UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

ý

 

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

 

 

 

 

 

For the quarterly period ended March 31, 2006

 

 

 

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 ý 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 o

 

Accelerated filer x

 

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 ý

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 28, 2006 was 51,783,666.

 

 



 

EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS

 

STATEMENT ON FORWARD LOOKING INFORMATION

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ITEM 4. CONTROL AND PROCEDURES

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

ITEM 1A. RISK FACTORS

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

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

 

ITEM 5. OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

SIGNATURES

 

 

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,” “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, 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 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 would cause rents and occupancy rates to decline;

 

      our ability to effectively compete in the industry in which we do business;

 

      difficulties in our ability to evaluate, finance and integrate acquired and developed properties into our existing operations and to fill 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 the our cash available for distribution;

 

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

 

      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 and per share amounts)

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

Real estate assets, net

 

$

1,251,315

 

$

1,212,678

 

Investments in real estate ventures

 

89,652

 

90,898

 

Cash and cash equivalents

 

11,061

 

28,653

 

Restricted cash

 

16,758

 

18,373

 

Receivables from related parties and affiliated real estate joint ventures

 

16,590

 

23,683

 

Notes receivable

 

11,996

 

12,109

 

Other assets, net

 

30,896

 

33,798

 

Total assets

 

$

1,428,268

 

$

1,420,192

 

 

 

 

 

 

 

Liabilities, Minority Interests, and Stockholders’ Equity:

 

 

 

 

 

Notes payable

 

$

748,204

 

$

747,193

 

Notes payable to trusts

 

119,590

 

119,590

 

Line of credit

 

25,000

 

 

Accounts payable and accrued expenses

 

7,326

 

13,261

 

Other liabilities

 

23,588

 

23,785

 

Total liabilities

 

923,708

 

903,829

 

 

 

 

 

 

 

Minority interest in Operating Partnership

 

35,194

 

36,010

 

Other minority interests

 

225

 

225

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 51,775,816 and 51,765,795 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively

 

518

 

518

 

Paid-in capital

 

623,801

 

626,123

 

Deferred stock compensation

 

 

(2,374

)

Accumulated deficit

 

(155,178

)

(144,139

)

Total stockholders’ equity

 

469,141

 

480,128

 

Total liabilities, minority interests, and stockholders’ equity

 

$

1,428,268

 

$

1,420,192

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



 

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Property rental

 

$

39,175

 

$

22,222

 

Management and franchise fees

 

5,159

 

368

 

Tenant insurance

 

921

 

 

Acquisition and development fees

 

50

 

267

 

Other income

 

65

 

51

 

Total revenues

 

45,370

 

22,908

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operations

 

14,742

 

8,878

 

Tenant insurance

 

633

 

 

Unrecovered development/acquisition costs

 

318

 

107

 

General and administrative

 

9,245

 

2,977

 

Depreciation and amortization

 

9,276

 

5,730

 

Total expenses

 

34,214

 

17,692

 

 

 

 

 

 

 

Income before interest, minority interest and equity in earnings of real estate ventures

 

11,156

 

5,216

 

 

 

 

 

 

 

Interest expense

 

(11,985

)

(6,239

)

Interest income

 

482

 

10

 

Minority interest - Operating Partnership

 

(54

)

56

 

Equity in earnings of real estate ventures

 

1,139

 

317

 

Net income (loss)

 

738

 

(640

)

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

Basic

 

$

0.01

 

$

(0.02

)

Diluted

 

$

0.01

 

$

(0.02

)

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

Basic

 

$

51,593,729

 

31,169,950

 

Diluted

 

55,709,430

 

31,169,950

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.23

 

$

0.23

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



 

Extra Space Storage Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Deferred

 

Accumulated

 

Stockholders'

 

 

 

Shares

 

Par Value

 

Capital

 

Compensation

 

Deficit

 

Equity

 

Balances at December 31, 2005

 

51,765,795

 

$

518

 

$

626,123

 

$

(2,374

)

$

(144,139

)

$

480,128

 

Reclassification of deferred compensation upon adoption of SFAS 123R

 

 

 

(2,374

)

2,374

 

 

 

Issuance of common stock upon the exercise of options

 

10,021

 

 

91

 

 

 

91

 

Other Adjustments

 

 

 

(425

)

 

 

(425

)

Compensation expense related to stock-based awards

 

 

 

386

 

 

 

386

 

Net income

 

 

 

 

 

738

 

738

 

Dividends paid on common stock at $0.2275 per share

 

 

 

 

 

(11,777

)

(11,777

)

Balances at March 31, 2006

 

51,775,816

 

$

518

 

$

623,801

 

$

 

$

(155,178

)

$

469,141

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6



 

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

738

 

$

(640

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,276

 

5,730

 

Stock compensation expense

 

386

 

 

Gain (loss) allocated to minority interests

 

54

 

(56

)

Distributions from real estate ventures in excess of earnings

 

1,303

 

69

 

Accrued interest on notes receivable

 

(251

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties

 

7,093

 

247

 

Other assets

 

3,643

 

(716

)

Accounts payable

 

(5,935

)

(1,825

)

Other liabilities

 

(1,277

)

447

 

Net cash provided by operating activities

 

15,030

 

3,256

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(42,910

)

(55,327

)

Development and construction of real estate assets

 

(5,543

)

(1,067

)

Proceeds from sale of real estate assets

 

728

 

 

Investments in real estate ventures

 

(57

)

(8

)

Change in restricted cash

 

1,615

 

(1,080

)

Principal payments received on notes receivable

 

364

 

 

Purchase of equipment and fixtures

 

(241

)

(197

)

Net cash used in investing activities

 

(46,044

)

(57,679

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

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

 

30,635

 

53,257

 

Principal payments on notes payable and line of credit

 

(4,049

)

(2,765

)

Deferred financing costs

 

(608

)

(400

)

Proceeds from exercise of stock options

 

91

 

 

Dividends paid on common stock

 

(11,777

)

(7,091

)

Distributions to Operating Partnership units held by minority interests

 

(870

)

(621

)

Net cash provided by financing activities

 

13,422

 

42,380

 

Net decrease in cash and cash equivalents

 

(17,592

)

(12,043

)

Cash and cash equivalents, beginning of the period

 

28,653

 

24,329

 

Cash and cash equivalents, end of the period

 

$

11,061

 

$

12,286

 

 

 

 

 

 

 

Supplemental schedule of cash flow information

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

10,964

 

$

5,103

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7



 

Extra Space Storage Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Amounts in thousands, except shares and per 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 and develop self-storage facilities located throughout the United States. The Company continues the business of Extra Space Storage LLC and its subsidiaries (the “Predecessor”), 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 by acquiring an equity interest in real estate entities. At March 31, 2006, the Company had direct and indirect equity interests in 553 storage facilities located in 34 states, and Washington, D.C.

 

The Company operates in two distinct segments: (1) property management and development; and (2) rental operations. The Company’s property management and development activities include acquiring, managing, 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 months ended March 31, 2006 are not necessarily indicative of results that may be expected for the year ended December 31, 2006. The Condensed Consolidated Balance Sheet as of December 31, 2005, 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, 2005 as filed with the Securities and Exchange Commission (“SEC”).

 

3.              STOCK-BASED COMPENSATION

 

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share–Based Payment,” (“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS 123R supersedes SFAS No. 123, “Accounting for Stock–Based Compensation” and Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The Company adopted SFAS 123R using the modified prospective application method of adoption which requires the Company to record compensation cost related to non-vested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over their remaining service period with no change in historical reported earnings. Awards granted after December 31, 2005 are valued at fair value in accordance with provisions of SFAS 123R and recognized on a straight line basis over the service periods of each award. The Company estimated forfeiture rates for the three months ended March 31, 2006 based on historical forfeitures from guideline companies since the Company does not have sufficient history as a publicly traded company.

 

Prior to 2006, the Company accounted for stock–based compensation in accordance with APB 25 using the intrinsic value method, which did not require that compensation cost be recogni zed for the Company’s stock options provided the option exercise price was established at 100% of the common stock fair value market on the date of grant. Under APB 25, the Company was required to record expense over the vesting period for the value of restricted common stock granted. Prior

 

8



 

to 2006, the Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock–Based Compensation – Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to its stock–based compensation. The Company’s net loss and net loss per share for the three months ended March 31, 2005 would have been greater if compensation cost related to stock options had been recorded in the financial statements based on fair value at the grant dates.

 

Options

 

The Company has the following two stock options plans under which shares are available for grant at March 31, 2006: the 2004 Long-Term Incentive Compensation Plan, and the 2004 Non-Employee Directors’ Share Plan. Under the terms of the plans, the exercise price of an option shall be determined by the Compensation, Nominating and Governance Committee and reflected in the applicable award agreement. 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 (or five years in the case of an incentive stock option granted to a 10% stockholder, if permitted under the plans). Options are exercisable at such times and subject to such terms as determined by the Compensation, Nominating and Governance Committee, but under no circumstances may an option 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 Committee at the time of grant, such stock options shall vest ratably over a four-year period beginning on the date of grant. The Company recorded $200 of compensation expense relating to outstanding options during the three months ended March 31, 2006. No compensation expense was recorded related to outstanding options during the three months ended March 31, 2005.

 

The following assumptions were used to estimate the fair value of options granted during the three months ended March 31, 2006 and 2005 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

Risk-free interest rate

 

3.7

%

3.5

%

Dividend yield

 

6.9

%

7.3

%

Expected volatility

 

21

%

22

%

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 guideline companies to estimate the expected price volatility and average expected term. These amounts are not materially different from the Company’s historical data on valuation and exercise timing.

 

The following table summarizes the Company’s activities with respect to its stock option plans for the first three months of 2006 as follows:

Options

 

Number of
Shares

 

Weighted-Average Exercise
Price Per Share

 

Weighted-
Average
Remaining
Contractual Term

 

Aggregate
Intrinsic Value

 

Outstanding at January 1, 2006

 

3,032,398

 

$

13.89

 

 

 

 

 

Granted

 

106,763

 

15.06

 

 

 

 

 

Exercised

 

(29,750

)

12.55

 

 

 

 

 

Cancelled

 

(19,625

)

13.51

 

 

 

 

 

Outstanding at March 31, 2006

 

3,089,786

 

$

13.95

 

8.88

 

$

10,009

 

Vested and expected to vest in the future at March 31, 2006

 

2,011,737

 

$

13.04

 

8.65

 

$

8,348

 

Exercisable at March 31, 2006

 

341,849

 

$

12.56

 

8.40

 

$

1,582

 

 

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 first quarter of 2006 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 March 31, 2006. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

 

9



 

The aggregate intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $97 and $0, respectively. Exercise of options during the three months ended March 31, 2006 and 2005 resulted in cash receipts of $91 and $0, respectively.

 

Non-vested Common Stock

 

During July 2005, the Company granted 190,000 shares of non-vested common stock to certain employees, without consideration under the Company’s 2004 Long-Term Incentive Compensation Plan. At the date of the grant, the recipient had all rights of a stockholder including the right to vote and receive dividends subject to restrictions on transfers and forfeiture provisions. The forfeiture and transfer restriction on the shares lapse over a three to four year period beginning on the date of grant. The Company did not grant shares of non-vested common stock during the three months ended March 31, 2005. The Company recorded approximately $186 and $0 of compensation expense related to outstanding shares of non-vested common stock held by employees during the three months ended March 31, 2006 and 2005, respectively.

 

 The fair value of non-vested common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date. There were no non-vested shares granted during the three months ended March 31, 2006 and 2005. A summary of the Company’s non-vested shares activity for the three months ended March 31, 2006 was as follows:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant-Date

 

 

 

Shares

 

Fair Value

 

Nonvested shares

 

 

 

 

 

Nonvested at January 1, 2006

 

173,750

 

$

15.66

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at March 31, 2006

 

173,750

 

$

15.66

 

 

At March 31, 2006, there was $2,188 of total unrecognized compensation expense related to non-vested shares granted to employees under the Company’s 2004 Long-Term Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 2.9 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 March 31, 2006 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the Statement of Operations. There were no shares that vested during the three months ended March 31, 2006. Unrecognized compensation expense related to non-vested shares of restricted common stock awards granted to employees was recorded as deferred compensation in stockholder’s equity at December 31, 2005. As part of the adoption of SFAS 123R, $2,374 of unrecognized compensation expense was reclassified as a component of paid-in capital.

 

Summary

 

As a result of adopting SFAS 123R, the net income set forth in the Condensed Consolidated Financial Statements for Operations for the three months ended March 31, 2006, was $200 lower than if the Company had continued to account for stock–based compensation under APB 25. Pro forma net loss as if the fair value based method had been applied to all awards for the three months ended March 31, 2005 is as follows:

 

10



 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2005

 

 

 

 

 

Net loss as reported

 

$

(640

)

Deduct: stock-based compensation expense

 

(86

)

Pro forma net loss

 

$

(726

)

 

 

 

 

Net loss per share - basic and diluted

 

 

 

Basic and diluted - as reported

 

$

(0.02

)

Basic and diluted - pro forma

 

$

(0.02

)

 

4.              NET INCOME  (LOSS) PER SHARE

 

Basic earnings (loss) per common share is computed by dividing the net income (loss) by the weighted average common shares outstanding, less non-vested restricted stock. Diluted earnings (loss) 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 the treasury stock method. Potential common shares are securities (such as options, warrants, convertible debt, and convertible Operating Partnership 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 (loss) 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 (loss) per share, only potential common shares that are dilutive, those that reduce earnings per share, are included. Since the Company generated a loss for the three months ended March 31, 2005, the impact of inclusion of the potential conversion of securities into common shares is anti-dilutive and therefore diluted earnings per share is the same as basic earnings per share. Excluded from the computation of diluted common shares outstanding at March 31, 2005 are 1,647,500 stock options and 2,730,050 convertible Operating Partnership units.

 

5.              REAL ESTATE ASSETS

 

The components of real estate assets are summarized as follows:

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Land

 

$

315,959

 

$

304,892

 

Buildings and improvements

 

960,252

 

929,745

 

Intangible assets - tenant relationships

 

23,036

 

22,174

 

Intangible lease rights

 

3,400

 

3,400

 

 

 

1,302,647

 

1,260,211

 

Less: accumulated depreciation and amortization

 

(67,127

)

(58,252

)

Net operating real estate assets

 

1,235,520

 

1,201,959

 

Real estate under development

 

15,795

 

10,719

 

Net real estate assets

 

$

1,251,315

 

$

1,212,678

 

 

On January 30, 2006 the Company sold an excess parcel of vacant land in Lanham, Pennsylvania for $728. There was no gain or loss recognized in the sale.

 

6.              PROPERTY ACQUISITIONS

 

On March 30, 2006, the Company purchased one self-storage facility located in Bensalem, Pennsylvania from a third party for cash of $3,814.

 

11



 

On February 15, 2006, the Company purchased three self-storage facilities located in Lakewood and Tacoma, Washington from a third party for cash of $17,866.

 

On January 17, 2006, the Company purchased one self-storage facility located in Dacula, Georgia from a franchisee for cash of $5,148.

 

On January 13, 2006, the Company purchased one self-storage facility located in Venice, Florida from a franchisee for cash of $8,003.

 

On January 6, 2006, the Company purchased one self-storage facility located in Deland, Florida from a franchisee for cash of $5,414.

 

7.              INVESTMENTS IN REAL ESTATE VENTURES

 

Investments in real estate ventures at March 31, 2006 and December 31, 2005 consists of the following:

 

 

 

Excess Profit

 

Equity

 

Investment balance at

 

 

 

Participation %

 

Ownership %

 

March 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

 

 

 

 

Extra Space West One LLC (“ESW”)

 

40

%

5

%

$

2,075

 

$

2,070

 

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

 

35

%

10

%

1,877

 

1,929

 

PRISA Self Storage LLC (“PRISA”)

 

17

%

2

%

13,736

 

13,824

 

PRISA II Self Storage LLC (“PRISA II”)

 

17

%

2

%

11,084

 

11,187

 

PRISA III Self Storage LLC (“PRISA III”)

 

20

%

5

%

4,814

 

4,954

 

VRS Self Storage LLC (“VRS”)

 

20

%

5

%

4,681

 

4,740

 

WCOT Self Storage LLC (“WCOT”)

 

20

%

5

%

4,956

 

5,052

 

Storage Portfolio I, LLC (“Teachers”)

 

40

%

25

%

20,115

 

20,346

 

Storage Portfolio Bravo II (“Heitman”)

 

45

%

20

%

15,668

 

15,753

 

Other minority owned properties

 

10-50

%

10-50

%

10,646

 

11,043

 

 

 

 

 

 

 

$

89,652

 

$

90,898

 

 

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.

 

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

 

 

 

Three months ended March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Equity in earnings of ESE

 

$

 

$

 

Equity in earnings of ESW

 

340

 

288

 

Equity in earnings of ESNPS

 

36

 

34

 

Equity in earnings of PRISA

 

125

 

 

Equity in earnings of PRISA II

 

110

 

 

Equity in earnings of PRISA III

 

23

 

 

Equity in earnings of VRS

 

34

 

 

Equity in earnings of WCOT

 

33

 

 

Equity in earnings of Teachers

 

224

 

 

Equity in earnings of Heitman

 

189

 

 

Equity in earnings of other minority owned properties

 

25

 

(5

)

 

 

$

1,139

 

$

317

 

 

12



 

Equity in earnings of Teachers and Heitman includes the amortization of the Company’s excess purchase price of approximately $19 million of these equity investments over its original basis. The excess basis is amortized over 40 years.

 

8.              NOTES RECEIVABLE

 

In July 2005, the Company along with joint-venture partner Prudential Real Estate Investors acquired Storage USA from GE Commercial Finance for approximately $2.3 million in cash. Notes receivable relate to construction advances Storage USA had offered to certain franchisees. All properties are now in their operating phase. The notes are collateralized by the franchised properties and have terms up to five years. Interest payments are generally due monthly on the notes during the first two years of the term, with amortization of principal generally commencing in the third year based upon a 25-year schedule with the balance due at the due date. The loans bear interest based on a spread over the prime interest rate of 0.5% to 1.0%. Typically, advances represented 70%- 90% of the anticipated cost of the project.

 

Management periodically assesses historical payment history, payment status, prevailing economic and business conditions, specific loan terms and other relevant factors to determine whether any notes receivable should be placed on non-accrual status or otherwise adjusted for impairment. At March 31, 2006, none of the notes receivable were considered impaired.

 

9.              OTHER ASSETS

 

The components of other assets are summarized as follows:

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Equipment and fixtures

 

$

9,631

 

$

9,389

 

Less: accumulated depreciation

 

(5,359

)

(4,977

)

Deferred financing costs, net

 

11,423

 

12,151

 

Deferred advertising costs, net

 

86

 

128

 

Prepaid expenses and escrow deposits

 

3,926

 

5,114

 

Accounts receivable, net

 

7,376

 

8,179

 

Investments in trusts

 

3,590

 

3,590

 

Other

 

223

 

224

 

 

 

$

30,896

 

$

33,798

 

 

10.       LINE OF CREDIT

 

The Company, as guarantor, and its Operating Partnership have entered into a $100.0 million revolving line of credit, which includes a $10.0 million swingline subfacility (the “Credit Facility”).

 

The Credit Facility has an interest rate of 175 basis points over LIBOR (6.58% and 6.14% at March 31, 2006 and December 31, 2005, respectively). The Operating Partnership intends to use the proceeds of the Credit Facility for general corporate purposes. As of March 31, 2006, the Credit Facility had approximately $75.4 million of capacity based on the assets collateralizing the Credit Facility. The outstanding principal balance on the line of credit at March 31, 2006 and December 2005 and 2004 was $25 million and $0, respectively. The maturity date on the line of credit is September 2007. The Credit Facility is collateralized by mortgages on certain real estate assets.

 

13



 

11.       NOTES PAYABLE

 

The components of notes payable are summarized as follows:

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Mortgage and construction loans with banks bearing interest at fixed rates between 4.65% and 7.50%. 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 31, 2009 and December 1, 2015.

 

$

654,441

 

$

652,980

 

 

 

 

 

 

 

Mortgage and construction loans with banks bearing floating interest rates (including loans subject to interest rate swaps) based on LIBOR and Prime. Interest rates based on LIBOR are between LIBOR plus 0.66% (5.49% and 5.05% at March 31, 2006 and December 31, 2005, respectively) and LIBOR plus 2.25% (7.08% and 6.64% at March 31, 2006 and December 31, 2005, respectively). Interest rates based on Prime are at Prime plus 0.5% (8.25% and 7.75% at March 31, 2006 and December 31, 2005, 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 August 2, 2006 and August 24, 2009.

 

93,763

 

94,213

 

 

 

$

748,204

 

$

747,193

 

 

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 March 31, 2006.

 

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 June 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 0.655%. 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 March 31, 2006 and December 31, 2005 was reflected as an other liability of $2,725 and $2,151, respectively. For the three months ended March 31, 2006 and 2005, interest expense has been increased by $96 and reduced by $164, respectively, as a result of the Swap Agreement.

 

12.       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 III 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 III 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 of the Company, issued an aggregate of $41.0 million of preferred

 

14



 

securities which mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust II 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 II 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 of the Company 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 FASB Interpretation 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, the Trust II, and the Trust III by the Company.

 

13.       OTHER LIABILITIES

 

The components of other liabilities are summarized as follows:

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

 

 

 

 

Deferred rental income

 

$

7,889

 

$

7,322

 

Accrued interest

 

3,687

 

3,413

 

Accrued taxes and security deposits

 

1,607

 

1,618

 

Fair value of interest rate swap

 

2,726

 

2,151

 

Storage USA lease obligation liability

 

3,012

 

3,068

 

Property insurance payable

 

328

 

2,299

 

Other liabilities

 

4,339

 

3,914

 

 

 

$

23,588

 

$

23,785

 

 

As a result of the acquisition of Storage USA, the Company recorded restructuring liabilities of $4,638 relating to the assumption of a lease for a facility that will no longer be used in the Company’s operations and $2,441 for severance costs related to terminated employees of the prior business.

 

The following table sets forth the restructuring activity during the three months ended March 31, 2006:

 

15



 

 

 

Accrued

 

 

 

 

 

Accrued

 

 

 

Restructuring

 

 

 

 

 

Restructuring

 

 

 

Liabilities at

 

 

 

 

 

Liabilities at

 

 

 

December 31, 2005

 

Cash Paid

 

Adjustments

 

March 31, 2006

 

Facility exit costs

 

$

3,068

 

$

(56

)

$

 

$

3,012

 

Severance costs

 

380

 

(725

)

1,167

 

822

 

Total

 

$

3,448

 

$

(781

)

$

1,167

 

$

3,834

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

3,448

 

$

(781

)

$

1,167

 

$

3,834

 

Discontinued operations

 

 

 

 

 

 

 

$

3,448

 

$

(781

)

$

1,167

 

$

3,834

 

 

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 provide generally for management fees of 6% of gross rental revenues for the management of operations at the self-storage facilities. The Company earns development fees of 4%-6% of budgeted costs on developmental projects and acquisition fees of 1% of the gross purchase price or the completed costs of development of acquired properties.

 

Management fee revenue for related party and affiliated real estate joint ventures for the three months ending March 31, 2006 and 2005 is summarized as follows:

 

 

 

 

 

March 31,

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

ESE

 

Affiliated real estate joint ventures

 

$

 

$

 

ESW

 

Affiliated real estate joint ventures

 

101

 

94

 

ESNPS

 

Affiliated real estate joint ventures

 

102

 

96

 

PRISA

 

Affiliated real estate joint ventures

 

1,232

 

 

PRISA II

 

Affiliated real estate joint ventures

 

1,000

 

 

PRISA III

 

Affiliated real estate joint ventures

 

452

 

 

VRS

 

Affiliated real estate joint ventures

 

273

 

 

WCOT

 

Affiliated real estate joint ventures

 

359

 

 

Teachers

 

Affiliated real estate joint ventures

 

298

 

 

Heitman

 

Affiliated real estate joint ventures

 

256

 

 

ESD

 

Related party

 

96

 

52

 

Other, franchisees and third parties

 

Affiliated real estate joint ventures

 

989

 

126

 

 

 

 

 

$

5,159

 

$

368

 

 

Acquisition and development fee revenue for related party and affiliated real estate joint ventures for the quarters ending March 31, 2006 and 2005 is summarized as follows:

 

16



 

 

 

 

 

March 31,

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Everest

 

Affiliated real estate joint ventures

 

$

7

 

$

168

 

Yancy

 

Affiliated real estate joint ventures

 

18

 

68

 

ESD

 

Related party

 

25

 

31

 

 

 

 

 

$

50

 

$

267

 

 

Related party and affiliated company balances as of March 31, 2006 and December 31, 2005 are summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

Receivables:

 

 

 

 

 

Development fees receivable

 

$

1,921

 

$

2,552

 

Other receivables from properties

 

11,747

 

15,379

 

 

 

 

 

 

 

Receivables from Prudential relating to Storage USA acquisition

 

1,883

 

4,713

 

Other receivables from related parties

 

1,039

 

1,039

 

 

 

$

16,590

 

$

23,683

 

 

Other receivables from properties consist of amounts due for expenses paid on behalf of the properties that the Company manages and management fees. Receivables from Prudential relating to the Storage USA acquisition represents amounts receivable from Prudential for general and administrative expenses, severance paid, and lease expenses paid relating to the Storage USA acquisition. The Company believes that all of these related party receivables are fully collectible. The Company does not have any payables to related parties at March 31, 2006 and December 31, 2005.

 

15.       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 holds a 93.12% majority ownership interest therein as of March 31, 2006. The remaining ownership interests in the Operating Partnership of 6.88% are held by certain former owners of assets acquired by the Operating Partnership, which include a director and officers of the Company.

 

The minority interest in the Operating Partnership represents Operating Partnership 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 Operating Partnership units or Contingent Conversion Units (“CCU”). Limited partners who received Operating Partnership units in the formation transactions have the right to require the Operating Partnership to redeem part or all of their Operating Partnership 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 Operating Partnership 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.

 

During July 2005 the Operating Partnership issued 1,470,149 Operating Partnership units valued at $21.6 million in conjunction with the acquisition of Storage USA. During September 2005 and November 2005, 350,000 and 50,000 Operating Partnership units were redeemed in exchange for common stock, respectively. As of March 31, 2006, the Operating Partnership had 3,825,787 and 200,046 shares of Operating Partnership units and CCUs outstanding, respectively.

 

Unlike the Operating Partnership 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 shares of the Company’s common stock. Initially, each CCU will be convertible on a one-for-one basis into shares of common stock, subject to customary anti-dilution adjustments. Beginning with the quarter ending 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

 

17



 

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 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 CCU remains unconverted through the calculation made in respect of the 12-month period ending December 31, 2008, such outstanding CCUs will be cancelled and restored to the status of authorized but unissued shares of common stock. As of March 31, 2006, there were no CCUs converted to common stock as the 14 early-stage lease-up properties did not achieve the performance thresholds.

 

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.

 

16.       STOCKHOLDERS’ EQUITY

 

The Company’s charter provides that it can issue up to 200,000,000 shares of common stock, $0.01 par value per share, 4,100,000 Contingent Conversion Shares (“CCS”), $.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. As of March 31, 2006, 51,775,816 shares of common stock were issued and outstanding, 3,888,843 shares of 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 ending 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 CCS 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 CCS remains 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. As of March 31, 2006, there were no CCSs converted to common stock as the 14 early-stage lease-up properties did not achieve the performance thresholds.

 

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.

 

17.       SEGMENT INFORMATION

 

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

 

18



 

 

 

Three months ended March 31,

 

 

 

2006

 

2005

 

Statement of Operations

 

 

 

 

 

Total revenues

 

 

 

 

 

Property management and development

 

$

6,195

 

$

686

 

Rental operations

 

39,175

 

22,222

 

 

 

$

45,370

 

$

22,908

 

 

 

 

 

 

 

Operating expenses, including depreciation and amortization

 

 

 

 

 

Property management and development

 

$

10,552

 

$

3,136

 

Rental operations

 

23,662

 

14,556

 

 

 

$

34,214

 

$

17,692

 

 

 

 

 

 

 

Income (loss) before interest, minority interests, equity in earnings of real estate ventures and gain on sale of real estate assets

 

 

 

$

 

Property management and development

 

$

(4,357

)

$

(2,450

)

Rental operations

 

15,513

 

7,666

 

 

 

$

11,156

 

$

5,216

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Property management and development

 

$

200

 

$

45

 

Rental operations

 

11,785

 

6,194

 

 

 

$

11,985

 

$

6,239

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

Property management and development

 

$

482

 

$

10

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

Rental operations

 

$

1,139

 

$

317

 

 

 

 

 

 

 

Income (loss) before minority interests

 

 

 

 

 

Property management and development

 

$

(4,075

)

$

(2,485

)

Rental operations

 

4,867

 

1,789

 

 

 

$

792

 

$

(696

)

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

Property management and development

 

$

183

 

$

52

 

Rental operations

 

9,093

 

5,678

 

 

 

$

9,276

 

$

5,730

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

Property management and development

 

$

(42,910

)

$

(55,327

)

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

Property management and development

 

$

(5,543

)

$

(1,067

)

 

 

 

March 31, 2006

 

December 31, 2005

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

89,652

 

$

90,898

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Property management and development

 

153,554

 

179,770

 

Property operations

 

1,274,714

 

1,240,422

 

 

 

$

1,428,268

 

$

1,420,192

 

 

18.       COMMITMENTS AND CONTINGENCIES

 

The Company has guaranteed three construction loans for unconsolidated partnerships that own development properties in Baltimore, Maryland, Chicago, Illinois and Peoria, Arizona. These properties are owned by joint ventures in which the Company has 10% equity interests. These guarantees were entered into in November 2004, July 2005 and August 2005, respectively. At

 

19



 

March 31, 2006, the total amount of guaranteed mortgage debt relating to these joint ventures was $14,443. These mortgage loans mature December 1, 2007, July 28, 2008 and August 31, 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 March 31, 2006 is $24,653. The Company has recorded no liability in relation to this guarantee as of March 31, 2006. 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.

 

The Company has been involved in routine litigation arising in the ordinary course of business. As of March 31, 2006, the Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against it, or its properties.

 

19.       SUBSEQUENT EVENTS

 

On May 4, 2006, the Company purchased one-self storage facility located in Dallas, Texas from a franchisee for approximately $14.7 million.

 

On May 1, 2006, the Company purchased one self-storage facility located in North Hollywood, California from Extra Space Development, which is owned by certain members of the Company’s management team and a director, for cash of $12.5 million.  This purchase price will be adjusted for final net asset pro-rations within 30 days of the date of the transaction.  The independent members of the Company’s board of directors approved this acquisition.

 

On April 12, 2006, the Company purchased its partners’ joint venture interest in five properties located in Kansas, Tennessee and Texas, and sold its joint venture interest in three properties located in Texas.  As part of the transaction the Company paid cash of $3.0 million, settled franchise notes receivable of $10.3 million and assumed a note payable of $7.9 million.  The final purchase price will be adjusted for final net asset pro-rations within 45 days from the date of the transaction. No gain or loss is expected on this transaction.

 

20.       ACCOUNTING AND DISCLOSURE CHANGES

 

In June 2005, the Emerging Issues Task Force (“EITF”) released Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-05”). EITF 04-05 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-05 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-05. EITF 04-05 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. EITF 04-05 is not expected to have a material impact on our results of operations or financial position.

 

20



 

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, 2005. 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 Audited Consolidated Financial Statements contained in our Form 10-K for the year ended December 31, 2005 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, 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 real estate investment trust formed to continue the business commenced in 1977 by our predecessor companies to own, operate, acquire, develop and redevelop professionally managed self-storage properties. We derive a substantial portion of our revenues from rents received from tenants under existing leases on each of our self-storage properties. Additional revenue is derived from management and franchise fees from our joint venture and franchise 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, therefore, 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 our internal revenue management team by utilizing STORE, the operating management software employed at all of our owned and managed properties.

 

We continue to evaluate a range of new growth initiatives and opportunities in order to enable us to maximize stockholder value. These include:

 

                  Maximize the performance of properties through strategic, efficient and timely 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 STORE’s unique ability to provide real-time, interactive rental rate and discount management. Our scale allows greater ability to implement national, regional and local marketing programs which will drive more customers to our stores.

 

                  Focus on the acquisition of self-storage properties from franchisees and third parties. We have benefited greatly from the acquisition of existing properties. The acquisitions team will continue to aggressively pursue the acquisition of single properties and portfolios that we believe can provide short and long-term stockholder value.

 

21



 

Our acquisition of Storage USA has further bolstered our reputation as a reliable, ethical buyer which enhances our ability to negotiate and close non-brokered, private deals. In addition, our status as an umbrella partnership real estate investment trust (“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 2006 and 2007 development pipeline includes 19 of these projects. The construction of many of these properties has already begun.

 

                  Expand the Company’s management business. We see the management business as a future development and acquisition pipeline. We are in the process of developing a strategic plan for this growth channel.

 

RECENT DEVELOPMENT

 

    To expand its business, on July 14, 2005, the Company, through its subsidiary Extra Space Storage LLC (“ESS LLC”) and the Operating Partnership, closed the acquisition (the “Transaction”) of various entities that collectively comprise the Storage USA self-storage business pursuant to the Purchase and Sale Agreement (the “Agreement”), dated May 5, 2005, between ESS LLC, the Operating Partnership, Security Capital Self Storage Incorporated, a Delaware corporation, PRISA Self Storage LLC, a Delaware limited liability company (“PRISA”), PRISA II Self Storage LLC, a Delaware limited liability company (“PRISA II”), PRISA III Self Storage LLC, a Delaware limited liability company (“PRISA III”), VRS Self Storage LLC, a Delaware limited liability company (“VRS”), WCOT Self Storage LLC, a Delaware limited liability company (“WCOT”), and the Prudential Insurance Company of America, a New Jersey corporation (together with its affiliates, “Prudential”).

 

    In connection with the Transaction, the Company acquired 61 wholly-owned self storage properties, acquired Storage USA (“SUSA”) Partnership, L.P.’s equity interest in joint ventures which collectively owned 78 properties and assumed the management of 60 franchises and third party owned properties. In addition, 259 of the self-storage properties were acquired in the Transaction by five separate limited liability companies owned by five subsidiaries of the Company (each, a “Company Sub”) and Prudential. The limited liability company agreements govern the rights and responsibilities of each such limited liability company. The Company also acquired $37.7 million of notes receivable due from franchisees.

 

PROPERTIES

 

As of March 31, 2006, we owned and operated 553 properties located in 34 states, and Washington, D.C. Of these properties, 198 are wholly owned and 355 are held in joint ventures with third parties. The properties owned and operated before the Storage USA acquisition are now operated under the registered Extra Space Storage brand name. We are currently implementing a re-branding program which will convert all of the Storage USA stores to the Extra Space Storage brand. As of March 31, 2006 we owned or had an ownership interest in approximately 40.1 million square feet of rentable space configured in approximately 375,000 individual self-storage units. Nearly 70% of the properties are clustered around the larger population centers of Atlanta, Baltimore, Boston, Chicago, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa, San Francisco and Washington, D.C. These markets contain above-average population and income demographics and high barriers to entry for new self-storage properties. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. The Storage USA acquisition has given us increased scale in many core markets as well as a solid presence in many markets where we had no previous 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 or has been open for three years.

 

As of March 31, 2006, greater than 100,000 tenants were leasing storage units at our 198 wholly-owned properties, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. 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 March 31, 2006, the median length of stay was approximately 11 months.

 

The following table sets forth additional information regarding the occupancy of the stabilized properties on a state-by-state basis as of March 31, 2006 and 2005. The information as of March 31, 2005 is on a pro forma basis as though all the properties owned at March 31, 2006 were under the Company’s control as of March 31, 2005.

 

22



 

Stabilized Property Data Based on Location

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of
March 31, 2006
(1)

 

Number of
Units as of
March 31,
2005

 

Net Rentable 
Square Feet as of
March 31, 2006
(2)

 

Net Rentable 
Square Feet as of
March 31, 2005

 

Square foot
Occupancy %
March 31, 2006

 

Square foot
Occupancy %
March 31, 2005

 

Wholly-Owned Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

2

 

1,325

 

1,316

 

176,220

 

174,625

 

96.3

%

93.2

%

California

 

29

 

19,262

 

19,328

 

2,080,464

 

2,084,058

 

87.1

%

86.2

%

Colorado

 

5

 

2,402

 

2,412

 

293,541

 

302,656

 

85.4

%

80.3

%

Florida

 

24

 

16,239

 

16,212

 

1,754,589

 

1,743,608

 

91.3

%

91.0

%

Georgia

 

8

 

4,506

 

4,530

 

586,565

 

588,557

 

85.7

%

85.6

%

Illinois

 

3

 

2,147

 

2,144

 

196,937

 

188,034

 

78.8

%

78.8

%

Kentucky

 

3

 

1,577

 

1,584

 

194,290

 

194,215

 

87.1

%

76.7

%

Louisiana

 

2

 

1,410

 

1,411

 

147,490

 

147,900

 

98.0

%

83.2

%

Maryland

 

5

 

4,530

 

4,542

 

489,502

 

488,659

 

80.4

%

74.5

%

Massachusetts

 

22

 

12,005

 

12,028

 

1,310,140

 

1,305,090

 

80.7

%

78.8

%

Michigan

 

2

 

1,042

 

1,048

 

134,912

 

134,672

 

75.7

%

71.5

%

Missouri

 

3

 

1,340

 

1,334

 

167,907

 

167,412

 

78.0

%

79.5

%

Nevada

 

1

 

462

 

463

 

56,500

 

57,100

 

88.0

%

91.0

%

New Hampshire

 

2

 

1,015

 

1,015

 

125,609

 

117,268

 

78.4

%

78.2

%

New Jersey

 

18

 

14,662

 

14,690

 

1,447,163

 

1,441,243

 

83.5

%

84.1

%

New York

 

4

 

4,446

 

4,445

 

259,924

 

262,004

 

76.7

%

81.5

%

Ohio

 

4

 

2,059

 

2,073

 

275,425

 

276,522

 

81.2

%

77.4

%

Oregon

 

1

 

764

 

767

 

103,690

 

105,810

 

85.2

%

71.2

%

Pennsylvania

 

8

 

6,126

 

5,916

 

636,394

 

609,985

 

77.3

%

77.5

%

Rhode Island

 

1

 

727

 

713

 

75,816

 

75,811

 

86.7

%

78.1

%

South Carolina

 

4

 

2,068

 

2,088

 

245,584

 

246,969

 

89.2

%

89.4

%

Tennessee

 

4

 

2,712

 

2,686

 

358,819

 

357,294

 

91.0

%

80.7

%

Texas

 

11

 

6,449

 

6,444

 

723,850

 

723,144

 

82.2

%

80.5

%

Utah

 

3

 

1,528

 

1,521

 

210,675

 

209,690

 

88.3

%

81.9

%

Virginia

 

2

 

1,220

 

1,229

 

125,507

 

126,069

 

86.4

%

84.8

%

Washington

 

3

 

2,022

 

2,014

 

242,595

 

241,945

 

86.0

%

90.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Wholly Owned Stabilized

 

174

 

114,045

 

113,953

 

12,420,108

 

12,370,340

 

85.0

%

83.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties held in Joint-Ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

4

 

2,321

 

2,315

 

281,213

 

281,445

 

83.0

%

82.4

%

Arizona

 

12

 

7,441

 

7,386

 

806,433

 

806,816

 

93.4

%

86.4

%

California

 

72

 

51,897

 

51,987

 

5,315,055

 

5,336,005

 

87.2

%

84.6

%

Colorado

 

3

 

1,906

 

1,920

 

215,713

 

216,202

 

79.5

%

77.8

%

Connecticut

 

9

 

6,531

 

6,537

 

754,329

 

758,294

 

73.5

%

73.2

%

Delaware

 

1

 

589

 

585

 

71,655

 

71,655

 

81.2

%

80.6

%

Florida

 

24

 

20,352

 

20,541

 

2,075,155

 

2,066,257

 

87.1

%

83.2

%

Georgia

 

3

 

1,917

 

1,919

 

251,738

 

251,772

 

77.6

%

78.1

%

Illinois

 

5

 

3,321

 

3,333

 

361,987

 

358,297

 

71.6

%

67.8

%

Indiana

 

9

 

3,733

 

3,733

 

469,528

 

470,029

 

83.3

%

82.0

%

Kansas

 

4

 

1,713

 

1,718

 

214,285

 

216,500

 

80.2

%

73.1

%

Kentucky

 

4

 

2,266

 

2,250

 

268,009

 

268,365

 

79.1

%

76.0

%

Maryland

 

14

 

10,934

 

10,913

 

1,077,001

 

1,075,676

 

82.2

%

79.5

%

Massachusetts

 

17

 

9,250

 

9,320

 

1,049,338

 

1,049,159

 

77.0

%

75.8

%

Michigan

 

10

 

5,960

 

5,976

 

784,677

 

785,353

 

74.9

%

76.7

%

Missouri

 

5

 

2,778

 

2,757

 

326,740

 

324,230

 

79.6

%

78.4

%

Nevada

 

7

 

4,626

 

4,626

 

622,464

 

623,834

 

88.1

%

92.8

%

New Hampshire

 

3

 

1,330

 

1,331

 

138,804

 

137,949

 

83.7

%

86.5

%

New Jersey

 

19

 

14,091

 

14,083

 

1,402,335

 

1,482,871

 

84.6

%

84.3

%

New Mexico

 

9

 

4,730

 

4,469

 

529,344

 

519,779

 

84.3

%

87.8

%

New York

 

20

 

22,921

 

22,957

 

1,669,339

 

1,688,745

 

80.8

%

76.2

%

Ohio

 

12

 

5,578

 

5,569

 

825,187

 

825,191

 

75.9

%

79.0

%

Oregon

 

2

 

1,280

 

1,265

 

136,450

 

136,080

 

87.5

%

84.8

%

Pennsylvania

 

9

 

5,892

 

5,880

 

658,485

 

653,299

 

80.4

%

81.3

%

Rhode Island

 

1

 

611

 

611

 

74,005

 

74,005

 

58.8

%

71.1

%

Tennessee

 

24

 

12,610

 

12,597

 

1,636,176

 

1,638,280

 

84.0

%

79.6

%

Texas

 

26

 

17,726

 

17,605

 

2,064,319

 

2,064,668

 

77.8

%

77.3

%

Utah

 

1

 

520

 

510

 

59,400

 

59,400

 

79.3

%

80.7

%

Virginia

 

15

 

10,359

 

10,349

 

1,106,241

 

1,105,596

 

81.2

%

80.3

%

Washington

 

1

 

551

 

551

 

62,730

 

62,730

 

92.3

%

86.0

%

Washington, D.C.

 

1

 

1,536

 

1,534

 

101,990

 

105,592

 

79.2

%

83.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stabilized Joint-Ventures

 

346

 

237,270

 

237,127