UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

x

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

 

 

 

For the quarterly period ended June 30, 2007

 

 

or

 

 

o

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

 

 

 

For the transition period from                     to                     .

 

Commission File Number: 001-32269

EXTRA SPACE STORAGE INC.

(Exact name of registrant as specified in its charter)

Maryland

 

20-1076777

(State or other jurisdiction of incorporation or organization)

 

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

 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 31, 2007 was 64,837,892.

 




EXTRA SPACE STORAGE INC.
TABLE OF CONTENTS

STATEMENT ON FORWARD-LOOKING INFORMATION

3

 

 

PART I. FINANCIAL INFORMATION

4

 

 

ITEM 1. FINANCIAL STATEMENTS

4

 

 

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

23

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

34

 

 

ITEM 4. CONTROLS AND PROCEDURES

35

 

 

PART II. OTHER INFORMATION

35

 

 

ITEM 1. LEGAL PROCEEDINGS

35

 

 

ITEM 1A. RISK FACTORS

35

 

 

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

35

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

36

 

 

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

36

 

 

ITEM 5. OTHER INFORMATION

36

 

 

ITEM 6. EXHIBITS

36

 

 

SIGNATURES

37

 

2




STATEMENT ON FORWARD-LOOKING INFORMATION

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

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

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

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

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

·                  potential liability for uninsured losses and environmental contamination;

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

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

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

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

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

3




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Extra Space Storage Inc.
Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

June 30, 2007

 

December 31, 2006

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Net operating real estate assets

 

$

1,641,120

 

$

1,382,055

 

Real estate under development

 

35,906

 

35,336

 

Net real estate assets

 

1,677,026

 

1,417,391

 

 

 

 

 

 

 

Investments in real estate ventures

 

91,303

 

88,115

 

Cash and cash equivalents

 

45,790

 

70,801

 

Short-term investments

 

90,331

 

 

Restricted cash

 

35,528

 

44,282

 

Receivables from related parties and affiliated real estate joint ventures

 

8,321

 

15,880

 

Other assets, net

 

35,640

 

33,356

 

Total assets

 

$

1,983,939

 

$

1,669,825

 

 

 

 

 

 

 

Liabilities, Minority Interests, and Stockholders’ Equity:

 

 

 

 

 

Notes payable

 

$

875,730

 

$

828,584

 

Notes payable to trusts

 

119,590

 

119,590

 

Exchangeable senior notes

 

250,000

 

 

Line of credit

 

 

 

Derivative instrument associated with Preferred Operating Partnership units (Note 14)

 

15,268

 

 

Accounts payable and accrued expenses

 

25,363

 

25,704

 

Other liabilities

 

22,960

 

17,234

 

Total liabilities

 

1,308,911

 

991,112

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Preferred Operating Partnership units, net of $100,000 note receivable (Note 14)

 

6,465

 

 

 

 

 

 

 

 

Minority interest in Operating Partnership

 

37,020

 

34,841

 

Other minority interests

 

277

 

317

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common Stock, $0.01 par value, 200,000,000 shares authorized, 64,833,425 and 64,167,098 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively

 

649

 

642

 

Paid-in capital

 

824,088

 

822,181

 

Accumulated deficit

 

(193,471

)

(179,268

)

Total stockholders’ equity

 

631,266

 

643,555

 

Total liabilities, Preferred Operating Partnership, minority interests, and stockholders’ equity

 

$

1,983,939

 

$

1,669,825

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4




Extra Space Storage Inc.
Condensed Consolidated Statements of Operations

(in thousands, except share data)
(unaudited)

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Property rental

 

$

48,392

 

$

42,020

 

$

94,623

 

$

81,195

 

Management and franchise fees

 

5,143

 

5,181

 

10,351

 

10,340

 

Tenant insurance

 

2,688

 

971

 

4,831

 

1,892

 

Development fees

 

182

 

175

 

237

 

225

 

Other income

 

145

 

184

 

284

 

249

 

Total revenues

 

56,550

 

48,531

 

110,326

 

93,901

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operations

 

17,352

 

15,248

 

34,248

 

29,990

 

Tenant insurance

 

1,217

 

589

 

2,190

 

1,222

 

Unrecovered development and acquisition costs

 

159

 

24

 

409

 

342

 

General and administrative

 

8,968

 

8,747

 

18,208

 

17,992

 

Depreciation and amortization

 

9,123

 

9,057

 

17,919

 

18,333

 

Total expenses

 

36,819

 

33,665

 

72,974

 

67,879

 

 

 

 

 

 

 

 

 

 

 

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

 

19,731

 

14,866

 

37,352

 

26,022

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,437

)

(12,784

)

(28,833

)

(24,769

)

Interest income

 

3,668

 

148

 

5,116

 

630

 

Minority interest - Operating Partnership

 

(515

)

(225

)

(899

)

(279

)

Minority interests - other

 

56

 

 

40

 

 

Equity in earnings of real estate ventures

 

1,192

 

1,087

 

2,389

 

2,226

 

Net income

 

$

8,695

 

$

3,092

 

$

15,165

 

$

3,830

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.06

 

$

0.24

 

$

0.07

 

Diluted

 

$

0.13

 

$

0.06

 

$

0.23

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

Basic

 

64,439,138

 

51,625,135

 

64,356,827

 

51,606,618

 

Diluted

 

69,248,845

 

55,991,088

 

69,214,313

 

55,983,086

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.23

 

$

0.23

 

$

0.46

 

$

0.46

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5




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

(in thousands, except share data)
(unaudited)

 

 

Common Stock

 

Paid-in
Capital

 

Accumulated
Deficit

 

Total Stockholders’
Equity

 

 

 

Shares

 

Par Value

 

 

 

 

Balances at December 31, 2006

 

64,167,098

 

$

642

 

$

822,181

 

$

(179,268

)

$

643,555

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon the exercise of options

 

76,048

 

1

 

1,032

 

 

1,033

 

Restricted stock grants issued

 

90,529

 

1

 

 

 

1

 

Restricted stock grants cancelled

 

(600

)

 

 

 

 

Conversion of Contingent Conversion Shares to common stock

 

500,350

 

5

 

 

 

5

 

Compensation expense related to stock-based awards

 

 

 

875

 

 

875

 

Net income

 

 

 

 

15,165

 

15,165

 

Dividends paid on common stock at $0.455 per share

 

 

 

 

(29,368

)

(29,368

)

Balances at June 30, 2007

 

64,833,425

 

$

649

 

$

824,088

 

$

(193,471

)

$

631,266

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6




Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows

(in thousands)
(unaudited)

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

15,165

 

$

3,830

 

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

 

 

 

 

 

Depreciation and amortization

 

17,919

 

18,333

 

Amortization of deferred financing costs

 

1,560

 

1,546

 

Stock compensation expense

 

875

 

1,016

 

Income allocated to minority interests

 

859

 

279

 

Distributions from operations of real estate ventures in excess of earnings

 

2,332

 

2,280

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties

 

7,559

 

11,890

 

Other assets

 

3,353

 

5,349

 

Accounts payable and accrued expenses

 

(341

)

(8,775

)

Other liabilities

 

2,624

 

516

 

Net cash provided by operating activities

 

51,905

 

36,264

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(98,148

)

(87,964

)

Development and construction of real estate assets

 

(19,381

)

(15,118

)

Proceeds from sale of real estate assets

 

 

728

 

Investments in real estate ventures

 

(6,022

)

(4,835

)

Net purchases of short-term investments

 

(90,331

)

 

Change in restricted cash

 

8,754

 

(11

)

Principal payments received on notes receivable

 

 

118

 

Purchase of equipment and fixtures

 

(501

)

(768

)

Net cash used in investing activities

 

(205,629

)

(107,850

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exchangeable senior notes

 

250,000

 

 

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

 

46,147

 

97,602

 

Principal payments on notes payable and line of credit

 

(30,137

)

(24,598

)

Deferred financing costs

 

(6,408

)

(647

)

Loan to Preferred Operating Partnership unit holder

 

(100,000

)

 

Redemption of Operating Partnership units held by minority interest

 

(775

)

 

Net proceeds from exercise of stock options

 

1,033

 

127

 

Dividends paid on common stock

 

(29,368

)

(23,561

)

Distributions to Operating Partnership units held by minority interest

 

(1,779

)

(1,740

)

Net cash provided by financing activities

 

128,713

 

47,183

 

Net decrease in cash and cash equivalents

 

(25,011

)

(24,403

)

Cash and cash equivalents, beginning of the period

 

70,801

 

28,653

 

Cash and cash equivalents, end of the period

 

$

45,790

 

$

4,250

 

 

7




 

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

Supplemental schedule of cash flow information

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

24,931

 

$

22,900

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Real estate assets

 

$

157,079

 

$

21,009

 

Notes payable

 

(31,010

)

(7,926

)

Notes receivable

 

 

(10,298

)

Preferred Operating Partnership units

 

(121,733

)

 

Investment in real estate ventures

 

(502

)

(2,785

)

Minority interest in Operating Partnership

 

(3,834

)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

8




Extra Space Storage Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Amounts in thousands, except share data

1.        ORGANIZATION

Extra Space Storage Inc. (the “Company”) is a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”), formed as a Maryland corporation on April 30, 2004 to own, operate, manage, acquire and develop self-storage facilities located throughout the United States. The Company continues the business of Extra Space Storage LLC and its subsidiaries, which had engaged in the self-storage business since 1977. The Company’s interest in its properties is held through its operating partnership, Extra Space Storage LP (the “Operating Partnership”), which was formed on May 5, 2004. The Company’s primary assets are general partner and limited partner interests in the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To the extent the Company continues to qualify as a REIT, it will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to its stockholders.

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

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

2.        BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007. The Condensed Consolidated Balance Sheet as of December 31, 2006 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission (“SEC”).

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

Recently Issued Accounting Standards

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

The Company has elected to early adopt Topic D-109 which specifically relates to the AAAAA Rent-A-Space acquisition that was completed during the quarter ended June 30, 2007.  See Note 14.

9




3.        NET INCOME PER SHARE

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding, less non-vested restricted stock. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued and is calculated using either the treasury stock or if converted method. Potential common shares are securities (such as options, warrants, convertible debt, Contingent Conversion Shares (“CCS”), Contingent Conversion Units (“CCU”), exchangeable preferred Operating Partnership units 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 in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per share, only potential common shares that are dilutive, those that reduce earnings per share, are included.

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

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

For the purposes of computing the diluted impact on earnings per share of the potential conversion of Series A Participating Redeemable Preferred Operating Partnership units into common shares, where the Company has the option to redeem in cash or shares as discussed in Note 14 and where the Company has stated the positive intent and ability to settle at least $115 million of the instrument in cash (or net settle a portion of the preferred Operating Partnership units against the related outstanding note receivable), only the amount of the instrument in excess of $115 million is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by paragraph 29 of FAS 128.  As of June 30, 2007 only nine of the ten properties had closed.  As such, $106,465 (the pro rata portion of the $115 million referenced above) was excluded from the calculation.

For the three months ended June 30, 2007 and 2006, options to purchase approximately 325,934 and 1,143,380 shares of common stock,  and for the six months ended June 30, 2007 and 2006, options to purchase approximately 204,315 and 1,148,173 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

10




The computation of net income per share is as follows:

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

8,695

 

$

3,092

 

$

15,165

 

$

3,830

 

Add:

 

 

 

 

 

 

 

 

 

Income allocated to minority interest - Operating Partnership

 

515

 

225

 

899

 

279

 

Net income for diluted computations

 

$

9,210

 

$

3,317

 

$

16,064

 

$

4,109

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares oustanding:

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding - basic

 

64,439,138

 

51,625,135

 

64,356,827

 

51,606,618

 

Operating Partnership units

 

4,012,379

 

3,825,787

 

4,012,379

 

3,825,787

 

Preferred Operating Partnership units

 

49,949

 

 

25,113

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive stock options, restricted stock and CCS/CCU conversions

 

747,379

 

540,166

 

819,995

 

550,681

 

Average number of common shares outstanding - diluted

 

69,248,845

 

55,991,088

 

69,214,313

 

55,983,086

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.06

 

$

0.24

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.13

 

$

0.06

 

$

0.23

 

$

0.07

 

 

4.        REAL ESTATE ASSETS

The components of real estate assets are summarized as follows:

 

June 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Land

 

$

419,038

 

$

361,569

 

Buildings and improvements

 

1,296,813

 

1,085,269

 

Intangible assets - tenant relationships

 

29,937

 

25,436

 

Intangible lease rights

 

5,900

 

3,400

 

 

 

1,751,688

 

1,475,674

 

Less: accumulated depreciation and amortization

 

(110,568

)

(93,619

)

Net operating real estate assets

 

1,641,120

 

1,382,055

 

Real estate under development

 

35,906

 

35,336

 

Net real estate assets

 

$

1,677,026

 

$

1,417,391

 

 

11




5.        PROPERTY ACQUISITIONS

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

Property Location(s)

 

Number of
Properties

 

Date of
Acquisition

 

Total
Consideration

 

Cash Paid

 

Loan
Assumed

 

Net
Liabilities /
(Assets)
Assumed

 

Value of OP
Units Issued

 

Number of
OP Units
Issued

 

Source of Acquisition

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

1

 

6/26/2007

 

$

11,216

 

$

196

 

$

2,822

 

$

1

 

$

8,197

 

61,398

 

Unrelated third party

 

(1)

 

California (6) & Hawaii (2)

 

8

 

6/25/2007

 

126,623

 

11,154

 

 

1,933

 

113,536

 

847,677

 

Unrelated third party

 

(1)

 

Georgia

 

3

 

6/14/2007

 

13,693

 

13,594

 

 

99

 

 

 

Unrelated franchisee

 

 

 

California

 

1

 

6/14/2007

 

18,703

 

867

 

14,062

 

(60

)

3,834

 

218,693

 

Unrelated third party

 

(2)

 

Maryland

 

1

 

6/6/2007

 

14,942

 

8,128

 

6,834

 

(20

)

 

 

Unrelated third party

 

 

 

California

 

1

 

6/1/2007

 

4,020

 

4,036

 

 

(16

)

 

 

Unrelated third party

 

 

 

Florida

 

1

 

5/31/2007

 

8,975

 

8,882

 

 

93

 

 

 

Unrelated third party

 

 

 

California

 

1

 

5/24/2007

 

5,585

 

5,575

 

 

10

 

 

 

Unrelated third party

 

 

 

Maryland

 

1

 

4/17/2007

 

12,670

 

5,428

 

7,292

 

(50

)

 

 

Unrelated third party

 

 

 

Florida

 

1

 

3/27/2007

 

6,320

 

6,257

 

 

63

 

 

 

Unrelated franchisee

 

 

 

Maryland

 

1

 

1/11/2007

 

14,334

 

14,348

 

 

(14

)

 

 

Unrelated franchisee

 

 

 

Tennessee

 

1

 

1/5/2007

 

3,684

 

3,672

 

 

12

 

 

 

Unrelated franchisee

 

 

 

Arizona

 

1

 

1/2/2007

 

4,361

 

4,527

 

 

(166

)

 

 

Related joint venture

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

22

 

 

 

$

245,126

 

$

86,664

 

$

31,010

 

$

1,885

 

$

125,567

 

1,127,768

 

 

 

 

 

 


Notes:

(1) - - Preferred Operating Partnership Units

(2) - Common Operating Partnership Units

6.        INVESTMENTS IN REAL ESTATE VENTURES

Investments in real estate ventures consisted of the following:

 

 

Excess Profit

 

Equity

 

Investment balance at

 

 

 

Participation %

 

Ownership %

 

June 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Extra Space West One LLC (“ESW”)

 

40%

 

5%

 

$

1,742

 

$

1,918

 

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

 

35%

 

10%

 

1,684

 

1,757

 

PRISA Self Storage LLC (“PRISA”)

 

17%

 

2%

 

13,303

 

13,393

 

PRISA II Self Storage LLC (“PRISA II”)

 

17%

 

2%

 

10,839

 

10,821

 

PRISA III Self Storage LLC (“PRISA III”)

 

20%

 

5%

 

4,513

 

4,534

 

VRS Self Storage LLC (“VRS”)

 

20%

 

5%

 

4,584

 

4,547

 

WCOT Self Storage LLC (“WCOT”)

 

20%

 

5%

 

5,308

 

5,287

 

Storage Portfolio I, LLC (“SP I”)

 

40%

 

25%

 

18,743

 

19,260

 

Storage Portfolio Bravo II (“SPB II”)

 

45%

 

20%

 

14,956

 

15,264

 

Other minority owned properties

 

10-50%

 

10-50%

 

15,631

 

11,334

 

 

 

 

 

 

 

$

91,303

 

$

88,115

 

 

In these joint ventures, the Company and the joint venture partner generally receive a preferred return on their invested capital. To the extent that cash/profits in excess of these preferred returns are generated through operations or capital transactions, the Company would receive a higher percentage of the excess cash/profits than its equity interest.

On March 1, 2007, the Company acquired a 39.5% interest in U-Storage de Mexico S.A., an existing Mexican corporation (“U-Storage”), which currently manages, develops, owns and operates self storage facilities in Mexico.  Included in Other Minority Owned Properties is $5,086 relating to the Company’s investment in Mexico.  Kenneth T. Woolley, a former Senior Vice President of the Company and son of Kenneth M. Woolley, the CEO of the Company, also acquired a 0.5% interest in U-Storage de Mexico S.A.

12




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

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of ESW

 

$

348

 

$

341

 

$

696

 

$

681

 

Equity in earnings of ESNPS

 

41

 

38

 

87

 

74

 

Equity in earnings of PRISA

 

185

 

132

 

355

 

256

 

Equity in earnings of PRISA II

 

147

 

115

 

277

 

221

 

Equity in earnings of PRISA III

 

71

 

30

 

134

 

53

 

Equity in earnings of VRS

 

62

 

41

 

123

 

75

 

Equity in earnings of WCOT

 

77

 

40

 

147

 

73

 

Equity in earnings of SP I

 

248

 

301

 

453

 

601

 

Equity in earnings of SPB II

 

181

 

242

 

371

 

473

 

Equity in earnings/(losses) of other minority owned properties

 

(168

)

(193

)

(254

)

(281

)

 

 

$

1,192

 

$

1,087

 

$

2,389

 

$

2,226

 

 

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

7.        SHORT-TERM INVESTMENTS

The Company accounts for its investments in debt and equity securities according to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires securities classified as “available-for-sale” to be stated at fair value. Adjustments to fair value of available-for-sale securities are recorded as a component of other comprehensive income (loss).  A decline in the market value of equity securities below cost, that is deemed to be other than temporary, results in a reduction in the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.  At June 30, 2007, the Company had $90,331 in highly-liquid auction rate securities (“ARS”), government and corporate bonds and variable rate demand notes classified as available-for-sale securities. Although these ARS have long-term stated contractual maturities, they can be presented for redemption at auction when rates are reset which is typically every 7, 28 or 35 days.  The Company had no realized or unrealized gains or losses related to these securities during the three and six months ended June 30, 2007.  All income related to these investments was recorded as interest income. In accordance with the Company’s investment policy, the Company only invests in ARS with high credit quality issuers and limits the amount of investment exposure to any one issuer.

13




8.        NOTES PAYABLE

The components of notes payable are summarized as follows:

 

 

June 30, 2007

 

December 31, 2006

 

Fixed Rate

 

 

 

 

 

 

 

 

 

 

 

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

 

$

811,008

 

$

743,511

 

 

 

 

 

 

 

Variable Rate

 

 

 

 

 

 

 

 

 

 

 

Mortgage and construction loans with banks bearing floating interest rates (including loans subject to interest rate swaps) based on LIBOR. Interest rates based on LIBOR are between LIBOR plus 0.66% (5.98% and 6.01% at June 30, 2007 and December 31, 2006, respectively) and LIBOR plus 2.00% (7.32% and 7.35% at June 30, 2007 and December 31, 2006, respectively). The loans are collateralized by mortgages on real estate assets and the assignment of rents. Principal and interest payments are made monthly with all outstanding principal and interest due between October 25, 2007 and June 11, 2009.

 

64,722

 

85,073

 

 

 

 

 

 

 

 

 

$

875,730

 

$

828,584

 

 

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

In October 2004, the Company entered into a reverse interest rate swap agreement (“Swap Agreement”) to float $61,770 of 4.30% fixed interest rate secured notes due in September 2009. Under this Swap Agreement, the Company will receive interest at a fixed rate of 4.30% and pay interest at a variable rate equal to LIBOR plus 0.66%. 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 June 30, 2007 and December 31, 2006 was reflected as an other liability of $1,800 and $1,925, respectively.  The Company recorded additional interest expense relating to the Swap Agreement of $264 and $186 for the three months ended June 30, 2007 and 2006, respectively.  Interest expense was increased by $525 and reduced by $148 for the six months ended June 30, 2007 and 2006, respectively.

9.        NOTES PAYABLE TO TRUSTS

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

During May 2005, ESS Statutory Trust II (the “Trust II”), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $41.0 million of preferred securities which mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1.3 million. On May 24, 2005, the proceeds from the sale of the preferred and common securities of $42.3 million were loaned in the form of a note to the Operating Partnership (“Note 2”). Note 2 has a fixed rate of 6.67% through June 30, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum.

14




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

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

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

10.     EXCHANGEABLE SENIOR NOTES

On March 27, 2007, our Operating Partnership issued $250.0 million of its 3.625% Exchangeable Senior Notes due April 1, 2027 (the “Notes”). Costs incurred to issue the Notes were approximately $5.7 million. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term of the Notes, and are included in other assets in the condensed consolidated balance sheet as of June 30, 2007. The Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on April 1 and October 1 of each year beginning October 1, 2007 until the maturity date of April 1, 2027. The Notes bear interest at 3.625% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash (up to the principal amount of the Notes) and, with respect to any excess exchange value, for cash, shares of our common stock or a combination of cash and shares of our common stock at an initial exchange rate of approximately 42.5822 shares per $1,000 principal amount of Notes at the option of the Operating Partnership.

The Operating Partnership may redeem the Notes at any time to preserve the Company’s status as a REIT. In addition, on or after April 5, 2012, the Operating Partnership may redeem the Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to holders of the Notes.

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

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

11.     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”).

15




The Credit Facility has an interest rate of 175 basis points over LIBOR (7.07% and 7.10% at June 30, 2007 and December 31, 2006, respectively). The Operating Partnership intends to use the proceeds of the Credit Facility for general corporate purposes. As of June 30, 2007, the Credit Facility had approximately $81 million of capacity based on the assets collateralizing the Credit Facility. No amounts were outstanding on the line of credit at June 30, 2007 or December 31, 2006. The maturity date on the line of credit is September 2007. The Credit Facility is collateralized by mortgages on certain real estate assets.

12.     RELATED PARTY AND AFFILIATED REAL ESTATE JOINT VENTURE TRANSACTIONS

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

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

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Entity

 

Type

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

ESW

 

Affiliated real estate joint ventures

 

$

109

 

$

103

 

$

218

 

$

204

 

ESNPS

 

Affiliated real estate joint ventures

 

109

 

104

 

216

 

206

 

PRISA

 

Affiliated real estate joint ventures

 

1,294

 

1,259

 

2,595

 

2,491

 

PRISA II

 

Affiliated real estate joint ventures

 

1,048

 

1,018

 

2,090

 

2,018

 

PRISA III

 

Affiliated real estate joint ventures

 

474

 

456

 

942

 

908

 

VRS

 

Affiliated real estate joint ventures

 

283

 

280

 

568

 

553

 

WCOT

 

Affiliated real estate joint ventures

 

387

 

364

 

768

 

723

 

SP I

 

Affiliated real estate joint ventures

 

316

 

303

 

626

 

601

 

SPB II

 

Affiliated real estate joint ventures

 

254

 

261

 

516

 

517

 

Extra Space Development (“ESD”)

 

Related party

 

188

 

110

 

355

 

206

 

Various

 

Franchisees, third parties and other

 

681

 

923

 

1,457

 

1,913

 

 

 

 

 

$

5,143

 

$

5,181

 

$

10,351

 

$

10,340

 

 

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

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

Type

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliated real estate joint ventures

 

$

182

 

$

122

 

$

237

 

$

147

 

 

 

Related party

 

 

53

 

 

78

 

 

 

 

 

$

182

 

$

175

 

$

237

 

$

225

 

 

Effective January 1, 2004, the Company entered into a license agreement with Centershift, a related party software provider, to secure a perpetual right for continued use of STORE (the site management software used at all sites operated by the Company) in all aspects of the Company’s property acquisition, development, redevelopment and operational activities. The Company paid Centershift $266 and $190 for the three months ended June 30, 2007 and 2006, respectively, and $455 and $368 for the six months ended June 30, 2007 and 2006, respectively, relating to the purchase of software and to license agreements.

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

 

June 30, 2007

 

December 31, 2006

 

Receivables:

 

 

 

 

 

Development fees

 

$

2,869

 

$

2,633

 

Other receivables from properties

 

5,452

 

13,247

 

 

 

$

8,321

 

$

15,880

 

 

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

16




13.     MINORITY INTEREST IN OPERATING PARTNERSHIP

The Company’s interest in its properties is held through the Operating Partnership. ESS Holding Business Trust I, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The Company, through ESS Holding Business Trust II, a wholly owned subsidiary of the Company, is also a limited partner of the Operating Partnership. Between its general partner and limited partner interests, the Company held a 94.17% majority ownership interest therein as of June 30, 2007. The remaining ownership interests in the Operating Partnership of 5.83% 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. Limited partners who received Operating Partnership units in the formation transactions or in exchange for contributions for interests in properties have the right to require the Operating Partnership to redeem part or all of their 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.

As of June 30, 2007, the Operating Partnership had 4,012,379 and 174,307 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 Operating Partnership units. Initially, each CCU will be convertible on a one-for-one basis into Operating Partnership units, subject to customary anti-dilution adjustments. Beginning with the quarter ended March 31, 2006, and ending with the quarter ending December 31, 2008, the Company will calculate the net operating income from the 14 wholly-owned early-stage lease-up properties over the 12-month period ending in such quarter. Within 35 days following the end of each quarter referred to above, some or all of the CCUs will be converted so that the total percentage (not to exceed 100%) of CCUs issued in connection with the formation transactions that have been converted to Operating Partnership units will be equal to the percentage determined by dividing the net operating income for such period in excess of $5.1 million by $4.6 million. If 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.

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

As of June 30, 2007, there were 25,739 CCUs converted to Operating Partnership units.  Based on the performance of the properties as of June 30, 2007, an additional 20,198 CCUs became eligible for conversion.  The board of directors approved the conversion of these CCUs on August 1, 2007 as per the Company’s charter, and the units were issued on August 3, 2007.

14.     PREFERRED OPERATING PARTNERSHIP UNITS

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

On June 25 and 26, 2007, nine of the ten properties were contributed to the Operating Partnership in exchange for consideration totaling $137.8 million. Preferred OP units totaling 909,075, with a value of $121.7 million, were issued along with the assumption of approximately $14.2 million of third-party debt, of which $11,381 was paid off at close.  The final property was purchased by the Company on August 1, 2007.

On June 25, 2007, the Company loaned the holders of the Preferred OP Units $100.0 million. The receivable bears interest at 4.85%, and is due September 1, 2017.  The loan is secured by the borrower’s Preferred OP Units.  In addition, any conversion of the Preferred OP Units prior to the maturity date requires repayment of the loan as of the date of the Preferred OP Unit

17




redemption.  Preferred OP Units are shown on the balance sheet net of the $100.0 million loan under the guidance in EITF No. 85-1, Classifying Notes Receivable for Capital because the borrower under the loan receivable is also the holder of the Preferred OP Units.

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

Per the Partnership Agreement, Preferred OP Units in the amount of $115.0 million bear a fixed priority return of 5% and have a fixed liquidation value of $115.0 million. The remaining balance will participate in distributions with and have a liquidation value equal to that of the common Operating Partnership units.  Included in the June 30, 2007 financials statements was the pro rata amount of  $106,464 related to the $115.0 million due to the Company not closing on the final property until August 1, 2007.  The Preferred OP Units will be redeemable at the option of the holder on or after September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

In accordance with SFAS 133 Accounting for Derivative Instruments and Hedging Activities, SFAS 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,  EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,  EITF Topic D-109, Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133, and Accounting Series Release  (“ASR”) No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks, the Preferred OP Units were classified as a hybrid instrument such that the value of the units associated with the fixed return are classified in mezzanine after total liabilities on the balance sheet and before stockholders’ equity.  The remaining balance that participates in distributions equal to that of common stock has been identified as an embedded derivative and has been classified as a liability on the balance sheet and is marked to fair value on a quarterly basis with any adjustment being recorded to the income statement.  As of June 30, 2007, the carrying value of the obligation associated with the Preferred OP Units approximated fair value.

The following table summarizes the components of the transaction:

$

121,733

 

Total amount of Preferred OP Units issued at June 30, 2007

 

(15,268

)

Derivative instrument associated with the Preferred OP Units presented as a liability

 

106,465

 

Value of Preferred OP units considered as mezzanine equity

 

(100,000

)

Less note receivable to Preferred OP unit holder

 

$

6,465

 

Net value of Preferred OP units considered as mezzanine equity

 

 

15.     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, $.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share.  As of June 30, 2007, 64,833,425 shares of common stock were issued and outstanding, 3,388,493 CCSs were issued and outstanding and no shares of preferred stock were issued and outstanding. All stockholders of the Company’s common stock are entitled to receive dividends and to one vote on all matters submitted to a vote of stockholders.

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

While any CCSs remain outstanding, a majority of the Company’s independent directors must review and approve the net

18




operating income calculation for each measurement period and also must approve any sales of any of the 14 wholly-owned early-stage lease-up properties.

As of June 30, 2007, there were 500,350 CCSs converted to common stock.  Based on the performance of the properties as of June 30, 2007, an additional 392,648 CCSs became eligible for conversion.  The board of directors approved the conversion of these CCSs on August 1, 2007 as per the Company’s charter, and the shares were issued on August 3, 2007.

16.     STOCK-BASED COMPENSATION

Options

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

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

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Expected volatility

 

23

%

22

%

Dividend yield

 

5.8

%

6.4

%

Risk-free interest rate

 

4.9

%

4.7

%

Average expected term (years)

 

5

 

5

 

 

The Black-Scholes model incorporates assumptions to value stock—based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility and average expected term.  The forfeiture rate, which is estimated at a weighted average of 18.93% of unvested options outstanding as of June 30, 2007, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

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

Options

 

Number of
Shares

 

Weighted
Average Exercise
Price

 

Weighted Average
Remaining
Contractual Life

 

Aggregate Intrinsic
Value as of June 30,
2007

 

Outstanding at December 31, 2006

 

2,564,563

 

$

13.92

 

 

 

 

 

Granted

 

321,000

 

19.61

 

 

 

 

 

Exercised

 

(76,048

)

13.63

 

 

 

 

 

Forfeited

 

(104,251

)

14.32

 

 

 

 

 

Outstanding at June 30, 2007

 

2,705,264

 

$

14.53

 

7.85

 

$

6,256,459

 

 

 

 

 

 

 

 

 

 

 

Vested and Expected to Vest

 

1,973,200

 

$

14.34

 

7.77

 

$

4,837,556

 

Ending Exercisable

 

836,397

 

$

13.54

 

7.47

 

$

2,475,896

 

 

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 second quarter of 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2007. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

19




The Company recorded compensation expense relating to outstanding options of $196 and $250 for the three months ended June 30, 2007 and 2006, respectively, and $419 and $450 for the six months ended June 30, 2007 and 2006, respectively.  The Company received cash from the exercise of options of $305 and $36 for the three months ended June 30, 2007 and 2006, respectively, and $1,033 and $127 for the six months ended June 30, 2007 and 2006, respectively.  At June 30, 2007, there was $1,422 of total unrecognized compensation expense related to non-vested stock options under the Company’s 2004 Long-Term Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 2.01 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 June 30, 2007, noted above does not necessarily represent the expense that will ultimately be realized by the Company in the Statement of Operations.

Common Stock Granted to Employees

Common stock is granted to certain employees without monetary consideration under the Company’s 2004 Long-Term Incentive Compensation Plan.  At the date of grant, the recipient has all rights of a stockholder including the right to vote and receive dividends subject to restrictions on transfer and forfeiture provisions. The forfeiture and transfer restrictions on the shares lapse over a two to four year period beginning on the date of grant.

The Company recorded compensation expense relating to outstanding shares of common stock granted to employees of $242 and $197 for the three months ended June 30, 2007 and 2006, respectively, and $456 and $383 for the six months ended June 30, 2007 and 2006, respectively.

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

Restricted Stock Grants

 

Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Unreleased at December 31, 2006

 

156,300

 

$

15.94

 

Granted

 

90,529

 

19.25

 

Released

 

(27,500

)

15.72

 

Cancelled

 

(600

)

18.24

 

Unreleased at June 30, 2007

 

218,729

 

$

17.35

 

 

17.     SEGMENT INFORMATION

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

 

 

June 30, 2007

 

December 31, 2006

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

91,303

 

$

88,115

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

373,759

 

$

223,402

 

Rental operations

 

1,610,180

 

1,446,423

 

 

 

$

1,983,939

 

$

1,669,825

 

 

20




 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

8,158

 

$

6,511

 

$

15,703

 

$

12,706

 

Rental operations

 

48,392

 

42,020

 

94,623

 

81,195

 

 

 

$

56,550

 

$

48,531

 

$

110,326

 

$

93,901

 

 

 

 

 

 

 

 

 

 

 

Operating expenses, including depreciation and amortization

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

10,684

 

$

9,561

 

$

21,409

 

$

19,940

 

Rental operations

 

26,135

 

24,104

 

51,565

 

47,939

 

 

 

$

36,819

 

$

33,665

 

$

72,974

 

$

67,879

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(2,526

)

$

(3,050

)

$

(5,706

)

$

(7,234

)

Rental operations

 

22,257

 

17,916

 

43,058

 

33,256

 

 

 

$

19,731

 

$

14,866

 

$

37,352

 

$

26,022

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(401

)

$

(186

)

$

(564

)

$

(386

)

Rental operations

 

(15,036

)

(12,598

)

(28,269

)

(24,383

)

 

 

$

(15,437

)

$

(12,784

)

$

(28,833

)

$

(24,769

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

3,668

 

$

148

 

$

5,116

 

$

630

 

 

 

 

 

 

 

 

 

 

 

Minority interests - Operating Partnership and other

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(459

)

$

(225

)

$

(859

)

$

(279

)

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

 

 

 

 

Rental operations

 

$

1,192

 

$

1,087

 

$

2,389

 

$

2,226

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

282

 

$

(3,313

)

$

(2,013

)

$

(7,269

)

Rental operations

 

8,413

 

6,405

 

17,178

 

11,099

 

 

 

$

8,695

 

$

3,092

 

$

15,165

 

$

3,830

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

340

 

$

201

 

$

602

 

$

384

 

Rental operations

 

8,783

 

8,856

 

17,317

 

17,949

 

 

 

$

9,123

 

$

9,057

 

$

17,919

 

$

18,333

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(98,148

)

$

(87,964

)

 

 

 

 

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(19,381

)

$

(15,118

)

 

18.     COMMITMENTS AND CONTINGENCIES

The Company has guaranteed two construction loans for unconsolidated partnerships that own development properties in Baltimore, Maryland and Chicago, Illinois. These properties are owned by joint ventures in which the Company has 10% equity interests. These guarantees were entered into in November 2004 and July 2005, respectively. At June 30, 2007, the total amount of guaranteed mortgage debt relating to these joint ventures was $13,095. These mortgage loans mature December 1, 2007 and July 28, 2008, respectively. If the joint ventures default on the loans, the Company may be forced to repay the loans. Repossessing and/or selling the self-storage facilities and land that collateralize the loans could provide funds sufficient to reimburse the Company. The estimated fair market value of the encumbered assets at June 30, 2007, was $16,281. The Company has recorded no liability in relation to this guarantee as of June 30, 2007. The fair value of the guarantee is not material. To date, the joint ventures have not defaulted on their mortgage debt. The Company believes the risk of having to perform on the guarantee is remote.

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

21




19.     INCOME TAXES

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

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

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

20.     SUBSEQUENT EVENTS

On August 1, 2007, one property was contributed to the Operating Partnership in exchange for consideration totaling $14.6 million. Preferred OP Units of 80,905 with a value of $9.8 million were issued along with cash of approximately $4.8 million.

22




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

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

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our “Unaudited Condensed Consolidated Financial Statements” and the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2006. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.” Amounts are in thousands (except per share data and unless otherwise stated).

CRITICAL ACCOUNTING POLICIES

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

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, 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.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

OVERVIEW

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

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

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

·                  Maximize the performance of properties through strategic, efficient and proactive management. We plan to pursue revenue generating and expense minimizing opportunities in our operations. Our revenue management team will seek to maximize revenue by responding to changing market conditions through our technology system’s ability to provide real-time, interactive rental rate and discount management. Our size and scale give us a greater ability than

23




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

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

·                  Develop new self-storage properties. We have several joint venture and wholly-owned development properties and will continue to develop new self-storage properties in our core markets. Our development pipeline for the remainder of 2007 through 2008 includes 16 projects. The majority of the projects will be developed on a wholly-owned basis by the Company. The construction of many of these properties has already begun.

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

PROPERTIES

As of June 30, 2007, we owned or had ownership interests in 585 operating self-storage properties located in 33 states and Washington, D.C. Of these properties, 242 are wholly-owned and consolidated, one is held in joint venture and consolidated and 342 are held in joint ventures accounted for using the equity method.  In addition, we managed 59 properties for franchisees or third parties bringing the total numbers of properties which we own and/or manage to 644.  We receive a management fee equal to approximately 6% of gross revenues to manage the joint venture, third party and franchise sites.  As of June 30, 2007, we owned or had ownership interests in approximately 42 million square feet of space and had greater than 300,000 customers.

Approximately 70% of our properties are clustered around the larger population centers, such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco.  These markets contain above-average population and income demographics for new self-storage properties.  The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale.  The Storage USA acquisition has given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

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.  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 June 30, 2007, the median length of stay was approximately eleven months.

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

24




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

Stabilized Property Data Based on Location

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of June
30, 2007(1)

 

Number of
Units as of June
30, 2006

 

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

 

Net Rentable
Square Feet as of
June 30, 2006

 

Square Foot
Occupancy %
June 30, 2007

 

Square Foot
Occupancy %
June 30, 2006

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

4

 

2,260

 

2,254

 

280,180

 

276,640

 

93.9

%

97.8

%

California

 

40

 

31,758

 

31,744

 

3,014,121

 

3,011,778

 

84.4

%

85.7

%

Colorado

 

5

 

2,399

 

2,394

 

301,691

 

293,591

 

91.3

%

91.6

%

Connecticut

 

1

 

745

 

745

 

62,505

 

62,430

 

84.5

%

72.7

%

Florida

 

27

 

17,729

 

17,683

 

1,880,443

 

1,878,402

 

86.2

%

91.8

%

Georgia

 

12

 

6,448

 

6,553

 

835,528

 

828,648

 

88.0

%

87.2

%

Hawaii

 

2

 

2,890

 

2,860

 

153,351

 

154,234

 

81.2

%

83.6

%

Illinois

 

4

 

2,674

 

2,691

 

266,454

 

265,487

 

87.8

%

83.2

%

Kansas

 

1

 

505

 

503

 

49,940

 

49,955

 

90.4

%

93.4

%

Kentucky

 

3

 

1,586

 

1,579

 

194,351

 

194,290

 

91.5

%

88.6

%

Louisiana

 

2

 

1,407

 

1,410

 

147,490

 

147,490

 

93.2

%

95.5

%

Maryland

 

8

 

6,746

 

6,684

 

731,002

 

703,522

 

85.5

%

85.0

%

Massachusetts

 

24

 

13,519

 

13,440

 

1,432,541

 

1,433,441

 

86.0

%

84.0

%

Michigan

 

2

 

1,041

 

1,043

 

134,402

 

135,312

 

90.6

%

84.8

%

Missouri

 

3

 

1,349

 

1,349

 

168,907

 

169,187

 

87.1

%

85.2

%

Nevada

 

2

 

1,256

 

1,242

 

132,465

 

131,135

 

84.3

%

86.6

%

New Hampshire

 

2

 

1,006

 

1,006

 

125,609

 

125,309

 

81.9

%

82.5

%

New Jersey

 

21

 

17,103

 

17,127

 

1,670,303

 

1,672,472

 

86.7

%

86.6

%

New York

 

7

 

6,957

 

6,965

 

455,779

 

456,119

 

82.1

%

82.4

%

Ohio

 

4

 

2,040

 

2,048

 

275,401

 

276,355

 

87.8

%

86.2

%

Oregon

 

1

 

764

 

767

 

103,450

 

103,610

 

95.7

%

94.1

%

Pennsylvania

 

8

 

6,133

 

6,128

 

640,568

 

637,294

 

86.9

%

81.8

%

Rhode Island

 

1

 

731

 

730

 

75,241

 

75,816

 

85.7

%

84.0

%

South Carolina

 

4

 

2,067

 

2,068

 

245,734

 

245,684

 

92.1

%

94.7

%

Tennessee

 

6

 

3,535

 

3,533

 

477,547

 

469,922

 

87.3

%

91.4

%

Texas

 

19

 

11,881

 

11,956

 

1,335,850

 

1,323,521

 

91.1

%

88.2

%

Utah

 

3

 

1,535

 

1,524

 

210,490

 

209,965

 

96.6

%

92.8

%

Virginia

 

4

 

2,890

 

2,889

 

272,825

 

273,038

 

88.0

%

86.3

%

Washington

 

3

 

2,031

 

2,030

 

244,865

 

244,595

 

98.3

%

96.3

%

Total Wholly-Owned Stabilized

 

223

 

152,985

 

152,945

 

15,919,033

 

15,849,242

 

87.2

%

87.3

%

 

25




 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of June
30, 2007(1)

 

Number of
Units as of June
30, 2006

 

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

 

Net Rentable
Square Feet as of
June 30, 2006

 

Square Foot
Occupancy %
June 30, 2007

 

Square Foot
Occupancy %
June 30, 2006

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

4

 

2,300

 

2,324

 

282,018

 

281,628

 

88.7

%

86.5

%

Arizona

 

11

 

6,901

 

6,888

 

751,141

 

752,076

 

92.0

%

94.2

%

California

 

72

 

51,822

 

51,931

 

5,315,289

 

5,316,072

 

90.2

%

89.5

%

Colorado

 

3

 

1,906

 

1,905

 

216,038

 

215,813

 

89.4

%

86.0

%

Connecticut

 

8

 

5,979

 

5,985

 

690,389

 

690,434

 

78.3

%

77.1

%

Delaware

 

1

 

589

 

589

 

71,655

 

71,655

 

94.3

%

85.5

%

Florida

 

24

 

20,344

 

20,355

 

2,080,172

 

2,079,353

 

85.7

%

88.7

%

Georgia

 

3

 

1,891

 

1,916

 

246,406

 

251,530

 

79.4

%

82.9

%

Illinois

 

6

 

4,033

 

4,031

 

433,562

 

436,977

 

82.8

%

77.3

%

Indiana

 

9

 

3,740

 

3,733

 

468,753

 

468,563

 

90.3

%

90.2

%

Kansas

 

3

 

1,217

 

1,210

 

164,225

 

163,950

 

87.9

%

85.4

%

Kentucky

 

4

 

2,282

 

2,270

 

268,509

 

268,289

 

88.9

%

84.6

%

Maryland

 

14

 

10,927

 

10,916

 

1,077,412

 

1,076,827

 

88.4

%

85.1

%

Massachusetts

 

16

 

8,500

 

8,556

 

972,499

 

975,597

 

83.9

%

81.2

%

Michigan

 

10

 

5,968

 

5,959

 

785,447

 

786,252

 

87.8

%

79.3

%

Missouri

 

5

 

2,771

 

2,774

 

324,665

 

325,615

 

85.9

%

87.6

%

Nevada

 

7

 

4,630

 

4,632

 

620,549

 

621,772

 

88.5

%

92.1

%

New Hampshire

 

3

 

1,326

 

1,330

 

138,554

 

138,964

 

87.3

%

85.5

%

New Jersey

 

20

 

15,148

 

15,134

 

1,595,238

 

1,588,181

 

81.6

%

87.7

%

New Mexico

 

9

 

4,709

 

4,727

 

526,194

 

528,864

 

86.0

%

87.1

%

New York

 

22

 

24,098

 

24,220

 

1,803,896

 

1,806,109

 

86.0

%

83.7

%

Ohio

 

11

 

5,027

 

5,041

 

751,107

 

753,177

 

87.4

%

81.5

%

Oregon

 

2

 

1,291

 

1,286

 

137,140

 

137,140

 

91.2

%

95.3

%

Pennsylvania

 

9

 

6,474

 

6,477

 

687,618

 

687,370

 

87.3

%

85.2

%

Rhode Island

 

1

 

611

 

611

 

73,905

 

74,005

 

75.8

%

68.3

%

Tennessee

 

22

 

11,828

 

11,851

 

1,547,503

 

1,550,417

 

88.8

%

87.8

%

Texas

 

18

 

11,837

 

11,862

 

1,519,316

 

1,525,237

 

81.4

%

80.7

%

Utah

 

1

 

519

 

524

 

59,500

 

59,700

 

97.2

%

93.5

%

Virginia

 

15

 

10,393

 

10,359

 

1,106,716

 

1,106,770

 

87.8

%

87.1

%

Washington

 

1

 

551

 

551

 

62,730

 

62,730

 

94.9

%

89.8

%

Washington, DC

 

1

 

1,536

 

1,536

 

102,003

 

101,990

 

94.9

%

86.2

%

Total Stabilized Joint-Ventures

 

335

 

231,148

 

231,483

 

24,880,149

 

24,903,057

 

86.9

%

86.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

5

 

3,273

 

3,271

 

401,655

 

398,455

 

77.9

%

80.9

%

Colorado

 

1

 

513

 

516

 

56,240

 

56,240

 

91.3

%

90.2

%

Florida

 

1

 

570

 

572

 

56,485

 

57,125

 

90.5

%

96.4

%

Georgia

 

7

 

4,530

 

4,559

 

485,472

 

486,372

 

87.8

%

86.3

%

Maryland

 

3

 

3,124

 

3,093

 

256,511

 

255,698

 

82.9

%

80.0

%

Nevada

 

1

 

436

 

442

 

61,235

 

61,510

 

80.0

%

79.5

%

New Jersey

 

2

 

1,096

 

1,089

 

131,472

 

131,642

 

93.3

%

89.4

%

New Mexico

 

2

 

1,576

 

1,584

 

171,555

 

171,355

 

88.0

%

93.3

%

Pennsylvania

 

2

 

888

 

888

 

131,130

 

131,330

 

95.0

%

83.9

%

Tennessee

 

2

 

1,147

 

1,133

 

135,410

 

130,286

 

88.5

%

92.2

%

Texas

 

1

 

371

 

371

 

46,955

 

46,955

 

99.4

%

98.7

%

Utah

 

2

 

1,431

 

1,433

 

136,412

 

146,587

 

85.6

%

75.8

%

Washington, DC

 

2

 

1,255

 

1,256

 

111,759

 

111,809

 

82.5

%

82.8

%

Total Stabilized Managed Properties

 

31

 

20,210

 

20,207

 

2,182,291

 

2,185,364

 

86.0

%

85.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stabilized Properties

 

589

 

404,343

 

404,635

 

42,981,473

 

42,937,663

 

87.0

%

86.6

%

 


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

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

26




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

Lease-up Property Data Based on Location

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of
Units as of June
30, 2007(1)

 

Number of
Units as of June
30, 2006

 

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

 

Net Rentable
Square Feet as of
June 30, 2006

 

Square Foot
Occupancy %
June 30, 2007

 

Square Foot
Occupancy %
June 30, 2006

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

587

 

599

 

67,375

 

67,375

 

77.3

%

32.5

%

California

 

5

 

3,653

 

2,798

 

433,850

 

330,280

 

56.9

%

55.8

%

Colorado

 

1

 

359

 

368

 

58,928

 

60,441

 

76.6

%

80.6

%

Connecticut

 

1

 

612

 

614

 

60,760

 

60,760

 

75.6

%

65.7

%

Florida

 

2

 

1,257

 

973

 

157,005

 

133,880

 

71.8

%

75.7

%

Illinois

 

1

 

591

 

588

 

75,800

 

75,820

 

76.4

%

66.5

%

Massachusetts

 

4

 

2,896

 

1,927

 

285,927

 

195,608

 

63.8

%

68.0

%

New Jersey

 

2

 

1,744

 

1,678

 

163,185

 

149,070

 

79.1

%

80.2

%

Pennsylvania

 

1

 

424

 

425

 

47,060

 

47,410

 

79.6

%

59.6

%

Washington

 

1

 

501

 

529

 

61,250

 

61,250

 

98.9

%

80.2

%

Total Wholly-Owned Lease-up

 

19

 

12,624

 

10,499

 

1,411,140

 

1,181,894

 

68.8

%

65.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

1

 

703

 

 

79,233

 

 

31.4

%

0.0

%

Illinois

 

1

 

955

 

957

 

74,153

 

75,399

 

43.1

%

0.0

%

Maryland

 

1

 

948

 

957

 

73,666

 

73,649

 

51.1

%

12.3

%

New Jersey

 

2

 

1,195

 

560

 

119,735

 

62,400

 

54.6

%

74.2

%

New Mexico

 

1

 

491

 

530

 

77,674

 

58,992

 

85.1

%

91.3

%

Pennsylvania

 

1

 

754

 

774

 

76,496

 

76,773

 

96.5

%

80.0

%

Virginia

 

1

 

878

 

878

 

84,383

 

84,383

 

76.6

%

58.4

%

Total Lease-up Joint-Ventures

 

8

 

5,924

 

4,656

 

585,340

 

431,596

 

62.2

%

50.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

8

 

5,433

 

4,792

 

552,315

 

461,095

 

72.9

%

58.7

%

Connecticut

 

1

 

683

 

687

 

54,840

 

54,380

 

94.9

%

70.1

%

Florida

 

3

 

2,226

 

1,297

 

224,832

 

112,286

 

46.3

%

60.9

%

Georgia

 

2

 

1,007

 

1,114

 

115,215

 

114,780

 

72.2

%

58.1

%

Illinois

 

2

 

1,561

 

1,573

 

190,329

 

192,949

 

67.6

%

51.9

%

Indiana

 

1

 

587

 

588

 

68,890

 

69,040

 

72.9

%

54.5

%

Maryland

 

1

 

727

 

728

 

67,810

 

67,560

 

79.2

%

73.4

%

Massachusetts

 

4

 

3,851

 

3,870

 

338,894

 

341,359

 

64.9

%

45.8

%

New Jersey

 

1

 

863

 

 

78,190

 

 

20.2

%

0.0

%

New York

 

1

 

1,578

 

1,579

 

116,235

 

116,530

 

78.9

%

65.3

%

Rhode Island

 

1

 

501

 

506

 

55,670

 

56,095

 

38.9

%

16.0

%

Texas

 

2

 

1,167

 

1,172

 

125,505

 

124,445

 

88.7

%

73.3

%

Virginia

 

1

 

687

 

676

 

74,840

 

74,900

 

87.1

%

78.2

%

Total Lease-up Managed

 

28

 

20,871

 

18,582

 

2,063,565

 

1,785,419

 

67.8

%

57.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Lease-up Properties

 

55

 

39,419

 

33,737

 

4,060,045

 

3,398,909

 

67.4

%

59.4

%

 


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

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

RESULTS OF OPERATIONS

Comparison of the three and six months ended June 30, 2007 and 2006

Overview

Results for the three and six months ended June 30, 2007 include the operations of 585 properties (243 of which were

27




consolidated and 342 of which were in joint ventures accounted for using the equity method) compared to the results for the three and six months ended June 30, 2006, which included the operations of 556 properties (208 of which were consolidated and 348 of which were in joint ventures accounted for using the equity method).

Revenues

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

 

 

Three months ended June
30,

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rental

 

$

48,392

 

$

42,020

 

$

6,372

 

15.2

%

$

94,623

 

$

81,195

 

$

13,428

 

16.5

%

Management and franchise fees

 

5,143

 

5,181

 

(38

)

(0.7

)%

10,351

 

10,340

 

11

 

0.1

%

Tenant insurance

 

2,688

 

971

 

1,717

 

176.8

%

4,831

 

1,892

 

2,939

 

155.3

%

Development fees

 

182

 

175

 

7

 

4.0

%

237

 

225

 

12

 

5.3

%

Other income

 

145

 

184

 

(39

)

(21.2

)%

284

 

249

 

35

 

14.1

%

Total revenues

 

$

56,550

 

$

48,531

 

$

8,019

 

16.5

%

$

110,326

 

$

93,901

 

$

16,425

 

17.5

%

 

Property Rental — The increase in property rental revenue for the three and six months ended June 30, 2007 consists of $4,500 and $9,240, respectively, associated with acquisitions completed in 2007 and 2006, $1,454 and $3,394, respectively, from rate increases at stabilized properties, and $418 and $794, respectively, from increases in occupancy at lease-up properties.

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

Tenant Insurance —The increase in tenant insurance revenues is due to the introduction of our captive insurance program at all wholly-owned properties in October 2006. In addition, during the six months ended June 30, 2007, we promoted the tenant insurance program and successfully increased sales of insurance policies in excess of 25%. Formerly, insurance revenues included only fee income paid by a third party insurance company.

Expenses

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

 

 

Three months ended June
30,

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operations

 

$

17,352

 

$

15,248

 

$

2,104

 

13.8

%

$

34,248

 

$

29,990

 

$

4,258

 

14.2

%

Tenant insurance

 

1,217

 

589

 

628

 

106.6

%

2,190

 

1,222

 

968

 

79.2

%

Unrecovered development and acquisition costs

 

159

 

24

 

135

 

562.5

%

409

 

342

 

67

 

19.6

%

General and administrative

 

8,968

 

8,747

 

221

 

2.5

%

18,208

 

17,992

 

216

 

1.2

%

Depreciation and amortization

 

9,123

 

9,057

 

66

 

0.7

%

17,919

 

18,333

 

(414

)

(2.3

)%

Total expenses

 

$

36,819

 

$

33,665

 

$

3,154

 

9.4

%

$

72,974

 

$

67,879

 

$

5,095

 

7.5

%

 

Property Operations — The increase in property operations expense for the three and six months ended June 30, 2007 consists of $1,344 and $3,057,  respectively, associated with acquisitions completed in 2007 and 2006, $760 and $1,201, respectively, from increases in utilities and advertising expenses at existing properties.

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

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

General and Administrative—General and administrative costs remained relatively constant due to the fact that the integration of the Storage USA properties was completed prior to the periods presented and as no similar large acquisitions have occurred.

28




Depreciation and Amortization—The decrease in depreciation and amortization expense for the six months ended June 30, 2007 is due primarily to the fact that the customer relationship intangibles related to the properties acquired in the Storage USA acquisition in July 2005 were fully amortized as of January 2007.  This decrease is offset by additional depreciation and amortization expense from other acquisitions made in 2007 and 2006, causing the increase in depreciation and amortization expense for the three months ended June 30, 2007.

Other Revenues and Expenses

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

 

 

Three months ended June
30,

 

 

 

 

 

Six months ended June
30,

 

 

 

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

$ Change

 

% Change

 

Other revenue and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(15,437

)

$

(12,784

)

$

(2,653

)

20.8

%

$

(28,833

)

$

(24,769

)

$

(4,064

)

16.4

%

Interest income

 

3,668

 

148

 

3,520

 

2,378.4

%

5,116

 

630

 

4,486

 

712.1

%

Minority interest - Operating Partnership

 

(515

)

(225

)

(290

)

128.9

%

(899

)

(279

)

(620

)

222.2

%

Minority interest - other

 

56

 

 

56

 

(100.0

)%

40

 

 

40

 

(100.0

)%

Equity in earnings of real estate ventures

 

1,192

 

1,087

 

105

 

9.7

%

2,389

 

2,226

 

163

 

7.3

%

Total other expense

 

$

(11,036

)

$

(11,774

)

$

738

 

(6.3

)%

$

(22,187

)

$

(22,192

)

$

5

 

0.0

%

 

Interest Expense — The increase in interest expense for the three and six months ended June 30, 2007 when compared to June 30, 2006 consists primarily of  $1,181 and $2,475, respectively, related to new loans on properties acquired in 2007 and 2006, and $1,596  and $1,221, respectively, related to increased corporate interest related primarily to the exchangeable senior notes offering in March 2007.

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

Minority Interest — Operating Partnership—Income allocated to the Operating Partnership represents 5.59% and 6.88% of the net income before minority interest for the six months ended June 30, 2007 and 2006, respectively.  The increase in the amount allocated to the minority interest in 2007 is due to the increase in net income.

Equity in Earnings of Real Estate Ventures — The change in equity in earnings of real estate ventures for the three and six months ended June 30, 2007 relates primarily to increases in income at the properties owned by the real estate ventures.

FUNDS FROM OPERATIONS

Funds from Operations (“FFO”) provides relevant and meaningful information about our operating performance that is necessary, along with net income and cash flows, for an understanding of our operating results. We believe FFO is a meaningful disclosure as a supplement to net earnings. Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses.  The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets.  FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) as net income computed in accordance with U.S. generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of operating properties, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in our unaudited condensed consolidated financial statements.

The computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income as an indication of our performance, as an alternative to net cash flow from operating activities as a measure of our liquidity, or as an indicator of our ability to make cash distributions. The following table sets forth the calculation of FFO (dollars are in thousands, except for share data):

29




 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

8,695

 

$

3,092

 

$

15,165

 

$

3,830

 

 

 

 

 

 

 

 

 

 

 

Plus:

 

 

 

 

 

 

 

 

 

Real estate depreciation

 

7,830

 

6,648

 

15,416

 

13,121

 

Amortization of intangibles

 

807

 

1,951

 

1 ,614

 

4,504

 

Joint venture real estate depreciation and amortization

 

1,026

 

1,247

 

2,087

 

2,447

 

Joint venture loss on sale of properties

 

5

 

 

5

 

 

Income allocated to Operating Partnership minority interest

 

515

 

225

 

899

 

279

 

 

 

 

 

 

 

 

 

 

 

Funds from operations

 

$

18,878

 

$

13,163

 

$

35,186

 

$

24,181

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - basic

 

 

 

 

 

 

 

 

 

Common stock (excluding restricted shares)

 

64,439,138

 

51,625,135

 

64,356,827

 

51,606,618

 

OP units

 

4,012,379

 

3,825,787

 

4,012,379

 

3,825,787

 

Total

 

68,451,517

 

55,450,922

 

68,369,206

 

55,432,405

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - diluted

 

 

 

 

 

 

 

 

 

Common stock

 

65,236,466

 

52,165,301

 

65,201,934

 

52,157,299

 

OP units

 

4,012,379

 

3,825,787

 

4,012,379

 

3,825,787

 

Total

 

69,249,845

 

55,991,088

 

69,214,313

 

55,983,086

 

 

SAME-STORE STABILIZED PROPERTY RESULTS

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

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

Same-store rental revenues

 

$

39,624

 

$

37,980

 

4.3

%

$

78,534

 

$

74,748

 

5.1

%

Same-store operating expenses

 

13,815

 

13,308

 

3.8

%

27,519

 

26,830

 

2.6

%

Same-store net operating income

 

25,809

 

24,672

 

4.6

%

51,015

 

47,918

 

6.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non same-store rental revenues

 

8,768

 

4,040

 

117.0

%

16,089

 

6,447

 

149.6

%

Non same-store operating expenses

 

3,537

 

1,940

 

82.3

%

6,729

 

3,160

 

112.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rental revenues

 

48,392

 

42,020

 

15.2

%

94,623

 

81,195

 

16.5

%

Total operating expenses

 

17,352

 

15,248

 

13.8

%

34,248

 

29,990

 

14.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store square foot occupancy as of quarter end

 

87.5

%

88.1

%

 

 

87.5

%

88.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties included in same-store

 

181

 

181

 

 

 

181

 

181

 

 

 

 

The increase in same-store rental revenues for the three and six months ended June 30, 2007 was due to our ability to maintain occupancy and increase rental rates to existing customers. The increase in same-store operating expenses was primarily due to increases in property taxes and advertising.

COMMON CONTINGENT SHARES AND COMMON CONTINGENT UNIT PROPERTY PERFORMANCE

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

As of June 30, 2007, there were 500,350 CCSs and 25,739 CCUs converted to common shares and common Operating

30




Partnership units, respectively. Based on the performance of the properties as of June 30, 2007, an additional 392,648 CCSs and 20,198 CCUs became eligible for conversion.  The board of directors approved the conversion of these CCSs and CCUs on August 1, 2007 as per the Company’s charter, and the shares and units were issued on August 3, 2007.

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

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

CCS/CCU rental revenues

 

$

2,967

 

$

2,508

 

18.3

%

$

5,853

 

$

4,890

 

19.7

%

CCS/CCU operating expenses

 

1,333

 

1,330

 

0.2

%

2,631

 

2,655

 

(0.9

)%

CCS/CCU net operating income

 

1,634

 

1,178

 

38.7

%

3,222

 

2,235

 

44.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non CCS/CCU rental revenues

 

45,425

 

39,512

 

15.0

%

88,770

 

76,305

 

16.3

%

Non CCS/CCU operating expenses

 

16,019

 

13,918

 

15.1

%

31,617

 

27,335

 

15.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rental revenues

 

48,392

 

42,020

 

15.2

%

94,623

 

81,195

 

16.5

%

Total operating expenses

 

17,352

 

15,248

 

13.8

%

34,248

 

29,990

 

14.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCS/CCU square foot occupancy as of quarter end

 

77.1

%

74.7

%

 

 

77.1

%

74.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties included in CCS/CCU

 

14

 

14

 

 

 

14

 

14

 

 

 

 

The increase in CCS/CCU rental revenues was due to increased rental rates and occupancy.

CASH FLOWS

Cash flows provided by operating activities were $51,905 and $36,264, respectively, for the six months ended June 30, 2007 and 2006. The increase in cash provided by operating activities was due primarily to an increase in net income related to the addition of new properties through acquisitions and interest income from short-term investments.  Additionally, there have also been lower cash funding requirements relating to our lease-up properties as occupancy has increased.

Cash used in investing activities was $205,629 and $107,850, respectively, for the six months ended June 30, 2007 and 2006. The increase is due primarily to the purchase of short-term investments during the six months ended June 30, 2007.

Cash provided by financing activities was $128,713 and $47,183 for the six months ended June 30, 2007 and 2006, respectively. The financing activities during the six months ended June 30, 2007 consisted primarily of the issuance of exchangeable senior notes for $250,000, additional net borrowings of $16,010, offset by $29,368 paid in dividends.

OPERATIONAL SUMMARY

For the three and six months ended June 30, 2007, we continued our same-store property revenue growth with a revenue increase of  4.3% and 5.1%, respectively, compared to the same periods in 2006. Occupancy at our stabilized properties was fairly consistent on a year-to-year basis, reaching 87.5% as of June 30, 2007 compared to 88.1% as of June 30, 2006.

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

OUTLOOK

In the second quarter, we continued to see a generally positive climate for self-storage in the United States.  Rental activity was flat overall when compared with the second quarter of 2006.  Despite the lack of increased demand, we were able to raise same-store and overall portfolio revenue through increased rental rates to existing customers.  The key economic indicators that affect self-storage demand are mixed, and we are looking to rental activity in the second quarter of 2007 as an indicator

31




of our results for the remainder of the year.

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

Our discounting strategies continue to evolve. Higher levels of discounting were utilized in the first six months of 2007 compared to 2006 due to special promotions associated with the 30th anniversary of the Company. We will selectively discount certain sites and units based on occupancy, availability, and competitive parameters that are controlled through our centralized, real-time technology systems and revenue management team.

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

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

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2007, we had $45,790 available in cash and cash equivalents, and $90,331 in short-term investments.  We intend to use this cash to purchase additional self-storage properties and fund other working capital needs during the remainder of 2007.  Additionally, we are required to distribute at least 90% of our net taxable income, excluding net capital gains, to our stockholders on an annual basis to maintain our qualification as a REIT.  Therefore, it is unlikely that we will have any substantial cash balances that could be used to meet our liquidity needs. Instead, these needs must be met from cash generated from operations and external sources of capital.

During September 2004, we, as guarantor, and our Operating Partnership entered into a $100 million revolving line of credit (“Credit Facility”), which includes a $10 million swingline sub facility. The Credit Facility is collateralized by self-storage properties. The Operating Partnership intends to use the proceeds of the Credit Facility for general corporate purposes and acquisitions. As of June 30, 2007, the Credit Facility had approximately $81 million of available borrowings based on the assets collateralizing the Credit Facility. As of June 30, 2007, we had no amount outstanding under the Credit Facility.

As of June 30, 2007, we had approximately $1,245.3 million of debt, resulting in a debt to total capitalization ratio of 52.3%. As of June 30, 2007, the ratio of total fixed rate debt and other instruments to total debt was 94.8%. The weighted average interest rate of the total of fixed and variable rate debt at June 30, 2007 was 5.1%.

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

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

Long-Term Liquidity Needs

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

32




deferral in their exiting transactions.

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

FINANCING STRATEGY

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

·                  the interest rate of the proposed financing;

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

·                  prepayment penalties and restrictions on refinancing;

·                  the purchase price of properties acquired with debt financing;

·                  long-term objectives with respect to the financing;

·                  target investment returns;

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

·                  overall level of consolidated indebtedness;

·                  timing of debt and lease maturities;

·                  provisions that require recourse and cross-collateralization;

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

·                  the overall ratio of fixed- and variable-rate debt.

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

OFF-BALANCE SHEET ARRANGEMENTS

Except as disclosed in the notes to our unaudited Condensed Consolidated Financial Statements, we do not currently have any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our unaudited Condensed Consolidated Financial Statements, we have not guaranteed any obligations of unconsolidated entities nor do we have any

33




commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

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

CONTRACTUAL OBLIGATIONS

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

 

 

Payments due by Period:

 

 

 

 

 

Less Than

 

 

 

 

 

After

 

 

 

Total

 

1 Year

 

1-3 Years

 

4-5 Years

 

5 Years

 

Operating leases

 

$

63,722

 

$

5,365

 

$

10,197

 

$

8,678

 

$

39,482

 

Notes payable, exchangeable senior notes and notes payable to trusts

 

 

 

 

 

 

 

 

 

 

 

Interest

 

454,474

 

63,396

 

111,409

 

68,531

 

211,138

 

Principal

 

1,245,320

 

4,513

 

298,990

 

179,680

 

762,137

 

Total contractual obligations

 

$

1,763,516

 

$

73,274

 

$

420,596

 

$

256,889

 

$

1,012,757

 

 

SEASONALITY

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

Interest Rate Risk

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

As of June 30, 2007, we had $1.2 billion in total debt of which $64.7 million was subject to variable interest rates (including the $61.8 million on which we have a reverse interest rate swap). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable rate debt would increase or decrease future earnings and cash flows by approximately $0.7 million annually.

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

The fair value of fixed rate notes payable and notes payable to trusts at June 30, 2007 was $1.1 billion. The carrying value of these fixed rate notes payable at June 30, 2007 was $1.2 billion.

34




ITEM 4. CONTROLS AND PROCEDURES

(i)            Disclosure Controls and Procedures

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

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

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

(ii)           Changes in internal control over financial reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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

As of June 30, 2007, there were 500,350 CCSs and 25,739 CCUs converted to common shares and common Operating Partnership units, respectively. Based on the performance of the properties as of June 30, 2007, an additional 392,648 CCSs

35




and 20,198 CCUs became eligible for conversion.  The board of directors approved the conversion of these CCS and CCUs on August 1, 2007 as per the Company’s charter, and the shares and units were issued on August 3, 2007.  The shares and units were issued in private placements in reliance on Section 3(a)(9) and Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.  We received no additional consideration for the conversions.

On June 14, 2007, the Company acquired one self-storage facility located in San Francisco, California from an unrelated third party for cash of $867, a loan assumption of $14.1 million, assumed net liabilities of $60 and 218,693 Operating Partnership units valued at $3,834.  The units were issued in a private placement in reliance on Section 4(2)  of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.  Subject to certain lock-up periods and adjustments, the units are generally exchangeable into common stock of the Company on a one-for-one basis or an equivalent amount of cash, at the option of the Company.

On August 1, 2007, one property was contributed to the Operating Partnership in exchange for consideration totaling $14.6 million.  Preferred OP Units of 80,905 with a value of $9.8 million were issued along with cash of approximately $4.8 million.  The units were issued in a private placement in reliance on Section 4(2)  of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.  Subject to certain lock-up periods and adjustments, the Preferred OP Units will be redeemable at the option of the holder on or after September 1, 2008, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

We held our annual meeting of stockholders on May 23, 2007. The first item of business was the election of seven members of the board of directors. The votes were tabulated as follows: 50,964,913 votes were cast for Kenneth M. Woolley and 700,456 votes were withheld; 51,058,067 votes were cast for Anthony Fanticola and 607,302 votes were withheld; 51,039,772 votes were cast for Hugh W. Horne and 625,597 votes were withheld; 47,530,424 votes were cast for Spencer F. Kirk and 4,134,945 votes were withheld; 51,193,682 votes were cast for Joseph D. Margolis and 471,687 votes were withheld; 51,063,979 votes were cast for Roger B. Porter and 601,390 votes were withheld; and 51,119,011 votes were cast for K. Fred Skousen and 546,358 votes were withheld. The second item of business was a proposal to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2007. The votes were tabulated as follows: 51,598,167 were cast for, 47,285 were cast against, and 19,914 abstained.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits

10.1

 

Contribution Agreement, dated June 15, 2007, among Extra Space Storage LP and various limited partnerships affiliated with AAAAA Rent-A-Space (incorporated by reference to Exhibit 10.1 of Form 8-K filed on June 18, 2007).

 

 

 

10.2

 

Second Amended and Restated Agreement of Limited Partnership of Extra Space Storage LP, dated June 25, 2007 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on June 26, 2007).

 

 

 

10.3

 

Promissory Note, dated June 25, 2007, among Extra Space Storage LP, H. James Knuppe and Barbara Knuppe (incorporated by reference to Exhibit 10.2 of Form 8-K filed on June 26, 2007).

 

 

 

10.4

 

Pledge Agreement, dated June 25, 2007, among Extra Space Storage LP, H. James Knuppe and Barbara Knuppe (incorporated by reference to Exhibit 10.3 of Form 8-K filed on June 26, 2007).

 

 

 

10.5

 

Form of Registration Rights Agreement among Extra Space Storage LP, H. James Knuppe and Barbara Knuppe (incorporated by reference to Exhibit 10.4 of Form 8-K filed on June 26, 2007).

 

36




 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

SIGNATURES

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

 

EXTRA SPACE STORAGE INC.

 

 

Registrant

 

 

 

Date: August 8, 2007

 

/s/ Kenneth M. Woolley

 

 

 

Kenneth M. Woolley

 

 

Chairman and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: August 8, 2007

 

/s/ Kent W. Christensen

 

 

 

Kent W. Christensen

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

37



Exhibit 31.1

CERTIFICATION

I, Kenneth M. Woolley, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 8, 2007

 

By:

/s/ Kenneth M. Woolley

 

 

 

Name: Kenneth M. Woolley

 

 

Title: Chairman and Chief Executive Officer

 



Exhibit 31.2

CERTIFICATION

I, Kent W. Christensen, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 8, 2007

 

By:

/s/ Kent W. Christensen

 

 

 

Name: Kent W. Christensen

 

 

Title: Executive Vice President and Chief Financial Officer

 



Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to

18 U.S. C. Section 1350

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

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

 

By:

/s/ Kenneth M. Woolley

 

 

Name: Kenneth M. Woolley

 

 

Title: Chairman and Chief Executive Officer

 

 

August 8, 2007

 

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

 

By:

/s/ Kent W. Christensen

 

 

Name: Kent W. Christensen

 

 

Title: Executive Vice President and Chief Financial Officer

 

 

August 8, 2007