Table of Contents

 

 

 

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, 2011

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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, 2011 was 94,373,253.

 

 

 



Table of Contents

 

EXTRA SPACE STORAGE INC.

 

TABLE OF CONTENTS

 

STATEMENT ON FORWARD-LOOKING INFORMATION

 

3

PART I. FINANCIAL INFORMATION

 

4

ITEM 1. FINANCIAL STATEMENTS

 

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

9

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

 

20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

31

ITEM 4. CONTROLS AND PROCEDURES

 

32

PART II. OTHER INFORMATION

 

32

ITEM 1. LEGAL PROCEEDINGS

 

32

ITEM 1A. RISK FACTORS

 

32

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

 

33

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

33

ITEM 4. REMOVED AND RESERVED

 

33

ITEM 5. OTHER INFORMATION

 

33

ITEM 6. EXHIBITS

 

33

SIGNATURES

 

34

 

2



Table of Contents

 

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, the real estate industry and the markets in which we operate;

 

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

 

·                  difficulties in our ability to evaluate, finance, complete and integrate acquisitions and developments successfully and to lease up those properties, which could adversely affect our profitability;

 

·                  potential liability for uninsured losses and environmental contamination;

 

·                  the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts (“REITs”), which could increase our expenses and reduce our cash available for distribution;

 

·                  disruptions in credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates or at all, which could impede our ability to grow;

 

·                  increased interest rates and operating costs;

 

·                  reductions in asset valuations and related impairment charges;

 

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

 

·                  the failure to maintain our REIT status for federal income tax purposes;

 

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

 

·                  our ability to attract and retain qualified personnel and management members.

 

3



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share data)

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Net operating real estate assets

 

$

2,051,567

 

$

1,935,319

 

Real estate under development

 

8,621

 

37,083

 

Net real estate assets

 

2,060,188

 

1,972,402

 

 

 

 

 

 

 

Investments in real estate ventures

 

134,219

 

140,560

 

Cash and cash equivalents

 

33,895

 

46,750

 

Restricted cash

 

30,352

 

30,498

 

Receivables from related parties and affiliated real estate joint ventures

 

61,184

 

10,061

 

Other assets, net

 

54,390

 

48,197

 

Total assets

 

$

2,374,228

 

$

2,248,468

 

 

 

 

 

 

 

Liabilities, Noncontrolling Interests and Equity:

 

 

 

 

 

Notes payable

 

$

869,866

 

$

871,403

 

Notes payable to trusts

 

119,590

 

119,590

 

Exchangeable senior notes

 

87,663

 

87,663

 

Discount on exchangeable senior notes

 

(897

)

(2,205

)

Lines of credit

 

166,000

 

170,467

 

Accounts payable and accrued expenses

 

39,891

 

34,210

 

Other liabilities

 

30,046

 

28,269

 

Total liabilities

 

1,312,159

 

1,309,397

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Extra Space Storage Inc. stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, 94,357,528 and 87,587,322 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

 

943

 

876

 

Paid-in capital

 

1,281,378

 

1,148,820

 

Accumulated other comprehensive deficit

 

(7,819

)

(5,787

)

Accumulated deficit

 

(267,122

)

(262,508

)

Total Extra Space Storage Inc. stockholders’ equity

 

1,007,380

 

881,401

 

Noncontrolling interest represented by Preferred Operating Partnership units, net of $100,000 note receivable

 

29,665

 

29,733

 

Noncontrolling interests in Operating Partnership

 

23,924

 

26,803

 

Other noncontrolling interests

 

1,100

 

1,134

 

Total noncontrolling interests and equity

 

1,062,069

 

939,071

 

Total liabilities, noncontrolling interests and equity

 

$

2,374,228

 

$

2,248,468

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Property rental

 

$

69,475

 

$

59,332

 

$

195,265

 

$

172,261

 

Management and franchise fees

 

6,353

 

5,851

 

18,464

 

17,056

 

Tenant reinsurance

 

8,269

 

6,796

 

22,889

 

19,026

 

Total revenues

 

84,097

 

71,979

 

236,618

 

208,343

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operations

 

24,270

 

21,334

 

70,326

 

64,231

 

Tenant reinsurance

 

1,596

 

1,736

 

4,593

 

4,416

 

Unrecovered development and acquisition costs

 

346

 

211

 

2,165

 

423

 

Loss on sublease

 

 

2,000

 

 

2,000

 

General and administrative

 

12,306

 

10,618

 

36,396

 

32,903

 

Depreciation and amortization

 

14,364

 

12,519

 

42,041

 

37,140

 

Total expenses

 

52,882

 

48,418

 

155,521

 

141,113

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

31,215

 

23,561

 

81,097

 

67,230

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(16,756

)

(15,702

)

(49,431

)

(49,209

)

Non-cash interest expense related to amortization of discount on exchangeable senior notes

 

(440

)

(416

)

(1,308

)

(1,236

)

Interest income

 

185

 

178

 

556

 

714

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

1,213

 

1,213

 

3,638

 

3,638

 

Income before equity in earnings of real estate ventures and income tax expense

 

15,417

 

8,834

 

34,552

 

21,137

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

1,873

 

1,736

 

6,060

 

4,796

 

Income tax expense

 

62

 

(1,088

)

(603

)

(3,347

)

Net income

 

17,352

 

9,482

 

40,009

 

22,586

 

Net income allocated to Preferred Operating Partnership noncontrolling interests

 

(1,598

)

(1,524

)

(4,682

)

(4,510

)

Net income allocated to Operating Partnership and other noncontrolling interests

 

(493

)

(291

)

(1,156

)

(661

)

Net income attributable to common stockholders

 

$

15,261

 

$

7,667

 

$

34,171

 

$

17,415

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

0.09

 

$

0.37

 

$

0.20

 

Diluted

 

$

0.16

 

$

0.09

 

$

0.37

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

Basic

 

94,314,429

 

87,484,731

 

91,277,261

 

87,244,161

 

Diluted

 

98,867,803

 

92,189,852

 

95,866,290

 

91,969,869

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.14

 

$

0.10

 

$

0.42

 

$

0.30

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 


Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statement of Equity

(amounts in thousands, except share data)

(unaudited)

 

 

 

Noncontrolling Interests

 

Extra Space Storage Inc. Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Preferred
Operating

 

Operating

 

 

 

 

 

 

 

Paid-in

 

Other
Comprehensive

 

Accumulated

 

Total

 

 

 

Partnership

 

Partnership

 

Other

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Deficit

 

Equity

 

Balances at December 31, 2010

 

$

29,733

 

$

26,803

 

$

1,134

 

87,587,322

 

$

876

 

$

1,148,820

 

$

(5,787

)

$

(262,508

)

$

939,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon the exercise of options

 

 

 

 

931,921

 

9

 

12,105

 

 

 

12,114

 

Restricted stock grants issued

 

 

 

 

222,130

 

2

 

 

 

 

2

 

Restricted stock grants cancelled

 

 

 

 

(12,909

)

 

 

 

 

 

Issuance of common stock, net of offering costs

 

 

 

 

5,335,423

 

53

 

112,299

 

 

 

112,352

 

Compensation expense related to stock-based awards

 

 

 

 

 

 

3,895

 

 

 

3,895

 

Redemption of Operating Partnership units for common stock

 

 

(2,344

)

 

293,641

 

3

 

2,341

 

 

 

 

Redemption of Operating Partnership units for cash

 

 

(271

)

 

 

 

 

 

 

(271

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

4,682

 

1,164

 

(8

)

 

 

 

 

34,171

 

40,009

 

Change in fair value of interest rate swap

 

(21

)

(62

)

 

 

 

 

(2,032

)

 

(2,115

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,894

 

Tax effect from vesting of restricted stock grants and stock option exercises

 

 

 

 

 

 

1,918

 

 

 

1,918

 

Distributions to Operating Partnership units held by noncontrolling interests

 

(4,729

)

(1,366

)

 

 

 

 

 

 

(6,095

)

Distributions to other noncontrolling interests

 

 

 

(26

)

 

 

 

 

 

(26

)

Dividends paid on common stock at $0.42 per share

 

 

 

 

 

 

 

 

(38,785

)

(38,785

)

Balances at September 30, 2011

 

$

29,665

 

$

23,924

 

$

1,100

 

94,357,528

 

$

943

 

$

1,281,378

 

$

(7,819

)

$

(267,122

)

$

1,062,069

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 


Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)
(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

40,009

 

$

22,586

 

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

 

 

 

 

 

Depreciation and amortization

 

42,041

 

37,140

 

Amortization of deferred financing costs

 

3,720

 

3,323

 

Non-cash interest expense related to amortization of discount on exchangeable senior notes

 

1,308

 

1,236

 

Compensation expense related to stock-based awards

 

3,895

 

3,457

 

Loss on sublease

 

 

2,000

 

Distributions from real estate ventures in excess of earnings

 

4,665

 

4,830

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties and affiliated real estate joint ventures

 

(301

)

(1,237

)

Other assets

 

1,108

 

(2,162

)

Accounts payable and accrued expenses

 

5,681

 

2,059

 

Other liabilities

 

(1,469

)

1,498

 

Net cash provided by operating activities

 

100,657

 

74,730

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(108,403

)

(24,648

)

Development and construction of real estate assets

 

(6,315

)

(28,523

)

Proceeds from sale of properties to joint venture

 

 

15,750

 

Investments in real estate ventures

 

(3,737

)

(9,371

)

Return of investment in real estate ventures

 

4,614

 

7,432

 

Change in restricted cash

 

146

 

6,315

 

Purchase of affiliated joint venture note receivable

 

(51,000

)

 

Purchase of equipment and fixtures

 

(4,493

)

(1,450

)

Net cash used in investing activities

 

(169,188

)

(34,495

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the sale of common stock, net of transaction costs

 

112,352

 

 

Proceeds from notes payable and lines of credit

 

370,242

 

131,124

 

Principal payments on notes payable and lines of credit

 

(389,706

)

(248,032

)

Deferred financing costs

 

(4,149

)

(2,674

)

Investments from noncontrolling interests

 

 

87

 

Redemption of Operating Partnership units held by noncontrolling interest

 

(271

)

(4,116

)

Net proceeds from exercise of stock options

 

12,114

 

5,101

 

Dividends paid on common stock

 

(38,785

)

(26,206

)

Distributions to noncontrolling interests (Operating Partnership and other)

 

(6,121

)

(5,671

)

Net cash provided by (used in) financing activities

 

55,676

 

(150,387

)

Net decrease in cash and cash equivalents

 

(12,855

)

(110,152

)

Cash and cash equivalents, beginning of the period

 

46,750

 

131,950

 

Cash and cash equivalents, end of the period

 

$

33,895

 

$

21,798

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)
(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

Supplemental schedule of cash flow information

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

45,048

 

$

45,593

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Deconsolidation of joint ventures due to application of Accounting Standards Codification 810:

 

 

 

 

 

Real estate assets, net

 

$

 

$

(42,739

)

Investments in real estate ventures

 

 

404

 

Receivables from related parties and affiliated real estate joint ventures

 

 

21,142

 

Other assets and other liabilities

 

 

(51

)

Notes payable

 

 

21,348

 

Other noncontrolling interests

 

 

(104

)

Redemption of Operating Partnership units held by noncontrolling interests for common stock:

 

 

 

 

 

Noncontrolling interests in Operating Partnership

 

$

2,344

 

$

 

Common stock and paid-in capital

 

(2,344

)

 

Tax effect from vesting of restricted stock grants and stock option exercises:

 

 

 

 

 

Other assets

 

$

1,918

 

$

995

 

Paid-in capital

 

(1,918

)

(995

)

Acquisitions of real estate assets

 

 

 

 

 

Real estate assets, net

 

$

8,660

 

$

6,475

 

Notes payable

 

(8,660

)

(6,475

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8



Table of Contents

 

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Amounts in thousands, except property and share data

 

1.              ORGANIZATION

 

Extra Space Storage Inc. (the “Company”) is a self-administered and self-managed real estate investment trust (“REIT”), formed as a Maryland corporation on April 30, 2004 to own, operate, manage, acquire, develop and redevelop professionally managed self-storage 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 (“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 by acquiring an equity interest in real estate entities.  At September 30, 2011, the Company had direct and indirect equity interests in 676 operating storage facilities.  In addition, the Company managed 178 properties for franchisees and third parties, bringing the total number of operating properties which it owns and/or manages to 854.  These properties are located in 34 states and Washington, D.C.

 

The Company operates in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance. The Company’s property management, acquisition and development activities include managing, acquiring, developing and selling self-storage facilities. On June 2, 2009, the Company announced the wind-down of its development activities.  As of September 30, 2011, there was one remaining development project in process.  The Company expects to complete this project by the end of 2011.  The rental operations activities include rental operations of self-storage facilities. No single tenant accounts for more than 5% of rental income.  Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the Company’s self storage facilities.

 

2.              BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of results that may be expected for the year ended December 31, 2011. The condensed consolidated balance sheet as of December 31, 2010 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, 2010 as filed with the Securities and Exchange Commission.

 

3.              FAIR VALUE DISCLOSURES

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following table provides information for each major category of assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

September 30, 2011

 

Quoted Prices in Active
Markets for Identical
Assets (Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Other liabilities - Cash Flow Hedge Swap Agreements

 

$

(8,189

)

$

 

$

(8,189

)

$

 

 

9



Table of Contents

 

The fair value of our derivatives is based on quoted market prices of similar instruments from various banking institutions or an independent third party provider for similar instruments. In determining the fair value, we consider our non-performance risk and that of our counterparties.

 

There were no transfers of assets and liabilities between Level 1 and Level 2 during the nine months ended September 30, 2011.  The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

When real estate assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the fair value of the assets, net of selling costs.  If the estimated fair value, net of selling costs, of the assets that have been identified as held for sale is less than the net carrying value of the assets, then a valuation allowance is established.  The operations of assets held for sale or sold during the period are generally presented as discontinued operations for all periods presented.

 

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

 

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

 

Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable rate notes payable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at September 30, 2011 and December 31, 2010 approximate fair value. The fair values of the Company’s notes receivable, fixed rate notes payable and notes payable to trusts and exchangeable senior notes are as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

Note receivable from Preferred Operating Partnership unit holder

 

$

103,994

 

$

100,000

 

$

115,696

 

$

100,000

 

Fixed rate notes payable and notes payable to trusts

 

$

937,327

 

$

873,137

 

$

777,575

 

$

731,588

 

Exchangeable senior notes

 

$

91,555

 

$

87,663

 

$

118,975

 

$

87,663

 

 

10



Table of Contents

 

4.              NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average common shares outstanding, including unvested share based payment awards that contain a non-forfeitable right to dividends or dividend equivalents. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the weighted average number of basic shares and the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued and is calculated using either the treasury stock or if-converted method. Potential common shares are securities (such as options, convertible debt, exchangeable Series A Participating Redeemable Preferred Operating Partnership units (“Preferred OP units”) and exchangeable 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 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’s Operating Partnership had $87,663 of exchangeable senior notes issued and outstanding as of September 30, 2011 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 $23.45 per share at September 30, 2011, 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 2011; therefore holders of the exchangeable senior notes may not elect to convert them during the fourth quarter of 2011.

 

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, Accounting Standards Codification (“ASC”) 260, “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 related to the exchangeable senior notes were included in the computations for the three and nine month periods ended September 30, 2011 or 2010 because there was no excess over the accreted principal for these periods.

 

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 and where the Company has stated the positive intent and ability to settle at least $115,000 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 $115,000 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by ASC 260-10-45-46.

 

For the three months ended September 30, 2011 and 2010, options to purchase 120,634 and 1,161,799 shares of common stock, and for the nine months ended September 30, 2011 and 2010, 106,726 and 2,187,449 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.  All restricted stock grants have been included in basic and diluted shares outstanding because such shares earn a non-forfeitable dividend and carry voting rights.

 

11



Table of Contents

 

The computation of net income per common share is as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net income attributable to common stockholders

 

$

15,261

 

$

7,667

 

$

34,171

 

$

17,415

 

Income allocated to noncontrolling interest - Preferred Operating Partnership and Operating Partnership

 

2,092

 

1,827

 

5,846

 

5,217

 

Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership

 

(1,438

)

(1,438

)

(4,313

)

(4,313

)

Net income for diluted computations

 

$

15,915

 

$

8,056

 

$

35,704

 

$

18,319

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding - basic

 

94,314,429

 

87,484,731

 

91,277,261

 

87,244,161

 

Operating Partnership units

 

3,049,935

 

3,356,963

 

3,049,935

 

3,356,963

 

Preferred Operating Partnership units

 

989,980

 

989,980

 

989,980

 

989,980

 

Dilutive and cancelled stock options

 

513,459

 

358,178

 

549,114

 

378,765

 

Average number of common shares outstanding - diluted

 

98,867,803

 

92,189,852

 

95,866,290

 

91,969,869

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

0.09

 

$

0.37

 

$

0.20

 

Diluted

 

$

0.16

 

$

0.09

 

$

0.37

 

$

0.20

 

 

5.              PROPERTY ACQUISITIONS

 

The following table summarizes the Company’s acquisitions of operating properties for the nine months ended September 30, 2011 and does not include improvements made to existing assets:

 

 

 

 

 

 

 

Consideration Paid

 

Acquisition Date Fair Value

 

 

 

Property Location

 

Number of
Properties

 

Date of
Acquisition

 

Total Paid

 

Cash Paid

 

Loan
Assumed

 

Net
Liabilities/
(Assets)
Assumed

 

Land

 

Building

 

Intangible

 

Closing
costs -
expensed

 

Source of Acquisition

 

Utah, Texas

 

2

 

4/1/2011

 

$

7,262

 

$

7,205

 

$

 

$

57

 

$

1,512

 

$

5,548

 

$

188

 

$

14

 

Affiliated joint venture

 

California

 

1

 

4/7/2011

 

8,207

 

8,150

 

 

57

 

2,211

 

5,829

 

163

 

4

 

Unrelated third party

 

Tennessee

 

1

 

4/15/2011

 

2,539

 

2,514

 

 

25

 

652

 

1,791

 

79

 

17

 

Unrelated third party

 

Colorado

 

1

 

5/25/2011

 

3,540

 

2,262

 

1,290

 

(12

)

407

 

3,077

 

61

 

(5

)

Unrelated third party

 

Virginia

 

1

 

5/26/2011

 

10,514

 

5,205

 

5,463

 

(154

)

932

 

9,349

 

202

 

31

 

Unrelated third party

 

New Jersey

 

1

 

6/2/2011

 

4,963

 

4,959

 

 

4

 

1,644

 

3,115

 

135

 

69

 

Affiliated joint venture

 

Colorado

 

1

 

6/10/2011

 

4,600

 

2,664

 

1,907

 

29

 

296

 

4,199

 

98

 

7

 

Unrelated third party

 

Nevada

 

1

 

6/22/2011

 

3,355

 

3,339

 

 

16

 

1,441

 

1,810

 

98

 

6

 

Unrelated third party

 

Ohio, Indiana, Kentucky

 

15

 

6/27/2011

 

39,773

 

39,387

 

 

386

 

13,587

 

24,991

 

903

 

292

 

Unrelated third party

 

Maryland

 

1

 

7/8/2011

 

5,785

 

5,795

 

 

(10

)

1,303

 

4,218

 

125

 

139

 

Unrelated third party

 

Maryland

 

1

 

8/1/2011

 

7,352

 

7,342

 

 

10

 

764

 

6,340

 

143

 

105

 

Unrelated third party

 

Texas

 

1

 

8/2/2011

 

2,402

 

2,353

 

 

49

 

979

 

1,346

 

73

 

4

 

Unrelated third party

 

 

On January 1, 2011, the Company paid $320 in cash to obtain its joint venture partners’ equity interests in a joint venture.  No gain or loss was recognized on this transaction.  The joint venture owned a single stabilized self-storage property located in Pennsylvania and was previously accounted for under the equity method.  This property is now wholly owned and consolidated by the Company.

 

6.              RECEIVABLES FROM RELATED PARTIES AND AFFILIATED REAL ESTATE JOINT VENTURES

 

During September 2011, the Company purchased a note receivable from Bank of America for $51,000.  The receivable is due from Storage Associates Holdco, LLC, a joint venture in which the Company holds a 10% equity interest.  The note is due March 2012 and has a monthly interest rate of LIBOR plus 185 basis points.  The Company has eliminated the interest income related to its 10% ownership interest.

 

12


 


Table of Contents

 

7.              VARIABLE INTERESTS

 

The Company has interests in three unconsolidated joint ventures with unrelated third parties which are variable interest entities (“VIEs” or the “VIE JVs”). The Company holds 10% to 39% of the equity interests in the VIE JVs, and has 50% of the voting rights in each of the VIE JVs. Qualification as a VIE was based on the determination that the equity investments at risk for each of these joint ventures were not sufficient based on a qualitative and quantitative analysis performed by the Company. The Company performed a qualitative analysis for these joint ventures to determine which party was the primary beneficiary of each VIE. The Company determined that since the powers to direct the activities most significant to the economic performance of these entities are shared equally by the Company and its joint venture partners, there is no primary beneficiary. Accordingly, these interests are recorded using the equity method.

 

Two of the VIE JVs each own a single self-storage property. The third VIE JV owns six self-storage properties. These joint ventures are financed through a combination of (1) equity contributions from the Company and its joint venture partners, (2) mortgage notes payable and (3) payables to the Company. The payables to the Company consist of amounts owed for expenses paid on behalf of the joint ventures by the Company as manager and mortgage notes payable to the Company. The Company performs management services for the VIE JVs in exchange for a management fee of approximately 6% of cash collected by the properties. Except as disclosed, the Company has not provided financial or other support during the periods presented to the VIE JVs that it was not previously contractually obligated to provide.

 

The Company guarantees the mortgage notes payable for two of the VIE JVs. The Company’s maximum exposure to loss for these joint ventures as of September 30, 2011 is the total of the guaranteed loan balances, the payables due to the Company and the Company’s investment balances in the joint ventures. The Company believes that the risk of incurring a material loss as a result of having to perform on the loan guarantees is unlikely and, therefore, no liability has been recorded related to these guarantees. Also, repossessing and/or selling the self-storage facility and land that collateralize the loans could provide funds sufficient to reimburse the Company. Additionally, the Company believes the payables to the Company are collectible.

 

The following table compares the Company’s liability balance to the respective VIE JVs and the maximum exposure to loss related to the VIE JVs as of September 30, 2011 after netting such liability balance:

 

 

 

 

 

 

 

Balance of

 

 

 

Maximum

 

 

 

 

 

Liability

 

Investment

 

Guaranteed

 

Payables to

 

Exposure

 

 

 

 

 

Balance

 

Balance

 

Loan

 

Company

 

to Loss

 

Difference

 

Extra Space of Montrose Avenue LLC

 

$

 

$

1,202

 

$

4,838

 

$

2,478

 

$

8,518

 

$

(8,518

)

Extra Space of Sacramento One LLC

 

 

(893

)

4,307

 

6,099

 

9,513

 

(9,513

)

Storage Associates Holdco, LLC

 

 

1,817

 

 

53,976

 

55,793

 

(55,793

)

 

 

$

 

$

2,126

 

$

9,145

 

$

62,553

 

$

73,824

 

$

(73,824

)

 

Included in payables to Company for Storage Associates Holdco, LLC is a first mortgage secured by the six self-storage properties which was purchased by the Company from the bank lender in September 2011.  The note payable is due March 2012 and pays interest monthly at LIBOR plus 185 basis points.

 

The Operating Partnership has three wholly-owned unconsolidated subsidiaries (“Trust,” “Trust II,” and “Trust III,” together, the “Trusts”) that have issued trust preferred securities to third parties and common securities to the Operating Partnership.  The proceeds from the sale of the preferred and common securities were loaned in the form of notes to the Operating Partnership.  The Trusts are VIEs because the holders of the equity investment at risk (the trust preferred securities) do not have the power to direct the activities of the entities that most significantly affect the entities’ economic performance because of their lack of voting or similar rights.  Because the Operating Partnership’s investment in the Trusts’ common securities was financed directly by the Trusts as a result of its loan of the proceeds to the Operating Partnership, that investment is not considered to be an equity investment at risk.  The Operating Partnership’s investment in the Trusts is not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk, and therefore the Operating Partnership cannot be the primary beneficiary of the Trusts.  Since the Company is not the primary beneficiary of the Trusts, they have not been consolidated.  A debt obligation has been recorded in the form of notes for the proceeds as discussed above, which are owed to the Trusts.  The Company has also included its investment in the Trusts’ common securities in other assets on the condensed consolidated balance sheets.

 

The Company has not provided financing or other support during the periods presented to the Trusts that it was not previously contractually obligated to provide.  The Company’s maximum exposure to loss as a result of its involvement with the Trusts is equal to the total amount of the notes discussed above less the amounts of the Company’s investments in the Trusts’ common securities.  The net amount is the notes payable that the Trusts owe to third parties for their investments in the Trusts’ preferred securities.

 

13



Table of Contents

 

The following is a tabular comparison of the liabilities the Company has recorded as a result of its involvement with the Trusts to the maximum exposure to loss the Company is subject to as a result of such involvement as of September 30, 2011:

 

 

 

Notes payable

 

Investment

 

Maximum

 

 

 

 

 

to Trusts

 

Balance

 

exposure to loss

 

Difference

 

Trust

 

$

36,083

 

$

1,083

 

$

35,000

 

$

 

Trust II

 

42,269

 

1,269

 

41,000

 

 

Trust III

 

41,238

 

1,238

 

40,000

 

 

 

 

$

119,590

 

$

3,590

 

$

116,000

 

$

 

 

The Company had no consolidated VIEs during the nine months ended September 30, 2011 or 2010.

 

8.              DERIVATIVES

 

GAAP requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet at fair value.  The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  A company must designate each qualifying hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in foreign operations.

 

The Company is exposed to certain risks relating to its ongoing business operations.  The primary risk managed by using derivative instruments is interest rate risk.  Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and variable-rate borrowings.  The Company designates certain interest rate swaps as cash flow hedges of variable-rate borrowings and the remainder as fair value hedges of fixed-rate borrowings.

 

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in the statement of operations.  For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income, outside of earnings, and subsequently reclassified to earnings when the hedged transaction affects earnings.

 

The following table summarizes the terms of the Company’s derivative financial instruments at September 30, 2011:

 

Hedge Product

 

Hedge Type

 

Notional Amounts

 

Strike

 

Effective Dates

 

Maturity Dates

 

Cash Flow Hedge Swap Agreements

 

Cash Flow

 

$8,462 - $63,000

 

4.24% - 6.98%

 

2/1/2009 - 7/1/2010

 

6/30/2013 - 6/27/2016

 

 

Monthly interest payments were recognized as an increase or decrease in interest expense as follows:

 

 

 

Classification of

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Type

 

Income (Expense)

 

2011

 

2010

 

2011

 

2010

 

Cash Flow Hedge Swap Agreements

 

Interest expense

 

$

(940

)

$

(1,196

)

$

(2,954

)

$

(2,469

)

 

Information relating to the gains recognized on the interest rate swap agreements is as follows:

 

 

 

Gain (loss)
recognized in OCI

 

Location of amounts

 

Gain (loss)
reclassified from
OCI

 

Type

 

September 30,
2011

 

reclassified from OCI
into income

 

Nine Months Ended
September 30, 2011

 

Cash Flow Hedge Swap Agreements

 

$

(2,115

)

Interest expense

 

$

(2,954

)

 

The interest rate swap agreements were highly effective for the three and nine months ended September 30, 2011.  The gain (loss) reclassified from other comprehensive income (“OCI”) in the preceding table represents the effective portion of the Company’s cash flow hedges reclassified from OCI to interest expense during the nine months ended September 30, 2011.

 

14



Table of Contents

 

The balance sheet classification and carrying amounts of the derivative instruments are as follows:

 

 

 

Asset (Liability) Derivatives

 

 

 

September 30, 2011

 

December 31, 2010

 

Derivatives designated as hedging

 

Balance Sheet

 

Fair

 

Balance Sheet

 

Fair

 

instruments:

 

Location

 

Value

 

Location

 

Value

 

Cash Flow Hedge Swap Agreements

 

Other liabilities

 

$

(8,189

)

Other liabilities

 

$

(6,074

)

 

9.              NONCONTROLLING 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 989,980 Preferred OP units of the Operating Partnership. The self-storage facilities are located in California and Hawaii.

 

On June 25, 2007, the Operating Partnership loaned the holders of the Preferred OP units $100,000. 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 units 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 $100,000 loan 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 (as subsequently amended, 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.

 

Under the Partnership Agreement, Preferred OP units in the amount of $115,000 bear a fixed priority return of 5% and have a fixed liquidation value of $115,000. The remaining balance participates in distributions with, and has a liquidation value equal to, that of the common OP units. The Preferred OP units became redeemable at the option of the holder on September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

 

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

 

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

 

10.       NONCONTROLLING 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 95.9% majority ownership interest therein as of September 30, 2011. The remaining ownership interests in the Operating Partnership (including Preferred OP units) of 4.1% are held by certain former owners of assets acquired by the Operating Partnership.  As of September 30, 2011, the Operating Partnership had 3,049,935 common OP units outstanding.

 

The noncontrolling interest in the Operating Partnership represents common 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 OP 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

 

15



Table of Contents

 

Operating Partnership to redeem part or all of their common OP units for cash based upon the fair market value of an equivalent number of shares of the Company’s common stock (ten-day average) 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 Partnership Agreement.  The ten-day average closing stock price at September 30, 2011 was $19.70 and there were 3,049,935 common OP units outstanding. Assuming that all of the unit holders exercised their right to redeem all of their common OP units on September 30, 2011 and the Company elected to pay the noncontrolling members cash, the Company would have paid $60,084 in cash consideration to redeem the OP units.

 

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

 

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

 

11.       OTHER NONCONTROLLING INTERESTS

 

Other noncontrolling interests represent the ownership interests of various third parties in three consolidated self-storage properties as of September 30, 2011.  Two of these consolidated properties were under development, and one was in the lease-up stage at September 30, 2011.  The ownership interests of the third-party owners range from 5.0% to 27.6%.  Other noncontrolling interests are included in the stockholders’ equity section of the Company’s condensed consolidated balance sheet.  The income or losses attributable to these third-party owners based on their ownership percentages are reflected in net income allocated to Operating Partnership and other noncontrolling interests in the condensed consolidated statement of operations.

 

12.       STOCK OFFERING

 

In May 2011, the Company closed a public stock offering of 5,335,423 shares of its common stock at an offering price of $21.16 per share.  The Company received gross proceeds of $112,898.  Transaction costs were $546 for net proceeds of $112,352.

 

13.       LOSS ON SUBLEASE

 

During the quarter ended September 30, 2010, a $2,000 charge was recorded as a result of the bankruptcy of a tenant subleasing office space from the Company in Memphis, Tennessee.  The Memphis, Tennessee office lease is a liability that was assumed in the Storage USA acquisition in July 2005.  The increase in this lease obligation liability was recognized through a $2,000 charge, which is included in loss on sublease in the condensed consolidated statement of operations.

 

16



Table of Contents

 

14.       SEGMENT INFORMATION

 

The Company operates in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance.  Financial information for the Company’s business segments is set forth below:

 

 

 

September 30, 2011

 

December 31, 2010

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

134,219

 

$

140,560

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Property management, acquisition and development

 

$

395,972

 

$

400,910

 

Rental operations

 

1,957,662

 

1,831,150

 

Tenant reinsurance

 

20,594

 

16,408

 

 

 

$

2,374,228

 

$

2,248,468

 

 

17



Table of Contents

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

6,353

 

$

5,851

 

$

18,464

 

$

17,056

 

Rental operations

 

69,475

 

59,332

 

195,265

 

172,261

 

Tenant reinsurance

 

8,269

 

6,796

 

22,889

 

19,026

 

 

 

$

84,097

 

$

71,979

 

$

236,618

 

$

208,343

 

 

 

 

 

 

 

 

 

 

 

Operating expenses, including depreciation and amortization

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

13,237

 

$

13,378

 

$

40,773

 

$

36,800

 

Rental operations

 

38,049

 

33,304

 

110,155

 

99,897

 

Tenant reinsurance

 

1,596

 

1,736

 

4,593

 

4,416

 

 

 

$

52,882

 

$

48,418

 

$

155,521

 

$

141,113

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(6,884

)

$

(7,527

)

$

(22,309

)

$

(19,744

)

Rental operations

 

31,426

 

26,028

 

85,110

 

72,364

 

Tenant reinsurance

 

6,673

 

5,060

 

18,296

 

14,610

 

 

 

$

31,215

 

$

23,561

 

$

81,097

 

$

67,230

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(926

)

$

(830

)

$

(2,531

)

$

(2,407

)

Rental operations

 

(16,270

)

(15,288

)

(48,208

)

(48,038

)

 

 

$

(17,196

)

$

(16,118

)

$

(50,739

)

$

(50,445

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

182

 

$

175

 

$

548

 

$

706

 

Tenant reinsurance

 

3

 

3

 

8

 

8

 

 

 

$

185

 

$

178

 

$

556

 

$

714

 

 

 

 

 

 

 

 

 

 

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,213

 

$

1,213

 

$

3,638

 

$

3,638

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

 

 

 

 

Rental operations

 

$

1,873

 

$

1,736

 

$

6,060

 

$

4,796

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

2,570

 

$

 

$

6,330

 

$

 

Rental operations

 

(169

)

 

(527

)

 

Tenant reinsurance

 

(2,339

)

(1,088

)

(6,406

)

(3,347

)

 

 

$

62

 

$

(1,088

)

$

(603

)

$

(3,347

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(3,845

)

$

(6,969

)

$

(14,324

)

$

(17,807

)

Rental operations

 

16,860

 

12,476

 

42,435

 

29,122

 

Tenant reinsurance

 

4,337

 

3,975

 

11,898

 

11,271

 

 

 

$

17,352

 

$

9,482

 

$

40,009

 

$

22,586

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

585

 

$

549

 

$

2,212

 

$

1,474

 

Rental operations

 

13,779

 

11,970

 

39,829

 

35,666

 

 

 

$

14,364

 

$

12,519

 

$

42,041

 

$

37,140

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(108,403

)

$

(24,648

)

 

 

 

 

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(6,315

)

$

(28,523

)

 

18



Table of Contents

 

15.       COMMITMENTS AND CONTINGENCIES

 

The Company has guaranteed loans for unconsolidated joint ventures as follows:

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

Loan

 

 

 

Fair Market

 

 

 

Date of

 

Maturity

 

Guaranteed

 

Value of

 

 

 

Guaranty

 

Date

 

Loan Amount

 

Assets

 

Extra Space of Montrose Avenue LLC

 

Dec-10

 

Dec-13

 

$

4,838

 

$

8,512

 

Extra Space of Sacramento One LLC

 

Apr-09

 

Apr-14

 

$

4,307

 

$

9,805

 

ESS Baltimore LLC

 

Nov-04

 

Feb-13

 

$

4,052

 

$

6,700

 

 

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 collateralizes the loans could provide funds sufficient to reimburse the Company. The Company has recorded no liability in relation to these guarantees as of September 30, 2011, as the fair value of the guarantees was not material. The Company believes the risk of incurring a material loss as a result of having to perform on these guarantees is unlikely.

 

The Company has been involved in routine litigation arising in the ordinary course of business. As of September 30, 2011, the Company was not involved in any material litigation nor, to its knowledge, was any material litigation threatened against it which, in the opinion of management, is expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

16.       SUBSEQUENT EVENTS

 

On October 6, 2011, the Company purchased one property located in New Jersey for $18,350.

 

On October 19, 2011, the Company purchased a portfolio of 19 properties located in California for $99,150.  In connection with this acquisition, the Company assumed $68,681 in debt.

 

On October 25, 2011, the Company purchased one property located in Florida for $5,700.

 

19



Table of Contents

 

Extra Space Storage Inc.

Management’s Discussion and Analysis

Amounts in thousands, except property and 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” appearing elsewhere in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2010. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.” (Amounts in thousands except property and share data 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 GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2010 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time 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 revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

 

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

 

OVERVIEW

 

We are a fully integrated, self-administered and self-managed REIT, formed to continue the business commenced in 1977 by our predecessor companies to own, operate, manage, acquire, develop and redevelop professionally managed self-storage properties. We derive our revenues from rents received from tenants under existing leases at each of our self-storage properties, management fees on the properties we manage for joint venture partners, franchisees and unaffiliated third parties and our tenant reinsurance program.  Our management fee is equal to approximately 6% of total revenues generated by the managed properties.

 

We operate in competitive markets, often where consumers have multiple self-storage properties from which to choose. Competition has impacted, and will continue to impact, our property results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our ability to lease available self-storage units, to actively manage rental rates, 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 new initiatives and opportunities in order to enable us to maximize stockholder value. Our strategies to maximize stockholder value include the following:

 

·                      Maximize the performance of properties through strategic, efficient and proactive management. We pursue revenue generating and expense minimizing opportunities in our operations. Our revenue management team seeks 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 allows greater ability than the majority of our competitors to

 

20



Table of Contents

 

implement national, regional and local marketing programs, which we believe will attract more customers to our stores at a lower net cost.

 

·                      Acquire self-storage properties from strategic partners and third parties. Our acquisitions team continues to pursue the acquisition of single properties and multi-property portfolios that we believe can provide stockholder value. We have established a reputation as a reliable, ethical buyer, which we believe enhances our ability to negotiate and close acquisitions. In addition, we believe our status as an UPREIT enables flexibility when structuring deals.

 

·                      Expand our management business. Our management business enables us to generate increased revenues through management fees and expand our geographic footprint. This expanded footprint enables us to reduce our operating costs through economies of scale. In addition, we see our management business as a future acquisition pipeline. We pursue strategic relationships with owners that strengthen our acquisition pipeline through agreements that typically give us first right of refusal to purchase the managed property in the event of a potential sale.

 

U.S. and international market and economic conditions have been challenging with tighter credit conditions and slower growth.  For the nine months ended September 30, 2011, concerns about the systemic impact of inflation, energy costs, geopolitical issues, and other macro-economic factors have contributed to market volatility and diminished expectations for the global economy.  Turbulence in U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the financial condition of our customers.  If these market conditions continue, they may result in an adverse effect on our financial condition and results of operations.

 

PROPERTIES

 

As of September 30, 2011, we owned or had ownership interests in 676 operating self-storage properties. Of these properties, 328 are wholly-owned and 348 are held in joint ventures. In addition, we managed an additional 178 properties for franchisees or third parties bringing the total number of operating properties that we own and/or manage to 854.  These properties are located in 34 states and Washington, D.C.  As of September 30, 2011, we owned and/or managed approximately 62 million square feet of space with approximately 570,000 units.

 

Our properties are generally situated in convenient, highly visible locations clustered around large 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/Oakland. These areas all enjoy above-average population growth and income levels. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale.

 

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, 2011, the median length of stay was approximately 13 months.  The average annual rent per square foot at these stabilized properties was $13.50 at September 30, 2011, compared to $13.45 at September 30, 2010.

 

Our property portfolio is 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.

 

21


 


Table of Contents

 

The following table sets forth additional information regarding the occupancy of our stabilized properties on a state-by-state basis as of September 30, 2011 and 2010. The information as of September 30, 2010 is on a pro forma basis as though all the properties owned and/or managed at September 30, 2011 were under our control as of September 30, 2010.

 

Stabilized Property Data Based on Location

 

 

 

 

 

 Company 

 

 Pro forma 

 

 Company 

 

 Pro forma 

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as
of September 30,
2011 (1)

 

Number of Units as
of September 30,
2010

 

Net Rentable
Square Feet as of
September 30,
2011 (2)

 

Net Rentable
Square Feet as of 
September 30,
2010

 

Square Foot
Occupancy %
September 30,
2011

 

Square Foot
Occupancy %
September 30,
2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,396

 

1,368

 

172,804

 

173,779

 

79.0

%

79.2

%

Arizona

 

5

 

2,789

 

2,802

 

356,520

 

347,098

 

87.1

%

86.3

%

California

 

46

 

36,030

 

36,201

 

3,570,836

 

3,576,439

 

88.3

%

83.4

%

Colorado

 

10

 

4,520

 

4,497

 

569,886

 

569,514

 

90.9

%

89.2

%

Connecticut

 

3

 

1,975

 

2,011

 

178,050

 

178,010

 

89.2

%

86.8

%

Florida

 

28

 

18,185

 

18,263

 

1,943,341

 

1,945,179

 

87.6

%

84.4

%

Georgia

 

12

 

6,423