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 September 30, 2005

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)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate by check mark whether the registrant is 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 October 31, 2005 was 37,915,544.

EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS

EXPLANATORY NOTE

The financial statements covered in this report for the period from January 1, 2004 to August 16, 2004 contain the results of operations and financial condition of Extra Space Storage LLC (“the Predecessor”) and its subsidiaries, the predecessor to Extra Space Storage Inc. (the “Company”) and its subsidiaries, prior to the consummation of the Company’s initial public offering on August 17, 2004.

STATEMENT ON FORWARD LOOKING INFORMATION

Throughout this report we make forward-looking statements.  Forward-looking statements include the words “may,” “will,” “believes,” “anticipates,” “continues,” “likely,” “should,” “estimates,” “expects” and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).  Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied in the forward-looking statements.  Such factors include, but are not limited to, changes in general economic conditions and in the markets in which the Company operates:

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

•                  the Company’s ability to effectively compete in the industry in which it does business;

•                  difficulties in the Company’s ability to evaluate, finance and integrate acquired and developed properties into the Company’s existing operations and to lease up those properties, which could adversely affect the Company’s 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 the Company’s costs and reduce the Company’s cash available for distribution;

•                  difficulties in raising capital at reasonable rates, which could impede the Company’s ability to grow; and

•                  delays in development and construction processes, which could adversely affect the Company’s profitability; and economic uncertainty due to the impact of war or terrorism which could adversely affect its business plan.

The Company disclaims any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

See accompanying notes

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Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data)

(unaudited)

(1)                                  The basic and diluted loss per share does not include the potential effects of the CCSs and CCUs as such securities would not have participated in earnings for any of the periods presented. These securities will not participate in distributions until they are converted, which cannot occur prior to March 31, 2006.

See accompanying notes

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Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(unaudited)

See accompanying notes

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See accompanying notes

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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”), a self-administered and self-managed real estate investment trust (“REIT”), was formed on April 30, 2004 to own, operate, acquire and develop self-storage facilities located throughout the United States and continues the business of Extra Space Storage  LLC (the “Predecessor”). The Company’s interest in its properties is held through its operating partnership Extra Space Storage LP (the “Operating Partnership”), and its primary assets are general partner and limited partner interests in the Operating Partnership.

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, 2005, the Company had direct and indirect equity interest in 546 storage facilities located in 34 states, including 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 segment includes rental operations of self-storage facilities.

On August 17, 2004, the Company completed its initial public offering (the “Offering”) of 20,200,000 shares of common stock. On September 1, 2004, the underwriters exercised their over allotment option and purchased 3,030,000 shares of common stock. The Company succeeded to the business conducted by the Predecessor.

In connection with the Offering, the existing holders of Class A, Class B, Class C and Class E units in the Predecessor exchanged these units for an aggregate of 7,939,950 shares of common stock, 1,608,437 Operating Partnership (“OP”) units, 3,888,843 contingent conversion shares (“CCSs”), 200,046 contingent conversion units (“CCUs”) and $18,885 in cash.  As a result of this exchange, the Predecessor became a wholly-owned subsidiary of the Operating Partnership and, as of September 30, 2005, is a 90.91% subsidiary of the Company.

2.              BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of results that may be expected for the year ended December 31, 2005. The Condensed Consolidated Balance Sheet as of December 31, 2004, 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, 2004 as filed with the Securities and Exchange Commission (“SEC”).

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3.              STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards (“SFAS”) No.123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure – an amendment of FASB Statement No. 123,” the Company has elected to measure and record compensation cost relative to employee stock option costs in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and make pro forma disclosures of net loss and basic loss per share as if the fair value method of valuing stock options had been applied. Under ABP No. 25, compensation cost is recognized for stock options granted to employees when the option price is less than the market price of the underlying common stock on the date of grant. During the nine months ended September 30, 2005, 4,948 shares of common stock were issued pursuant to options being exercised.  For purposes of the pro forma disclosures, we apply SFAS No. 123, as amended by SFAS No. 148, which requires the Company to estimate the fair value of the employee stock options at the grant date using an option-pricing model. The following table represents the effect on net loss and loss per share if the Company had applied the fair value based method and recognition provisions of SFAS No. 123, as amended:

The fair value of options granted under the Company’s stock plan was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 6.9%, expected volatility of from 19.0% to 22.0%, risk free interest rate from 3.3% to 4.3%, and expected life of 5 years. The weighted-average fair value of options at the date of grant was $1.25.

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4.              NET LOSS PER SHARE

Basic loss per share is computed using the weighted average common shares outstanding, excluding unvested restricted stock. Diluted earnings per share are computed using the weighted average common shares outstanding, excluding unvested restricted stock. Diluted loss per share is unchanged from basic loss per share for the three and nine months ended September 30, 2005 and 2004 because the addition of common shares that would be issued assuming exercise or conversion would be anti-dilutive.  No options, OP units or unvested restricted stock were included in the computation of diluted net loss attributable to common stockholders per share for the three or nine months ended September 30, 2005 and 2004, because the effect would have been antidilutive. Options to purchase 3,015,774 and 1,324,000 shares of common stock were outstanding at September 30, 2005 and 2004, respectively.

For the nine months ended September 30, 2004, the weighted average number of common shares outstanding included Class A units, on a pro forma basis, as if the Class A units had been converted to common stock using the initial public offering conversion ratio of one Class A unit to 0.08 shares of common stock.

The basic and diluted loss per share does not include the potential effects of the CCSs and CCUs as such securities would not have participated in earnings for any of the periods presented. These securities will not participate in distributions until they are converted. Such conversion cannot occur prior to March 31, 2006.

5.              REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:

6.              ACQUISITIONS

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

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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”).  The results of the acquired operations have been included in the unaudited condensed consolidated financial statements since July 14, 2005.

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 own 78 properties and assumed the management of 60 franchises and third party managed 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.  The Company paid cash of $528.7 million, issued 1,470,149 operating partnership units, valued at $21.6 million and assumed liabilities of $36,665.  Closing and other costs incurred in connection with the transaction totaled $14.8 million.  The limited liability companies contemporaneously entered into management agreements with the Company to manage the properties for a fee of 6% of revenues, as defined.

On March 28, 2005, the Company purchased one self-storage facility located in Green Acres, Florida from a third party for cash of $4.7 million.

On March 8, 2005, the Company purchased four self-storage facilities located in Florida from a third party for cash of $29.6 million.

On February 28, 2005, the Company purchased one self-storage facility located in Atlanta, Georgia from a third party for cash of $11.8 million.

On January 18, 2005, the Company purchased one self-storage facility located in Avenel, New Jersey from a third party for $9.7 million. The Company paid cash of $5.6 million and assumed net liabilities of $4.1 million.

On January 1, 2005, the Company purchased one self-storage facility located in Palmdale, California from certain members of the Company’s management team and a director, for $6.6 million. The Company paid cash of $3.3 million and assumed a note payable for $3.3 million. The independent members of the Company’s Board of Directors approved this acquisition.

The pro forma financial information presented below gives effect to the acquisitions as if the acquisitions had occurred as of the beginning of the respective periods. The information presented below is for illustrative purposes only and is not indicative of results that would have been achieved if the acquisitions had occurred on January 1, 2005 and 2004, respectively, or results which may be achieved in the future.

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7.              INVESTMENTS IN REAL ESTATE VENTURES

At September 30, 2005, the Company held minority investments in the following joint ventures:

1)              Extra Space West One LLC (“ESW”)

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

3)              PRISA

4)              PRISA II

5)              PRISA III

6)              VRS

7)              WCOT

8)              Storage Portfolio I, LLC (“Teachers”)

9)              Storage Portfolio Bravo II, LLC (“Heitman”) and

10)        Other equity investments.

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.

During the first and second quarter 2004, the Predecessor held a minority investment in Extra Space East One LLC (“ESE”). The Predecessor acquired its joint venture partner’s interest in ESE on May 4, 2004. Subsequent to the acquisition of its partner’s joint venture interest in ESE, the Company has consolidated the properties previously owned by ESE.

To the extent that properties were sold/transferred into these ventures where such transactions did not qualify for sales treatment, those properties are reflected as being owned by the Predecessor in the consolidated financial statements with the joint venture partners’ interests in these properties reflected as minority interests and putable preferred interests in consolidated joint ventures. There were no such transactions as of September 30, 2005 or December 31, 2004.

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The components of investments in real estate ventures consist of the following:

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

8.              NOTES RECEIVABLE

Notes receivable relate to construction advances Storage USA had offered to franchisees, although 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 generally bear interest based on a spread over the Prime interest rate or on a fixed rate of 5.85%.  Typically, advances represented 70%-90% of the anticipated cost of the project.

Based upon management assessments of current and historical loss experience, loan portfolio trends, prevailing economic and business conditions, specific loan review and other relevant

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factors, the face value of certain notes has been reduced by an aggregate of $3 million to reflect their estimated fair value on the date of acquisition.

9.              OTHER ASSETS

The components of other assets are summarized as follows:

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 (5.61% at September 30, 2005 and 4.15% at December 31, 2004). The Operating Partnership intends to use the proceeds of the Credit Facility for general corporate purposes. As of September 30, 2005, the Credit Facility has approximately $74.7 million of capacity based on the assets collateralizing the Credit Facility. The outstanding principal balance on the line of credit at September 30, 2005 and December 31, 2004 was $42.0 and $39.0 million, respectively and is due September 2007. The Credit Facility is collateralized by mortgages on real estate assets.

11.       NOTES PAYABLE

The components of notes payable are summarized as follows:

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Substantially all of the Company’s and the Predecessor’s real estate assets are pledged as collateral for the notes payable. In addition, the Company is subject to certain restrictive covenants relating to the outstanding notes payable, which the Company was in compliance with at September 30, 2005.

The Company has entered into a reverse interest rate swap agreement (“Swap Agreement”) in order to float $61.8 million 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 qualifies as a fair value hedge, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, 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 interest payments are recognized as an increase or decrease in interest expense.

The estimated fair value of the Swap Agreement is a liability of $1,815 and $532 at September 30, 2005 and December 31, 2004, respectively. For the three and nine months ended September 30, 2005, interest expense has been reduced by $51 and $285, respectively as a result of the Swap Agreement.

On July 14, 2005, a subsidiary of the Company entered into a $100.0 million bridge loan (the “Bridge Loan”) with a financial institution, maturing on November 11, 2005.  The Bridge Loan bears interest at LIBOR plus 150 basis points or at the base rate specified therein and is guaranteed by the Company and certain subsidiaries of the Company.  The Bridge Loan provides for various customary events of default which could result in an acceleration of all amounts payable there under.  The terms of the Bridge Loan require that it be repaid with the proceeds of equity offerings by the Company.  As of September 30, 2005 the Company had an outstanding balance of $61.3 million.

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On July 14, 2005, a subsidiary of the Company entered into a $28.0 million loan (the “Franchise Loan”) with a financial institution, maturing on July 31, 2007.  The Franchise Loan bears interest at LIBOR plus 150 basis points or at the base rate specified therein and is guaranteed by the Company and certain subsidiaries of the Company.  The Franchise Loan is collateralized by the Notes Receivable.

12.       NOTES PAYABLE TO TRUSTS

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

During May 2005, ESS Statutory Trust II (the “Trust II”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership of the Company, issued an aggregate of $41.0 million of preferred securities which mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1.3 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 (the “Note 2”). Note 2 has a fixed rate of 6.67% through June 30, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum. The interest on Note 2 , payable quarterly, will be used by the Trust II to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after June 30, 2010.

During April 2005, ESS Statutory Trust I (the “Trust”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership 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 note to the Operating Partnership (the “Note”). The Note has a fixed rate of 6.53% through June 30, 2010 and then will be payable at 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.

Under FASB Interpretation No. 46 (“FIN 46”) Consolidation of Variable Interest Entities and Revised Amendment to FIN 46 (“FIN 46R”), Trust, Trust II and Trust III are not consolidated. A

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debt obligation has been recorded in the form of notes as discussed above for the proceeds, which are owed to the Trust, Trust II, and Trust III by the Company.

13.       OTHER LIABILITIES

The components of other liabilities are summarized as follows:

Other miscellaneous liabilities mainly include other employee-related accruals.  The liability also includes severance of $1,187 and an obligation under a long-term lease agreement for Storage USA’s corporate offices in Memphis, Tennessee of $3,120, related to the Transaction.  There have been no material adjustments or payments to these accruals since the date of the Transaction.  Also included are various amounts owed for legal fees and other costs related to the Transaction.

14.       RELATED PARTY TRANSACTIONS

At September 30, 2005, the Company had receivables from related parties for $31.1 million.  Of these amounts, $19.0 million were from joint venture properties related to unpaid management fees and other advances made by the Company to fund the operations of these properties.  In addition $6.2 million were receivables from PRISA, PRISA II, PRISA II, VRS, and WCOT joint ventures for partial reimbursement of severance and other transition costs incurred by the Company on their behalf related to the Transaction.  The PRISA, PRISA II, PRISA III, VRS, and WCOT joint ventures had agreed to share a portion of these costs.  In addition, $3.4 million related to development fees receivable.

On January 1, 2004, the Predecessor distributed its equity ownership in Extra Space Development (“ESD”), a subsidiary consolidated at that time, to its Class A members. ESD owned 13 early-stage development properties, two parcels of undeveloped land and a note receivable. The net book value of the distributed properties and related liabilities was approximately $15.0 million. The Predecessor retained a receivable of $6.2 million from ESD and recorded a net distribution of $9.0 million. In September 2004, ESD repaid the amounts due to the Company using funds obtained through new loans on unencumbered properties. The Predecessor was required to continue to consolidate certain of the properties due to financial guarantees. Concurrent with the initial public offering, the Company was released from all guarantees, and the properties were deconsolidated as of August 16, 2004. ESD paid the Company $67 and $17 for the three months ending September 30, 2005 and 2004, respectively, and $176 and $24 for the nine months ending September 30, 2005 and 2004, respectively, relating to management fees.

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The Company has determined that it holds a variable interest in properties in which ESD owns or has an ownership interest. The Company does not have an equity investment or interest, and is not the primary beneficiary. This variable interest is a result of management and development contracts that are held by the Company. The variable interest is limited to the management and development fees and no additional loss can be attributed to the Company. The Company has determined that it is not the primary beneficiary in these agreements. Accordingly, such properties have not been consolidated subsequent to August 16, 2004.

On January 1, 2004, the Predecessor distributed the $4.5 million (including accrued interest of $438) note receivable from Centershift to the Class A unit holders. Effective January 1, 2004, the Company entered into a license agreement with Centershift which secures a perpetual right for continued use of STORE (the site management software used at all sites operated by the Company) in all aspects of the Company’s property acquisition, development, redevelopment and operational activities. The Company paid Centershift $383 and $159 for the three months ending September 30, 2005 and 2004, respectively, and $575 and $322 for the nine months ending September 30, 2005 and 2004, respectively, relating to the purchase of software and to license agreements.

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 is also a limited partner of the Operating Partnership, and controls the operations of the Operating Partnership, holding a 90.91% majority ownership interest therein as of September 30, 2005. The remaining ownership interests in the Operating Partnership of 9.09% are held by certain former owners of assets acquired by the Operating Partnership. The Company and Operating Partnership were formed to continue to operate and expand the business of the Predecessor.

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

On July 14, 2005 the Company issued 1,470,149 OP units valued at $21.6 million in conjunction with the Transaction.  On September 9, 2005, 350,000 OP units were redeemed in exchange for common stock. As of September 30, 2005, the Operating Partnership had 3,791,200 OP units outstanding and 200,046 shares of CCUs were issued and outstanding.

Unlike the OP units, CCUs do not carry any voting rights. Upon the achievement of certain performance thresholds relating to 14 early-stage lease-up properties, all or a portion of the CCUs will be automatically converted into 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

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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 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.

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

On June 20, 2005 the Company completed a private placement of 6.2 million shares of its common stock at an offering price of $13.47 per share, for aggregate gross proceeds of $83.5 million. Transaction costs were $2.2 million, resulting in net proceeds of $81.3 million. The shares were issued pursuant to an exemption from the registration requirements of Section 5 of the Securities Act of 1933, as amended. Pursuant to the terms of the registration rights agreement, the Company filed a registration statement covering the shares on September 22, 2005. The Company will use commercially reasonable efforts to cause the registration statement to be declared effective as soon as possible thereafter, but in any event within 90 days thereafter. If the registration statement is not declared effective within this time period, the Company has agreed to pay liquidated damages as described in the Registration Rights Agreement.

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 CCSs, $.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. As of September 30, 2005, 37,914,898 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.

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,

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2008, such outstanding CCSs will be cancelled and restored to the status of authorized but unissued shares of common stock.

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

During the quarter ended September 30, 2005, the Company granted 190,000 shares of restricted stock, without consideration.  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 typically lapse over a three to four year period beginning on the date of grant.  The Company recorded deferred compensation in stockholders’ equity equal to the market value of the restricted shares on the date of grant and amortizes deferred compensation to expense over the vesting period.  For the three and nine months ending September 30, 2005, $416 of amortization expense of this deferred compensation is included in general and administrative expense.

17.       SEGMENT INFORMATION

The Company and the Predecessor operate in two distinct segments, (i) Property Management and (ii) Development and Rental Operations. Financial information for the Company’s and Predecessor’s business segments are as follows:

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