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EXTRA SPACE STORAGE INC. Table of Contents
Item 8. Financial Statements and Supplementary Data

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K

(Mark One)    

ý

 

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

For the fiscal year ended December 31, 2010

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
(State or other jurisdiction of
incorporation or organization)
  20-1076777
(I.R.S. Employer
Identification No.)

2795 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121

(Address of principal executive offices and zip code)

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

         Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class   Name of exchange on which registered
Common Stock, $0.01 par value   New York Stock Exchange, Inc.

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

         The aggregate market value of the common stock held by non-affiliates of the registrant was $1,108,215,405 based upon the closing price on the New York Stock Exchange on June 30, 2010, the last business day of the registrant's most recently completed second fiscal quarter. This calculation does not reflect a determination that persons whose shares are excluded from the computation are affiliates for any other purpose.

         The number of shares outstanding of the registrant's common stock, $0.01 par value per share, as of February 14, 2011 was 87,954,417.

Documents Incorporated by Reference

         Portions of the registrant's definitive proxy statement to be issued in connection with the registrant's annual stockholders' meeting to be held in 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents


EXTRA SPACE STORAGE INC.

Table of Contents

PART I

  5

Item 1. Business

 
5

Item 1A. Risk Factors

 
9

Item 1B. Unresolved Staff Comments

 
23

Item 2. Properties

 
23

Item 3. Legal Proceedings

 
27

Item 4. (Removed and Reserved)

 
27

PART II

 
28

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 
28

Item 6. Selected Financial Data

 
29

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 
30

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

 
50

Item 8. Financial Statements and Supplementary Data

 
51

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 
107

Item 9A. Controls and Procedures

 
107

Item 9B. Other Information

 
109

PART III

 
110

Item 10. Directors, Executive Officers and Corporate Governance

 
110

Item 11. Executive Compensation

 
110

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 
110

Item 13. Certain Relationships and Related Transactions, and Director Independence

 
110

Item 14. Principal Accountant Fees and Services

 
110

PART IV

 
111

Item 15. Exhibits and Financial Statement Schedules

 
111

SIGNATURES

 
115

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Statements Regarding 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 estimates 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 I. Item 1A. Risk Factors" below. Such factors include, but are not limited to:

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        The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our securities.

        We disclaim any duty or obligation to update or revise any forward-looking statements set forth in this Annual Report on Form 10-K to reflect new information, future events or otherwise.

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PART I

Item 1.    Business

General

        Extra Space Storage Inc. ("we," "our," "us" or the "Company") is a self-administered and self-managed real estate investment trust ("REIT") formed as a Maryland corporation on April 30, 2004 to own, operate, manage, acquire, develop and redevelop professionally managed self-storage facilities. We closed our initial public offering ("IPO") on August 17, 2004. Our common stock is traded on the New York Stock Exchange under the symbol "EXR."

        We were formed to continue the business of Extra Space Storage LLC and its subsidiaries (the "Predecessor"), which had engaged in the self-storage business since 1977. These companies were reorganized after the consummation of our IPO and various formation transactions. As of December 31, 2010, we held ownership interests in 660 operating properties. Of these operating properties, 295 are wholly owned, and 365 are owned in joint venture partnerships. An additional 160 operating properties are owned by franchisees or third parties and operated by us in exchange for a management fee, bringing the total number of operating properties which we own and/or manage to 820. These operating properties are located in 34 states and Washington, D.C. and contain approximately 59 million square feet of net rentable space in approximately 550,000 units and currently serve a customer base of over 425,000 tenants.

        We operate in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance. Our property management, acquisition and development activities include managing, acquiring, developing and selling self-storage facilities. On June 2, 2009, we announced the wind-down of our development activities. As of December 31, 2010, there were six development projects in process. We expect to complete these projects by the end of 2011. Our rental operations activities include rental operations of self-storage facilities. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the Company's self storage facilities.

        Substantially all of our business is conducted through Extra Space Storage LP (the "Operating Partnership"). Our 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. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). To the extent we continue to qualify as a REIT we will not be subject to tax, with certain exceptions, on our net taxable income that is distributed to our stockholders.

        We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (the "SEC"). You may obtain copies of these documents by visiting the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC's website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our website at www.extraspace.com, or by contacting our Secretary at our principal offices, which are located at 2795 East Cottonwood Parkway, Suite 400, Salt Lake City, Utah 84121, telephone number (801) 562-5556.

Management

        Members of our executive management team have significant experience in all aspects of the self-storage industry. The senior management team has collectively acquired and/or developed 536 properties since our IPO. Our executive management team and their years of industry experience are as follows: Spencer F. Kirk, Chairman and Chief Executive Officer, 10 years; Kent W. Christensen,

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Executive Vice President and Chief Financial Officer, 13 years; Charles L. Allen, Executive Vice President and Chief Legal Officer, 13 years; and Karl Haas, Executive Vice President and Chief Operating Officer, 23 years.

        Members of the executive management team have guided the Company through substantial growth, developing and acquiring over $4.1 billion in assets since 1996. This growth has been funded through public equity offerings and more than $2.0 billion in private equity capital since 1998. This private equity capital has come primarily from sophisticated, high net-worth individuals and institutional investors such as affiliates of Prudential Financial, Inc. and Fidelity Investments.

        Our executive management and board of directors have a significant ownership position in the Company with executive officers and directors owning approximately 6,870,214 shares or 7.8% of our outstanding common stock as of February 14, 2011.

Industry & Competition

        Self-storage facilities refers to properties that offer month-to-month storage space rental for personal or business use. Self-storage offers a cost-effective and flexible storage alternative. Tenants rent fully enclosed spaces that can vary in size according to their specific needs and to which they have unlimited, exclusive access. Tenants have responsibility for moving their items into and out of their units. Self-storage unit sizes typically range from five feet by five feet to 20 feet by 20 feet, with an interior height of eight to 12 feet. Properties generally have on-site managers who supervise and run the day-to-day operations, providing tenants with assistance as needed.

        Self-storage provides a convenient way for individuals and businesses to store their possessions due to life changes, or simply because of a need for storage space. The mix of residential tenants using a self-storage property is determined by a property's local demographics and often includes people who are looking to downsize their living space or others who are not yet settled into a permanent residence. Items that residential tenants place in self-storage properties range from cars, boats and recreational vehicles, to furniture, household items and appliances. Commercial tenants tend to include small business owners who require easy and frequent access to their goods, records, inventory or storage for seasonal goods.

        Our research has shown that tenants choose a self-storage property based primarily on the convenience of the site to their home or business, making high-density, high-traffic population centers ideal locations for self-storage properties. A property's perceived security and the general professionalism of the site managers and staff are also contributing factors to a site's ability to successfully secure rentals. Although most self-storage properties are leased to tenants on a month-to-month basis, tenants tend to continue their leases for extended periods of time.

        There are seasonal fluctuations in occupancy rates for self-storage properties. Based on our experience, generally, there is increased leasing activity at self-storage properties during the summer months due to the higher number of people who relocate during this period. The highest level of occupancy is typically at the end of July, while the lowest level of occupancy is seen in late February and early March.

        Since inception in the early 1970's, the self-storage industry has experienced significant growth. In the past ten years, there has been even greater growth. According to the Self-Storage Almanac (the "Almanac"), in 2000 there were only 31,947 self-storage properties in the United States, with an average occupancy rate of 83.7% of net rentable square feet, compared to 49,356 self-storage properties in 2010 with an average occupancy rate of 75.5% of net rentable square feet.

        Increased supply has affected our business and has led to both pricing and discount pressure. The increased supply has limited our ability to increase revenues in many markets in which we operate. Many markets have been able to absorb the increase in self-storage development due to superior

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demographics and density. However, select markets have not been able to absorb the new facilities and have not performed as well.

        We have encountered competition when we have sought to acquire properties, especially for brokered portfolios. Aggressive bidding practices have been commonplace between both public and private entities, and this competition will likely continue.

        The industry is also characterized by fragmented ownership. According to the Almanac, the top ten self-storage companies in the United States owned approximately 10.9% of total U.S. self-storage properties, and the top 50 self-storage companies owned approximately 14.5% of the total U.S. properties as of December 31, 2010. We believe this fragmentation will contribute to continued consolidation at some level in the future. We also believe that we are well positioned to compete for acquisitions given our historical reputation for closing deals.

        We are the second largest self-storage operator in the United States. We are one of four public self-storage REITs along with Public Storage Inc., Sovran Self-Storage, Inc., and U-Store-It Inc.

Long-Term Growth and Investment Strategies

        Our primary business objectives are to maximize cash flow available for distribution to our stockholders and to achieve sustainable long-term growth in cash flow per share in order to maximize long-term stockholder value. We continue to evaluate a range of growth initiatives and opportunities, including the following:

Financing of Our Long-Term Growth Strategies

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Regulation

        Generally, self-storage properties are subject to various laws, ordinances and regulations, including regulations relating to lien sale rights and procedures. Changes in any of these laws or regulations, as well as changes in laws, such as the Comprehensive Environmental Response and Compensation Liability Act, which increase the potential liability for environmental conditions or circumstances existing or created by tenants or others on properties, or laws affecting development, construction, operation, upkeep, safety and taxation may result in significant unanticipated expenditures, loss of self-storage sites or other impairments to operations, which would adversely affect our financial position, results of operations or cash flows.

        Under the Americans with Disabilities Act of 1990 (the "ADA"), places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws also exist that may require modifications to the properties, or restrict further renovations thereof, with respect to access thereto by disabled persons. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, thereby requiring substantial capital expenditures. To the extent our properties are not in compliance, we are likely to incur additional costs to comply with the ADA.

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        Insurance activities are subject to state insurance laws and regulations as determined by the particular insurance commissioner for each state in accordance with the McCarran-Ferguson Act, and are subject to the Gramm-Leach-Bliley Act and the privacy regulations promulgated by the Federal Trade Commission pursuant thereto.

        Property management activities are often subject to state real estate brokerage laws and regulations as determined by the particular real estate commission for each state.

        Changes in any of the laws governing our conduct could have an adverse impact on our ability to conduct our business or could materially affect our financial position, results of operations or cash flows.

Employees

        As of February 14, 2011, we had 2,125 employees and believe our relationship with our employees is good. Our employees are not represented by a collective bargaining agreement.

Item 1A.    Risk Factors

        An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information contained in this Annual Report before trading in our securities. If any of the events set forth in the following risks actually occur, our business, operating results, prospects and financial condition could be harmed.

        Our performance is subject to risks associated with real estate investments. We are a real estate company that derives our income from operation of our properties. There are a number of factors that may adversely affect the income that our properties generate, including the following:

Risks Related to Our Properties and Operations

Adverse economic or other conditions in the markets in which we do business could negatively affect our occupancy levels and rental rates and therefore our operating results.

        Our operating results are dependent upon our ability to maximize occupancy levels and rental rates in our self-storage properties. Adverse economic or other conditions in the markets in which we operate may lower our occupancy levels and limit our ability to increase rents or require us to offer rental discounts. If our properties fail to generate revenues sufficient to meet our cash requirements, including operating and other expenses, debt service and capital expenditures, our net income, funds from operations ("FFO"), cash flow, financial condition, ability to make cash distributions to stockholders and the trading price of our securities could be adversely affected. The following factors, among others, may adversely affect the operating performance of our properties:

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        Recent U.S. and international market and economic conditions have been challenging, with tighter credit conditions and slower growth through 2008, 2009 and 2010. For the year ended December 31, 2010, concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit and other macro-economic factors have contributed to increased market volatility and diminished expectations for the global economy and increased market uncertainty and instability. Turbulence in U.S. and international markets may adversely affect our liquidity and financial condition, and the financial condition of our customers. If these market conditions continue, they may result in an adverse effect on our financial condition and results of operations.

If we are unable to promptly re-let our units or if the rates upon such re-letting are significantly lower than expected, then our business and results of operations would be adversely affected.

        Virtually all of our leases are on a month-to-month basis. Any delay in re-letting units as vacancies arise would reduce our revenues and harm our operating results. In addition, lower than expected rental rates upon re-letting could adversely affect our revenues and impede our growth.

We depend upon our on-site personnel to maximize tenant satisfaction at each of our properties, and any difficulties we encounter in hiring, training and maintaining skilled field personnel may harm our operating performance.

        We had 1,793 field personnel as of February 14, 2011 in the management and operation of our properties. The general professionalism of our site managers and staff are contributing factors to a site's ability to successfully secure rentals and retain tenants. We also rely upon our field personnel to maintain clean and secure self-storage properties. If we are unable to successfully recruit, train and retain qualified field personnel, the quality of service we strive to provide at our properties could be adversely affected which could lead to decreased occupancy levels and reduced operating performance.

Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flow.

        We maintain comprehensive liability, fire, flood, earthquake, wind (as deemed necessary or as required by our lenders), extended coverage and rental loss insurance with respect to our properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, hurricanes, tornadoes, riots, acts of war or terrorism. Should an uninsured loss occur, we could lose both our investment in and anticipated profits and cash flow from a property. In addition, if any such loss is insured, we may be required to pay significant amounts on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss. As a result, our operating results may be adversely affected.

Increases in taxes and regulatory compliance costs may reduce our income.

        Costs resulting from changes in real estate tax laws generally are not passed through to tenants directly and will affect us. Increases in income, property or other taxes generally are not passed through to tenants under leases and may reduce our net income, FFO, cash flow, financial condition, ability to

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pay or refinance our debt obligations, ability to make cash distributions to stockholders, and the trading price of our securities. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which could similarly adversely affect our business and results of operations.

Environmental compliance costs and liabilities associated with operating our properties may affect our results of operations.

        Under various U.S. federal, state and local laws, ordinances and regulations, owners and operators of real estate may be liable for the costs of investigating and remediating certain hazardous substances or other regulated materials on or in such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such substances or materials. The presence of such substances or materials, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to lease, sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous substances or other regulated materials may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials.

        Certain environmental laws also impose liability, without regard to knowledge or fault, for removal or remediation of hazardous substances or other regulated materials upon owners and operators of contaminated property even after they no longer own or operate the property. Moreover, the past or present owner or operator from which a release emanates could be liable for any personal injuries or property damages that may result from such releases, as well as any damages to natural resources that may arise from such releases.

        Certain environmental laws impose compliance obligations on owners and operators of real property with respect to the management of hazardous materials and other regulated substances. For example, environmental laws govern the management of asbestos-containing materials and lead-based paint. Failure to comply with these laws can result in penalties or other sanctions.

        No assurances can be given that existing environmental studies with respect to any of our properties reveal all environmental liabilities, that any prior owner or operator of our properties did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more of our properties. There also exists the risk that material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future. Finally, future laws, ordinances or regulations and future interpretations of existing laws, ordinances or regulations may impose additional material environmental liability.

Costs associated with complying with the Americans with Disabilities Act of 1990 may result in unanticipated expenses.

        Under the ADA, places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict certain further renovations of the properties, with respect to access thereto by disabled persons. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. We have not conducted an audit or investigation

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of all of our properties to determine our compliance and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our properties is not in compliance with the ADA or other legislation, then we would be required to incur additional costs to bring the facility into compliance. If we incur substantial costs to comply with the ADA or other legislation, our financial condition, results of operations, cash flow, per share trading price of our securities and our ability to satisfy our debt service obligations and to make cash distributions to our stockholders could be adversely affected.

We face competition for the acquisition of self-storage properties and other assets, which may impede our ability to make future acquisitions or may increase the cost of these acquisitions.

        We compete with many other entities engaged in real estate investment activities for acquisitions of self-storage properties and other assets, including national, regional and local operators and developers of self-storage properties. These competitors may drive up the price we pay for self-storage properties or other assets we seek to acquire or may succeed in acquiring those properties or assets themselves. In addition, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase. This competition would result in increased demand for these assets and therefore increased prices paid for them. Because of an increased interest in single- property acquisitions among tax-motivated individual purchasers, we may pay higher prices if we purchase single properties in comparison with portfolio acquisitions. If we pay higher prices for self-storage properties or other assets, our profitability will be reduced.

We may not be successful in identifying and consummating suitable acquisitions that meet our criteria, which may impede our growth.

        Our ability to expand through acquisitions is integral to our business strategy and requires us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategy. We may not be successful in identifying suitable properties or other assets that meet our acquisition criteria or in consummating acquisitions or investments on satisfactory terms or at all. Failure to identify or consummate acquisitions will slow our growth, which could in turn adversely affect our stock price.

        Our ability to acquire properties on favorable terms and successfully integrate and operate them may be constrained by the following significant risks:

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        In addition, strategic decisions by us, such as acquisitions, may adversely affect the price of our securities.

We may not be successful in integrating and operating acquired properties.

        We expect to make future acquisitions of self-storage properties. If we acquire any self-storage properties, we will be required to integrate them into our existing portfolio. The acquired properties may turn out to be less compatible with our growth strategy than originally anticipated, may cause disruptions in our operations or may divert management's attention away from day-to-day operations, which could impair our operating results as a whole.

We do not always obtain independent appraisals of our properties, and thus the consideration paid for these properties may exceed the value that may be indicated by third-party appraisals.

        We do not always obtain third-party appraisals in connection with our acquisition of properties and the consideration being paid by us in exchange for those properties may exceed the value determined by third-party appraisals. In such cases, the value of the properties were determined by our senior management team.

Our investments in development and redevelopment projects may not yield anticipated returns, which would harm our operating results and reduce the amount of funds available for distributions.

        On June 2, 2009, we announced the wind-down of our development activities. To the extent that we engage in development and redevelopment activities, we will be subject to the following risks normally associated with these projects:

        In deciding whether to develop or redevelop a particular property, we make certain assumptions regarding the expected future performance of that property. We may underestimate the costs necessary to bring the property up to the standards established for its intended market position or may be unable to increase occupancy at a newly developed property as quickly as expected or at all. Any substantial unanticipated delays or expenses could adversely affect the investment returns from these development or redevelopment projects and harm our operating results, liquidity and financial condition, which could result in a decline in the value of our securities.

        We may rely on the investments of our joint venture partners for funding certain of our development and redevelopment projects. If our reputation in the self-storage industry changes or the number of investors considering us an attractive strategic partner is otherwise reduced, our ability to develop or redevelop properties could be affected, which would limit our growth.

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Risks Related to Our Organization and Structure

Our business could be harmed if key personnel with long-standing business relationships in the self-storage industry terminate their employment with us.

        Our success depends, to a significant extent, on the continued services of members of our executive management team. Our executive management team has substantial experience in the self-storage industry. In addition, our ability to acquire or develop properties in the future depends on the significant relationships our executive management team has developed with our institutional joint venture partners such as affiliates of Prudential Financial, Inc. There is no guarantee that any of them will remain employed by us. We do not maintain key person life insurance on any of our officers. The loss of services of one or more members of our executive management team could harm our business and our prospects.

We may change our investment and financing strategies and enter into new lines of business without stockholder consent, which may subject us to different risks.

        We may change our investment and financing strategies and enter into new lines of business at any time without the consent of our stockholders, which could result in our making investments and engaging in business activities that are different from, and possibly riskier than, the investments and businesses described in this document. A change in our investment strategy or our entry into new lines of business may increase our exposure to other risks or real estate market fluctuations.

If other self-storage companies convert to an UPREIT structure or if tax laws change, we may no longer have an advantage in competing for potential acquisitions.

        Because we are structured as an UPREIT, we are a more attractive acquirer of properties to tax-motivated sellers than our competitors that are not structured as UPREITs. However, if other self-storage companies restructure their holdings to become UPREITs, this competitive advantage will disappear. In addition, new legislation may be enacted or new interpretations of existing legislation may be issued by the Internal Revenue Service ("IRS"), or the U.S. Treasury Department that could affect the attractiveness of our UPREIT structure so that it may no longer assist us in competing for acquisitions.

Tax indemnification obligations may require the Operating Partnership to maintain certain debt levels.

        We have provided certain tax protections to various third parties in connection with their property contributions to the Operating Partnership upon acquisition by the Company, including making available the opportunity to (1) guarantee debt or (2) enter into a special loss allocation and deficit restoration obligation. We have agreed to these provisions in order to assist these contributors in preserving their tax position after their contributions. These obligations may require us to maintain certain indebtedness levels that we would not otherwise require for our business.

Our joint venture investments could be adversely affected by our lack of sole decision-making authority.

        As of December 31, 2010, we held interests in 365 operating properties through joint ventures. Some of these arrangements could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers financial conditions and disputes between us and our co-venturers. We expect to continue our joint venture strategy by entering into more joint ventures for the purpose of developing new self-storage properties and acquiring existing properties. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. The decision-making authority regarding the properties we currently hold through joint ventures is either vested exclusively with our joint venture partners, is subject to a majority vote of the joint venture partners or equally shared by us and the joint venture partners. In

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addition, investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and efforts on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers, which could harm our financial condition.

Spencer F. Kirk, Chairman and Chief Executive Officer, Kent W. Christensen, Executive Vice President and Chief Financial Officer, Charles L. Allen, Executive Vice President and Chief Legal Officer, and other members of our senior management team have outside business interests which could divert their time and attention away from us, which could harm our business.

        Spencer F. Kirk, our Chairman and Chief Executive Officer, as well as certain other members of our senior management team, have outside business interests. These business interests include the ownership of a self-storage property located in Pico Rivera, California. Other than this property, the members of our senior management are not currently engaged in any other self-storage activities outside the Company. These outside business interests could interfere with their ability to devote time to our business and affairs as a result, our business could be harmed.

Conflicts of interest could arise as a result of our relationship with our Operating Partnership.

        Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, and our Operating Partnership or any partner thereof. Our directors and officers have duties to our Company under applicable Maryland law in connection with their management of our Company. At the same time, we, through our wholly-owned subsidiary, have fiduciary duties, as a general partner, to our Operating Partnership and to the limited partners under Delaware law in connection with the management of our Operating Partnership. Our duties, through our wholly-owned subsidiary, as a general partner to our Operating Partnership and its partners may come into conflict with the duties of our directors and officers to our Company. The partnership agreement of our Operating Partnership does not require us to resolve such conflicts in favor of either our Company or the limited partners in our Operating Partnership. Unless otherwise provided for in the relevant partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness, and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest.

        Additionally, the partnership agreement expressly limits our liability by providing that neither we, our direct wholly-owned Massachusetts business trust subsidiary, as the general partner of the Operating Partnership, nor any of our or their trustees, directors or officers, will be liable or accountable in damages to our Operating Partnership, the limited partners or assignees for errors in judgment, mistakes of fact or law or for any act or omission if we, or such trustee, director or officer, acted in good faith. In addition, our Operating Partnership is required to indemnify us, our affiliates and each of our respective trustees, officers, directors, employees and agents to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys' fees and other legal fees and expenses),

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judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Operating Partnership, provided that our Operating Partnership will not indemnify for (1) willful misconduct or a knowing violation of the law, (2) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the partnership agreement, or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful.

        The provisions of Delaware law that allow the common law fiduciary duties of a general partner to be modified by a partnership agreement have not been resolved in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties that would be in effect under common law were it not for the partnership agreement.

We may pursue less vigorous enforcement of terms of contribution and other agreements because of conflicts of interest with certain of our officers.

        Spencer F. Kirk, Chairman and Chief Executive Officer, Kent W. Christensen, Executive Vice President and Chief Financial Officer, Charles L. Allen, Executive Vice President and Chief Legal Officer, other members of our senior management team and Kenneth M. Woolley, Director, had direct or indirect ownership interests in certain properties that were contributed to our Operating Partnership in the formation transactions. Following the completion of the formation transactions, we, under the agreements relating to the contribution of such interests, became entitled to indemnification and damages in the event of breaches of representations or warranties made by the contributors. None of these contribution and non-competition agreements was negotiated at an arm's-length basis. We may choose not to enforce, or to enforce less vigorously, our rights under these contribution and non-competition agreements because of our desire to maintain our ongoing relationships with the individuals party to these agreements.

Certain provisions of Maryland law and our organizational documents, including the stock ownership limit imposed by our charter, may inhibit market activity in our stock and could prevent or delay a change in control transaction.

        Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 7.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock or 7.0% (by value or by number of shares, whichever is more restrictive) of our outstanding capital stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership could jeopardize our qualification as a REIT. These restrictions on ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may delay or impede a transaction or a change of control that might involve a premium price for our securities or otherwise be in the best interests of our stockholders. Different ownership limits apply to the family of Kenneth M. Woolley, certain of his affiliates, family members and estates and trusts formed for the benefit of the foregoing and Spencer F. Kirk, certain of his affiliates, family members and estates and trusts formed for the benefit of the foregoing and certain designated investment entities (as defined in our charter).

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Our board of directors has the power to issue additional shares of our stock in a manner that may not be in the best interest of our stockholders.

        Our charter authorizes our board of directors to issue additional authorized but unissued shares of common stock or preferred stock and to increase the aggregate number of authorized shares or the number of shares of any class or series without stockholder approval. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. Our board of directors could issue additional shares of our common stock or establish a series of preferred stock that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for our securities or otherwise not be in the best interests of our stockholders.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

        Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors' and officers' liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to indemnify our directors and officers for liability resulting from actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

To the extent our distributions represent a return of capital for U.S. federal income tax purposes, our stockholders could recognize an increased capital gain upon a subsequent sale of common stock.

        Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a U.S. stockholder under current U.S. federal income tax law to the extent those distributions do not exceed the stockholder's adjusted tax basis in his, her, or its common stock, but instead will constitute a return of capital and will reduce such adjusted basis. If distributions result in a reduction of a stockholder's adjusted basis in such holder's common stock, subsequent sales of such holder's common stock will result in recognition of an increased capital gain or decreased capital loss due to the reduction in such adjusted basis.

Risks Related to the Real Estate Industry

Our primary business involves the ownership and operation of self-storage properties.

        Our current strategy is to own, operate, manage, acquire, develop and redevelop only self-storage properties. Consequently, we are subject to risks inherent in investments in a single industry. Because investments in real estate are inherently illiquid, this strategy makes it difficult for us to diversify our investment portfolio and to limit our risk when economic conditions change. Decreases in market rents, negative tax, real estate and zoning law changes and changes in environmental protection laws may also increase our costs, lower the value of our investments and decrease our income, which would adversely affect our business, financial condition and operating results.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties.

        Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is

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limited. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

        We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to transfer restrictions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These transfer restrictions would impede our ability to sell a property even if we deem it necessary or appropriate.

Any investments in unimproved real property may take significantly longer to yield income-producing returns, if at all, and may result in additional costs to us to comply with re-zoning restrictions or environmental regulations.

        We have invested in the past, and may invest in the future, in unimproved real property. Unimproved properties generally take longer to yield income-producing returns based on the typical time required for development. Any development of unimproved property may also expose us to the risks and uncertainties associated with re-zoning the land for a higher use or development and environmental concerns of governmental entities and/or community groups. Any unsuccessful investments or delays in realizing an income-producing return or increased costs to develop unimproved real estate could restrict our ability to earn our targeted rate of return on an investment or adversely affect our ability to pay operating expenses which would harm our financial condition and operating results.

Any negative perceptions of the self-storage industry generally may result in a decline in our stock price.

        To the extent that the investing public has a negative perception of the self-storage industry, the value of our securities may be negatively impacted, which could result in our securities trading below the inherent value of our assets.

Risks Related to Our Debt Financings

Disruptions in the financial markets could affect our ability to obtain debt financing on reasonable terms and have other adverse effects on us.

        The United States credit markets have experienced significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Uncertainty in the credit markets may negatively impact our ability to access additional debt financing or to refinance existing debt maturities on favorable terms (or at all), which may negatively affect our ability to make acquisitions and fund development projects. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of common

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stock, preferred stock or other equity securities. These disruptions in the financial markets may have other adverse effects on us or the economy generally, which could cause our stock price to decline.

Required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties or to pay the distributions currently contemplated or necessary to maintain our qualification as a REIT and may expose us to the risk of default under our debt obligations.

        As of December 31, 2010, we had approximately $1.2 billion of outstanding indebtedness. We may incur additional debt in connection with future acquisitions and development. We may borrow under our Credit Lines or borrow new funds to finance these future properties. Additionally, we do not anticipate that our internally generated cash flow will be adequate to repay our existing indebtedness upon maturity and, therefore, we expect to repay our indebtedness through refinancings and equity and/or debt offerings. Further, we may need to borrow funds in order to make cash distributions to maintain our qualification as a REIT or to make our expected distributions.

        If we are required to utilize our Credit Lines for purposes other than acquisition activity, this will reduce the amount available for acquisitions and could slow our growth. Therefore, our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

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We could become highly leveraged in the future because our organizational documents contain no limitation on the amount of debt we may incur.

        Our organizational documents contain no limitations on the amount of indebtedness that we or our Operating Partnership may incur. We could alter the balance between our total outstanding indebtedness and the value of our portfolio at any time. If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and to pay our anticipated cash distributions and/or to continue to make cash distributions to maintain our REIT qualification, and could harm our financial condition.

Increases in interest rates may increase our interest expense and adversely affect our cash flow and our ability to service our indebtedness and make cash distributions to our stockholders.

        As of December 31, 2010, we had approximately $1.2 billion of debt outstanding, of which approximately $429.9 million or 34.4% was subject to variable interest rates (excluding debt with interest rate swaps). This variable rate debt had a weighted average interest rate of approximately 3.1% per annum. Increases in interest rates on this variable rate debt would increase our interest expense, which could harm our cash flow and our ability to pay cash distributions. For example, if market rates of interest on this variable rate debt increased by 100 basis points (excluding variable rate debt with interest rate floors), the increase in interest expense would decrease future earnings and cash flows by approximately $3.4 million annually.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

        In certain cases we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements. Hedging involves risks, such as the risk that the counterparty may fail to honor its obligations under an arrangement. Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations and ability to make cash distributions to our stockholders.

Risks Related to Qualification and Operation as a REIT

To maintain our qualification as a REIT, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.

        To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding net capital gains, and we are subject to regular corporate income taxes to the extent that we distribute less than 100% of our net taxable income each year. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions made by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. While historically we have satisfied these distribution requirements by making cash distributions to our shareholders, a REIT is permitted to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, its own stock. For distributions with respect to taxable years ending on or before December 31, 2011, recent Internal Revenue Service guidance allows us to satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock, if certain conditions are met. Assuming we continue to satisfy these distributions requirements with cash, we may need to borrow funds on a short-term basis, or possibly long-term, to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt amortization payments.

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Dividends payable by REITs generally do not qualify for reduced tax rates.

        The maximum U.S. federal income tax rate for dividends paid by domestic corporations to individual U.S. stockholders is 15% (through 2012). Dividends paid by REITs, however, are generally not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our securities.

        In addition, the relative attractiveness of real estate in general may be adversely affected by the favorable tax treatment given to corporate dividends, which could negatively affect the value of our properties.

Possible legislative or other actions affecting REITs could adversely affect our stockholders.

        The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders. It cannot be predicted whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders will be changed.

The power of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.

        Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our net taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.

Our failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.

        We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Internal Revenue Code. If we fail to qualify as a REIT or lose our qualification as a REIT at any time, we will face serious tax consequences that would substantially reduce the funds available for distribution for each of the years involved because:

        In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that our U.S. individual stockholders would be taxed on our dividends at capital gains rates, and our U.S. corporate stockholders would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Internal Revenue Code. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the relief

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provisions under the Internal Revenue Code in order to maintain our REIT status, we may nevertheless be required to pay penalty taxes of $50,000 or more for each such failure. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could adversely affect the value of our securities.

        Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets, the sources of our gross income and the owners of our stock. Our ability to satisfy the asset tests depends upon our analysis of the fair market value of our assets, some of which are not susceptible to precise determination, and for which we will not obtain independent appraisals. Also, we must make distributions to stockholders aggregating annually at least 90% of our net taxable income, excluding capital gains, and we will be subject to income tax at regular corporate rates to the extent we distribute less than 100% of our net taxable income including capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Although we believe that we have been organized and have operated in a manner that is intended to allow us to qualify for taxation as a REIT, we can give no assurance that we have qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan to request a ruling from the Internal Revenue Service regarding our qualification as a REIT.

We will pay some taxes.

        Even though we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state and local taxes on our income and property. Extra Space Management, Inc. manages self-storage properties for our joint venture properties and properties owned by third parties. We, jointly with Extra Space Management, Inc., elected to treat Extra Space Management, Inc. as a "taxable REIT subsidiary" of our Company for U.S. federal income tax purposes. A taxable REIT subsidiary is a fully taxable corporation, and may be limited in its ability to deduct interest payments made to us. In addition, we will be subject to a 100% penalty tax on certain amounts if the economic arrangements among our tenants, our taxable REIT subsidiary and us are not comparable to similar arrangements among unrelated parties or if we receive payments for inventory or property held for sale to customers in the ordinary course of business. Also, if we sell property as a dealer (i.e., to customers in the ordinary course of our trade or business), we will be subject to a 100% penalty tax on any gain arising from such sales. While we don't intend to sell properties as a dealer, the IRS could take a contrary position. To the extent that we are or our taxable REIT subsidiary is required to pay U.S. federal, state or local taxes, we will have less cash available for distribution to stockholders.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

        To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Thus, compliance with the REIT requirements may adversely affect our ability to operate solely to maximize profits.

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Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        As of December 31, 2010, we owned or had ownership interests in 660 operating self-storage properties. Of these properties, 295 are wholly-owned and 365 are held in joint ventures. In addition, we managed an additional 160 properties for franchisees or third parties bringing the total number of properties which we own and/or manage to 820. These properties are located in 34 states and Washington, D.C. We receive a management fee equal to approximately 6% of cash collected from total revenues to manage the joint venture, third party and franchise sites. As of December 31, 2010, we own and/or manage approximately 59 million square feet of rentable space configured in approximately 550,000 separate storage units. Approximately 70% of our properties are clustered around large population centers, such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These 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. Our acquisitions have 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 for a full year measured as of January 1, or has been open for three years.

        As of December 31, 2010, over 425,000 tenants were leasing storage units at the 820 operating properties that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of December 31, 2010, the median length of stay was approximately eleven months. The average annual rent per square foot at these stabilized properties was $13.49 at December 31, 2010 compared to $13.46 at December 31, 2009.

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

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        The following table sets forth additional information regarding the occupancy of our stabilized properties on a state-by-state basis as of December 31, 2010 and 2009. The information as of December 31, 2009 is on a pro forma basis as though all the properties owned at December 31, 2010 were under our control as of December 31, 2009.

Stabilized Property Data Based on Location

 
   
  Company   Pro forma   Company   Pro forma   Company   Pro forma  
Location
  Number of
Properties
  Number of Units as of
December 31, 2010(1)
  Number of Units as of
December 31, 2009
  Net Rentable Square
Feet as of
December 31, 2010(2)
  Net Rentable Square
Feet as of
December 31, 2009
  Square Foot
Occupancy %
December 31, 2010
  Square Foot
Occupancy %
December 31, 2009
 

Wholly-owned properties

                                           

Alabama

    3     1,372     1,370     174,019     173,499     76.4 %   80.4 %

Arizona

    5     2,795     2,818     356,720     346,998     87.9 %   83.6 %

California

    44     34,838     34,969     3,464,223     3,468,924     84.1 %   80.2 %

Colorado

    8     3,760     3,790     476,464     476,484     85.1 %   84.4 %

Connecticut

    3     1,980     2,023     177,985     178,040     86.6 %   78.9 %

Florida

    28     18,246     18,303     1,944,092     1,944,925     84.5 %   81.3 %

Georgia

    12     6,425     6,425     837,248     836,922     84.5 %   82.1 %

Hawaii

    2     2,815     2,858     145,815     145,816     81.8 %   80.4 %

Illinois

    5     3,336     3,320     341,734     341,724     82.2 %   79.9 %

Indiana

    6     3,470     3,477     412,709     412,759     84.1 %   82.3 %

Kansas

    1     506     507     50,310     50,190     89.0 %   82.2 %

Kentucky

    3     1,568     1,578     193,901     194,051     86.4 %   88.9 %

Louisiana

    2     1,412     1,412     150,035     150,335     84.4 %   81.8 %

Maryland

    11     8,741     8,754     937,309     937,027     86.4 %   85.5 %

Massachusetts

    28     16,804     16,772     1,718,219     1,708,997     84.3 %   82.4 %

Michigan

    2     1,018     1,026     134,954     135,026     85.6 %   85.7 %

Missouri

    6     3,152     3,141     374,962     374,292     84.6 %   82.4 %

Nevada

    1     463     463     57,550     56,850     74.6 %   84.7 %

New Hampshire

    2     1,007     1,006     125,473     125,473     87.3 %   88.2 %

New Jersey

    23     18,732     18,801     1,831,826     1,834,626     86.8 %   84.7 %

New Mexico

    1     541     541     71,575     71,555     86.9 %   78.7 %

New York

    11     9,239     9,243     713,751     669,579     83.9 %   82.1 %

Ohio

    2     1,185     1,184     156,519     156,839     85.6 %   86.0 %

Oregon

    1     770     767     103,130     103,150     89.5 %   84.7 %

Pennsylvania

    8     4,869     4,883     582,410     581,532     86.6 %   87.1 %

Rhode Island

    1     721     722     75,816     75,521     86.9 %   81.3 %

South Carolina

    4     2,173     2,175     253,406     253,406     86.0 %   84.0 %

Tennessee

    2     985     990     148,150     148,395     83.5 %   82.9 %

Texas

    16     10,184     10,223     1,142,451     1,143,979     85.7 %   84.9 %

Utah

    6     2,688     2,651     351,263     347,324     84.1 %   84.5 %

Virginia

    5     3,529     3,525     334,767     334,807     86.3 %   82.6 %

Washington

    4     2,543     2,548     308,015     308,015     71.7 %   90.6 %
                               

Total Wholly-Owned Stabilized

    256     171,867     172,265     18,146,801     18,087,060     84.7 %   82.9 %
                               

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  Company   Pro forma   Company   Pro forma   Company   Pro forma  
Location
  Number of
Properties
  Number of Units as of
December 31, 2010(1)
  Number of Units as of
December 31, 2009
  Net Rentable Square
Feet as of
December 31, 2010(2)
  Net Rentable Square
Feet as of
December 31, 2009
  Square Foot
Occupancy %
December 31, 2010
  Square Foot
Occupancy %
December 31, 2009
 

Joint-venture properties

                                           

Alabama

    3     1,705     1,705     205,588     205,638     86.6 %   82.5 %

Arizona

    11     6,822     6,829     766,785     751,889     86.4 %   82.6 %

California

    81     57,708     58,437     5,984,222     5,987,901     85.1 %   84.2 %

Colorado

    2     1,318     1,325     158,523     158,583     84.8 %   82.7 %

Connecticut

    8     5,990     5,983     692,632     691,406     85.3 %   82.8 %

Delaware

    1     581     584     71,740     71,680     88.8 %   92.2 %

Florida

    26     21,001     21,120     2,163,071     2,168,592     83.9 %   80.9 %

Georgia

    3     1,848     1,871     240,701     245,520     77.6 %   80.1 %

Illinois

    9     6,455     6,431     693,583     694,185     85.1 %   81.6 %

Indiana

    7     2,774     2,769     366,293     366,173     86.1 %   86.4 %

Kansas

    3     1,222     1,211     163,750     160,060     79.7 %   79.1 %

Kentucky

    4     2,275     2,268     269,545     268,886     87.6 %   83.1 %

Maryland

    14     10,986     11,055     1,086,603     1,085,468     87.6 %   84.5 %

Massachusetts

    17     9,248     9,252     1,048,351     1,049,070     85.0 %   81.6 %

Michigan

    10     5,906     5,917     783,038     784,683     86.1 %   81.8 %

Missouri

    2     961     956     118,045     118,045     83.5 %   80.2 %

Nevada

    8     5,364     5,391     692,743     694,438     84.4 %   82.7 %

New Hampshire

    3     1,305     1,316     136,994     137,434     87.8 %   84.2 %

New Jersey

    21     15,633     15,656     1,644,776     1,647,200     84.1 %   83.0 %

New Mexico

    9     4,657     4,673     539,430     542,799     83.7 %   82.9 %

New York

    21     21,624     21,638     1,733,601     1,733,870     87.1 %   86.2 %

Ohio

    13     5,862     5,848     872,890     871,140     81.4 %   80.1 %

Oregon

    2     1,292     1,290     136,920     136,290     88.1 %   84.2 %

Pennsylvania

    11     8,922     8,914     873,736     873,096     86.6 %   84.8 %

Rhode Island

    2     1,078     1,089     127,975     129,865     76.5 %   72.6 %

Tennessee

    25     13,820     13,822     1,820,218     1,820,900     84.1 %   82.8 %

Texas

    22     13,768     13,852     1,807,914     1,807,615     83.5 %   83.8 %

Utah

    1     522     520     59,250     59,000     82.8 %   81.7 %

Virginia

    17     12,016     12,000     1,267,628     1,266,743     86.8 %   85.3 %

Washington

    1     546     546     62,730     62,730     84.4 %   86.4 %

Washington, DC

    1     1,533     1,536     102,003     102,003     91.7 %   91.7 %
                               

Total Stabilized Joint-Ventures

    358     244,742     245,804     26,691,278     26,692,902     85.0 %   83.3 %
                               

Managed properties

                                           

Arizona

    1     580     581     67,350     67,350     37.1 %   32.6 %

California

    8     6,062     6,085     767,190     759,214     76.3 %   71.1 %

Colorado

    6     2,246     2,237     257,217     264,096     81.8 %   81.0 %

Florida

    16     7,672     7,713     924,708     867,182     71.7 %   69.2 %

Georgia

    6     3,623     3,647     507,367     509,389     74.3 %   72.0 %

Illinois

    5     2,980     2,977     315,719     328,584     70.5 %   73.1 %

Indiana

    3     1,706     1,711     183,289     188,119     76.6 %   74.8 %

Kansas

    3     1,506     1,518     225,250     226,120     79.7 %   71.3 %

Kentucky

    1     525     532     66,100     66,000     84.0 %   76.6 %

Louisiana

    1     1,009     1,008     135,970     106,853     63.4 %   67.2 %

Maryland

    15     9,266     9,406     1,047,078     1,048,140     78.6 %   74.6 %

Massachusetts

    2     2,109     2,114     189,899     190,099     76.8 %   70.6 %

Missouri

    3     1,529     1,532     302,698     305,138     75.2 %   72.9 %

Nevada

    2     1,574     1,576     170,375     170,775     80.2 %   81.8 %

New Jersey

    5     4,131     4,138     389,580     386,517     84.1 %   80.3 %

New Mexico

    2     1,106     1,101     132,282     131,857     85.9 %   85.0 %

New York

    1     695     704     83,055     83,055     90.2 %   81.5 %

North Carolina

    5     3,599     3,599     378,054     379,130     69.6 %   75.0 %

Ohio

    4     1,075     1,087     158,160     161,760     66.6 %   59.3 %

Pennsylvania

    20     8,347     8,380     1,017,666     1,017,521     72.1 %   63.6 %

South Carolina

    2     1,175     1,024     162,337     137,827     67.5 %   79.5 %

Tennessee

    2     885     883     131,490     131,140     86.0 %   84.2 %

Texas

    7     3,213     3,263     422,870     421,759     78.5 %   79.9 %

Virginia

    4     2,745     2,767     274,198     274,583     86.3 %   83.0 %

Washington, DC

    2     1,263     1,263     112,459     112,459     86.2 %   87.2 %
                               

Total Stabilized Managed Properties

    126     70,621     70,846     8,422,361     8,334,667     75.8 %   73.0 %
                               

Total Stabilized Properties

    740     487,230     488,915     53,260,440     53,114,629     83.5 %   81.6 %
                               

(1)
Represents unit count as of December 31, 2010, which may differ from December 31, 2009 unit count due to unit conversions or expansions.

(2)
Represents net rentable square feet as of December 31, 2010, which may differ from December 31, 2009 net rentable square feet due to unit conversions or expansions.

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        The following table sets forth additional information regarding the occupancy of our lease-up properties on a state-by-state basis as of December 31, 2010 and 2009. The information as of December 31, 2009 is on a pro forma basis as though all the properties owned at December 31, 2010 were under our control as of December 31, 2009.

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
December 31, 2010(1)
  Number of Units as of
December 31, 2009
  Net Rentable Square
Feet as of
December 31, 2010(2)
  Net Rentable Square
Feet as of
December 31, 2009
  Square Foot
Occupancy %
December 31, 2010
  Square Foot
Occupancy %
December 31, 2009
 

Wholly-owned properties

                                           

California

    13     9,234     8,522     1,002,847     930,294     55.8 %   34.1 %

Florida

    6     5,002     3,240     492,325     314,255     32.9 %   17.2 %

Georgia

    4     1,995     1,797     252,986     230,909     65.6 %   55.1 %

Illinois

    4     2,565     2,689     276,250     276,265     66.0 %   50.2 %

Maryland

    3     2,217     1,394     236,922     149,937     56.1 %   55.1 %

Massachusetts

    1     605     594     72,225     72,150     63.1 %   52.5 %

New Jersey

    3     1,888     1,965     184,135     184,570     63.1 %   35.5 %

New York

    1     674     670     42,551     42,313     64.8 %   62.5 %

Oregon

    1     730     744     76,120     76,375     44.9 %   7.5 %

Tennessee

    1     635     635     67,110     66,935     79.3 %   63.9 %

Texas

    2     1,087     1,087     156,050     156,050     60.1 %   68.6 %
                               

Total Wholly-Owned Lease up

    39     26,632     23,337     2,859,521     2,500,053     55.0 %   40.2 %
                               

Joint-venture properties

                                           

California

    4     3,011     3,025     295,224     294,133     64.8 %   45.3 %

Illinois

    2     1,306     1,026     131,809     107,836     52.4 %   57.4 %

Maryland

    1     857     853     71,474     71,349     90.8 %   73.7 %
                               

Total Lease up Joint-Ventures

    7     5,174     4,904     498,507     473,318     65.2 %   52.3 %
                               

Managed properties

                                           

California

    2     1,740     1,737     236,289     236,174     63.9 %   50.9 %

Colorado

    1     519     508     61,420     61,070     90.2 %   78.4 %

Florida

    9     6,611     4,919     623,978     454,890     42.9 %   24.9 %

Georgia

    6     3,585     3,594     535,276     534,824     52.4 %   42.6 %

Illinois

    4     2,640     2,757     231,010     233,234     61.9 %   50.8 %

Massachusetts

    2     1,198     1,210     123,048     123,058     47.9 %   30.8 %

New Jersey

    1     850     848     78,295     77,895     73.5 %   57.4 %

New York

    1     906     914     46,197     46,197     39.6 %   21.9 %

Pennsylvania

    2     1,991     1,990     173,019     173,019     58.1 %   39.8 %

Rhode Island

    1     985         90,995         29.3 %   0.0 %

South Carolina

    1     755     767     76,435     76,875     34.7 %   0.0 %

Tennessee

    1     505     505     69,550     69,550     67.2 %   62.1 %

Texas

    1     934     936     103,350     103,450     18.8 %   0.0 %

Utah

    1     654     653     75,601     75,451     79.3 %   61.2 %

Virginia

    1     459     476     63,709     63,709     64.0 %   45.0 %
                               

Total Lease up Managed Properties

    34     24,332     21,814     2,588,172     2,329,396     52.3 %   39.0 %
                               

Total Lease up Properties

    80     56,138     50,055     5,946,200     5,302,767     54.7 %   40.8 %
                               

(1)
Represents unit count as of December 31, 2010, which may differ from December 31, 2009 unit count due to unit conversions or expansions.

(2)
Represents net rentable square feet as of December 31, 2010, which may differ from December 31, 2009 net rentable square feet due to unit conversions or expansions.

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Item 3.    Legal Proceedings

        We are involved in various litigation and legal 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 4.    (Removed and Reserved)

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

        Our common stock has been traded on the New York Stock Exchange ("NYSE") under the symbol "EXR" since our IPO on August 17, 2004. Prior to that time there was no public market for our common stock.

        The following table sets forth, for the periods indicated, the high and low sales price for our common stock as reported by the NYSE and the per share dividends declared:

 
   
  Range    
 
 
   
  Dividends
Declared
 
Year
  Quarter   High   Low  

2009

  1st     10.49     4.93     0.2500  

  2nd     9.04     5.36     0.0000  

  3rd     11.58     7.38     0.0000  

  4th     12.23     9.13     0.1300  

2010

 

1st

   
13.35
   
10.78
   
0.1000
 

  2nd     16.32     12.52     0.1000  

  3rd     17.10     12.94     0.1000  

  4th     17.70     15.39     0.1000  

        On February 14, 2011, the closing price of our common stock as reported by the NYSE was $19.69. At February 14, 2011, we had 257 holders of record of our common stock. Certain shares of the Company are held in "street" name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

        Holders of shares of common stock are entitled to receive distributions when declared by our board of directors out of any assets legally available for that purpose. As a REIT, we are required to distribute at least 90% of our "REIT taxable income," which is generally equivalent to our net taxable ordinary income, determined without regard to the deduction for dividends paid to our stockholders annually in order to maintain our REIT qualification for U.S. federal income tax purposes.

        Information about our equity compensation plans is incorporated by reference in Item 12 of Part III of this Annual Report on Form 10-K.

Unregistered Sales of Equity Securities

        None.

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Item 6.    Selected Financial Data

        The following table sets forth the selected financial data and should be read in conjunction with the Financial Statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K. (Amounts in thousands, except share and per share data.)

 
  For the Year Ended December 31,  
 
  2010   2009   2008   2007   2006  

Revenues:

                               
 

Property rental

  $ 232,447   $ 238,256   $ 235,695   $ 206,315   $ 170,993  
 

Fees, tenant reinsurance and other income

    49,050     41,890     37,036     31,647     25,201  
                       
   

Total revenues

    281,497     280,146     272,731     237,962     196,194  
                       

Expenses:

                               
 

Property operations

    86,165     88,935     84,522     73,070     62,243  
 

Tenant reinsurance

    6,505     5,461     5,066     4,710     2,328  
 

Unrecovered development and acquisition costs, loss on sublease and severance

    3,235     21,236     1,727     765     269  
 

General and administrative

    44,428     40,224     39,388     35,818     34,530  
 

Depreciation and amortization

    50,349     52,403     49,566     39,801     37,172  
                       
   

Total expenses

    190,682     208,259     180,269     154,164     136,542  
                       

Income from operations

    90,815     71,887     92,462     83,798     59,652  

Interest expense

    (65,780 )   (69,818 )   (68,671 )   (64,045 )   (50,953 )

Interest income

    5,748     6,432     8,249     10,417     2,469  

Gain on repurchase of exchangeable senior notes

        27,928     6,311          

Loss on investments available for sale

            (1,415 )   (1,233 )    

Fair value adjustment of obligation associated with Preferred Operating Partnership units

                1,054      
                       

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

    30,783     36,429     36,936     29,991     11,168  

Equity in earnings of real estate ventures

    6,753     6,964     6,932     5,300     4,693  

Income tax expense

    (4,162 )   (4,300 )   (519 )        
                       

Net income

    33,374     39,093     43,349     35,291     15,861  

Noncontrolling interests in Operating Partnership and other

    (7,043 )   (7,116 )   (7,568 )   (3,562 )   (985 )

Fixed distribution paid to Preferred Operating Partnership unit holder

                (1,510 )    
                       

Net income attributable to common stockholders

  $ 26,331   $ 31,977   $ 35,781   $ 30,219   $ 14,876  
                       

Net income per common share

                               
 

Basic

  $ 0.30   $ 0.37   $ 0.46   $ 0.47   $ 0.27  
 

Diluted

  $ 0.30   $ 0.37   $ 0.46   $ 0.46   $ 0.27  

Weighted average number of shares

                               
 

Basic

    87,324,104     86,343,029     76,966,754     64,900,713     55,117,021  
 

Diluted

    92,050,453     91,082,834     82,352,988     70,715,640     59,409,836  

Cash dividends paid per common share

  $ 0.40   $ 0.38   $ 1.00   $ 0.93   $ 0.91  

Balance Sheet Data

                               

Total assets

  $ 2,248,468   $ 2,407,556   $ 2,291,008   $ 2,054,075   $ 1,669,825  

Total notes payable, notes payable to trusts, exchangeable senior notes and lines of credit

  $ 1,246,918   $ 1,402,977   $ 1,286,820   $ 1,299,997   $ 948,174  

Noncontrolling interests

  $ 57,670   $ 62,040   $ 68,023   $ 66,217   $ 35,158  

Total stockholders' equity

  $ 881,401   $ 884,179   $ 878,770   $ 638,461   $ 643,555  

Other Data

                               

Net cash provided by operating activities

  $ 104,815   $ 81,165   $ 98,391   $ 102,096   $ 76,885  

Net cash used in investing activities

  $ (83,706 ) $ (104,410 ) $ (244,481 ) $ (354,344 ) $ (239,778 )

Net cash provided by (used in) financing activities

  $ (106,309 ) $ 91,223   $ 172,685   $ 98,824   $ 205,041  

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward- looking statements, see the section in this Form 10-K entitled "Statements Regarding Forward-Looking Information." Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Form 10-K entitled "Risk Factors." (Amounts in thousands, except share and per share data.)

Overview

        We are a fully integrated, self-administered and self-managed real estate investment trust, or REIT, formed to continue the business commenced in 1977 by our predecessor companies to own, operate, manage, acquire, develop and redevelop professionally managed self-storage properties. Since our IPO, our fully integrated development and acquisition teams have completed the development or acquisition of 536 self-storage properties.

        At December 31, 2010, we owned, had ownership interests in, or managed 820 operating properties in 34 states and Washington, D.C. Of these 820 operating properties, 295 were wholly owned, we held joint venture interests in 365 properties, and our taxable REIT subsidiary, Extra Space Management, Inc., operated an additional 160 properties that are owned by franchisees or third parties in exchange for a management fee. These operating properties contain approximately 59 million square feet of rentable space contained in approximately 550,000 units and currently serve a customer base of over 425,000 tenants.

        Our properties are generally situated in convenient, highly visible locations clustered around large population centers such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These areas all enjoy above average population growth and income levels. The clustering of our assets around these population centers enables us to reduce our operating costs through economies of scale. We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. A property is considered to be stabilized once it has achieved an 80% occupancy rate for a full year measured as of January 1, or has been open for three years.

        To maximize the performance of our properties, we employ a state-of-the-art, web-based tracking and yield management technology called STORE. Developed by our management team, STORE enables us to analyze, set and adjust rental rates in real time across our portfolio in order to respond to changing market conditions. In addition, we also have an industry leading revenue management system called "RevMan." We believe that the combination of STORE's yield management capabilities and the systematic processes developed by our team using RevMan allows us to more proactively manage revenues.

        We derive substantially all of our revenues from rents received from tenants under existing leases at each of our self-storage properties, from management fees on the properties we manage for joint-venture partners, franchisees and unaffiliated third parties and from our tenant reinsurance program. Our management fee is equal to approximately 6% of cash collected from total revenues generated by the managed properties.

        We operate in competitive markets, often where consumers have multiple self-storage properties from which to choose. Competition has impacted, and will continue to impact our property results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our

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ability to lease available self-storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. We believe that we are able to respond quickly and effectively to changes in local, regional and national economic conditions by adjusting rental rates through the use of STORE, and through the use of RevMan.

        We continue to evaluate and implement a range of new initiatives and opportunities in order to enable us to maximize stockholder value. Our strategies to maximize stockholder value include the following:

        During 2010, we acquired 15 wholly-owned properties and completed the development of four wholly-owned properties, all in our core markets. We have six development properties remaining. All six are wholly-owned and are scheduled for completion by the end of 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those that impact our most critical accounting policies. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates. We believe the following are our most critical accounting policies:

        CONSOLIDATION:    Arrangements that are not controlled through voting or similar rights are accounted for as variable interest entities ("VIEs"). An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE.

        A VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) the entity's equity holders as a group either: (a) lack the power, through voting or similar rights, to direct the activities of the entity that most significantly impact the entity's economic performance, (b) are not obligated to absorb expected losses of the entity if they occur, or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, the enterprise

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that is deemed to have a variable interest, or combination of variable interests, that provides the enterprise with a controlling financial interest in the VIE is considered the primary beneficiary and must consolidate the VIE.

        We have concluded that under certain circumstances when we (1) enter into option agreements for the purchase of land or facilities from an entity and pay a non-refundable deposit, or (2) enter into arrangements for the formation of joint ventures, a VIE may be created under condition (i), (ii) (b) or (c) of the previous paragraph. For each VIE created, we have performed a qualitative analysis, including considering which party, if any, has the power to direct the activities most significant to the economic performance of each VIE and whether that party has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If we are determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with our financial statements. Additionally, our Operating Partnership has notes payable to three trusts that are VIEs under condition (ii)(a) above. Since the Operating Partnership is not the primary beneficiary of the trusts, these VIEs are not consolidated.

        REAL ESTATE ASSETS:    Real estate assets are stated at cost, less accumulated depreciation. Direct and allowable internal costs associated with the development, construction, renovation, and improvement of real estate assets are capitalized. Interest, property taxes, and other costs associated with development incurred during the construction period are capitalized.

        Expenditures for maintenance and repairs are charged to expense as incurred. Major replacements and betterments that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between five and 39 years.

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

        Intangible lease rights include: (1) purchase price amounts allocated to leases on two properties that cannot be classified as ground or building leases; these rights are amortized to expense over the term of the leases and (2) intangibles related to ground leases on four properties where the ground leases were assumed by the Company at rates that were different than the current market rates for similar leases. The value associated with these assumed leases were recorded as intangibles, which will be amortized over the lease terms.

        EVALUATION OF ASSET IMPAIRMENT:    We evaluate long lived assets held for use when events or circumstances indicate that there may be impairment. We review each property at least annually to determine if any such events or circumstances have occurred or exist. We focus on properties where occupancy and/or rental income have decreased by a significant amount. For these properties, we determine whether the decrease is temporary or permanent and whether the property will likely recover the lost occupancy and/or revenue in the short term. In addition, we carefully review properties in the lease-up stage and compare actual operating results to original projections.

        When we determine that an event that may indicate impairment has occurred, we compare the carrying value of the related long-lived assets to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the assets exceeds

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the undiscounted future net operating cash flows attributable to the assets. The impairment loss recognized equals the excess of net carrying value over the related fair value of the assets.

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

        FAIR VALUE OF FINANCIAL INSTRUMENTS:    The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable rate notes payable and notes payable to trusts, lines of credit and other liabilities reflected in the consolidated balance sheets at December 31, 2010 and 2009 approximate fair value. The fair values of our notes receivable, our fixed rate notes payable and notes payable to trusts and exchangeable senior notes are as follows:

 
  December 31, 2010   December 31, 2009  
 
  Fair
Value
  Carrying
Value
  Fair
Value
  Carrying
Value
 

Note receivable from Preferred Operating Partnership unit holder

  $ 115,696   $ 100,000   $ 112,740   $ 100,000  

Fixed rate notes payable and notes payable to trusts

  $ 777,575   $ 731,588   $ 1,067,653   $ 1,015,063  

Exchangeable senior notes

  $ 118,975   $ 87,663   $ 110,122   $ 87,663  

        INVESTMENTS IN REAL ESTATE VENTURES:    Our investments in real estate joint ventures where we have significant influence but not control, and joint ventures which are VIEs in which we are not the primary beneficiary, are recorded under the equity method of accounting on the accompanying consolidated financial statements.

        Under the equity method, our investment in real estate ventures is stated at cost and adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on our ownership interest in the earnings of each of the unconsolidated real estate ventures. For the purposes of presentation in the statement of cash flows, we follow the "look through" approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture's sale of assets) in which case it is reported as an investing activity.

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

        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:    The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

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

        CONVERSION OF OPERATING PARTNERSHIP UNITS:    Conversions of Operating Partnership units to common stock, when converted under the original provisions of the Operating Partnership agreement, are accounted for by reclassifying the underlying net book value of the units from noncontrolling interest to our equity. The difference between the fair value of the consideration paid and the adjustment to the carrying amount of the noncontrolling interest is recognized as additional paid in capital of the Company.

        REVENUE AND EXPENSE RECOGNITION:    Rental revenues are recognized as earned based upon amounts that are currently due from tenants. Leases are generally on month-to-month terms. Prepaid rents are recognized on a straight-line basis over the term of the leases. Promotional discounts are recognized as a reduction to rental income over the promotional period. Late charges, administrative fees, merchandise sales and truck rentals are recognized in income when earned. Management and franchise fee revenues are recognized monthly as services are performed and in accordance with the terms of the related management agreements. Tenant reinsurance premiums are recognized as revenues over the period of insurance coverage. Equity in earnings of real estate entities is recognized based on our ownership interest in the earnings of each of the unconsolidated real estate entities. Interest income is recognized as earned.

        Property expenses, including utilities, property taxes, repairs and maintenance and other costs to manage the facilities are recognized as incurred. We accrue for property tax expense based upon invoice amounts, estimates and historical trends. If these estimates are incorrect, the timing of expense recognition could be affected.

        REAL ESTATE SALES:    In general, sales of real estate and related profits/losses are recognized when all consideration has changed hands and risks and rewards of ownership have been transferred. Certain types of continuing involvement preclude sale treatment and related profit recognition; other forms of continuing involvement allow for sale recognition but require deferral of profit recognition.

        INCOME TAXES:    We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, among other things, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income tax with respect to that portion of our income which meets certain criteria and is distributed annually to our stockholders. We plan to continue to operate so that we meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we would be subject to federal income tax. We are subject to certain state and local taxes. Provision for such taxes has been included in property operating and general and administrative expenses in our consolidated statements of operations.

        We have elected to treat one of our corporate subsidiaries, Extra Space Management, Inc., as a taxable REIT subsidiary ("TRS"). In general, our TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and

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liabilities. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred.

        STOCK-BASED COMPENSATION:    The measurement and recognition of compensation expense for all share-based payment awards to employees and directors are based on estimated fair values. Awards are valued at fair value and recognized on a straight line basis over the service periods of each award.

RECENT ACCOUNTING PRONOUNCEMENTS

        In January 2010, the Financial Accounting Standards Board ("FASB") issued new fair value measurements and disclosures standards to increase the transparency of these measures. The standards revise two disclosure requirements concerning fair value measurements and clarify two others. They require separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. They will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. The adoption of the new standards did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In June 2009, the FASB issued changes to Accounting Standards Codification ("ASC") 810, "Consolidation," which amended guidance for determining whether an entity is a VIE, and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. This guidance became effective for the first annual reporting period that begins after November 15, 2009, with early adoption prohibited. We adopted this guidance effective January 1, 2010 and reviewed the terms of all joint ventures in relation to the new guidance. As a result of this analysis, we determined that five joint ventures that were consolidated under the previous accounting guidance should be deconsolidated as of January 1, 2010. The assets and liabilities associated with these joint ventures were removed from our financial statements and our investments in these joint ventures were recorded under the equity method of accounting during the year ended December 31, 2010.

RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009

Overview

        Results for the year ended December 31, 2010 included the operations of 660 properties (296 of which were consolidated and 364 of which were in joint ventures accounted for using the equity method) compared to the results for the year ended December 31, 2009, which included operations of 642 properties (298 of which were consolidated and 344 of which were in joint ventures accounted for using the equity method).

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Revenues

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

 
  For the Year Ended
December 31,
   
   
 
 
  2010   2009   $ Change   % Change  

Revenues:

                         
 

Property rental

  $ 232,447   $ 238,256   $ (5,809 )   (2.4 )%
 

Management and franchise fees

    23,122     20,961     2,161     10.3 %
 

Tenant reinsurance

    25,928     20,929     4,999     23.9 %
                   
   

Total revenues

  $ 281,497   $ 280,146   $ 1,351     0.5 %
                   

        Property Rental—the decrease in property rental revenues relates primarily to a decrease of $15,669 associated with the sale of 19 properties to an unconsolidated joint venture with Harrison Street Real Estate Capital, LLC ("Harrison Street") on January 21, 2010. There was an additional decrease in revenue of $1,682 relating to the deconsolidation of five properties as a result of our adoption of amended accounting guidance in ASC 810 effective January 1, 2010. These decreases were offset by increases in revenues of $5,852 relating to increases in occupancy at our lease-up properties, $3,319 relating to increases in occupancy and rental rates to new and existing customers at our stabilized properties, and $2,371 associated with acquisitions completed in 2010 and 2009.

        Management and Franchise Fees—Our taxable REIT subsidiary, Extra Space Management, Inc., manages properties owned by our joint ventures, franchisees and third parties. Management fees generally represent 6% of cash collected from properties owned by third parties, franchisees and unconsolidated joint ventures. The increase in management and franchise fees is related to additional fees earned from the joint venture with Harrison Street and to the increase in third-party properties managed by us compared to the prior year. We managed 160 third-party properties as of December 31, 2010, compared with 124 as of December 31, 2009.

        Tenant Reinsurance—The increase in tenant reinsurance revenues is due to the fact that during the year ended December 31, 2010, we successfully increased overall customer participation to approximately 60% at December 31, 2010 compared to approximately 54% at December 31, 2009. In addition we operated 820 properties at December 31, 2010, compared to 766 at December 31, 2009.

Expenses

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

 
  For the Year Ended
December 31,
   
   
 
 
  2010   2009   $ Change   % Change  

Expenses:

                         
 

Property operations

  $ 86,165   $ 88,935   $ (2,770 )   (3.1 )%
 

Tenant reinsurance

    6,505     5,461     1,044     19.1 %
 

Unrecovered development and acquisition costs

    1,235     19,011     (17,776 )   (93.5 )%
 

Loss on sublease

    2,000         2,000     100.0 %
 

Severance costs

        2,225     (2,225 )   (100.0 )%
 

General and administrative

    44,428     40,224     4,204     10.5 %
 

Depreciation and amortization

    50,349     52,403     (2,054 )   (3.9 )%
                   
   

Total expenses

  $ 190,682   $ 208,259   $ (17,577 )   (8.4 )%
                   

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        Property Operations—The decrease in property operations expense was primarily due to decreases of $5,695 related to the sale of 19 properties to an unconsolidated joint venture with Harrison Street on January 21, 2010 and $692 related to the deconsolidation of five properties as a result of our adoption of amended accounting guidance in ASC 810 effective January 1, 2010. These decreases were partially offset by increases of $2,762 related to our stabilized and lease up properties and $855 associated with acquisitions completed in 2010 and 2009.

        Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The increase in tenant reinsurance expense is related to the increase in overall customer participation in the tenant reinsurance program to approximately 60% at December 31, 2010 compared to approximately 54% at December 31, 2009. In addition we operated 820 properties at December 31, 2010, compared to 766 at December 31, 2009.

        Unrecovered Development and Acquisition Costs—These costs relate to unsuccessful development and acquisition activities during the periods indicated. On June 2, 2009, the Company announced that it had begun a wind-down of its development program. As a result of this decision, the Company recorded $18,883 of one-time impairment charges in order to write down the carrying value of undeveloped land, development projects that will be completed and investments in development projects to their estimated fair values less cost to sell.

        Loss on Sublease—This expense is a result of a $2,000 charge relating to the bankruptcy of a tenant subleasing office space from us in Memphis, TN. The Memphis, TN office lease is a liability assumed as part of the Storage, USA acquisition in July 2005.

        Severance Costs—On June 2, 2009, the Company announced that it had begun a wind-down of its development program. As a result of this decision, the Company recorded severance costs of $1,400. In December 2009, the Company began the closure of its marketing office in Memphis, TN. As a result of this closure, the Company recorded severance costs of $825. There were no severance costs incurred during the year ended December 31, 2010.

        General and Administrative—General and administrative expenses increased primarily as a result of the additional costs related to the management of additional third-party properties. We operated 820 properties at December 31, 2010, compared to 766 at December 31, 2009.

        Depreciation and Amortization—Depreciation and amortization expense decreased primarily as a result of the sale of 19 properties to an unconsolidated joint venture with Harrison Street on January 21, 2010. This decrease was partially offset by the additional depreciation on new properties added through acquisition and development during 2010 and 2009.

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Other Revenue and Expenses

        The following table sets forth information on other revenue and expenses for the years indicated:

 
  For the Year Ended
December 31,
   
   
 
 
  2010   2009   $ Change   % Change  

Other revenue and expenses:

                         
 

Interest expense

  $ (64,116 ) $ (67,579 ) $ 3,463     (5.1 )%
 

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

    (1,664 )   (2,239 )   575     (25.7 )%
 

Interest income

    898     1,582     (684 )   (43.2 )%
 

Interest income on note receivable from Preferred Operating Partnership unit holder

    4,850     4,850          
 

Gain on repurchase of exchangeable senior notes

        27,928     (27,928 )   (100.0 )%
 

Equity in earnings of real estate ventures

    6,753     6,964     (211 )   (3.0 )%
 

Income tax expense

    (4,162 )   (4,300 )   138     (3.2 )%
                   
   

Total other revenue (expense)

  $ (57,441 ) $ (32,794 ) $ (24,647 )   75.2 %
                   

        Interest Expense—The decrease in interest expense was primarily the result of a decrease of $5,120 relating to the deconsolidation of the debt related to the 19 properties sold to an unconsolidated joint venture with Harrison Street on January 21, 2010 and a decrease of $694 related to the deconsolidation of five properties as a result of our adoption of amended accounting guidance in ASC 810 effective January 1, 2010. These decreases were partially offset as a result of higher interest rates on new loans obtained in 2010 and 2009.

        Non-cash Interest Expense Related to Amortization of Discount on Exchangeable Senior Notes—The decrease in non-cash interest expense related to amortization of discount on exchangeable senior notes for the year ended December 31, 2010 when compared to the prior year was due to the repurchase of a total principal amount of $122,000 of our notes during 2009. The discount associated with the repurchase of the notes was written off as a result of these repurchases, which decreased the ongoing amortization of the discount in 2010 when compared to 2009.

        Interest Income—The decrease in interest income is primarily due to a decrease in the average interest rate on our invested cash when compared to the same period in the prior year, along with a decrease in the average cash balance.

        Interest Income on Note Receivable from Preferred Operating Partnership Unit Holder —Represents interest on a $100,000 loan to the holder of the Series A Participating Redeemable Preferred units of our Operating Partnership (the "Preferred OP units").

        Gain on Repurchase of Exchangeable Senior Notes—This amount represents the gain on the repurchase of $122,000 total principal amount of our exchangeable senior notes during 2009. We did not repurchase any of our exchangeable senior notes during the year ended December 31, 2010.

        Equity in Earnings of Real Estate Ventures—The decrease is related primarily to additional losses allocated to equity in earnings of real estate ventures due to the deconsolidation of five lease-up properties as a result of the adoption of new accounting guidance in ASC 810 effective January 1, 2010.

        Income Tax Expense—The decrease in income tax expense relates primarily to a $832 solar tax credit that was partially offset by increased taxes resulting from increased tenant reinsurance income earned by our taxable REIT subsidiary.

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Net Income Allocated to Noncontrolling Interests

        The following table sets forth information on net income allocated to noncontrolling interests for the years indicated:

 
  For the Year Ended
December 31,
   
   
 
 
  2010   2009   $ Change   % Change  

Net income allocated to noncontrolling interests:

                         
 

Net income allocated to Preferred Operating Partnership noncontrolling interests

  $ (6,048 ) $ (6,186 ) $ 138     (2.2 )%
 

Net income allocated to Operating Partnership and other noncontrolling interests

    (995 )   (930 )   (65 )   7.0 %
                   
   

Total income allocated to noncontrolling interests:

  $ (7,043 ) $ (7,116 ) $ 73     (1.0 )%
                   

        Net Income Allocated to Preferred Operating Partnership Noncontrolling Interests —Income allocated to the Preferred Operating Partnership equals the fixed distribution paid to the Preferred OP unit holder plus approximately 1.1% of the remaining net income allocated after the adjustment for the fixed distribution paid for the years ended December 31, 2010 and 2009. The amount allocated to Preferred Operating Partnership noncontrolling interest was lower in 2010 than in 2009 as our net income was lower in 2010 than it was in 2009.

        Net Income Allocated to Operating Partnership and Other Noncontrolling Interests —Income allocated to the Operating Partnership represents approximately 3.8% and 4.4% of net income after the allocation of the fixed distribution paid to the Preferred OP unit holder for the years ended December 31, 2010 and 2009, respectively. The loss allocated to the other noncontrolling interests was lower than the prior year due mainly to the deconsolidation of five lease-up properties with other noncontrolling interests effective January 1, 2010 as a result of the adoption of new accounting guidance in ASC 810.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

Overview

        Results for the year ended December 31, 2009 included the operations of 642 properties (298 of which were consolidated and 344 of which were in joint ventures accounted for using the equity method) compared to the results for the year ended December 31, 2008, which included operations of 627 properties (283 of which were consolidated and 344 of which were in joint ventures accounted for using the equity method). Results for both periods also included equity in earnings of real estate ventures, third-party management and franchise fees and tenant reinsurance.

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Revenues

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

 
  For the Year Ended
December 31,
   
   
 
 
  2009   2008   $ Change   % Change  

Revenues:

                         
 

Property rental

  $ 238,256   $ 235,695   $ 2,561     1.1 %
 

Management and franchise fees

    20,961     20,945     16     0.1 %
 

Tenant reinsurance

    20,929     16,091     4,838     30.1 %
                   
   

Total revenues

  $ 280,146   $ 272,731   $ 7,415     2.7 %
                   

        Property Rental—The increase in property rental revenues consists of $8,554 associated with acquisitions and consolidations completed in 2009 and 2008 and $2,462 associated with increases in occupancy and rental rates at lease-up properties. These increases were offset by a decrease of $8,455 in revenues at stabilized properties mainly due to a decreased incoming rental rates and a decrease in average occupancy compared with the prior year.

        Management and Franchise Fees—Our taxable REIT subsidiary, Extra Space Management, Inc., manages properties owned by our joint ventures, franchisees and third parties. Management fees generally represent 6% of cash collected from properties owned by third parties, franchisees and unconsolidated joint ventures. Revenues from management and franchise fees have remained fairly stable compared to the previous year. Decreased revenues at our joint venture, franchise, and third-party managed sites related to rental rate and average occupancy decreases have been offset by additional management fees earned as a result of additional third party properties managed in 2009 compared to the prior year.

        Tenant Reinsurance—The increase in tenant reinsurance revenues is due to the fact that during the year ended December 31, 2009, we successfully increased overall customer participation to approximately 54% at December 31, 2009 compared to approximately 47% at December 31, 2008.

Expenses

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

 
  For the Year Ended
December 31,
   
   
 
 
  2009   2008   $ Change   % Change  

Expenses:

                         
 

Property operations

  $ 88,935   $ 84,522   $ 4,413     5.2 %
 

Tenant reinsurance

    5,461     5,066     395     7.8 %
 

Unrecovered development and acquisition costs

    19,011     1,727     17,284     1,000.8 %
 

Severance costs

    2,225         2,225     100.0 %
 

General and administrative

    40,224     39,388     836     2.1 %
 

Depreciation and amortization

    52,403     49,566     2,837     5.7 %
                   
   

Total expenses

  $ 208,259   $ 180,269   $ 27,990     15.5 %
                   

        Property Operations—The increase in property operations expense in 2009 was primarily due to increases of $2,313 associated with acquisitions completed in 2009 and 2008. Expenses also increased by $2,721 at existing properties related to increases in expenses at lease-up properties. These increases were partially offset by a decrease in expenses at stabilized properties of $344.

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        Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The increase in tenant reinsurance expense is related to the increase in overall customer participation in the tenant reinsurance program to approximately 54% at December 31, 2009 compared to approximately 47% at December 31, 2008.

        Unrecovered Development and Acquisition Costs—These costs relate to unsuccessful development and acquisition activities during the periods indicated. On June 2, 2009, the Company announced that it had begun a wind-down of its development program. As a result of this decision, the Company recorded $18,883 of one-time impairment charges in order to write down the carrying value of undeveloped land, development projects that will be completed and investments in development projects to their estimated fair values less cost to sell. The unrecovered development and acquisition costs incurred during the year ended December 31, 2008 include $1,257 relating to due diligence costs that were part of an unsuccessful attempt by the Company to purchase a large portfolio of properties during the second quarter of 2008. The remainder of these costs relate to entitlement and other due diligence work done on development projects that the Company elected not to pursue.

        Severance Costs—On June 2, 2009, the Company announced that it had begun a wind-down of its development program. As a result of this decision, the Company recorded severance costs of $1,400. In December 2009, the Company began the closure of its marketing office in Memphis, TN. As a result of this closure, the Company recorded severance costs of $825.

        General and Administrative—General and administrative expenses increased nominally when compared to the prior year while the number of properties under management increased by approximately 10%. The Company operated 766 properties as of December 31, 2009, compared to 694 at December 31, 2008.

        Depreciation and Amortization—The increase in depreciation and amortization expense is a result of additional properties that have been added through acquisition and development throughout 2009 and 2008.

Other Revenue and Expenses

        The following table sets forth information on other revenue and expenses for the years indicated:

 
  For the Year Ended
December 31,
   
   
 
 
  2009   2008   $ Change   % Change  

Other revenue and expenses:

                         
 

Interest expense

  $ (67,579 ) $ (64,611 ) $ (2,968 )   4.6 %
 

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

    (2,239 )   (4,060 )   1,821     (44.9 )%
 

Interest income

    1,582     3,399     (1,817 )   (53.5 )%
 

Interest income on note receivable from Preferred Operating Partnership unit holder

    4,850     4,850          
 

Gain on repurchase of exchangeable senior notes

    27,928     6,311     21,617     342.5 %
 

Loss on sale of investments available for sale

        (1,415 )   1,415     (100.0 )%
 

Equity in earnings of real estate ventures

    6,964     6,932     32     0.5 %
 

Income tax expense

    (4,300 )   (519 )   (3,781 )   728.5 %
                   
   

Total other revenue (expense)

  $ (32,794 ) $ (49,113 ) $ 16,319     (33.2 )%
                   

        Interest Expense—The increase in interest expense for the year ended December 31, 2009 was due primarily to the increases in our total notes payable and line of credit balances when compared to the

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prior year. These increases were partially offset by a decrease in the interest paid related to our Exchangeable Notes due to the repurchase of a total principal amount of $162,337 during 2008 and 2009.

        Non-cash Interest Expense Related to Amortization of Discount on Exchangeable Senior Notes—The decrease in non-cash interest expense related to amortization of discount on exchangeable senior notes for the year ended December 31, 2009 when compared to the prior year was due to the repurchase of a total principal amount of $162,337 of our notes during 2009 and 2008. The discount associated with the repurchase of the notes was written off as a result of these repurchases which decreased the ongoing amortization of the discount in 2009 when compared to 2008.

        Interest Income—Interest income earned in 2008 was primarily due to interest on the net proceeds from the sales of common stock in May and October 2008. There were no such sales of common stock during the year ended December 31, 2009.

        Interest Income on Note Receivable from Preferred Operating Partnership Unit Holder —Represents interest on a $100,000 loan to the holder of the Preferred OP units.

        Gain on Repurchase of Exchangeable Senior Notes—This amount represents the gain on the repurchase of $122,000 total principal amount of our exchangeable senior notes during 2009. For the year ended December 31, 2008, we repurchased $40,337 principal amount of exchangeable senior notes resulting in a smaller gain compared to the year ended December 31, 2009.

        Loss on Sale of Investments Available for Sale—This amount represents the loss recorded on February 29, 2008 related to the liquidation of auction rate securities held in investments available for sale. We had no investments available for sale during the year ended December 31, 2009.

        Equity in Earnings of Real Estate Ventures—The change in equity in earnings of real estate ventures for the year ended December 31, 2009 relates to an increase of $753 from our purchase of an additional 40% interest in the VRS Self Storage LLC joint venture on July 1, 2008. This increase was offset by decreases in income at the properties owned by the real estate joint ventures.

        Income Tax Expense—The increase in income tax expense relates primarily to our net operating loss carryforward being used completely during 2008 and to the increased profitability of our TRS in 2009.

Net Income Allocated to Noncontrolling Interests

        The following table sets forth information on net income allocated to noncontrolling interests for the years indicated:

 
  For the Year Ended
December 31,
   
   
 
 
  2009   2008   $ Change   % Change  

Net income allocated to noncontrolling interests:

                         
 

Net income allocated to Preferred Operating Partnership noncontrolling interests

  $ (6,186 ) $ (6,269 ) $ 83     (1.3 )%
 

Net income allocated to Operating Partnership and other non-controlling interests

    (930 )   (1,299 )   369     (28.4 )%
                   
   

Total income allocated to noncontrolling interests:

  $ (7,116 ) $ (7,568 ) $ 452     (6.0 )%
                   

        Net Income Allocated to Preferred Operating Partnership Noncontrolling Interests —Income allocated to the Preferred Operating Partnership equals the fixed distribution paid to the Preferred OP

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unit holder plus approximately 1.1% of the remaining net income allocated after the adjustment for the fixed distribution paid for the years ended December 31, 2009 and 2008. The amount allocated to noncontrolling interest was lower in 2009 than in 2008 as our net income was lower in 2009 than it was in 2008.

        Net Income Allocated to Operating Partnership and Other Noncontrolling Interests —Income allocated to the Operating Partnership represents approximately 4.4% and 4.7% of net income after the allocation of the fixed distribution paid to the Preferred OP unit holder for the years ended December 31, 2009 and 2008, respectively. The decrease in the amount allocated to the noncontrolling interests in the Operating Partnership was due to two factors: (1) a decrease in net income in 2009; and (2) a decrease in the percentage of income allocated to the noncontrolling interests in the Operating Partnership as a result of the redemption of 637,600 OP units for cash and common stock during the year ended December 31, 2009. Income allocated to other noncontrolling interests represents the losses allocated to partners in consolidated joint ventures on eight properties that were in lease-up during 2009. The loss allocated to the other noncontrolling interests was higher than the prior year as there were only four consolidated joint venture properties in lease-up for the year ended December 31, 2008.

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 the 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

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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 for the periods indicated:

 
  For the Year Ended
December 31,
 
 
  2010   2009   2008  

Net income attributable to common stockholders

  $ 26,331   $ 31,977   $ 35,781  

Adjustments:

                   
 

Real estate depreciation

    47,063     48,417     42,834  
 

Amortization of intangibles

    650     1,647     4,494  
 

Joint venture real estate depreciation and amortization

    8,269     5,805     5,072  
 

Joint venture loss on sale of properties

    65     175      
 

Distributions paid on Preferred Operating Partnership units

    (5,750 )   (5,750 )   (5,750 )
 

Income allocated to Operating Partnership noncontrolling interests

    7,096     8,012     8,444  
               

Funds from operations

  $ 83,724   $ 90,283   $ 90,875  
               

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 and 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 and completed developments.

 
  For the Three Months
Ended December 31,
   
  For the Year Ended
December 31,
   
 
 
  Percent
Change
  Percent
Change
 
 
  2010   2009   2010   2009  

Same-store rental and tenant reinsurance revenues

  $ 56,720   $ 54,897     3.3 % $ 224,826   $ 220,101     2.1 %

Same-store operating and tenant reinsurance expenses

    19,114     19,181     (0.3 )%   77,075     77,924     (1.1 )%
                           

Same-store net operating income

  $ 37,606   $ 35,716     5.3 % $ 147,751   $ 142,177     3.9 %

Non same-store rental and tenant reinsurance revenues

  $ 10,368   $ 10,548     (1.7 )% $ 33,549   $ 39,084     (14.2 )%

Non same-store operating and tenant reinsurance expenses

  $ 4,909   $ 3,763     30.5 % $ 15,595   $ 16,472     (5.3 )%

Total rental and tenant reinsurance revenues

  $ 67,088   $ 65,445     2.5 % $ 258,375   $ 259,185     (0.3 )%

Total operating and tenant reinsurance expenses

  $ 24,023   $ 22,944     4.7 % $ 92,670   $ 94,396     (1.8 )%

Same-store square foot occupancy as of quarter end

    84.8 %   82.9 %         84.8 %   82.9 %      

Properties included in same-store

    246     246           246     246        

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  For the Three Months Ended
December 31,
   
  For the Year Ended
December 31,
   
 
 
  Percent
Change
  Percent
Change
 
 
  2009   2008   2009   2008  

Same-store rental and tenant reinsurance revenues

  $ 56,497   $ 58,863     (4.0 )% $ 226,899   $ 233,682     (2.9 )%

Same-store operating and tenant reinsurance expenses

    19,752     19,391     1.9 %   80,009     80,142     (0.2 )%
                           

Same store net operating income

  $ 36,745   $ 39,472     (6.9 )% $ 146,890   $ 153,540     (4.3 )%

Non same-store rental and tenant reinsurance revenues

  $ 8,948   $ 6,294     42.2 % $ 32,286   $ 18,104     78.3 %

Non same-store operating and tenant reinsurance expenses

  $ 3,192   $ 3,368     (5.2 )% $ 14,387   $ 9,446     52.3 %

Total rental and tenant reinsurance revenues

  $ 65,445   $ 65,157     0.4 % $ 259,185   $ 251,786     2.9 %

Total operating and tenant reinsurance expenses

  $ 22,944   $ 22,759     0.8 % $ 94,396   $ 89,588     5.4 %

Same-store square foot occupancy as of quarter end

    83.2 %   82.2 %         83.2 %   82.2 %      

Properties included in same-store

    252     252           252     252        

Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009

        The increase in same-store rental revenues was primarily due to increased rental rates to incoming and existing customers and increased occupancy. The decreases in same-store operating expenses for the year ended December 31, 2010 were primarily due to decreases in utilities, office expenses, property taxes and insurance.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

        The decrease in same-store rental revenues was primarily due to lower rates to new customers and decreased average annual occupancy. These decreases were partially offset by rental rate increases to existing tenants.

CASH FLOWS

Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009

        Cash flows provided by operating activities were $104,815 and $81,165 for the years ended December 31, 2010 and 2009, respectively. The increase when compared to the prior year was due mainly to an increase in cash received from affiliated joint ventures and related parties during 2010 compared to 2009 to repay receivables from related parties and affiliated real estate joint ventures. The decrease in net income in the current year when compared to the prior year was offset by a gain on the repurchase of exchangeable senior notes and a loss relating to the wind-down of our development program in 2009.

        Cash used in investing activities was $83,706 and $104,410 for the years ended December 31, 2010 and 2009, respectively. The decrease in 2010 was primarily the result of $31,239 less cash being used to fund development activities in 2010 compared to 2009. Additionally, the Company received $15,750 in proceeds from the sale of 19 properties to a joint venture in 2010, compared to $0 in 2009. The decrease in cash used and proceeds from the sales of properties were offset by an increase of $31,403 in cash used to acquire new properties in 2010 compared to 2009.

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        Cash used in financing activities was $106,309 for the year ended December 31, 2010, compared to cash provided by financing activities of $91,223 for the year ended December 31, 2009. The decrease in cash provided in 2010 when compared to the prior year was primarily the result of a decrease of $251,498 in the net proceeds from notes payable and lines of credit in 2010 when compared to 2009, and $39,885 more cash paid for principal payments on notes payable and lines of credit in 2010 when compared to 2009. These decreases were partially offset by $87,734 less cash being used to repurchase exchangeable senior notes in 2010 compared to 2009.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

        Cash flows provided by operating activities were $81,165 and $98,391 for the years ended December 31, 2009 and 2008, respectively. This decrease was due mainly to a decrease in net income and an increase in the cash paid to affiliated joint ventures and related parties during 2009 compared to 2008 to repay receivables from related parties and affiliated real estate joint ventures. Additionally, more cash was spent to pay down accounts payable and accrued expenses in 2009 when compared to 2008.

        Cash used in investing activities was $104,410 and $224,481 for the years ended December 31, 2009 and 2008, respectively. The decrease in 2009 was primarily the result of $89,108 less cash being used to fund acquisition activities in 2009 compared to 2008 and a decrease of $46,815 in the amount of cash invested in real estate ventures in 2009 compared to 2008. These decreases were partially offset by the collection of $21,812 of cash from the sale of our investments available for sale in 2008, compared to $0 in 2009.

        Cash provided by financing activities were $91,223 and $172,685 for the years ended December 31, 2009 and 2008, respectively. The decrease in cash provided in 2009 when compared to the prior year was primarily the result of proceeds from issuance of common stock of $276,601 in 2008 compared to $0 in 2009. Additionally, we paid $56,013 more cash in 2009 to repurchase a portion of our exchangeable senior notes when compared to the prior year. These decreases were partially offset by a net increase of $206,609 in the net proceeds from notes payable and lines of credit in 2009 when compared to 2008, and $46,320 less cash paid for dividends in 2009.

LIQUIDITY AND CAPITAL RESOURCES

        As of December 31, 2010, we had $46,750 available in cash and cash equivalents. We intend to use this cash to repay debt scheduled to mature in 2011 and 2012 and for general corporate purposes. 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. Recently issued guidance from the IRS allowed for up to 90% of a REIT's dividends to be paid with its common stock through 2011 if certain conditions are met. 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.

        Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. During 2010 we experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

        On December 8, 2010, we entered into a $40,000 Fourth Credit Line that is collateralized by mortgages on certain real estate assets and matures December 8, 2013 with two one-year extension options available. We intend to use the proceeds from the Fourth Credit Line to repay debt and for general corporate purposes. The Fourth Credit Line has an interest rate of LIBOR plus 320 basis points with an interest rate floor of 4.5% (4.5% as of December 31, 2010). At December 31, 2010, $15,000 was drawn on the Fourth Credit Line. The Company guarantees the Fourth Credit Line.

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        On June 4, 2010, we entered into a $45,000 Third Credit Line that is collateralized by mortgages on certain lease-up real estate assets and matures on May 31, 2013 with a two-year extension available. We intend to use the proceeds of the Third Credit Line to repay debt and for general corporate purposes. The Third Credit Line has an interest rate of LIBOR plus 350 basis points (3.8% as of December 31, 2010). As of December 31, 2010, the Third Credit Line had $34,700 of capacity based on the lease-up of the assets collateralizing the Third Credit Line. At December 31, 2010 $25,467 was drawn on the Third Credit Line. The Company guarantees the Third Credit Line.

        On February 13, 2009, we entered into a $50,000 Second Credit Line that is collateralized by mortgages on certain real estate assets and matures February 13, 2013 with an option to extend one additional year. We intend to use the proceeds from the Second Credit Line to repay debt and for general corporate purposes. The Second Credit Line has an interest rate of LIBOR plus 350 basis points (3.8% as of December 31, 2010). As of December 31, 2010, $30,000 was drawn on the Second Credit Line. The Company guarantees the Second Credit Line.

        On October 19, 2007, we entered into a $100,000 Credit Line. The outstanding balance on the Credit Line at December 31, 2010 was $100,000. We intend to use the proceeds of the Credit Line to repay debt and for general corporate purposes. The Credit Line has an interest rate between 100 and 205 basis points over LIBOR, depending on certain of our financial ratios (1.3% as of December 31, 2010). The Credit Line is collateralized by mortgages on certain real estate assets. The Credit Line matures on October 31, 2011 with a one-year extension available.

        As of December 31, 2010, we had approximately $1,249,123 of debt, resulting in a debt to total capitalization ratio of 44.1%. As of December 31, 2010, the ratio of total fixed rate debt and other instruments to total debt was 65.6% (including $176,188 on which we have interest rate swaps that have been included as fixed-rate debt). The weighted average interest rate of the total of fixed and variable rate debt at December 31, 2010 was 4.7%. Certain of our 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 financial covenants at December 31, 2010.

        We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of OP units and interest on our outstanding indebtedness out of our operating cash flow, cash on hand and borrowings under our Credit Lines. In addition, we are actively pursuing additional term loans secured by unencumbered properties.

        Our liquidity needs consist primarily of cash distributions to stockholders, facility development, property acquisitions, principal payments under our borrowings and non-recurring capital expenditures. We may from time to time seek to repurchase or redeem our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds. We do not expect that our operating cash flow will be sufficient to fund our liquidity needs and instead expect to fund such needs out of additional borrowings of secured or unsecured indebtedness, joint ventures with third parties, and from the proceeds of public and private offerings of equity and debt. Additional capital may not be available on terms favorable to us or at all. Any additional issuance of equity or equity-linked securities may result in dilution to our stockholders. In addition, any new securities we issue could have rights, preferences and privileges senior to holders of our common stock. We may also use OP units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.

        The U.S. credit markets have experienced dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen. These circumstances have impacted liquidity in the

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debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Uncertainty in the credit markets may negatively impact our ability to make acquisitions and fund development projects. In addition, the financial condition of the lenders of our credit facilities may worsen to the point that they default on their obligations to make available to us the funds under those facilities. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse affect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. These disruptions in the financial market may have other adverse effects on us or the economy generally, which could cause our stock price to decline.

OFF-BALANCE SHEET ARRANGEMENTS

        Except as disclosed in the notes to our financial statements, we do not currently have any relationships with unconsolidated entities or financial partnerships, such as 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 financial statements, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

        Our exchangeable senior notes provide for excess exchange value to be paid in 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 sets forth information on payments due by period as of December 31, 2010:

 
  Payments due by Period:  
 
  Total   Less Than
1 Year (2011)
  1-3 Years
(2012-2013)
  3-5 Years
(2014-2015)
  After 5 Years
(after 2015)
 

Operating leases

  $ 61,362   $ 6,597   $ 11,429   $ 7,446   $ 35,890  

Notes payable, notes payable to trusts, exchangeable senior notes and lines of credit

                               
 

Interest

    310,730     53,782     92,157     60,761     104,030  
 

Principal

    1,249,123     292,888     257,809     353,728     344,698  
                       

Total contractual obligations

  $ 1,621,215   $ 353,267   $ 361,395   $ 421,935   $ 484,618  
                       

        As of December 31, 2010, the weighted average interest rate for all fixed rate loans was 5.5%, and the weighted average interest rate on all variable rate loans was 3.1%.

FINANCING STRATEGY

        We will continue to employ leverage in our capital structure in amounts reviewed 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

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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, we will consider factors including but not limited to:

        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.

        During 2008 and 2009, we repurchased $162,337 in aggregate principal amount of our exchangeable senior notes on the open market for $119,455 in cash. We may from time to time seek to retire, repurchase or redeem our additional outstanding debt including our exchangeable senior notes as well as shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

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 at 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.

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Item 7a.    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 December 31, 2010, we had approximately $1.2 billion in total debt, of which approximately $429.9 million was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable rate debt (excluding variable rate debt with interest rate floors) would increase or decrease future earnings and cash flows by approximately $3.4 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.

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Item 8.    Financial Statements and Supplementary Data


EXTRA SPACE STORAGE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  52

CONSOLIDATED BALANCE SHEETS

 
53

CONSOLIDATED STATEMENTS OF OPERATIONS

 
54

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
55

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
57

SCHEDULE III

 
100

        All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Extra Space Storage Inc.

        We have audited the accompanying consolidated balance sheets of Extra Space Storage Inc. ("the Company") as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the index at Item 8. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2010 and 2009 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Salt Lake City, Utah
February 25, 2011

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Extra Space Storage Inc.

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 
  December 31, 2010   December 31, 2009  

Assets:

             

Real estate assets:

             
 

Net operating real estate assets

  $ 1,935,319   $ 2,015,432  
 

Real estate under development

    37,083     34,427  
           
   

Net real estate assets

    1,972,402     2,049,859  

Investments in real estate ventures

    140,560     130,449  

Cash and cash equivalents

    46,750     131,950  

Restricted cash

    30,498     39,208  

Receivables from related parties and affiliated real estate joint ventures

    10,061     5,114  

Other assets, net

    48,197     50,976  
           
     

Total assets

  $ 2,248,468   $ 2,407,556  
           

Liabilities, Noncontrolling Interests and Equity:

             

Notes payable

  $ 871,403   $ 1,099,593  

Notes payable to trusts

    119,590     119,590  

Exchangeable senior notes

    87,663     87,663  

Discount on exchangeable senior notes

    (2,205 )   (3,869 )

Lines of credit

    170,467     100,000  

Accounts payable and accrued expenses

    34,210     33,386  

Other liabilities

    28,269     24,974  
           
     

Total liabilities

    1,309,397     1,461,337  
           

Commitments and contingencies

             

Equity:

             
 

Extra Space Storage Inc. stockholders' equity:

             
 

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

         
 

Common stock, $0.01 par value, 300,000,000 shares authorized, 87,587,322 and 86,721,841 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively

    876     867  
 

Paid-in capital

    1,148,820     1,138,243  
 

Accumulated other comprehensive deficit

    (5,787 )   (1,056 )
 

Accumulated deficit

    (262,508 )   (253,875 )
           
   

Total Extra Space Storage Inc. stockholders' equity

    881,401     884,179  
 

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

    29,733     29,886  
 

Noncontrolling interests in Operating Partnership

    26,803     31,381  
 

Other noncontrolling interests

    1,134     773  
           
     

Total noncontrolling interests and equity

    939,071     946,219  
           
     

Total liabilities, noncontrolling interests and equity

  $ 2,248,468   $ 2,407,556  
           

See accompanying notes.

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Extra Space Storage Inc.

Consolidated Statements of Operations

(Dollars in thousands, except share data)

 
  For the Year Ended December 31,  
 
  2010   2009   2008  

Revenues:

                   
 

Property rental

  $ 232,447   $ 238,256   $ 235,695  
 

Management and franchise fees

    23,122     20,961     20,945  
 

Tenant reinsurance

    25,928     20,929     16,091  
               
   

Total revenues

    281,497     280,146     272,731  
               

Expenses:

                   
 

Property operations

    86,165     88,935     84,522  
 

Tenant reinsurance

    6,505     5,461     5,066  
 

Unrecovered development and acquisition costs

    1,235     19,011     1,727  
 

Loss on sublease

    2,000          
 

Severance costs

        2,225      
 

General and administrative

    44,428     40,224     39,388  
 

Depreciation and amortization

    50,349     52,403     49,566  
               
   

Total expenses

    190,682     208,259     180,269  
               

Income from operations

    90,815     71,887     92,462  

Interest expense

    (64,116 )   (67,579 )   (64,611 )

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

    (1,664 )   (2,239 )   (4,060 )

Interest income

    898     1,582     3,399  

Interest income on note receivable from Preferred Operating Partnership unit holder

    4,850     4,850     4,850  

Gain on repurchase of exchangeable senior notes

        27,928     6,311  

Loss on sale of investments available for sale

            (1,415 )
               

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

    30,783     36,429     36,936  

Equity in earnings of real estate ventures

    6,753     6,964     6,932  

Income tax expense

    (4,162 )   (4,300 )   (519 )
               

Net income

    33,374     39,093     43,349  

Net income allocated to Preferred Operating Partnership noncontrolling interests

    (6,048 )   (6,186 )   (6,269 )

Net income allocated to Operating Partnership and other noncontrolling interests

    (995 )   (930 )   (1,299 )
               

Net income attributable to common stockholders

  $ 26,331   $ 31,977   $ 35,781  
               

Net income per common share

                   
 

Basic

  $ 0.30   $ 0.37   $ 0.46  
 

Diluted

  $ 0.30   $ 0.37   $ 0.46  

Weighted average number of shares

                   
 

Basic

    87,324,104     86,343,029     76,996,754  
 

Diluted

    92,050,453     91,082,834     82,352,988  

Cash dividends paid per common share

  $ 0.40   $ 0.38   $ 1.00  

See accompanying notes.

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Extra Space Storage Inc.

Consolidated Statements of Stockholders' Equity

(Dollars in thousands, except share data)

 
  Noncontrolling Interests   Extra Space Storage Inc. Stockholders' Equity    
 
 
  Preferred
Operating
Partnership
  Operating
Partnership
  Other   Shares   Par
Value
  Paid-in
Capital
  Accumulated
Other
Comprehensive
Deficit
  Accumulated
Deficit
  Total
Equity
 

Balances at December 31, 2007

  $ 30,287   $ 36,124   $ (194 )   65,784,274   $ 658   $ 848,830   $ (1,314 ) $ (209,713 ) $ 704,678  

Issuance of common stock upon the exercise of options

                146,795     1     1,903             1,904  

Restricted stock grants issued

                361,624     4                 4  

Restricted stock grants cancelled

                (10,186 )                    

Compensation expense related to stock-based awards

                        3,500             3,500  

Conversion of Contingent Conversion shares to common stock

                1,428,325     14                 14  

Issuance of common stock, net of offering costs

                17,950,000     180     276,421             276,601  

New Operating Partnership units issued

        3,621                             3,621  

Investments from other noncontrolling interests

            2,628                         2,628  

Repurchase of equity portion of exchangeable senior notes

                        (1,025 )           (1,025 )

Conversion of Operating Partnership units to common stock

        (1,239 )       129,499     1     1,238              

Comprehensive income:

                                                       

Net income (loss)

    6,269     2,175     (876 )                   35,781     43,349  

Loss on sale of investments available for sale

    20     81                     1,314         1,415  
                                                       

Total comprehensive income

                                                    44,764  

Tax effect from exercise of common stock options

                        97             97  

Distributions to Operating Partnership units held by noncontrolling interests

    (6,739 )   (4,134 )                           (10,873 )

Dividends paid on common stock at $1.00 per share

                                (79,120 )   (79,120 )
                                       

Balances at December 31, 2008

  $ 29,837   $ 36,628   $ 1,558     85,790,331   $ 858   $ 1,130,964   $   $ (253,052 ) $ 946,793  

Restricted stock grants issued

                547,265     5                 5  

Restricted stock grants cancelled

                (21,256 )                    

Compensation expense related to stock-based awards

                        3,809             3,809  

Noncontrolling interest consolidated as business acquisition

            726                         726  

Investments from other noncontrolling interests

            (615 )                       (615 )

Repurchase of equity portion of exchangeable senior notes

                        (2,234 )           (2,234 )

Conversion of Operating Partnership units to common stock

        (3,583 )       405,501     4     3,579              

Redemption of Operating Partnership units for cash

        (1,908 )                           (1,908 )

Comprehensive income:

                                                       

Net income (loss)

    6,186     1,826     (896 )                   31,977     39,093  

Change in fair value of interest rate swap

    (11 )   (44 )                   (1,056 )       (1,111 )
                                                       

Total comprehensive income

                                                    37,982  

Tax effect from vesting of restricted stock grants

                        (414 )           (414 )

Tax effect from wind down of development program

                        2,539             2,539  

Distributions to Operating Partnership units held by noncontrolling interests

    (6,126 )   (1,538 )                           (7,664 )

Dividends paid on common stock at $0.38 per share

                                (32,800 )   (32,800 )
                                       

Balances at December 31, 2009

  $ 29,886   $ 31,381   $ 773     86,721,841   $ 867   $ 1,138,243   $ (1,056 ) $ (253,875 ) $ 946,219  

Issuance of common stock upon the exercise of options

                484,261     5     5,656             5,661  

Restricted stock grants issued

                445,230     4                 4  

Restricted stock grants cancelled

                (64,010 )                    

Compensation expense related to stock-based awards

                        4,580             4,580  

Deconsolidation of noncontrolling interests

            104                         104  

Redemption of Operating Partnership units for cash

        (4,116 )                           (4,116 )

Investments from other noncontrolling interests

            87                         87  

Purchase of noncontrolling interest

            223                         223  

Comprehensive income:

                                                       

Net income (loss)

    6,048     1,048     (53 )                   26,331     33,374  

Change in fair value of interest rate swap

    (55 )   (177 )                   (4,731 )       (4,963 )
                                                       

Total comprehensive income

                                                    28,411  

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

                        836             836  

Tax effect from contribution of property to Taxable REIT Subsidiary

                        (495 )           (495 )

Distributions to Operating Partnership units held by noncontrolling interests

    (6,146 )   (1,333 )                           (7,479 )

Dividends paid on common stock at $0.40 per share

                                (34,964 )   (34,964 )
                                       

Balances at December 31, 2010

  $ 29,733   $ 26,803   $ 1,134     87,587,322   $ 876   $ 1,148,820   $ (5,787 ) $ (262,508 ) $ 939,071  
                                       

See accompanying notes.

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Extra Space Storage Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

 
  For the Year Ended December 31,  
 
  2010   2009   2008  

Cash flows from operating activities:

                   
 

Net income

  $ 33,374   $ 39,093   $ 43,349  
 

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

                   
   

Depreciation and amortization

    50,349     52,403     49,566  
   

Amortization of deferred financing costs

    4,354     3,877     3,596  
   

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

    1,664     2,239     4,060  
   

Gain on repurchase of exchangeable senior notes

        (27,928 )   (6,311 )
   

Compensation expense related to stock-based awards

    4,580     3,809     3,500  
   

Loss on sale of investments available for sale

            1,415  
   

Non-cash unrecovered development and acquisition costs

        19,011     1,727  
   

Loss on sublease

    2,000          
   

Distributions from real estate ventures in excess of earnings

    6,722     5,968     5,176  
   

Changes in operating assets and liabilities:

                   
     

Receivables from related parties and affiliated real estate joint ventures

    3,011     (12,347 )   (5,976 )
     

Other assets

    (324 )   (6,584 )   (9,164 )
     

Accounts payable and accrued expenses

    824     (1,675 )   3,435  
     

Other liabilities

    (1,739 )   3,299     4,018  
               
   

Net cash provided by operating activities

    104,815     81,165     98,391  
               

Cash flows from investing activities:

                   
 

Acquisition of real estate assets

    (69,588 )   (38,185 )   (127,293 )
 

Development and construction of real estate assets

    (36,062 )   (67,301 )   (66,071 )
 

Proceeds from sale of real estate assets

        4,652     340  
 

Proceeds from sale of properties to joint venture

    15,750          
 

Investments in real estate ventures

    (9,699 )   (3,246 )   (50,061 )
 

Return of investment in real estate ventures

    8,802     1,315     2,915  
 

Net proceeds from sale of investments available for sale

            21,812  
 

Change in restricted cash

    9,036     (497 )   (3,781 )
 

Purchase of equipment and fixtures

    (1,945 )   (1,148 )   (2,342 )
               
   

Net cash used in investing activities

    (83,706 )   (104,410 )   (224,481 )
               

Cash flows from financing activities:

                   
 

Repurchase of exchangeable senior notes

        (87,734 )   (31,721 )
 

Proceeds from notes payable and lines of credit

    191,062     442,560     42,302  
 

Principal payments on notes payable and lines of credit

    (252,400 )   (212,515 )   (26,575 )
 

Deferred financing costs

    (4,160 )   (8,716 )   (1,007 )
 

Investments from other noncontrolling interests

    87         1,174  
 

Redemption of Operating Partnership units held by noncontrolling interest

    (4,116 )   (1,908 )    
 

Proceeds from issuance of common shares, net

            276,601  
 

Net proceeds from exercise of stock options

    5,661         1,904  
 

Dividends paid on common stock

    (34,964 )   (32,800 )   (79,120 )
 

Distributions to noncontrolling interests in Operating Partnership

    (7,479 )   (7,664 )   (10,873 )
               
   

Net cash provided by (used in) financing activities

    (106,309 )   91,223     172,685  
               

Net increase (decrease) in cash and cash equivalents

    (85,200 )   67,978     46,595  

Cash and cash equivalents, beginning of the period

    131,950     63,972     17,377  
               

Cash and cash equivalents, end of the period

  $ 46,750   $ 131,950   $ 63,972  
               

Supplemental schedule of cash flow information

                   

Interest paid, net of amounts capitalized

  $ 60,100   $ 64,175   $ 62,831  

Supplemental schedule of noncash investing and financing activities:

                   

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

                   
 

Real estate assets, net

  $ (42,739 ) $   $  
 

Investments in real estate ventures

    404          
 

Receivables from related parties and affiliated real estate joint ventures

    21,142          
 

Other assets and other liabilities

    (51 )        
 

Notes payable

    21,348          
 

Other noncontrolling interests

    (104 )        

Conversion of Operating Partnership units held by noncontrolling interests for common stock

  $   $ 3,583   $ 1,239  

Acquisitions of real estate assets

                   
 

Real estate assets, net

  $ 25,963   $   $ 3,621  
 

Notes payable assumed

    (25,963 )