 

$

(388

)

$

 

 

Affiliated joint venture

 

 

 

Maryland

 

1

 

8/31/07

 

10,471

 

10,418

 

 

53

 

 

 

Affiliated joint venture

 

 

 

California

 

1

 

8/1/2007

 

14,686

 

4,915

 

 

5

 

9,766

 

80,905

 

Unrelated third party

 

(1

)

California

 

1

 

6/26/2007

 

11,216

 

196

 

2,822

 

1

 

8,197

 

61,398

 

Unrelated third party

 

(1

)

California (6) & Hawaii (2)

 

8

 

6/25/2007

 

126,623

 

11,154

 

 

1,933

 

113,536

 

847,677

 

Unrelated third party

 

(1

)

Georgia

 

3

 

6/14/2007

 

13,693

 

13,594

 

 

99

 

 

 

Unrelated franchisee

 

 

 

California

 

1

 

6/14/2007

 

18,703

 

867

 

14,062

 

(60

)

3,834

 

218,693

 

Unrelated third party

 

(2

)

Maryland

 

1

 

6/6/2007

 

14,942

 

8,128

 

6,834

 

(20

)

 

 

Unrelated third party

 

 

 

California

 

1

 

6/1/2007

 

4,020

 

4,036

 

 

(16

)

 

 

Unrelated third party

 

 

 

Florida

 

1

 

5/31/2007

 

8,975

 

8,882

 

 

93

 

 

 

Unrelated third party

 

 

 

California

 

1

 

5/24/2007

 

5,585

 

5,575

 

 

10

 

 

 

Unrelated third party

 

 

 

Maryland

 

1

 

4/17/2007

 

12,670

 

5,428

 

7,292

 

(50

)

 

 

Unrelated third party

 

 

 

Florida

 

1

 

3/27/2007

 

6,320

 

6,257

 

 

63

 

 

 

Unrelated franchisee

 

 

 

Maryland

 

1

 

1/11/2007

 

14,334

 

14,348

 

 

(14

)

 

 

Unrelated franchisee

 

 

 

Tennessee

 

1

 

1/5/2007

 

3,684

 

3,672

 

 

12

 

 

 

Unrelated franchisee

 

 

 

Arizona

 

1

 

1/2/2007

 

4,361

 

4,527

 

 

(166

)

 

 

Affiliated joint venture

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

31

 

 

 

$

306,793

 

$

115,555

 

$

54,350

 

$

1,555

 

$

135,333

 

1,208,673

 

 

 

 

 

 


Notes:

(1) - Preferred Operating Partnership Units

(2) - Common Operating Partnership Units

 

6.                                      INVESTMENTS IN REAL ESTATE VENTURES

 

Investments in real estate ventures consisted of the following:

 

 

 

Excess Profit

 

Equity

 

Investment balance at

 

 

 

Participation %

 

Ownership %

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Extra Space West One LLC (“ESW”)

 

40

%

5

%

$

1,796

 

$

1,918

 

Extra Space Northern Properties Six, LLC (“ESNPS”)

 

35

%

10

%

1,701

 

1,757

 

PRISA Self Storage LLC (“PRISA”)

 

17

%

2

%

12,791

 

13,393

 

PRISA II Self Storage LLC (“PRISA II”)

 

17

%

2

%

10,781

 

10,821

 

PRISA III Self Storage LLC (“PRISA III”)

 

20

%

5

%

4,436

 

4,534

 

VRS Self Storage LLC (“VRS”)

 

20

%

5

%

4,542

 

4,547

 

WCOT Self Storage LLC (“WCOT”)

 

20

%

5

%

5,236

 

5,287

 

Storage Portfolio I, LLC (“SP I”)

 

40

%

25

%

18,708

 

19,260

 

Storage Portfolio Bravo II (“SPB II”)

 

45

%

20

%

14,822

 

15,264

 

U-Storage de Mexico S.A. and related entities

 

30-40

%

30-40

%

4,958

 

 

Other minority owned properties

 

10-50

%

10-50

%

10,105

 

11,334

 

 

 

 

 

 

 

$

89,876

 

$

88,115

 

 

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/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/profits than its equity interest.

 

On March 1, 2007, the Company acquired a 39.5% interest in U-Storage de Mexico S.A., an existing Mexican corporation (“U-Storage”), which currently manages, develops, owns and operates self storage facilities in Mexico.   Kenneth T. Woolley, a former Senior Vice President of the Company and son of Kenneth M. Woolley, the CEO of the Company, also acquired a 0.5% interest in U-Storage de Mexico S.A.

 

The components of equity in earnings of real estate ventures consist of the following:

 

12



 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of ESW

 

$

411

 

$

337

 

$

1,106

 

$

1,018

 

Equity in earnings of ESNPS

 

49

 

39

 

136

 

113

 

Equity in earnings of PRISA

 

166

 

138

 

521

 

394

 

Equity in earnings of PRISA II

 

153

 

110

 

430

 

334

 

Equity in earnings of PRISA III

 

86

 

35

 

220

 

88

 

Equity in earnings of VRS

 

67

 

43

 

190

 

119

 

Equity in earnings of WCOT

 

77

 

40

 

224

 

114

 

Equity in earnings of SP I

 

333

 

291

 

785

 

740

 

Equity in earnings of SPB II

 

189

 

210

 

560

 

599

 

Equity in earnings (losses) of U-Storage and related entities

 

(141

)

 

(221

)

 

Equity in earnings (losses) of other minority owned properties

 

(86

)

97

 

(258

)

47

 

 

 

$

1,304

 

$

1,340

 

$

3,693

 

$

3,566

 

 

Equity in earnings of SP I and SPB II includes the amortization of the Company’s excess purchase price of approximately $22 million of these equity investments over its original basis. The excess basis is amortized over 40 years.

 

7.                                      SHORT-TERM INVESTMENTS

 

The Company accounts for its investments in debt and equity securities according to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires securities classified as “available-for-sale” to be stated at fair value. Adjustments to fair value of available-for-sale securities are recorded as a component of other comprehensive income.  A decline in the market value of investment securities below cost, that is deemed to be other than temporary, results in a reduction in the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.  At September 30, 2007, the Company had $49,200 in highly-liquid auction rate securities (“ARS”), government and corporate bonds and variable rate demand notes classified as available-for-sale securities. Although these ARS have long-term stated contractual maturities, they can be presented for redemption at auction when rates are reset which is typically every 7, 28 or 35 days.  The Company had no realized or unrealized gains or losses related to these securities during the three and nine months ended September 30, 2007. All income related to these investments was recorded as interest income. In accordance with the Company’s investment policy, the Company only invests in ARS with high credit quality issuers and limits the amount of investment exposure to any one issuer.

 

8.                                      OTHER ASSETS

 

The components of other assets are summarized as follows:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Equipment and fixtures

 

$

11,918

 

$

11,083

 

Less: accumulated depreciation

 

(8,042

)

(6,564

)

Deferred financing costs, net

 

15,132

 

10,511

 

Prepaid expenses and deposits

 

5,240

 

5,139

 

Accounts receivable, net

 

7,192

 

9,373

 

Investments in Trusts

 

3,590

 

3,590

 

Other

 

223

 

224

 

 

 

$

35,253

 

$

33,356

 

 

9.                                      NOTES PAYABLE

 

The components of notes payable are summarized as follows:

 

13



 

 

 

September 30, 2007

 

December 31, 2006

 

Fixed Rate

 

 

 

 

 

Mortgage and construction loans with banks bearing interest at fixed rates between 4.65% and 8.33%. The loans are collateralized by mortgages on real estate assets and the assignment of rents. Principal and interest payments are made monthly with all outstanding principal and interest due between March 1, 2008 and January 1, 2023.

 

$

810,009

 

$

743,511

 

 

 

 

 

 

 

Variable Rate

 

 

 

 

 

Mortgage and construction loans with banks bearing floating interest rates (including loans subject to interest rate swaps) based on LIBOR. Interest rates are between LIBOR plus 0.65% (5.77% and 6.01% at September 30, 2007 and December 31, 2006, respectively) and LIBOR plus 2.00% (7.12% and 7.35% at September 30, 2007 and December 31, 2006, respectively). The loans are collateralized by mortgages on real estate assets and the assignment of rents. Principal and interest payments are made monthly with all outstanding principal and interest due between December 31, 2008 and March 1, 2011.

 

92,921

 

85,073

 

 

 

 

 

 

 

 

 

$

902,930

 

$

828,584

 

 

Real estate assets are pledged as collateral for the notes payable. The Company is subject to certain restrictive covenants relating to the outstanding notes payable. The Company was in compliance with all covenants at September 30, 2007.

 

In October 2004, the Company entered into a reverse interest rate swap agreement (“Swap Agreement”) to float $61,770 of 4.30% fixed interest rate secured notes due in September 2009. Under this Swap Agreement, the Company will receive interest at a fixed rate of 4.30% and pay interest at a variable rate equal to LIBOR plus 0.65%. The Swap Agreement matures at the same time the notes are due. This Swap Agreement is a fair value hedge, as defined by SFAS No. 133, and the fair value of the Swap Agreement is recorded as an asset or liability, with an offsetting adjustment to the carrying value of the related note payable. Monthly variable interest payments are recognized as an increase or decrease in interest expense.

 

The estimated fair value of the Swap Agreement at September 30, 2007 and December 31, 2006 was reflected as an other liability of $896 and $1,925, respectively. The Company recorded additional interest expense relating to the Swap Agreement of $273 and $258 for the three months ended September 30, 2007 and 2006, respectively. Interest expense was increased by $798 and $540 for the nine months ended September 30, 2007 and 2006, respectively.

 

On August 31, 2007, as part of the acquisition of our partner’s joint venture interest in seven properties, the Company assumed an interest rate cap agreement related to the assumption of the loan on these properties. The Company has designated the  interest rate cap agreement as a cash flow hedge of the interest payments resulting from an increase in the interest rate above the rates designated in the interest rate cap agreement. The interest rate cap agreement will allow increases in interest payments based on an increase in the LIBOR rate above the capped rates (5.19% from 1/1/07 to 12/31/07 and 5.48% from 1/1/08 to 12/31/08) on $23,340 of floating rate debt to be offset by the value of the interest rate cap agreement. The Company is in the process of valuing the hedge as part of the purchase accounting and related allocation for the seven properties.

 

10.                               NOTES PAYABLE TO TRUSTS

 

During July 2005, ESS Statutory Trust III (the “Trust III”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $40.0 million of preferred securities which mature on July 31, 2035. In addition, the Trust III issued 1,238 of Trust common securities to the Operating Partnership for a purchase price of $1.2 million. On July 27, 2005, the proceeds from the sale of the preferred and common securities of $41.2 million were loaned in the form of a note to the Operating Partnership (“Note 3”). Note 3 has a fixed rate of 6.91% through July 31, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum. The interest on Note 3, payable quarterly, will be used by the Trust III to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after July 27, 2010.

 

During May 2005, ESS Statutory Trust II (the “Trust II”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $41.0 million of preferred securities which

 

14



 

mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1.3 million. On May 24, 2005, the proceeds from the sale of the preferred and common securities of $42.3 million were loaned in the form of a note to the Operating Partnership (“Note 2”). Note 2 has a fixed rate of 6.67% through June 30, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum.

 

The interest on Note 2, payable quarterly, will be used by the Trust II to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after June 30, 2010.

 

During April 2005, ESS Statutory Trust I (the “Trust”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership issued an aggregate of $35.0 million of trust preferred securities which mature on June 30, 2035. In addition, the Trust issued 1,083 of trust common securities to the Operating Partnership for a purchase price of $1.1 million. On April 8, 2005, the proceeds from the sale of the trust preferred and common securities of $36.1 million were loaned in the form of a note to the Operating Partnership (the “Note”). The Note has a variable rate equal to the three-month LIBOR plus 2.25% per annum. The interest on the Note, payable quarterly, will be used by the Trust to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after June 30, 2010.

 

The Company follows Financial Accounting Standards Board (“FASB”) Intrepretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), which addresses the consolidation of variable interest entities (“VIEs”). Under FIN 46R, Trust, Trust II and Trust III are VIEs that are not consolidated because the Company is not the primary beneficiary. A debt obligation has been recorded in the form of notes as discussed above for the proceeds, which are owed to the Trust, Trust II, and Trust III by the Company.

 

11.                               EXCHANGEABLE SENIOR NOTES

 

On March 27, 2007, our Operating Partnership issued $250.0 million of its 3.625% Exchangeable Senior Notes due April 1, 2027 (the “Notes”). Costs incurred to issue the Notes were approximately $5.7 million. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term of the Notes, and are included in other assets, net in the Condensed Consolidated Balance Sheet as of September 30, 2007. The 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 October 1, 2007 until the maturity date of April 1, 2027. The Notes bear interest at 3.625% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash (up to the principal amount of the Notes) and, with respect to any excess exchange value, for cash, shares of our common stock or a combination of cash and shares of our common stock at an initial exchange rate of approximately 42.5822 shares per $1,000 principal amount of Notes at the option of the Operating Partnership.

 

The Operating Partnership may redeem the Notes at any time to preserve the Company’s status as a REIT. In addition, on or after April 5, 2012, the Operating Partnership may redeem the 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 holders of the Notes.

 

The holders of the Notes have the right to require the Operating Partnership to repurchase the Notes for cash, in whole or in part, on each of April 1, 2012, April 1, 2017 and April 1, 2022, and upon the occurrence of a designated event, in each case for a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. Certain events are considered “Events of Default,” as defined in the indenture governing the Notes, which may result in the accelerated maturity of the Notes.

 

The Company has considered whether the exchange settlement feature represents an embedded derivative within the debt instrument under the guidance of FAS 133 Accounting for Derivative Instruments and Hedging Activities,  EITF 90-19 Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion, and EITF 01-6 The Meaning of “Indexed to a Company’s Own Stock” that would require bifurcation (i.e., separate accounting).  The Company has concluded that the exchange settlement feature has satisfied the exemption in SFAS 133 because it is indexed to the Company’s own stock and would otherwise be classified in stockholders equity, among other considerations.  Accordingly, the Notes are presented as a single debt instrument (often referred to as “Instrument C” in EITF 90-19) in accordance with APB 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants due to the inseparability of the debt and the conversion feature.

 

15



 

12.                               LINE OF CREDIT

 

The Company, as guarantor, and its Operating Partnership had entered into a $100.0 million revolving line of credit in September 2004, which included a $10.0 million swingline subfacility (the “Credit Facility”). The Credit Facility had an interest rate of 175 basis points over LIBOR (6.87% and 7.10% at September 30, 2007 and December 31, 2006, respectively), and was collateralized by mortgages on certain real estate assets. No amounts were outstanding on the line of credit at September 30, 2007 or December 31, 2006. The Credit Facility expired on September 30, 2007.

 

On October 19, 2007, the Company entered into a new $100.0 million revolving line of credit (the “Credit Line”). The Company intends to use the proceeds of the Credit Line for general corporate purposes. The Credit Line has an interest rate of between 100 and 250 basis points over LIBOR, depending on certain financial ratios of the Company. The Credit Line is collateralized by mortgages on certain real estate assets. As of the closing date, the Credit Line had approximately $97 million of capacity based on the assets collateralizing the Credit Line. The Credit Line matures October 31, 2010.

 

13.                               OTHER LIABILITIES

 

The components of other liabilities are summarized as follows:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Deferred rental income

 

$

11,622

 

$

9,224

 

Security deposits

 

401

 

291

 

SUSA lease obligation liability

 

2,655

 

2,838

 

Fair value of interest rate swap

 

896

 

1,925

 

Other miscellaneous liabilities

 

2,842

 

2,956

 

 

 

$

18,416

 

$

17,234

 

 

14.                               RELATED PARTY AND AFFILIATED REAL ESTATE JOINT VENTURE TRANSACTIONS

 

The Company provides management and development services for certain joint ventures, franchise, third party and other related party properties. Management agreements generally provide for management fees of 6% of cash collected from properties for the management of operations at the self-storage facilities. The Company earns development fees of 4%-6% of budgeted costs on developmental projects.

 

Management fee revenue for related party and affiliated real estate joint ventures is summarized as follows:

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Entity

 

Type

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

ESW

 

Affiliated real estate joint ventures

 

$

110

 

$

103

 

$

328

 

$

307

 

ESNPS

 

Affiliated real estate joint ventures

 

113

 

110

 

329

 

316

 

PRISA

 

Affiliated real estate joint ventures

 

1,273

 

1,289

 

3,868

 

3,780

 

PRISA II

 

Affiliated real estate joint ventures

 

1,052

 

1,038

 

3,142

 

3,056

 

PRISA III

 

Affiliated real estate joint ventures

 

475

 

476

 

1,417

 

1,384

 

VRS

 

Affiliated real estate joint ventures

 

292

 

285

 

860

 

838

 

WCOT

 

Affiliated real estate joint ventures

 

387

 

373

 

1,155

 

1,096

 

SP I

 

Affiliated real estate joint ventures

 

319

 

309

 

945

 

910

 

SPB II

 

Affiliated real estate joint ventures

 

254

 

260

 

770

 

777

 

Extra Space Development ("ESD")

 

Related party

 

193

 

129

 

548

 

333

 

Various

 

Franchisees, third parties and other

 

701

 

985

 

2,158

 

2,900

 

 

 

 

 

$

5,169

 

$

5,357

 

15,520

 

15,697

 

 

Development fee revenue for related party and affiliated real estate joint ventures is summarized as follows:

 

16



 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Type

 

2007

 

2006

 

2007

 

2006

 

Affiliated real estate joint ventures

 

$

97

 

$

16

 

$

334

 

$

163

 

Related party

 

 

31

 

 

109

 

 

 

$

97

 

$

47

 

$

334

 

$

272

 

 

Effective January 1, 2004, the Company entered into a license agreement with Centershift, a related party software provider, to secure a perpetual right for continued use of STORE (the site management software used at all sites operated by the Company) in all aspects of the Company’s property acquisition, development, redevelopment and operational activities. The Company paid Centershift $225 and $185 for the three months ended September 30, 2007 and 2006, respectively, and $680 and $549 for the nine months ended September 30, 2007 and 2006, respectively, relating to the purchase of software and to license agreements.

 

Related party and affiliated real estate joint ventures balances are summarized as follows:

 

 

 

September 30, 2007

 

December 31, 2006

 

Receivables:

 

 

 

 

 

Development fees

 

$

2,562

 

$

2,633

 

Other receivables from properties

 

6,885

 

13,247

 

 

 

$

9,447

 

$

15,880

 

 

Other receivables from properties consist of amounts due for management fees and expenses paid by the Company on behalf of the managed properties. The Company believes that all of these related party and affiliated joint venture receivables are fully collectible. The Company did not have any payables to related parties at September 30, 2007 or December 31, 2006.

 

15.                               MINORITY INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

 

On June 15, 2007, the Operating Partnership entered into a Contribution Agreement with various limited partnerships affiliated with AAAAA Rent-A-Space to acquire ten self-storage facilities (the “Properties”) in exchange for the issuance of newly designated Preferred OP Units of the Operating Partnership. The self-storage facilities are located in California and Hawaii.

 

On June 25 and 26, 2007, nine of the ten properties were contributed to the Operating Partnership in exchange for consideration totaling $137.8 million. Preferred OP units totaling 909,075, with a value of $121.7 million, were issued along with the assumption of approximately $14.2 million of third-party debt, of which $11.4 million was paid off at close. The final property was contributed on August 1, 2007 in exchange for consideration totaling $14.7 million. 80,905 Preferred OP Units with a value of $9.8 million were issued along with $4.9 million of cash.

 

On June 25, 2007, the Company loaned the holders of the Preferred OP Units $100.0 million. The note receivable bears interest at 4.85%, and is due September 1, 2017. The loan is secured by the borrower’s Preferred OP Units. The holders of the Preferred OP Units can convert up to 114,500 Preferred OP Units prior to the maturity date of the loan. If any redemption in excess of  114,500 Preferred OP Units occurs prior to the maturity date, the holder of the Preferred OP Unit is required to repay the loan as of the date of that Preferred OP Unit redemption. Preferred OP Units are shown on the balance sheet net of the $100.0 million loan under the guidance in EITF No. 85-1, Classifying Notes Receivable for Capital because the borrower under the loan receivable is also the holder of the Preferred OP Units.

 

The Operating Partnership entered into a Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) which provides for the designation and issuance of the Preferred OP Units. The Preferred OP Units will have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

 

Per the Partnership Agreement, Preferred OP Units in the amount of $115.0 million bear a fixed priority return of 5% and have a fixed liquidation value of $115.0 million. The remaining balance will participate in distributions with and have a

 

17



 

liquidation value equal to that of the common Operating Partnership units. The Preferred OP Units will be redeemable at the option of the holder on or after September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

 

At issuance, in accordance with SFAS 133: Accounting for Derivative Instruments and Hedging Activities, SFAS 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,  EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,  EITF Topic D-109: Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133: and Accounting Series Release  (“ASR”) No. 268: Presentation in Financial Statements of “Redeemable Preferred Stocks, from inception through September 28, 2007 (the date of the amendment discussed below), the Preferred OP Units were classified as a hybrid instrument such that the value of the units associated with the fixed return were classified in mezzanine after total liabilities on the balance sheet and before stockholders’ equity. The remaining balance that participates in distributions equal to that of common OP Units had been identified as an embedded derivative and had been classified as a liability on the balance sheet and recorded at fair value on a quarterly basis with any adjustment being recorded to the income statement. For the three and nine months ended September 30, 2007, the fair value adjustment associated with the embedded derivative was $1,054.

 

On September 28, 2007, the Operating Partnership entered into an amendment to the Contribution Agreement. Pursuant to the amendment, the maximum number of shares that can be issued upon redemption of the Preferred OP Units was set at 116 million, after which the Company will have no further obligations with respect to the redeemed or any other remaining Preferred OP Units. As a result of this amendment, and in accordance with the above referenced guidance, the Preferred OP Units are no longer considered a hybrid instrument and the previously identified embedded derivative no longer requires bifurcation and is considered permanent equity of the Operating Partnership and is included on the balance sheet as the minority interest represented by Preferred Operating Partnership units.

 

16.                               MINORITY INTEREST IN OPERATING PARTNERSHIP

 

The Company’s interest in its properties is held through the Operating Partnership. ESS Holding Business Trust I, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The Company, through ESS Holding Business Trust II, a wholly owned subsidiary of the Company, is also a limited partner of the Operating Partnership. Between its general partner and limited partner interests, the Company held a 92.86%  majority ownership interest therein as of September 30, 2007. The remaining ownership interests in the Operating Partnership (including Preferred OP Units) of 7.14% are held by certain former owners of assets acquired by the Operating Partnership, which includes a director and certain officers of the Company.

 

The minority interest in the Operating Partnership represents OP Units that are not owned by the Company. In conjunction with the formation of the Company and as a result of subsequent acquisitions, certain persons and entities contributing interests in properties to the Operating Partnership received limited partnership units in the form of either OP Units or Contingent Conversion Units. Limited partners who received OP Units in the formation transactions or in exchange for contributions for interests in properties have the right to require the Operating Partnership to redeem part or all of their OP Units for cash based upon the fair market value of an equivalent number of shares of the Company’s common stock at the time of the redemption. Alternatively, the Company may, at its option, elect to acquire those OP Units in exchange for shares of its common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Operating Partnership agreement.

 

As of September 30, 2007, the Operating Partnership had 4,032,577 and 154,109 OP Units and CCUs outstanding, respectively.

 

Unlike the OP Units, CCUs do not carry any voting rights. Upon the achievement of certain performance thresholds relating to 14 early-stage lease-up properties, all or a portion of the CCUs will be automatically converted into OP Units. Initially, each CCU will be convertible on a one-for-one basis into OP Units, subject to customary anti-dilution adjustments. Beginning with the quarter ended March 31, 2006, and ending with the quarter ending December 31, 2008, the Company will calculate the net operating income from the 14 wholly-owned early-stage lease-up properties over the 12-month period ending in such quarter. Within 35 days following the end of each quarter referred to above, some or all of the CCUs will be converted so that the total percentage (not to exceed 100%) of CCUs issued in connection with the formation transactions that have been converted to OP Units will be equal to the percentage determined by dividing the net operating income for such period in excess of $5.1 million by $4.6 million. If

 

18



 

any CCUs remain unconverted through the calculation made in respect of the 12-month period ending December 31, 2008, such outstanding CCUs will be cancelled.

 

While any CCUs remain outstanding, a majority of the Company’s independent directors must review and approve the net operating income calculation for each measurement period and also must approve any sales of any of the 14 wholly-owned early-stage lease-up properties.

 

As of September 30, 2007, there were 45,937 CCUs converted to OP Units. Based on the performance of the properties as of September 30, 2007, an additional 24,677 CCUs became eligible for conversion. The board of directors approved the conversion of these CCUs on November 1, 2007 as per the Company’s charter, and the units were issued on November 5, 2007.

 

17.                               STOCKHOLDERS’ EQUITY

 

On September 28, 2007, in connection with an amendment to the Contribution Agreement (see Note 15) the Company amended its charter to increase the authorized number of shares of common stock of the Company from 200,000,000 to 300,000,000. The Company’s charter now provides that it can issue up to 300,000,000 shares of common stock, $0.01 par value per share, 4,100,000 Contingent Conversion Shares, $.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. As of September 30, 2007, 65,276,108 shares of common stock were issued and outstanding, 2,995,845 CCSs were issued and outstanding and no shares of preferred stock were issued and outstanding. All stockholders of the Company’s common stock are entitled to receive dividends and to one vote on all matters submitted to a vote of stockholders.

 

Unlike the Company’s shares of common stock, CCSs do not carry any voting rights. Upon the achievement of certain performance thresholds relating to 14 early-stage lease-up properties, all or a portion of the CCSs will be automatically converted into shares of the Company’s common stock. Initially, each CCS will be convertible on a one-for-one basis into shares of common stock, subject to customary anti-dilution adjustments. Beginning with the quarter ended March 31, 2006, and ending with the quarter ending December 31, 2008, the Company will calculate the net operating income from the 14 wholly-owned early-stage lease-up properties over the 12-month period ending in such quarter. Within 35 days following the end of each quarter referred to above, some or all of the CCSs will be converted so that the total percentage (not to exceed 100%) of CCSs issued in connection with the formation transactions that have been converted to common stock will be equal to the percentage determined by dividing the net operating income for such period in excess of $5.1 million by $4.6 million. If any CCSs remain unconverted through the calculation made in respect of the 12-month period ending December 31, 2008, such outstanding CCSs will be cancelled and restored to the status of authorized but unissued shares of common stock.

 

While any CCSs remain outstanding, a majority of the Company’s independent directors must review and approve the net operating income calculation for each measurement period and also must approve any sales of any of the 14 wholly-owned early-stage lease-up properties.

 

As of September 30, 2007, there were 892,998 CCSs converted to common stock. Based on the performance of the properties as of September 30, 2007, an additional 479,730 CCSs became eligible for conversion. The board of directors approved the conversion of these CCSs on November 1, 2007 as per the Company’s charter, and the shares were issued on November 5, 2007.

 

On October 29, 2007, the Company’s Board of Directors approved an increase in the Company’s annual dividend to $1.00 per common share to be paid quarterly at the rate of $0.25 per common share starting in the fourth quarter of 2007.

 

18.                               STOCK-BASED COMPENSATION

 

Options

 

The Company has the following two stock option plans under which shares were available for grant at September 30, 2007: 1) the 2004 Long-Term Incentive Compensation Plan, and 2) the 2004 Non-Employee Directors’ Share Plan. Under the terms of the plans, the exercise price of an option is the fair value of the stock on the date of grant. Each option becomes exercisable after the period or periods specified in the award agreement, which generally do not exceed 10 years from the date of grant. Options are exercisable at such times and subject to such terms as determined by the Compensation, Nominating and Governance Committee; options may not be exercised if such exercise would cause a violation of the ownership limit in the Company’s charter. Unless otherwise determined by the Compensation, Nominating and Governance

 

19



 

Committee at the time of grant, stock options vest ratably over a four-year periodbeginning on the date of grant.

 

The following assumptions were used to estimate the fair value of options granted during the nine months ended September 30, 2007 and 2006 using the Black-Scholes option-pricing model:

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Expected volatility

 

24

%

24

%

Dividend yield

 

5.8

%

6.4

%

Risk-free interest rate

 

4.2

%

4.6

%

Average expected term (years)

 

5

 

5

 

 

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility and average expected term. The forfeiture rate, which is estimated at a weighted average of 20.65% of unvested options outstanding as of September 30, 2007, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

 

The following table summarizes the Company’s activities with respect to its stock option plans:

 

Options

 

Number of
Shares

 

Weighted
Average Exercise
Price

 

Weighted Average
Remaining
Contractual Life

 

Aggregate Intrinsic
Value as of
September 30, 2007

 

Outstanding at December 31, 2006

 

2,564,563

 

$

13.92

 

 

 

 

 

Granted

 

418,000

 

18.51

 

 

 

 

 

Exercised

 

(99,290

)

13.55

 

 

 

 

 

Forfeited

 

(161,609

)

14.56

 

 

 

 

 

Outstanding at September 30, 2007

 

2,721,664

 

$

14.55

 

7.54

 

$

3,757,019

 

 

 

 

 

 

 

 

 

 

 

Vested and Expected to Vest

 

2,085,677

 

$

14.28

 

7.41

 

$

3,192,279

 

Ending Exercisable

 

1,345,343

 

$

13.59

 

7.04

 

$

2,522,751

 

 

The aggregate intrinsic value in the table above represents the total value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

 

The Company recorded compensation expense relating to outstanding options of $252 and $187 for the three months ended September 30, 2007 and 2006, respectively, and $670 and $637 for the nine months ended September 30, 2007 and 2006, respectively. The Company received cash from the exercise of options of $306 and $871 for the three months ended September 30, 2007 and 2006, respectively, and $1,339 and $1,029 for the nine months ended September 30, 2007 and 2006, respectively. At September 30, 2007, there was $1,219 of total unrecognized compensation expense related to non-vested stock options under the Company’s 2004 Long-Term Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 2.11 years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized compensation expense at September 30, 2007, noted above does not necessarily represent the expense that will ultimately be realized by the Company in the Statement of Operations.

 

Common Stock Granted to Employees

 

Common stock is granted to certain employees without monetary consideration under the Company’s 2004 Long-Term Incentive Compensation Plan. At the date of grant, the recipient has all rights of a stockholder including the right to vote and

 

20



 

receive dividends subject to restrictions on transfer and forfeiture provisions. The forfeiture and transfer restrictions on the shares lapse over a two to four year period beginning on the date of grant.

 

The Company recorded compensation expense relating to outstanding shares of common stock granted to employees of $485 and $174 for the three months ended September 30, 2007 and 2006, respectively, and $941 and $740 for the nine months ended September 30, 2007 and 2006, respectively.

 

The fair value of common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date. A summary of the Company’s employee share grant activity is as follows:

 

Restricted Stock Grants

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Unreleased at December 31, 2006

 

156,300

 

$

15.94

 

Granted

 

119,329

 

18.21

 

Released

 

(57,875

)

15.69

 

Cancelled

 

(2,607

)

18.70

 

Unreleased at September 30, 2007

 

215,147

 

$

17.26

 

 

19.                               SEGMENT INFORMATION

 

The Company operates in two distinct segments: (1) property management, acquisition and development and (2) rental operations. Financial information for the Company’s business segments is set forth below:

 

 

 

September 30, 2007

 

December 31, 2006

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

89,876

 

$

88,115

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Property management, acquisition and development

 

$

324,056

 

$

223,402

 

Rental operations

 

1,695,519

 

1,446,423

 

 

 

$

2,019,575

 

$

1,669,825

 

 

21



 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

8,617

 

$

6,506

 

$

24,320

 

$

19,212

 

Rental operations

 

55,209

 

44,682

 

149,832

 

125,877

 

 

 

$

63,826

 

$

51,188

 

$

174,152

 

$

145,089

 

 

 

 

 

 

 

 

 

 

 

Operating expenses, including depreciation and amortization

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

11,217

 

$

9,020

 

$

32,626

 

$

28,959

 

Rental operations

 

29,895

 

25,641

 

81,460

 

73,581

 

 

 

$

41,112

 

$

34,661

 

$

114,086

 

$

102,540

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before interest, Preferred Operating Partnership, minority interests and equity in earnings of real estate ventures

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(2,600

)

$

(2,514

)

$

(8,306

)

$

(9,747

)

Rental operations

 

25,314

 

19,041

 

68,372

 

52,296

 

 

 

$

22,714

 

$

16,527

 

$

60,066

 

$

42,549

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(376

)

$

(297

)

$

(940

)

$

(683

)

Rental operations

 

(15,703

)

(13,132

)

(43,972

)

(37,515

)

 

 

$

(16,079

)

$

(13,429

)

$

(44,912

)

$

(38,198

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,821

 

$

175

 

$

6,937

 

$

805

 

 

 

 

 

 

 

 

 

 

 

Interest income on note receivable from Preferred Unit holder

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,280

 

$

 

$

1,280

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value adjustment of obligation associated with Preferred Partnership units

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,054

 

$

 

$

1,054

 

$

 

 

 

 

 

 

 

 

 

 

 

Minority interests - Operating Partnership and other

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(756

)

$

(306

)

$

(1,615

)

$

(585

)

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

 

 

 

 

Rental operations

 

$

1,304

 

$

1,340

 

$

3,693

 

$

3,566

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

423

 

$

(2,942

)

$

(1,590

)

$

(10,210

)

Rental operations

 

10,915

 

7,249

 

28,093

 

18,347

 

 

 

$

11,338

 

$

4,307

 

$

26,503

 

$

8,137

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

310

 

$

225

 

$

912

 

$

608

 

Rental operations

 

10,288

 

9,028

 

27,605

 

26,978

 

 

 

$

10,598

 

$

9,253

 

$

28,517

 

$

27,586

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(144,347

)

$

(127,826

)

 

 

 

 

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(31,495

)

$

(26,301

)

 

20.                               COMMITMENTS AND CONTINGENCIES

 

The Company has guaranteed three construction loans for unconsolidated partnerships that own development properties in Baltimore, Maryland, Chicago, Illinois and Sacramento, California. These properties are owned by joint ventures in which the Company has 10%-50% equity interests. These guarantees were entered into in November 2004, July 2005, and August 2007, respectively. At September 30, 2007, the total amount of guaranteed mortgage debt relating to these joint ventures was $13,179. These mortgage loans mature December 1, 2007 and July 28, 2008, respectively. If the joint ventures default on the loans, the Company may be forced to repay the loans. Repossessing and/or selling the self-storage facilities and land that collateralize the loans could provide funds sufficient to reimburse the Company. The estimated fair market value of the encumbered assets at September 30, 2007, was $22,167. The Company has recorded no liability in relation to this guarantee as of September 30, 2007. The fair value of the guarantee is not material. To date, the joint ventures have not defaulted on their mortgage debt. The Company believes the risk of having to perform on the guarantee is remote.

 

22



 

The Company has been involved in routine litigation arising in the ordinary course of business. As of September 30, 2007, the Company was not involved in any material litigation nor, to its knowledge, was any material litigation threatened against it, or its properties.

 

21.                               INCOME TAXES

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, there were no material unrecognized tax benefits. At September 30, 2007, there were no material unrecognized tax benefits.

 

Interest and penalties related to uncertain tax positions will be recognized in income tax expense when incurred. As of September 30, 2007, the Company had no interest and penalties related to uncertain tax positions.

 

The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

22.                               SUBSEQUENT EVENTS

 

On October 4, 2007, the Company purchased one property located in California for $10,775.

 

23



 

Extra Space Storage Inc.
Management’s Discussion and Analysis
Amounts in thousands, except property and per share data

 

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

 

CAUTIONARY LANGUAGE

 

The following discussion and analysis should be read in conjunction with our “Unaudited Condensed Consolidated Financial Statements” and the “Notes to Unaudited Condensed Consolidated Financial Statements” contained 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, 2006. The Company makes 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.” Amounts are in thousands (except per share data and unless otherwise stated).

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based on our unaudited Condensed Consolidated Financial Statements contained elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Our notes to the unaudited Condensed Consolidated Financial Statements contained elsewhere in this report and the Audited Consolidated Financial Statements contained in our Form 10-K for the year ended December 31, 2006 describe the significant accounting policies essential to our unaudited Condensed Consolidated Financial Statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions which we have used are appropriate and correct based on information available at the time that they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenue and expense during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

 

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, however, there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited Condensed Consolidated Financial Statements that contain additional information regarding our accounting policies and other disclosures.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Emerging Issues Task Force (“EITF”) Topic D-109, “Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133” (“Topic D-109”), discussed at the March 15, 2007 EITF meeting, is effective at the beginning of the first fiscal quarter beginning after June 15, 2007 (even if that period is other than the first fiscal quarter of the registrant’s fiscal year). Topic D-109 provides the SEC staff’s view as to how one must evaluate whether a preferred stock “host” contract is a debt host or an equity host. It states that the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC staff believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied substantive terms and features of the hybrid financial instrument. This may represent a change from the way these instruments were analyzed in the past.

 

We elected to early adopt Topic D-109 which specifically relates to the AAAAA Rent-A-Space acquisition that was completed during the quarter ended June 30, 2007.

 

24



 

OVERVIEW

 

We are a fully integrated, self-administered and self-managed real estate investment trust formed to continue the business commenced in 1977 by our predecessor company to own, operate, manage, acquire and develop self-storage properties. We derive a majority of our revenues from rents received from tenants under existing leases at each of our self-storage properties. Additional revenue is derived from management and franchise fees from our joint venture and managed properties. We operate in competitive markets where consumers have multiple self-storage properties from which to choose. Competition has and will continue to impact our results. We experience minor seasonal fluctuations in occupancy levels, with occupancy levels higher in the summer months due to increased rental activity.

 

Our operating results depend materially on our ability to lease available self-storage space and on the ability of our tenants to make required rental payments. We believe we are able to respond quickly and effectively to changes in local, regional and national economic conditions by centrally adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems.

 

We continue to evaluate a range of growth initiatives and opportunities including the following:

 

                  Maximize the performance of properties through strategic, efficient and proactive management. We plan to pursue revenue generating and expense minimizing opportunities in our operations. Our revenue management team will seek to maximize revenue by responding to changing market conditions through our technology system’s ability to provide real-time, interactive rental rate and discount management. Our size and scale give us a greater ability than the majority of our competitors to implement national, regional and local marketing programs, which we believe will attract more customers to our stores at a lower net cost.

 

                  Focus on the acquisition of self-storage properties from strategic partners and third parties. Our acquisitions team will continue to pursue the acquisition of single properties and multi-property portfolios that we believe can provide stockholder value. Our July 2005 acquisition of Storage USA bolstered our reputation as a reliable, ethical buyer, which we believe enhances our ability to negotiate and close acquisitions. In addition, our status as an UPREIT enables flexibility when structuring deals.

 

                  Develop new self-storage properties. We have several joint venture and wholly-owned development properties and will continue to develop new self-storage properties in our core markets. Our development pipeline for the remainder of 2007 through 2008 includes 17 projects. The majority of the projects will be developed on a wholly-owned basis by the Company. The construction of most of these properties has already begun.

 

                  Expand the Company’s management business. We see the management business as a future acquisition pipeline and expect to pursue strategic relationships with owners that should strengthen our acquisition pipeline through agreements which give us first right of refusal to purchase the managed property in the event of a potential sale. Twelve of the Company’s 2006 and 15 of the Company’s 2007 acquisitions have come from this channel.

 

PROPERTIES

 

As of September 30, 2007, we owned or had ownership interests in 585 operating self-storage properties located in 33 states and Washington, D.C. Of these properties, 251 are wholly-owned and consolidated, one is held in joint venture and consolidated and 333 are held in joint ventures accounted for using the equity method. In addition, we managed 59 properties for franchisees or third parties bringing the total numbers of properties which we own and/or manage to 644. We receive a management fee of approximately 6% of gross revenues to manage the joint venture, third party and franchise sites. As of September 30, 2007, we owned or had ownership interests in approximately 43 million square feet of space and had greater than 300,000 customers.

 

Approximately 70% of our properties are clustered around the larger population centers, such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco. These markets contain above-average population and income demographics for new self-storage properties. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale.

 

25



 

We consider a property 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 property to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1, or has been open for three years. Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of September 30, 2007, the median length of stay was approximately eleven months.

 

Our property portfolio is a made up of different types of construction and building configurations depending on the site and the municipality where it is located. Most often sites are what we consider “hybrid” facilities, a mix of both drive-up buildings and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of facilities featuring ground-floor access only.

 

The following table sets forth additional information regarding the occupancy of our stabilized properties on a state-by-state basis as of September 30, 2007 and 2006. The information as of September 30, 2006 is on a pro forma basis as though all the properties owned at September 30, 2007 were under the Company’s control as of September 30, 2006.

 

Stabilized Property Data Based on Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of
Sept. 30, 2007(1)

 

Number of
Units as of
Sept. 30, 2006

 

Net Rentable
Square Feet as of
Sept. 30, 2007(2)

 

Net Rentable
Square Feet as of
Sept. 30, 2006

 

Square Foot
Occupancy %

Sept. 30, 2007

 

Square Foot
Occupancy %
Sept. 30, 2006

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

1

 

592

 

607

 

76,105

 

76,135

 

76.4

%

71.3

%

Arizona

 

4

 

2,263

 

2,255

 

279,540

 

278,670

 

94.8

%

94.6

%

California

 

41

 

34,064

 

33,923

 

3,240,997

 

3,226,675

 

83.2

%

83.8

%

Colorado

 

6

 

2,944

 

2,967

 

359,741

 

351,491

 

87.9

%

90.2

%

Connecticut

 

1

 

745

 

745

 

62,505

 

62,430

 

86.1

%

82.8

%

Florida

 

27

 

17,725

 

17,694

 

1,880,350

 

1,874,521

 

85.5

%

89.6

%

Georgia

 

12

 

6,445

 

6,474

 

835,386

 

835,233

 

87.5

%

87.2

%

Hawaii

 

2

 

2,890

 

2,860

 

150,536

 

154,413

 

81.4

%

82.4

%

Illinois

 

4

 

2,674

 

2,681

 

263,389

 

264,857

 

89.9

%

88.2

%

Indiana

 

1

 

589

 

590

 

62,250

 

62,250

 

93.9

%

91.8

%

Kansas

 

1

 

504

 

502

 

49,940

 

49,940

 

90.1

%

92.3

%

Kentucky

 

3

 

1,588

 

1,579

 

194,420

 

194,325

 

92.8

%

90.1

%

Louisiana

 

2

 

1,407

 

1,411

 

147,690

 

147,690

 

89.5

%

94.8

%

Maryland

 

9

 

7,447

 

7,377

 

793,436

 

768,576

 

85.8

%

83.8

%

Massachusetts

 

24

 

13,506

 

13,458

 

1,432,706

 

1,428,285

 

84.0

%

84.1

%

Michigan

 

2

 

1,040

 

1,043

 

134,882

 

135,312

 

87.1

%

83.5

%

Missouri

 

6

 

3,177

 

3,169

 

375,582

 

375,702

 

85.9

%

86.8

%

Nevada

 

2

 

1,255

 

1,238

 

132,565

 

130,655

 

84.9

%

89.2

%

New Hampshire

 

2

 

1,007

 

1,006

 

125,909

 

125,609

 

80.2

%

83.4

%

New Jersey

 

21

 

17,099

 

17,113

 

1,669,753

 

1,671,116

 

85.5

%

87.5

%

New Mexico

 

1

 

503

 

534

 

61,690

 

67,770

 

89.8

%

95.3

%

New York

 

7

 

6,953

 

6,958

 

456,269

 

455,529

 

83.3

%

82.7

%

Ohio

 

4

 

2,031

 

2,046

 

273,876

 

276,201

 

87.4

%

88.3

%

Oregon

 

1

 

764

 

767

 

103,450

 

103,610

 

89.8

%

91.9

%

Pennsylvania

 

8

 

6,141

 

6,135

 

641,727

 

637,231

 

85.7

%

84.9

%

Rhode Island

 

1

 

728

 

728

 

75,601

 

75,241

 

85.9

%

86.1

%

South Carolina

 

4

 

2,067

 

2,068

 

245,734

 

245,734

 

93.0

%

93.4

%

Tennessee

 

6

 

3,533

 

3,534

 

477,227

 

474,512

 

84.7

%

89.5

%

Texas

 

19

 

11,874

 

11,959

 

1,337,314

 

1,322,511

 

90.7

%

87.1

%

Utah

 

3

 

1,533

 

1,529

 

210,540

 

210,140

 

96.2

%

94.7

%

Virginia

 

4

 

2,889

 

2,890

 

272,824

 

272,677

 

85.3

%

84.8

%

Washington

 

3

 

2,031

 

2,030

 

244,865

 

244,595

 

94.6

%

96.1

%

Total Wholly-Owned Stabilized

 

232

 

160,008

 

159,870

 

16,668,799

 

16,599,636

 

86.2

%

86.8

%

 

26



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of
Sept. 30, 2007(1)

 

Number of
Units as of
Sept. 30, 2006

 

Net Rentable
Square Feet as of
Sept. 30, 2007(2)

 

Net Rentable
Square Feet as of
Sept. 30, 2006

 

Square Foot
Occupancy %

Sept. 30, 2007

 

Square Foot
Occupancy %
Sept. 30, 2006

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,708

 

1,723

 

205,638

 

205,443

 

87.4

%

88.6

%

Arizona

 

11

 

6,897

 

6,894

 

751,156

 

751,266

 

91.8

%

93.3

%

California

 

72

 

51,821

 

51,868

 

5,315,985

 

5,317,230

 

89.6

%

88.6

%

Colorado

 

2

 

1,335

 

1,337

 

158,263

 

158,113

 

84.5

%

85.1

%

Connecticut

 

8

 

5,979

 

5,977

 

690,724

 

689,464

 

76.3

%

79.9

%

Delaware

 

1

 

589

 

589

 

71,655

 

71,655

 

93.5

%

88.6

%

Florida

 

24

 

20,360

 

20,338

 

2,090,368

 

2,079,201

 

84.6

%

87.2

%

Georgia

 

3

 

1,887

 

1,916

 

246,406

 

251,530

 

86.6

%

83.6

%

Illinois

 

6

 

4,020

 

4,026

 

432,517

 

435,592

 

81.5

%

77.0

%

Indiana

 

8

 

3,151

 

3,145

 

406,503

 

406,323

 

89.3

%

91.3

%

Kansas

 

3

 

1,214

 

1,214

 

163,030

 

163,900

 

85.3

%

90.8

%

Kentucky

 

4

 

2,285

 

2,279

 

268,427

 

268,479

 

88.1

%

87.5

%

Maryland

 

13

 

10,224

 

10,216

 

1,013,413

 

1,012,618

 

88.2

%

85.4

%

Massachusetts

 

16

 

8,491

 

8,550

 

972,570

 

974,811

 

83.6

%

82.9

%

Michigan

 

10

 

5,959

 

5,954

 

783,993

 

785,122

 

88.1

%

78.9

%

Missouri

 

2

 

951

 

947

 

118,195

 

117,935

 

88.0

%

75.7

%

Nevada

 

7

 

4,629

 

4,643

 

620,299

 

621,916

 

90.5

%

89.4

%

New Hampshire

 

3

 

1,322

 

1,324

 

137,714

 

138,004

 

84.4

%

88.9

%

New Jersey

 

20

 

15,150

 

15,133

 

1,593,358

 

1,588,876

 

81.7

%

87.8

%

New Mexico

 

8

 

4,198

 

4,200

 

462,160

 

462,644

 

84.1

%

84.9

%

New York

 

21

 

22,154

 

22,111

 

1,719,892

 

1,716,170

 

88.5

%

85.5

%

Ohio

 

11

 

5,023

 

5,032

 

750,287

 

753,052

 

84.6

%

85.0

%

Oregon

 

2

 

1,292

 

1,288

 

137,140

 

137,140

 

91.4

%

94.8

%

Pennsylvania

 

9

 

6,472

 

6,482

 

687,858

 

687,420

 

85.5

%

84.7

%

Rhode Island

 

1

 

610

 

611

 

73,880

 

73,905

 

73.6

%

67.3

%

Tennessee

 

22

 

11,817

 

11,839

 

1,548,693

 

1,550,247

 

86.8

%

87.0

%

Texas

 

18

 

11,835

 

11,856

 

1,519,536

 

1,518,084

 

81.6

%

79.4

%

Utah

 

1

 

520

 

522

 

59,500

 

59,400

 

94.9

%

89.1

%

Virginia

 

15

 

10,404

 

10,380

 

1,106,550

 

1,106,646

 

86.9

%

83.6

%

Washington

 

1

 

551

 

551

 

62,730

 

62,730

 

94.2

%

89.7

%

Washington, DC

 

1

 

1,536

 

1,536

 

102,003

 

101,990

 

92.4

%

87.8

%

Total Stabilized Joint-Ventures

 

326

 

224,384

 

224,481

 

24,270,443

 

24,266,906

 

86.4

%

85.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

5

 

3,272

 

3,270

 

401,555

 

400,355

 

79.3

%

82.2

%

Colorado

 

1

 

513

 

513

 

56,240

 

56,240

 

91.6

%

88.3

%

Florida

 

1

 

572

 

569

 

56,725

 

56,685

 

94.7

%

96.5

%

Georgia

 

7

 

4,532

 

4,555

 

485,544

 

488,730

 

88.4

%

85.6

%

Maryland

 

3

 

3,123

 

3,093

 

256,586

 

256,146

 

84.5

%

81.4

%

Nevada

 

1

 

435

 

440

 

61,235

 

61,235

 

81.2

%

81.0

%

New Jersey

 

2

 

1,098

 

1,090

 

131,472

 

131,542

 

91.5

%

90.2

%

New Mexico

 

2

 

1,576

 

1,584

 

171,555

 

171,355

 

87.5

%

90.2

%

Pennsylvania

 

2

 

889

 

889

 

131,130

 

131,330

 

92.1

%

87.4

%

Tennessee

 

2

 

1,147

 

1,150

 

135,410

 

135,710

 

92.4

%

89.6

%

Texas

 

1

 

371

 

371

 

46,955

 

46,955

 

99.4

%

98.8

%

Utah

 

2

 

1,434

 

1,434

 

136,477

 

146,687

 

87.3

%

78.4

%

Washington, DC

 

2

 

1,255

 

1,256

 

111,759

 

111,809

 

85.2

%

83.0

%

Total Stabilized Managed Properties

 

31

 

20,217

 

20,214

 

2,182,643

 

2,194,779

 

86.9

%

85.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stabilized Properties

 

589

 

404,609

 

404,565

 

43,121,885

 

43,061,321

 

86.4

%

86.2

%

 


(1) Represents unit count as of September 30, 2007, which may differ from September 30, 2006 unit count due to unit conversions or expansions.

 

(2) Represents net rentable square feet as of September 30, 2007, which may differ from September 30, 2006 net rentable square feet due to unit conversions or expansions.

 

The following table sets forth additional information regarding the occupancy of our lease-up properties on a state-by-state basis as of September 30, 2007 and 2006. The information as of September 30, 2006 is on a pro forma basis as though all the properties owned at September 30, 2007 were under our control as of September 30, 2006.

 

27



 

Lease-up Property Data Based on Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Actual

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of
Sept. 30, 2007(1)

 

Number of
Units as of
Sept. 30, 2006

 

Net Rentable
Square Feet as of
Sept. 30, 2007(2)

 

Net Rentable
Square Feet as of
Sept. 30, 2006

 

Square Foot
Occupancy %

Sept. 30, 2007

 

Square Foot
Occupancy %
Sept. 30, 2006

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

586

 

599

 

67,375

 

67,375

 

78.2

%

52.2

%

California

 

5

 

3,639

 

2,787

 

433,850

 

329,960

 

62.6

%

63.4

%

Colorado

 

1

 

358

 

365

 

58,928

 

60,441

 

84.4

%

73.1

%

Connecticut

 

1

 

612

 

612

 

60,760

 

60,560

 

77.0

%

74.0

%

Florida

 

2

 

1,257

 

973

 

157,155

 

133,880

 

76.3

%

75.7

%

Illinois

 

1

 

592

 

589

 

75,800

 

75,810

 

77.3

%

68.5

%

Massachusetts

 

4

 

2,898

 

2,292

 

286,237

 

219,303

 

69.9

%

63.3

%

New Jersey

 

2

 

1,745

 

1,695

 

163,260

 

149,395

 

81.6

%

81.7

%

Pennsylvania

 

1

 

423

 

425

 

46,910

 

47,410

 

80.8

%

61.5

%

Washington

 

1

 

506

 

528

 

61,250

 

61,250

 

93.1

%

86.2

%

Total Wholly-Owned Lease-up

 

19

 

12,616

 

10,865

 

1,411,525

 

1,205,384

 

72.8

%

68.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

1

 

701

 

 

78,672

 

 

39.3

%

0.0

%

Illinois

 

1

 

955

 

957

 

74,153

 

74,558

 

54.4

%

18.7

%

Maryland

 

1

 

948

 

957

 

73,672

 

73,649

 

57.2

%

21.3

%

New Jersey

 

2

 

1,196

 

560

 

119,735

 

62,400

 

57.2

%

76.3

%

New Mexico

 

1

 

495

 

530

 

77,406

 

58,992

 

95.6

%

93.3

%

Pennsylvania

 

1

 

753

 

767

 

76,496

 

76,773

 

93.6

%

82.0

%

Virginia

 

1

 

878

 

878

 

84,383

 

84,383

 

82.6

%

66.3

%

Total Lease-up Joint-Ventures

 

8

 

5,926

 

4,649

 

584,517

 

430,755

 

68.0

%

58.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

8

 

5,425

 

4,793

 

552,315

 

460,915

 

75.7

%

68.7

%

Connecticut

 

1

 

683

 

696

 

54,840

 

55,260

 

71.7

%

55.7

%

Florida

 

3

 

2,076

 

1,297

 

224,265

 

112,646

 

61.7

%

61.7

%

Georgia

 

2

 

974

 

1,029

 

115,265

 

114,740

 

75.3

%

69.1

%

Illinois

 

2

 

1,562

 

1,575

 

190,399

 

190,509

 

71.9

%

58.5

%

Indiana

 

1

 

566

 

586

 

68,690

 

68,690

 

83.9

%

63.5

%

Maryland

 

1

 

727

 

728

 

67,810

 

67,560

 

89.2

%

75.8

%

Massachusetts

 

4

 

3,847

 

3,864

 

337,234

 

339,454

 

67.5

%

51.3

%

New Jersey

 

1

 

862

 

 

78,030

 

 

26.8

%

0.0

%

New York

 

1

 

1,578

 

1,579

 

116,305

 

116,310

 

79.7

%

73.3

%

Rhode Island

 

1

 

501

 

506

 

55,670

 

56,095

 

35.5

%

24.1

%

Texas

 

2

 

1,158

 

1,172

 

125,305

 

124,445

 

86.4

%

70.2

%

Virginia

 

1

 

687

 

679

 

74,840

 

74,860

 

85.0

%

75.7

%

Total Lease-up Managed

 

28

 

20,646

 

18,504

 

2,060,968

 

1,781,484

 

71.4

%

62.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Lease-up Properties

 

55

 

39,188

 

34,018

 

4,057,010

 

3,417,623

 

71.4

%

64.4

%

 


(1) Represents unit count as of September 30, 2007, which may differ from September 30, 2006 unit count due to unit conversions or expansions.

 

(2) Represents net rentable square feet as of September 30, 2007, which may differ from September 30, 2006 net rentable square feet due to unit conversions or expansions.

 

RESULTS OF OPERATIONS

 

Comparison of the three and nine months ended September 30, 2007 and 2006

 

Overview

 

Results for the three and nine months ended September 30, 2007 include the operations of 585 properties (252 of which were consolidated and 333 of which were in joint ventures accounted for using the equity method) compared to the results for the three and nine months ended September 30, 2006, which included the operations of 561 properties (213 of which were

 

28



 

consolidated and 348 of which were in joint ventures accounted for using the equity method).

 

Revenues

 

The following table sets forth information on revenues earned for the periods indicated:

 

 

 

Three months ended
September 30,

 

 

 

 

 

Nine months ended
September 30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rental

 

$

55,209

 

$

44,682

 

$

10,527

 

23.6

%

$

149,832

 

$

125,877

 

$

23,955

 

19.0

%

Management and franchise fees

 

5,169

 

5,357

 

(188

)

(3.5

)%

15,520

 

15,697

 

(177

)

(1.1

)%

Tenant insurance

 

3,027

 

716

 

2,311

 

322.8

%

7,858

 

2,608

 

5,250

 

201.3

%

Development fees

 

97

 

47

 

50

 

106.4

%

334

 

272

 

62

 

22.8

%

Other income

 

324

 

386

 

(62

)

(16.1

)%

608

 

635

 

(27

)

(4.3

)%

Total revenues

 

$

63,826

 

$

51,188

 

$

12,638

 

24.7

%

$

174,152

 

$

145,089

 

$

29,063

 

20.0

%

 

Property Rental — The increase in property rental revenue for the three and nine months ended September 30, 2007 consists of $9,214 and $18,455, respectively, associated with acquisitions completed in 2007 and 2006, $825 and $4,218, respectively, from rate increases at stabilized properties, and $488 and $1,282, respectively, from increases in occupancy at lease-up properties.

 

Management and Franchise Fees — Revenue from management and franchise fees have remained fairly stable. Increased revenues at our joint venture, franchise, and third-party managed sites related to rental rate and occupancy increases have been offset by lost management fees due to the termination of certain management agreements.

 

Tenant Insurance —The increase in tenant insurance revenues is due to the introduction of our captive insurance program at all wholly-owned properties in October 2006. Formerly, insurance revenues included only fee income paid by a third party insurance company. In addition, during the nine months ended September 30, 2007, we promoted the tenant insurance program and successfully increased sales of insurance policies in excess of 40% over the same period in 2006.

 

Expenses

 

The following table sets forth information on expenses for the periods indicated:

 

 

 

Three months ended
September 30,

 

 

 

 

 

Nine months ended
September 30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operations

 

$

19,607

 

$

16,613

 

$

2,994

 

18.0

%

$

53,855

 

$

46,603

 

$

7,252

 

15.6

%

Tenant insurance

 

1,397

 

284

 

1,113

 

391.9

%

3,587

 

1,506

 

2,081

 

138.2

%

Unrecovered development and acquisition costs

 

184

 

(87

)

271

 

(311.5

)%

593

 

255

 

338

 

132.5

%

General and administrative

 

9,326

 

8,598

 

728

 

8.5

%

27,534

 

26,590

 

944

 

3.6

%

Depreciation and amortization

 

10,598

 

9,253

 

1,345

 

14.5

%

28,517

 

27,586

 

931

 

3.4

%

Total expenses

 

$

41,112

 

$

34,661

 

$

6,451

 

18.6

%

$

114,086

 

$

102,540

 

$

11,546

 

11.3

%

 

Property Operations — The increase in property operations expense for the three and nine months ended September 30, 2007 consists of $2,983 and $6,040,  respectively, associated with acquisitions completed in 2007 and 2006, and $11 and $1,212, respectively, from increases in general operating expenses including property taxes and insurance at existing properties.

 

Tenant Insurance —The increase in tenant insurance expense is due to the introduction of our captive insurance program at all wholly-owned properties in October 2006. The increase in tenant insurance expense correlates directly to the increase in sales of tenant insurance premiums.

 

Unrecovered Development/Acquisition Costs—Unrecovered development and acquisition costs have increased when compared to the prior year due to an increase in acquisition volume and competition for raw land and operating properties.

 

General and Administrative—General and administrative costs remained relatively constant for the periods presented. The slight increase in general and administrative expense is due to additional support personnel being added as a result of our

 

29



 

acquisition and development volume.

 

Depreciation and Amortization —Depreciation and amortization expense in the three and nine months ended September 30, 2007 increased due to additional properties being added through acquisition and development. These increases were offset by the customer relationship intangibles related to the Storage USA acquisition being fully amortized in January 2007.

 

Other Revenues and Expenses

 

The following table sets forth information on other revenues and expenses for the periods indicated:

 

 

 

Three months ended
September 30,

 

 

 

 

 

Nine months ended
September 30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Other revenue and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(16,079

)

$

(13,429

)

$

(2,650

)

19.7

%

$

(44,912

)

$

(38,198

)

$

(6,714

)

17.6

%

Interest income

 

1,821

 

175

 

1,646

 

940.6

%

6,937

 

805

 

6,132

 

761.7

%

Interest income on note receivable from Preferred Unit holder

 

1,280

 

 

1,280

 

100.0

%

1,280

 

 

1,280

 

100.0

%

Equity in earnings of real estate ventures

 

1,304

 

1,340

 

(36

)

(2.7

)%

3,693

 

3,566

 

127

 

3.6

%

Fair value adjustment of obligation associated with Preferred Partnership units

 

1,054

 

 

1,054

 

100.0

%

1,054

 

 

1,054

 

100.0

%

Minority interest - Operating Partnership

 

(869

)

(306

)

(563

)

184.0

%

(1,768

)

(585

)

(1,183

)

202.2

%

Minority interest - other

 

113

 

 

113

 

100.0

%

153

 

 

153

 

100.0

%

Total other expense

 

$

(11,376

)

$

(12,220

)

$

844

 

(6.9

)%

$

(33,563

)

$

(34,412

)

$

849

 

(2.5

)%

 

Interest Expense — The increase in interest expense for the three and nine months ended September 30, 2007 when compared to September 30, 2006 consists of  $888 and $3,850, respectively, related to new loans on properties acquired in 2007 and 2006, and $1,340  and $2,561, respectively, related to increased corporate interest related primarily to the exchangeable senior notes offering in March 2007.

 

Interest Income — The increase in interest income was due to the larger amount of cash and short-term investments held during the three and nine months ended September 30, 2007 compared to the prior year. The excess cash was generated primarily by the exchangeable senior notes offering in March 2007.

 

Interest Income on note receivable from Preferred Unit holder — Represents interest on a $100 million loan to the holders of the  Preferred OP Units. The funds were loaned on June 25, 2007 and bear interest at 4.85% payable quarterly.

 

Equity in Earnings of Real Estate Ventures — The change in equity in earnings of real estate ventures for the three and nine months ended September 30, 2007 relates to increases in income at the properties owned by the real estate ventures. The increases were partially offset by the losses on certain lease-up properties held in joint ventures.

 

Fair value adjustment of obligation associated with Preferred Partnership units — This amount is a one-time  adjustment that represents the change in fair value of the embedded derivative associated with the Preferred OP Units between the original issuance of the Preferred OP Units (June and August, 2007) and the completion of the amendment to the agreement that was signed on September 28, 2007.

 

Minority Interest — Operating Partnership—Income allocated to the Operating Partnership represents 7.14% (including the Preferred OP Units) and 8.13% of the net income before minority interest for the nine months ended September 30, 2007 and 2006, respectively. The increase in the amount allocated to the minority interest in 2007 is due to the increase in net income.

 

Distributions to Preferred Operating Partnership Units

 

The fixed distribution to the Preferred OP Units of $1,510 represents the portion of the distribution related to the $115.0 million of Preferred OP Units that bears a fixed priority return of 5%. This amount was included on the income statement as a one-time adjustment related to the accounting for the Preferred OP Units prior to the signing of the amended contribution agreement that was filed on September 28, 2007. In future periods, all distributions paid to the Preferred OP Unit holders will be recorded as part of minority interest represented by the Preferred OP Units.

 

30



 

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 U.S. generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of operating properties, plus 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 unaudited condensed consolidated financial statements.

 

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 sets forth the calculation of FFO (dollars are in thousands, except for share data):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income available to common stockholders

 

$

9,828

 

$

4,307

 

$

24,993

 

$

8,137

 

 

 

 

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

Real estate depreciation

 

8,874

 

6,945

 

24,290

 

20,066

 

Amortization of intangibles

 

1,263

 

1,944

 

2,877

 

6,448

 

Joint venture real estate depreciation and amortization

 

1,004

 

1,144

 

3,091

 

3,600

 

Joint venture loss on sale of properties

 

15

 

 

20

 

 

Fair value adjustment of obligation associated with Preferred Operating Partnership units

 

(1,054

)

 

(1,054

)

 

Income allocated to Operating Partnership minority interest

 

869

 

306

 

1,768

 

585

 

 

 

 

 

 

 

 

 

 

 

Funds from operations

 

$

20,799

 

$

14,646

 

$

55,985

 

$

38,836

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - diluted

 

70,567,078

 

57,072,838

 

69,702,837

 

56,250,164

 

 

SAME-STORE STABILIZED PROPERTY RESULTS

 

We consider our same-store stabilized portfolio to consist of only those properties which were wholly-owned at the beginning and at the end of the applicable periods presented that have achieved stabilization as of the first day of such period. The following table sets forth operating data for our same-store portfolio. We consider the following same-store presentation to be meaningful in regards to the properties shown below. These results provide information relating to property-level operating changes without the effects of acquisitions or completed developments.

 

31



 

 

 

Three Months Ended

September 30,

 

Percent

 

Nine Months Ended
September 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

Same-store rental revenues

 

$

40,440

 

$

39,312

 

2.9

%

$

118,974

 

$

114,060

 

4.3

%

Same-store operating expenses

 

13,972

 

14,086

 

(0.8

)%

41,491

 

40,916

 

1.4

%

Same-store net operating income

 

26,468

 

25,226

 

4.9

%

77,483

 

73,144

 

5.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non same-store rental revenues

 

14,769

 

5,370

 

175.0

%

30,858

 

11,817

 

161.1

%

Non same-store operating expenses

 

5,635

 

2,527

 

123.0

%

12,364

 

5,687

 

117.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rental revenues

 

55,209

 

44,682

 

23.6

%

149,832

 

125,877

 

19.0

%

Total operating expenses

 

19,607

 

16,613

 

18.0

%

53,855

 

46,603

 

15.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store square foot occupancy as of quarter end

 

86.8

%

88.0

%

 

 

86.8

%

88.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties included in same-store

 

181

 

181

 

 

 

181

 

181

 

 

 

 

The increase in same-store rental revenues for the three and nine months ended September 30, 2007 was due to our ability to maintain occupancy and increase rental rates to existing customers. The decrease in same-store operating expenses for the threee months ended September 30, 2007 was primarily due to decreases in utilities and repairs and maintenance. These decreases were partially offset by increases to property insurance. The increase in same-store operating expenses for the nine months ended September 30, 2007 was primarily due to increases in property taxes and insurance.

 

COMMON CONTINGENT SHARES AND COMMON CONTINGENT UNIT PROPERTY PERFORMANCE

 

As described in the notes to our unaudited Condensed Consolidated Financial Statements, upon the achievement of certain levels of net operating income with respect to 14 of our pre-stabilized properties, our contingent conversion shares (“CCS”) and our Operating Partnership’s contingent conversion units (“CCU”) will convert into additional shares of common stock and OP Units, respectively.

 

As of September 30, 2007, 892,998 CCSs and 45,937 CCUs had converted to common shares and common OP units, respectively. Based on the performance of the properties as of September 30, 2007, an additional 479,730 CCSs and 24,677 CCUs became eligible for conversion. The board of directors approved the conversion of these CCSs and CCUs on November 1, 2007 as per the Company’s charter, and the shares and units were issued on November 5, 2007.

 

The table below outlines the performance of the properties for the three and nine months ended September 30, 2007 and 2006:

 

32



 

 

 

Three Months Ended September 30,

 

Percent

 

Nine Months Ended September 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

CCS/CCU rental revenues

 

$3,094

 

$2,718

 

13.8

%

$8,946

 

$7,608

 

17.6

%

CCS/CCU operating expenses

 

1,341

 

1,540

 

(12.9

)%

3,973

 

4,195

 

(5.3

)%

CCS/CCU net operating income

 

1,753

 

1,178

 

48.8

%

4,973

 

3,413

 

45.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non CCS/CCU rental revenues

 

52,115

 

41,964

 

24.2

%

140,886

 

118,269

 

19.1

%

Non CCS/CCU operating expenses

 

18,266

 

15,073

 

21.2

%

49,882

 

42,408

 

17.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rental revenues

 

55,209

 

44,682

 

23.6

%

149,832

 

125,877

 

19.0

%

Total operating expenses

 

19,607

 

16,613

 

18.0

%

53,855

 

46,603

 

15.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCS/CCU square foot occupancy as of quarter end

 

80.8

%

75.3

%

 

 

80.8

%

75.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties included in CCS/CCU

 

14

 

14

 

 

 

14

 

14

 

 

 

 

The increase in CCS/CCU rental revenues for the periods presented was due to increased rental rates and occupancy.  The decrease in CCS/CCU operting expenses for the periods presented was due to a decrease in advertising.

 

CASH FLOWS

 

Cash flows provided by operating activities were $78,852 and $60,716, respectively, for the nine months ended September 30, 2007 and 2006. The increase in cash provided by operating activities was due primarily to an increase in net income related to the addition of new properties through acquisitions and interest income from short-term investments.

 

Cash used in investing activities was $221,007 and $158,146, respectively, for the nine months ended September 30, 2007 and 2006. The increase is due primarily to the acquisition of properties and the purchase of short-term investments during the nine months ended September 30, 2007.

 

Cash provided by financing activities was $113,184 and $220,463 for the nine months ended September 30, 2007 and 2006, respectively. The financing activities during the nine months ended September 30, 2007 consisted of the issuance of exchangeable senior notes for $250,000, note receivable issued to a Preferred OP Unit holder of $100,000, additional net borrowings of $11,227, and $44,218 paid in dividends.  During the nine months ended September 30, 2006, we issued equity for net proceeds of $194,901, and had additional net borrowings of $63,014, offset by $35,407 paid in dividends.

 

OPERATIONAL SUMMARY

 

For the three and nine months ended September 30, 2007, we continued our same-store property revenue growth with a revenue increase of  2.9% and 4.3%, respectively, compared to the same periods in 2006. Occupancy at our stabilized properties was fairly consistent on a year-to-year basis, reaching 86.8% as of September 30, 2007 compared to 88.0% as of September 30, 2006.

 

Property revenue growth was evident in the majority of markets in which we operate. The growth in property revenue is the result of increases in occupancy and rental rates to both new and existing customers. Property expenses increased primarily as a result of increases in property taxes due to re-assessments on properties that we have acquired and other annual tax re-assessments.

 

OUTLOOK

 

In the third quarter, we continued to see a generally positive climate for self-storage in the United States.  Rental activity was flat overall when compared with the third quarter of 2006.  Despite the lack of increased demand, we were able to raise same-store and overall portfolio revenue through increased rental rates to existing customers.  The key economic indicators that affect self-storage demand are mixed, and we continue to look at monthly rental activity as an indicator of demand.

 

33



 

We seek to drive rental activity and revenue growth by actively managing both pricing and promotional strategies through our revenue management team and utilizing the yield management features of our technology system. In-house training, operational initiatives and marketing promotions continue to be implemented.  These activities also provide support for increased rentals at the store level.

 

Our discounting strategies continue to evolve. Higher levels of discounting were utilized in the first nine months of 2007 compared to 2006. We will selectively discount certain sites and units based on occupancy, availability, and competitive parameters that are controlled through our centralized, real-time technology systems and revenue management team.

 

Property taxes are a primary driver of expenses for the coming year. As we acquire existing self-storage facilities, tax reassessments will continue to occur. Snow removal expenses, usually a major contributor to expense increases, were lower in the first nine months of 2007 due to lower snowfall amounts in the northeast and mid-Atlantic regions.

 

We anticipate continued competition from all operators, both public and private, in all of the markets in which we operate. However, we believe that the quality and location of our property portfolio, our revenue management systems, and the strength of our self-storage fundamentals will provide opportunities to grow revenues in the remainder of 2007.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2007, we had $41,830 available in cash and cash equivalents and $49,200 in short-term investments.  We intend to use this cash to purchase additional self-storage properties and fund other working capital needs during the remainder of 2007.  Additionally, we are required to distribute at least 90% of our net taxable income, excluding net capital gains, to our stockholders on an annual basis to maintain our qualification as a REIT.  Therefore, it is unlikely that we will have any substantial cash balances that could be used to meet our liquidity needs. Instead, these needs must be met from cash generated from operations and external sources of capital.

 

During September 2004, we, as guarantor, and our Operating Partnership entered into a $100.0 million revolving line of credit (“Credit Facility”), which included a $10.0 million swingline subfacility.  The Credit Facility was collateralized by self-storage properties.  No amounts were outstanding on the line of credit at September 30, 2007 or December 31, 2006 and the Credit Facility expired on September 30, 2007.

 

On October 19, 2007, we entered into a new $100.0 million revolving line of credit (the “Credit Line”).  We intend to use the proceeds of the Credit Line for general corporate purposes and acquisitions.  The Credit Line has an interest rate of between 100 and 250 basis points over LIBOR, depending on certain financial ratios of the Company.  The Credit Line is collateralized by mortgages on certain real estate assets.  As of the closing date, the Credit Line had approximately $97 million of capacity based on the assets collateralizing the Credit Line.  The Credit Line matures October 31, 2010.

 

As of September  30, 2007, we had approximately $1.3 billion of debt, resulting in a debt to total capitalization ratio of 54.0%. As of September 30, 2007, the ratio of total fixed rate debt and other instruments to total debt was 92.7%. The weighted average interest rate of the total of fixed and variable rate debt at September 30, 2007 was 5.1%.

 

Real estate assets are pledged as collateral for our debt.  We are subject to certain restrictive covenants relating to our outstanding debt.  We were in compliance with all covenants at September 30, 2007.

 

We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of Operating Partnership units and interest on our outstanding indebtedness out of our operating cash flow, cash on hand, short-term investments and borrowings under our Credit Line.

 

Long-Term Liquidity Needs

 

Our long-term liquidity needs consist primarily of distributions to stockholders and OP unit holders, new facility development, property acquisitions, principal payments under our borrowings and non-recurring capital expenditures. We do not expect that our operating cash flow will be sufficient to fund our long term liquidity needs and instead expect to fund such needs out of additional borrowings, joint ventures with third parties, and from the proceeds of public and private offerings of equity and debt. We may also use Operating Partnership units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.

 

34



 

On October 13, 2005, we filed a universal shelf registration statement with the Securities and Exchange Commission, which permits us to sell, from time to time, up to $800 million of our common stock, preferred stock, depositary shares, warrants and rights to the extent necessary or advisable to meet our liquidity needs.  We have issued approximately $406 million of securities under this shelf registration statement to date, leaving us with availability of approximately $394 million.

 

FINANCING STRATEGY

 

We will continue to employ leverage in our capital structure in amounts determined from time to time by our board of directors. Although our board of directors has not adopted a policy which limits the total amount of indebtedness that we may incur, we will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or variable rate. In making financing decisions, our board of directors will consider factors including but not limited to:

 

                  the interest rate of the proposed financing;

 

                  the extent to which the financing impacts flexibility in managing our properties;

 

                  prepayment penalties and restrictions on refinancing;

 

                  the purchase price of properties acquired with debt financing;

 

                  long-term objectives with respect to the financing;

 

                  target investment returns;

 

                  the ability of particular properties, and the Company as a whole, to generate cash flow sufficient to cover expected debt service payments;

 

                  overall level of consolidated indebtedness;

 

                  timing of debt and lease maturities;

 

                  provisions that require recourse and cross-collateralization;

 

                  corporate credit ratios including debt service coverage, debt to total capitalization and debt to undepreciated assets; and

 

                  the overall ratio of fixed and variable-rate debt.

 

Our indebtedness may be recourse, non-recourse or cross-collateralized. If the indebtedness is non-recourse, the collateral will be limited to the particular properties to which the indebtedness relates. In addition, we may invest in properties subject to existing loans collateralized by mortgages or similar liens on our properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to refinance investments, including the redevelopment of existing properties, for general working capital or to purchase additional interests in partnerships or joint ventures or for other purposes when we believe it is advisable.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Except as disclosed in the notes to our unaudited Condensed Consolidated Financial Statements, we do not currently have any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our unaudited Condensed Consolidated Financial Statements, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

35



 

Our exchangeable senior notes provide for excess exchange value to be paid in cash or shares of our common stock if our stock price exceeds a certain amount. See the notes to our financial statements for a further description of our exchangeable senior notes.

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations as of September 30, 2007:

 

 

 

Payments due by Period:

 

 

 

 

 

Less Than

 

 

 

 

 

After

 

 

 

Total

 

1 Year

 

1-3 Years

 

4-5 Years

 

5 Years

 

Operating leases

 

$

62,376

 

$

5,282

 

$

10,165

 

$

8,357

 

$

38,572

 

Notes payable, exchangeable senior notes and notes payable to trusts

 

 

 

 

 

 

 

 

 

 

 

Interest

 

456,847

 

65,041

 

112,116

 

68,606

 

211,084

 

Principal

 

1,272,520

 

4,513

 

423,263

 

82,879

 

761,865

 

Total contractual obligations

 

$

1,791,743

 

$

74,836

 

$

545,544

 

$

159,842

 

$

1,011,521

 

 

SEASONALITY

 

The self-storage business is subject to seasonal fluctuations. A greater portion of revenues and profits are realized from May through September. Historically, our highest level of occupancy has been as of the end of July, while our lowest level of occupancy has been in late February and early March. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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 30, 2007, we had $1.3 billion in total debt of which $92.9 million was subject to variable interest rates (including the $61.8 million on which we have a reverse interest rate swap). 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 $0.9 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 significant 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.

 

The fair value of fixed rate notes payable and notes payable to trusts at September 30, 2007 was $1.2 billion. The carrying value of these fixed rate notes payable at September 30, 2007 was $1.2 billion.

 

36



 

ITEM 4. CONTROLS AND PROCEDURES

 

(i)                                    Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We have a disclosure committee to ensure that all disclosures made by the Company to its security holders or the investment community will be accurate and complete and fairly present the Company’s financial condition and results of operations in all material respects, and are made on a timely basis as required by applicable laws, regulations and stock exchange requirements.

 

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

(ii)                                Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in various litigation and proceedings in the ordinary course of business. We are not a party to any material litigation or legal proceedings, or to the best of our knowledge, any threatened litigation or legal proceedings, which, in the opinion of management, will have a material adverse effect on our financial condition or results of operations either individually or in the aggregate.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in “Part I. Item 1A. Risk Factors” in our 2006 Annual Report on Form 10-K.  Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

 

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

 

As described in the notes to our unaudited Condensed Consolidated Financial Statements, upon the achievement of certain levels of net operating income with respect to 14 of our pre-stabilized properties, our CCSs and our Operating Partnership’s CCUs will convert into additional shares of common stock and Operating Partnership units, respectively.  Subject to certain lock-up periods and adjustments, the units are generally exchangeable for shares of common stock on a one-for-one basis or an equivalent amount of cash, at the option of the Company.

 

As of September 30, 2007, 892,998 CCSs and 45,937 CCUs had converted to common shares and common Operating Partnership units, respectively. Based on the performance of the properties as of September 30, 2007, an additional 479,730 CCSs and 24,677 CCUs became eligible for conversion.  The board of directors approved the conversion of these CCS and CCUs on November 1, 2007 as per the Company’s charter, and the shares and units were issued on November 5, 2007.  The shares and units were issued in private placements in reliance on Section 3(a)(9) and Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.  We received no additional consideration for the

 

37



 

conversions.

 

On August 1, 2007, one property was contributed to the Operating Partnership in exchange for consideration totaling $14.7 million.  Preferred OP Units of 80,905 with a value of $9.8 million were issued along with cash of approximately $4.9 million.  The units were issued in a private placement in reliance on Section 4(2)  of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.  Subject to certain lock-up periods and adjustments, the Preferred OP Units will be redeemable at the option of the holder on or after September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

ITEM 5. OTHER INFORMATION

 

None.

 

38



 

ITEM 6. EXHIBITS

 

Exhibits

 

3.1

 

Articles of Amendment, dated September 28, 2007 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on October 3, 2007).

 

 

 

10.1

 

First Amendment to Contribution Agreement and to Agreement Regarding Transfer of Series A Units among Extra Space Storage LP, various limited partnerships affiliated with AAAAA Rent-A-Space, H. James Knuppe and Barbara Knuppe, dated September 28, 2007. (incorporated by reference to Exhibit 10.1 of Form 8-K filed on October 3, 2007).

 

 

 

10.2

 

2004 Long Term Incentive Compensation Plan Restricted Stock Award Agreement

 

 

 

10.3

 

First Amendment to Extra Space Storage Inc. 2004 Long Term Incentive Plan

 

 

 

10.4

 

First Amendment to Extra Space Storage Inc. 2004 Non-Employee Directors’ Share Plan

 

 

 

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.


* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Extra Space Storage Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

SIGNATURES

 

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: November 7, 2007

/s/ Kenneth M. Woolley

 

 

Kenneth M. Woolley

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: November 7, 2007

/s/ Kent W. Christensen

 

 

Kent W. Christensen

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

39


Exhibit 10.2

 

EXTRA SPACE STORAGE INC.

2004 LONG TERM INCENTIVE COMPENSATION PLAN

 

RESTRICTED STOCK AWARD AGREEMENT

 

AGREEMENT by and between EXTRA SPACE STORAGE INC., a Maryland corporation (the “Company”) and                                                                        (the “Grantee”), dated as of                                                   , 20      .

 

WHEREAS, the Company maintains the Extra Space Storage Inc. 2004 Long Term Incentive Compensation Plan (the “Plan”) (capitalized terms used but not defined herein shall have the respective meanings ascribed thereto by the Plan);

 

WHEREAS, the Grantee is an employee of the Company; and

 

WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to grant Restricted Stock to the Grantee pursuant to the Plan and subject to the terms and conditions set forth below.

 

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

 

1.                                       Grant of Restricted Stock.

 

The Company hereby grants the Grantee                  Shares of Restricted Stock of the Company, subject to the following terms and conditions and subject to the provisions of the Plan. The Plan is hereby incorporated herein by reference as though set forth herein in its entirety.

 

2.                                       Restrictions and Conditions.

 

The Restricted Stock awarded pursuant to this Agreement and the Plan shall be subject to the following restrictions and conditions:

 

(i)                                     Subject to the provisions of the Plan and this Agreement, during the period of restriction with respect to Shares granted hereunder (the “Restriction Period”), the Grantee shall not be permitted voluntarily or involuntarily to sell, transfer, pledge, anticipate, alienate, encumber or assign the Shares (or have such Shares attached or garnished). Subject to clauses (iii), (iv), (v) and (vi) below, the Restriction Period shall begin on the date hereof and lapse on the following schedule:

 

Date Restriction Lapses

 

Number of Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

1



 

Notwithstanding the foregoing, unless otherwise expressly provided by the Committee, the Restriction Period with respect to such Shares shall only lapse as to whole Shares.

 

(ii)                                  Except as provided in the foregoing clause (i), below in this clause (ii) or in the Plan, the Grantee shall have, in respect of the Shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the Shares and the right to receive dividends. Certificates for Shares (not subject to restrictions under the Plan) shall be delivered to the Grantee or his or her designee promptly after, and only after, the Restriction Period shall lapse without forfeiture in respect of such Shares of Restricted Stock.

 

(iii)                               Subject to clauses (iv), (v) and (vi) below, if the Grantee has a Termination of Service by the Company and its Subsidiaries or by the Grantee for any reason, during the Restriction Period, then all Shares still subject to restriction shall thereupon, and with no further action, be forfeited by the Grantee.

 

(iv)                              Cessation of service as an employee shall not be treated as a cessation of employment for purposes of this paragraph 2 if the Grantee continues without interruption to serve thereafter as an officer or Director of the Company or in such other capacity as determined by the Company, and the termination of such successor service shall be treated as the applicable termination.

 

(v)                                 If the Grantee is party to an employment agreement which provides that Shares subject to restriction shall be subject to terms other than those set forth above, the terms of such employment agreement shall apply with respect to the Shares granted hereby and shall, to the extent applicable, supersede the terms hereof.

 

(vi)                              In the event that a Change of Control occurs during the Restriction Period, then all restrictions on Shares shall thereupon, and with no further action immediately lapse.

 

3.                                       Certain Terms of Shares.

 

(a)                                  In the discretion of the Company, each Grantee of Restricted Stock may be issued a stock certificate in respect of Shares of Restricted Stock awarded under the Plan. A “book entry” (by computerized or manual entry) shall be made in the records of the Company to evidence an award of Restricted Stock, where no certificate is issued in the name of the Grantee. Each certificate, if any, shall be registered in the name of the Grantee and may include any legend which the Company deems appropriate to reflect any restrictions on transfer under this Agreement or the Plan, or as the Company may otherwise deem appropriate, and, without limiting the generality of the foregoing, shall bear a legend referring to the terms,

 

2



 

conditions, and restrictions applicable to such Award, substantially in the following form:

 

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE EXTRA SPACE STORAGE INC. 2004 LONG TERM INCENTIVE COMPENSATION PLAN AND AN AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND EXTRA SPACE STORAGE INC. COPIES OF SUCH PLAN AND AWARD AGREEMENT ARE ON FILE IN THE OFFICES OF EXTRA SPACE STORAGE INC. AT 2795 EAST COTTONWOOD PARKWAY, SUITE 400, SALT LAKE CITY, UT 84121.

 

(b)                                The Committee shall require that any stock certificates evidencing such Shares be held in custody by the Company until the restrictions thereon shall have lapsed, and may in its discretion require that, as a condition of any Restricted Stock award, the Grantee shall have delivered to the Company a stock power, endorsed in blank, relating to the stock covered by such Award. If and when such restrictions so lapse, any stock certificates shall be delivered by the Company to the Grantee or his or her designee.

 

4.                                      Miscellaneous.

 

(a)                                 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY PRINCIPLES OF CONFLICTS OF LAW WHICH COULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF MARYLAND.

 

(b)                                The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

 

(c)                                 The Committee may make such rules and regulations and establish such procedures for the administration of this Agreement as it deems appropriate. Without limiting the generality of the foregoing, the Committee may interpret the Plan and this Agreement, with such interpretations to be conclusive and binding on all persons and otherwise accorded the maximum deference permitted by law, provided that the Committee’s interpretation shall not be entitled to deference on and after a Change in Control except to the extent that such interpretations are made exclusively by members of the Committee who are individuals who served

 

3



 

as Committee members before the Change in Control and take any other actions and make any other determinations or decisions that it deems necessary or appropriate in connection with the Plan, this Agreement or the administration or interpretation thereof. In the event of any dispute or disagreement as to interpretation of the Plan or this Agreement or of any rule, regulation or procedure, or as to any question, right or obligation arising from or related to the Plan or this Agreement, the decision of the Committee, except as provided above, shall be final and binding upon all persons.

 

(d)                                All notices hereunder shall be in writing, and if to the Company or the Committee, shall be delivered to the Board or mailed to its principal office, addressed to the attention of the Board; and if to the Grantee, shall be delivered personally, sent by facsimile transmission or mailed to the Grantee at the address appearing in the records of the Company. Such addresses may be changed at any time by written notice to the other party given in accordance with this paragraph 4(d).

 

(e)                                 The failure of the Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right the Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan.

 

(f)                                   Nothing in this Agreement shall confer on the Grantee any right to continue in the employ or other service of the Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries and their shareholders to terminate the Grantee’s employment or other service at any time.

 

(g)                                This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto.

 

IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as of the day and year first above written.

 

 

 

EXTRA SPACE STORAGE INC.

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

Grantee:

 

 

 

 

 

4


Exhibit 10.3

FIRST AMENDMENT

TO

EXTRA SPACE STORAGE INC.

2004 LONG TERM INCENTIVE COMPENSATION PLAN

 

                WHEREAS, Extra Space Storage Inc. (the “Company”) has adopted the Extra Space Storage Inc. 2004 Long Term Incentive Compensation Plan (the “Plan”); and

 

                WHEREAS, Section 13 of the Plan permits the Board of Directors of the Company to amend the Plan, subject to certain limitations; and

 

                WHEREAS, the Board of the Company desires to amend the Plan to change the definition of Fair Market Value for purposes of determining option exercise prices and other purposes under the Plan;

 

                NOW, THEREFORE, effective November 7, 2007, the definition of “Fair Market Value” as contained in Section 1 of the Plan is hereby amended to read as follows:

 

“Fair Market Value” per Share as of a particular date means (i) if Shares are then listed on a national stock exchange, the closing sales price per Share on the exchange for the relevant date, or if no sales of Shares occurred on the relevant date, then the closing sales price per Share on the next preceding date on which there was a sale of Shares on such exchange, as determined by the Committee, (ii) if Shares are not then listed on a national stock exchange but are then traded on an over-the-counter market, the average of the closing bid and asked prices for the Shares in such over-the-counter market on the relevant date, or if no trading in the Shares occurred on the relevant date, then the closing sales price per Share on the next preceding date on which there was trading of Shares, as determined by the Committee, or (iii) if Shares are not then listed on a national stock exchange or traded on an over-the-counter market, such value as the Committee in its discretion may in good faith determine; provided that, where the Shares are so listed or traded, the Committee may make such discretionary determinations where the Shares have not been traded for 10 or more trading days.”

                Except to the extent herein above set forth, the Plan shall remain in full force and effect.

 

                IN WITNESS WHEREOF, the Board of Directors of the Company has caused this First Amendment to be executed by a duly authorized officer of the Company as of November 7, 2007.

 

 

 

EXTRA SPACE STORAGE INC.

 

 

 

 

By:

 

 

 

 

 

Title:

 

 


 

Exhibit 10.4

FIRST AMENDMENT

TO

EXTRA SPACE STORAGE INC.

2004 NON-EMPLOYEE DIRECTORS’ SHARE PLAN

 

                WHEREAS, Extra Space Storage Inc. (the “Company”) has adopted the Extra Space Storage Inc. 2004 Non-Employee Directors’ Share Plan (the “Plan”); and

 

                WHEREAS, Section 9 of the Plan permits the Board of Directors of the Company to amend the Plan, subject to certain limitations; and

 

                WHEREAS, the Board of the Company desires to amend the Plan to change the definition of Fair Market Value for purposes of determining option exercise prices under the Plan;

 

                NOW, THEREFORE, effective November 7, 2007, the definition of “Fair Market Value” as contained in Section 2 of the Plan is hereby amended to read as follows:

 

“Fair Market Value” per Share as of a particular date means (i) if Shares are then listed on a national stock exchange, the closing sales price per Share on the exchange for the relevant date, or if no sales of Shares occurred on the relevant date, then the closing sales price per Share on the next preceding date on which there was a sale of Shares on such exchange, as determined by the Committee, (ii) if Shares are not then listed on a national stock exchange but are then traded on an over-the-counter market, the average of the closing bid and asked prices for the Shares in such over-the-counter market on the relevant date, or if no trading in the Shares occurred on the relevant date, then the closing sales price per Share on the next preceding date on which there was trading of Shares, as determined by the Committee, or (iii) if Shares are not then listed on a national stock exchange or traded on an over-the-counter market, such value as the Committee in its discretion may in good faith determine; provided that, where the Shares are so listed or traded, the Committee may make such discretionary determinations where the Shares have not been traded for 10 or more trading days.”

                Except to the extent herein above set forth, the Plan shall remain in full force and effect.

 

                IN WITNESS WHEREOF, the Board of Directors of the Company has caused this First Amendment to be executed by a duly authorized officer of the Company as of November 7, 2007.

 

 

 

EXTRA SPACE STORAGE INC.

 

 

 

 

By:

 

 

 

 

 

Title:

 

 


 

Exhibit 31.1

 

CERTIFICATION

 

I, Kenneth M. Woolley, certify that:

 

1.              I have reviewed this quarterly report on Form 10-Q of Extra Space Storage Inc.;

 

2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)                                 designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S generally accepted accounting principles;

 

(c)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.              The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)                                 all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)                                any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 7, 2007

By:

/s/ Kenneth M. Woolley

 

 

Name: Kenneth M. Woolley

 

Title: Chairman and Chief Executive Officer

 


Exhibit 31.2

 

CERTIFICATION

 

I, Kent W. Christensen, certify that:

 

1.              I have reviewed this quarterly report on Form 10-Q of Extra Space Storage Inc.;

 

2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)                                 designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S generally accepted accounting principles;

 

(c)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

(d)                                disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.              The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)                                 all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)                                any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 7, 2007

By:

/s/ Kent W. Christensen

 

 

Name: Kent W. Christensen

 

Title: Executive Vice President and Chief Financial Officer

 


Exhibit 32.1

 

Certification of 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

 

The undersigned, the Chief Executive Officer of Extra Space Storage Inc. (the “Company”), hereby certifies to his knowledge on the date hereof, pursuant to 18 U.S.C. 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the “Form 10-Q”), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

By:

/s/ Kenneth M. Woolley

 

Name: Kenneth M. Woolley

 

Title: Chairman and Chief Executive Officer

 

November 7, 2007

 

The undersigned, the Chief Financial Officer of Extra Space Storage Inc. (the “Company”), hereby certifies to his knowledge on the date hereof, pursuant to 18 U.S.C. 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the “Form 10-Q”), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

By:

/s/ Kent W. Christensen

 

Name: Kent W. Christensen

 

Title: Executive Vice President and Chief Financial Officer

 

November 7, 2007