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Extra Space Storage Inc. - Quarter Report: 2011 March (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2011

 

or

 

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

 

For the transition period from                  to                 .

 

Commission File Number: 001-32269

 

EXTRA SPACE STORAGE INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-1076777

(State or other jurisdiction of incorporation or organization)

 

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

 

2795 East Cottonwood Parkway, Suite 400

Salt Lake City, Utah 84121

(Address of principal executive offices)

 

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

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 29, 2011 was 88,791,581.

 

 

 



Table of Contents

 

EXTRA SPACE STORAGE INC.

 

TABLE OF CONTENTS

 

STATEMENT ON FORWARD-LOOKING INFORMATION

3

 

 

PART I. FINANCIAL INFORMATION

4

ITEM 1. FINANCIAL STATEMENTS

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

9

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

19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

ITEM 4. CONTROLS AND PROCEDURES

30

 

 

PART II. OTHER INFORMATION

31

ITEM 1. LEGAL PROCEEDINGS

31

ITEM 1A. RISK FACTORS

31

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

31

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

31

ITEM 4. REMOVED AND RESERVED

31

ITEM 5. OTHER INFORMATION

31

ITEM 6. EXHIBITS

31

 

 

SIGNATURES

32

 

2



Table of Contents

 

STATEMENT ON FORWARD-LOOKING INFORMATION

 

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

 

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

 

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

 

·                  changes in general economic conditions, the real estate industry and the markets in which we operate;

 

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

 

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

 

·                  potential liability for uninsured losses and environmental contamination;

 

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

 

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

 

·                  increased interest rates and operating costs;

 

·                  reductions in asset valuations and related impairment charges;

 

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

 

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

 

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

 

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

 

3



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share data)

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Net operating real estate assets

 

$

1,958,245

 

$

1,935,319

 

Real estate under development

 

13,168

 

37,083

 

Net real estate assets

 

1,971,413

 

1,972,402

 

 

 

 

 

 

 

Investments in real estate ventures

 

141,525

 

140,560

 

Cash and cash equivalents

 

42,555

 

46,750

 

Restricted cash

 

40,527

 

30,498

 

Receivables from related parties and affiliated real estate joint ventures

 

9,334

 

10,061

 

Other assets, net

 

47,763

 

48,197

 

Total assets

 

$

2,253,117

 

$

2,248,468

 

 

 

 

 

 

 

Liabilities, Noncontrolling Interests and Equity:

 

 

 

 

 

Notes payable

 

$

915,533

 

$

871,403

 

Notes payable to trusts

 

119,590

 

119,590

 

Exchangeable senior notes

 

87,663

 

87,663

 

Discount on exchangeable senior notes

 

(1,777

)

(2,205

)

Lines of credit

 

125,000

 

170,467

 

Accounts payable and accrued expenses

 

34,333

 

34,210

 

Other liabilities

 

25,632

 

28,269

 

Total liabilities

 

1,305,974

 

1,309,397

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Extra Space Storage Inc. stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, 88,546,913 and 87,587,322 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

 

885

 

876

 

Paid-in capital

 

1,161,184

 

1,148,820

 

Accumulated other comprehensive deficit

 

(4,678

)

(5,787

)

Accumulated deficit

 

(266,588

)

(262,508

)

Total Extra Space Storage Inc. stockholders’ equity

 

890,803

 

881,401

 

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

 

29,701

 

29,733

 

Noncontrolling interests in Operating Partnership

 

25,510

 

26,803

 

Other noncontrolling interests

 

1,129

 

1,134

 

Total noncontrolling interests and equity

 

947,143

 

939,071

 

Total liabilities, noncontrolling interests and equity

 

$

2,253,117

 

$

2,248,468

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Property rental

 

$

61,490

 

$

56,143

 

Management and franchise fees

 

5,967

 

5,552

 

Tenant reinsurance

 

7,024

 

5,892

 

Total revenues

 

74,481

 

67,587

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operations

 

23,344

 

21,956

 

Tenant reinsurance

 

1,615

 

1,223

 

Unrecovered development and acquisition costs

 

249

 

70

 

General and administrative

 

11,658

 

11,056

 

Depreciation and amortization

 

13,585

 

12,419

 

Total expenses

 

50,451

 

46,724

 

 

 

 

 

 

 

Income from operations

 

24,030

 

20,863

 

 

 

 

 

 

 

Interest expense

 

(16,414

)

(17,274

)

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

 

(428

)

(404

)

Interest income

 

182

 

325

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

1,213

 

1,213

 

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

 

8,583

 

4,723

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

1,811

 

1,501

 

Income tax expense

 

(254

)

(1,045

)

Net income

 

10,140

 

5,179

 

Net income allocated to Preferred Operating Partnership noncontrolling interests

 

(1,532

)

(1,479

)

Net income allocated to Operating Partnership and other noncontrolling interests

 

(307

)

(132

)

Net income attributable to common stockholders

 

$

8,301

 

$

3,568

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.09

 

$

0.04

 

Diluted

 

$

0.09

 

$

0.04

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

Basic

 

88,045,951

 

86,873,472

 

Diluted

 

92,812,067

 

91,666,076

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.14

 

$

0.10

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statement of Equity

(amounts in thousands, except share data)

(unaudited)

 

 

 

Noncontrolling Interests

 

Extra Space Storage Inc. Stockholders’ Equity

 

 

 

 

 

Preferred
Operating

 

Operating

 

 

 

 

 

 

 

Paid-in

 

Accumulated 
Other 
Comprehensive

 

Accumulated

 

Total

 

 

 

Partnership

 

Partnership

 

Other

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Deficit

 

Equity

 

Balances at December 31, 2010

 

$

29,733

 

$

26,803

 

$

1,134

 

87,587,322

 

$

 876

 

$

1,148,820

 

$

(5,787

)

$

(262,508

)

$

939,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon the exercise of options

 

 

 

 

684,030

 

7

 

8,551

 

 

 

8,558

 

Restricted stock grants issued

 

 

 

 

130,200

 

1

 

 

 

 

1

 

Restricted stock grants cancelled

 

 

 

 

(4,639

)

 

 

 

 

 

Compensation expense related to stock-based awards

 

 

 

 

 

 

1,126

 

 

 

1,126

 

Redemption of Operating Partnership units for common stock

 

 

(1,198

)

 

150,000

 

1

 

1,197

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

1,532

 

312

 

(5

)

 

 

 

 

8,301

 

10,140

 

Change in fair value of interest rate swap

 

12

 

42

 

 

 

 

 

1,109

 

 

1,163

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,303

 

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

 

 

 

 

 

 

1,490

 

 

 

1,490

 

Distributions to Operating Partnership units held by noncontrolling interests

 

(1,576

)

(449

)

 

 

 

 

 

 

(2,025

)

Dividends paid on common stock at $0.14 per share

 

 

 

 

 

 

 

 

(12,381

)

(12,381

)

Balances at March 31, 2011

 

$

29,701

 

$

25,510

 

$

1,129

 

88,546,913

 

$

885

 

$

1,161,184

 

$

(4,678

)

$

(266,588

)

$

947,143

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows

(amounts in thousands)
(unaudited)

 

 

 

For the Three Months ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

10,140

 

$

5,179

 

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

 

 

 

 

 

Depreciation and amortization

 

13,585

 

12,419

 

Amortization of deferred financing costs

 

1,102

 

1,250

 

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

 

428

 

404

 

Compensation expense related to stock-based awards

 

1,126

 

919

 

Distributions from real estate ventures in excess of earnings

 

1,313

 

1,351

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties and affiliated real estate joint ventures

 

549

 

352

 

Other assets

 

3,110

 

(5,473

)

Accounts payable and accrued expenses

 

123

 

512

 

Other liabilities

 

(1,474

)

(898

)

Net cash provided by operating activities

 

30,002

 

16,015

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(3,811

)

(2,962

)

Development and construction of real estate assets

 

(3,431

)

(6,019

)

Proceeds from sale of properties to joint venture

 

 

15,750

 

Investments in real estate ventures

 

(3,077

)

(1,057

)

Change in restricted cash

 

(10,029

)

6,246

 

Purchase of equipment and fixtures

 

(309

)

(137

)

Net cash provided by (used in) investing activities

 

(20,657

)

11,821

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from notes payable and lines of credit

 

108,858

 

7,442

 

Principal payments on notes payable and lines of credit

 

(114,995

)

(48,219

)

Deferred financing costs

 

(1,555

)

(149

)

Net proceeds from exercise of stock options

 

8,558

 

487

 

Dividends paid on common stock

 

(12,381

)

(8,707

)

Distributions to noncontrolling interests in Operating Partnership

 

(2,025

)

(1,900

)

Net cash used in financing activities

 

(13,540

)

(51,046

)

Net decrease in cash and cash equivalents

 

(4,195

)

(23,210

)

Cash and cash equivalents, beginning of the period

 

46,750

 

131,950

 

Cash and cash equivalents, end of the period

 

$

42,555

 

$

108,740

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows

(amounts in thousands)
(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Supplemental schedule of cash flow information

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

14,180

 

$

15,384

 

 

 

 

 

 

 

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

)

Acquisitions of real estate assets

 

 

 

 

 

Real estate assets, net

 

$

4,800

 

$

 

Notes payable assumed

 

(4,800

)

 

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

 

$

1,198

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Amounts in thousands, except property and share data

 

1.              ORGANIZATION

 

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

 

The Company invests in self-storage facilities by acquiring or developing wholly-owned facilities or by acquiring an equity interest in real estate entities.  At March 31, 2011, the Company had direct and indirect equity interests in 662 operating storage facilities.  In addition, the Company managed 167 properties for franchisees and third parties, bringing the total number of operating properties which it owns and/or manages to 829. These properties are located in 34 states and Washington, D.C.

 

The Company operates in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance. The Company’s property management, acquisition and development activities include managing, acquiring, developing and selling self-storage facilities. On June 2, 2009, the Company announced the wind-down of its development activities.  As of March 31, 2011, there were two remaining development projects in process.  The Company expects to complete these projects by the end of the fourth quarter of 2011. The rental operations activities include rental operations of self-storage facilities. No single tenant accounts for more than 5% of rental income.  Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the Company’s self storage facilities.

 

2.              BASIS OF PRESENTATION

 

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

 

3.              FAIR VALUE DISCLOSURES

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

March 31, 2011

 

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

 

Significant Other 
Observable Inputs
(Level 2)

 

Significant 
Unobservable Inputs
(Level 3)

 

Other liabilities - Cash Flow Hedge Swap Agreements

 

$

(4,911

)

$

 

$

(4,911

)

$

 

 

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

 

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There were no transfers of assets and liabilities between Level 1 and Level 2 during the three months ended March 31, 2011.  The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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

 

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

 

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

 

Fair Value of Financial Instruments

 

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

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

Note receivable from Preferred Operating Partnership unit holder

 

$

114,167

 

$

100,000

 

$

115,696

 

$

100,000

 

Fixed rate notes payable and notes payable to trusts

 

$

771,129

 

$

815,990

 

$

777,575

 

$

731,588

 

Exchangeable senior notes

 

$

115,490

 

$

87,663

 

$

118,975

 

$

87,663

 

 

4.              NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average common shares outstanding, including unvested share based payment awards that contain a non-forfeitable right to dividends or dividend equivalents. Diluted

 

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earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the weighted average number of basic shares and the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued and is calculated using either the treasury stock or if-converted method. Potential common shares are securities (such as options, warrants, convertible debt, exchangeable Series A Participating Redeemable Preferred Operating Partnership units (“Preferred OP units”) and exchangeable Operating Partnership units (“OP units”)) that do not have a current right to participate in earnings but could do so in the future by virtue of their option or conversion right. In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per share, only potential common shares that are dilutive, those that reduce earnings per share, are included.

 

The Company’s Operating Partnership has $87,663 of exchangeable senior notes issued and outstanding as of March 31, 2011 that also can potentially have a dilutive effect on its earnings per share calculations. The exchangeable senior notes are exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the exchangeable senior notes. The exchangeable senior notes are not exchangeable unless the price of the Company’s common stock is greater than or equal to 130% of the applicable exchange price for a specified period during a quarter, or unless certain other events occur. The exchange price was $23.45 per share at March 31, 2011, and could change over time as described in the indenture. The price of the Company’s common stock did not exceed 130% of the exchange price for the specified period of time during the first quarter of 2011; therefore holders of the exchangeable senior notes may not elect to convert them during the second quarter of 2011.

 

The Company has irrevocably agreed to pay only cash for the accreted principal amount of the exchangeable senior notes relative to its exchange obligations, but has retained the right to satisfy the exchange obligations in excess of the accreted principal amount in cash and/or common stock. Though the Company has retained that right, ASC 260, “Earnings Per Share,” requires an assumption that shares will be used to pay the exchange obligations in excess of the accreted principal amount, and requires that those shares be included in the Company’s calculation of weighted average common shares outstanding for the diluted earnings per share computation. No shares related to the exchangeable senior notes were included in the computation at March 31, 2011 or 2010 because there was no excess over the accreted principal for these periods.

 

For the purposes of computing the diluted impact on earnings per share of the potential conversion of Preferred OP units into common shares, where the Company has the option to redeem in cash or shares and where the Company has stated the positive intent and ability to settle at least $115,000 of the instrument in cash (or net settle a portion of the Preferred OP units against the related outstanding note receivable), only the amount of the instrument in excess of $115,000 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by ASC 260-10-45-46.

 

For the three months ended March 31, 2011 and 2010, options to purchase 290,819 and 3,613,268 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.  All restricted stock grants have been included in basic and diluted shares outstanding because such shares earn a non-forfeitable dividend and carry voting rights.

 

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

 

 

 

For the Three Months ended March 31,

 

 

 

2011

 

2010

 

Net income attributable to common stockholders

 

$

8,301

 

$

3,568

 

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

 

1,844

 

1,628

 

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

 

(1,438

)

(1,438

)

Net income for diluted computations

 

$

8,707

 

$

3,758

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Average number of common shares outstanding - basic

 

88,045,951

 

86,873,472

 

Operating Partnership units

 

3,206,963

 

3,627,368

 

Preferred Operating Partnership units

 

989,980

 

989,980

 

Dilutive and cancelled stock options

 

569,173

 

175,256

 

Average number of common shares outstanding - diluted

 

92,812,067

 

91,666,076

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.09

 

$

0.04

 

Diluted

 

$

0.09

 

$

0.04

 

 

5.              PROPERTY ACQUISITIONS

 

 

 

 

 

 

 

Consideration Paid

 

Acquisition Date Fair Value

 

 

 

Property Location

 

Number of
Properties

 

Date of
Acquisition

 

Total Paid

 

Cash Paid

 

Loan 
Assumed

 

Net 
Liabilities/
(Assets) 
Assumed

 

Land

 

Building

 

Intangible

 

Closing 
costs -
expensed

 

Source of Acquisition

 

Pennsylvania

 

1

 

1/1/2011

 

$

4,525

 

$

320

 

$

4,800

 

$

(595

)

$

1,297

 

$

4,027

 

$

 

$

28

 

Purchase of JV interest

 

 

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

 

6.              VARIABLE INTERESTS

 

The Company has interests in two unconsolidated joint ventures with unrelated third parties which are variable interest entities (“VIEs” or the “VIE JVs”). The Company holds 18% and 39%, respectively, of the equity interests in the VIE JVs, and has 50% of the voting rights in each of the VIE JVs. Qualification as a VIE was based on the determination that the equity investments at risk for each of these joint ventures were not sufficient based on a qualitative and quantitative analysis performed by the Company. The Company performed a qualitative analysis for these joint ventures to determine which party was the primary beneficiary of each VIE. The Company determined that since the powers to direct the activities most significant to the economic performance of these entities are shared equally by the Company and its joint venture partners, there is no primary beneficiary. Accordingly, these interests are recorded using the equity method.

 

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

 

The Company guarantees the mortgage notes payable for the VIE JVs. The Company’s maximum exposure to loss for these joint ventures as of March 31, 2011 is the total of the guaranteed loan balances, the payables due to the Company and the Company’s investment balances in the joint ventures. The Company believes that the risk of incurring a loss as a result of having to perform on the loan guarantees is unlikely and therefore no liability has been recorded related to these guarantees. Also, repossessing and/or selling the self-storage facility and land that collateralize the loans could provide funds sufficient to reimburse the Company. Additionally, the Company believes the payables to the Company are collectible.

 

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The following table compares the liability balance and the maximum exposure to loss related to the VIE JVs as of March 31, 2011:

 

 

 

Liability

 

Investment

 

Guaranteed

 

Payables to

 

Exposure

 

 

 

 

 

Balance

 

Balance

 

Loan

 

Company

 

to Loss

 

Difference

 

Extra Space of Montrose Avenue LLC

 

$

 

$

1,226

 

$

4,332

 

$

2,981

 

$

8,539

 

$

(8,539

)

Extra Space of Sacramento One LLC

 

 

(834

)

5,000

 

5,364

 

9,530

 

(9,530

)

 

 

$

 

$

392

 

$

9,332

 

$

8,345

 

$

18,069

 

$

(18,069

)

 

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

 

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

 

The following is a tabular comparison of the liabilities the Company has recorded as a result of its involvements with the Trusts to the maximum exposure to loss the Company is subject to as a result of such involvement as of March 31, 2011:

 

 

 

Notes payable

 

 

 

 

 

 

 

 

 

to Trusts as of

 

Investment

 

Maximum

 

 

 

 

 

March 31, 2011

 

Balance

 

exposure to loss

 

Difference

 

Trust

 

$

36,083

 

$

1,083

 

$

35,000

 

$

 

Trust II

 

42,269

 

1,269

 

41,000

 

 

Trust III

 

41,238

 

1,238

 

40,000

 

 

 

 

$

119,590

 

$

3,590

 

$

116,000

 

$

 

 

The Company had no consolidated VIEs during the three months ended March 31, 2011 or 2010.

 

7.              DERIVATIVES

 

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

 

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

 

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

 

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The following table summarizes the terms of the Company’s derivative financial instruments at March 31, 2011:

 

Hedge Product

 

Hedge Type

 

Notional Amount

 

Strike

 

Effective Date

 

Maturity

 

Cash Flow Hedge Swap Agreements (6)

 

Cash Flow

 

$8,462 - $63,000

 

4.24% - 6.98%

 

2/2009 - 7/2010

 

6/2013 - 6/2016

 

 

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

 

 

 

Classification of

 

For the Three Months Ended March 31,

 

Type

 

Income (Expense)

 

2011

 

2010

 

Cash Flow Hedge Swap Agreements

 

Interest expense

 

$

(970

)

$

(632

)

 

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

 

 

 

Gain (loss) 
recognized in OCI

 

Location of 
amounts

 

Gain (loss) 
reclassified from 

OCI

 

Type

 

March 31, 2011

 

reclassified from
OCI into income

 

Three months ended
March 31, 2011

 

Cash Flow Hedge Swap Agreements

 

$

(1,163

)

Interest expense

 

$

(970

)

 

The interest rate swap agreements were highly effective for the three months ended March 31, 2011.  The gain (loss) reclassified from other comprehensive income (“OCI”) in the preceding table represents the effective portion of the Company’s cash flow hedges reclassified from OCI to interest expense during the three months ended March 31, 2011.

 

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

 

 

 

Asset (Liability) Derivatives

 

 

 

March 31, 2011

 

December 31, 2010

 

Derivatives designated as hedging

 

Balance Sheet

 

Fair

 

Balance Sheet

 

Fair

 

instruments:

 

Location

 

Value

 

Location

 

Value

 

Cash Flow Hedge Swap Agreements

 

Other liabilities

 

$

(4,911

)

Other liabilities

 

$

(6,074

)

 

8.              NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

 

On June 15, 2007, the Operating Partnership entered into a Contribution Agreement with various limited partnerships affiliated with AAAAA Rent-A-Space to acquire ten self-storage facilities (the “Properties”) in exchange for the 989,980 Preferred OP units of the Operating Partnership. The self-storage facilities are located in California and Hawaii.

 

On June 25, 2007, the Operating Partnership loaned the holders of the Preferred OP units $100,000. The note receivable bears interest at 4.85% and is due September 1, 2017. The loan is secured by the borrower’s Preferred OP units. The holders of the Preferred OP units can convert up to 114,500 Preferred OP units prior to the maturity date of the loan. If any redemption in excess of 114,500 Preferred OP units occurs prior to the maturity date, the holder of the Preferred OP units is required to repay the loan as of the date of that Preferred OP unit redemption. Preferred OP units are shown on the balance sheet net of the $100,000 loan because the borrower under the loan receivable is also the holder of the Preferred OP units.

 

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

 

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

 

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

 

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

 

9.              NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP

 

The Company’s interest in its properties is held through the Operating Partnership. ESS Holding Business Trust I, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The Company, through ESS Holding Business Trust II, a wholly owned subsidiary of the Company, is also a limited partner of the Operating Partnership. Between its general partner and limited partner interests, the Company held a 95.5% majority ownership interest therein as of March 31, 2011. The remaining ownership interests in the Operating Partnership (including Preferred OP units) of 4.5% are held by certain former owners of assets acquired by the Operating Partnership.  As of March 31, 2011, the Operating Partnership had 3,206,963 common OP units outstanding.

 

The noncontrolling interest in the Operating Partnership represents common OP units that are not owned by the Company. In conjunction with the formation of the Company and as a result of subsequent acquisitions, certain persons and entities contributing interests in properties to the Operating Partnership received limited partnership units in the form of either OP units or Contingent Conversion Units. Limited partners who received OP units in the formation transactions or in exchange for contributions for interests in properties have the right to require the Operating Partnership to redeem part or all of their common OP units for cash based upon the fair market value of an equivalent number of shares of the Company’s common stock (ten-day average) at the time of the redemption. Alternatively, the Company may, at its option, elect to acquire those OP units in exchange for shares of its common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Partnership Agreement.  The ten-day average closing stock price at March 31, 2011 was $20.10 and there were 3,206,963 common OP units outstanding. Assuming that all of the unit holders exercised their right to redeem all of their common OP units on March 31, 2011 and the Company elected to pay the noncontrolling members cash, the Company would have paid $64,460 in cash consideration to redeem the OP units.

 

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

 

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

 

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Table of Contents

 

10.       OTHER NONCONTROLLING INTERESTS

 

Other noncontrolling interests represent the ownership interests of various third parties in three consolidated self-storage properties as of March 31, 2011.  Two of these consolidated properties were under development, and one was in the lease-up stage at March 31, 2011.  The ownership interests of the third-party owners range from 5.0% to 27.6%.  Other noncontrolling interests are included in the stockholders’ equity section of the Company’s condensed consolidated balance sheet.  The income or losses attributable to these third- party owners based on their ownership percentages are reflected in net income allocated to the Operating Partnership and other noncontrolling interests in the condensed consolidated statement of operations.

 

11.       SEGMENT INFORMATION

 

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

 

 

 

March 31, 2011

 

December 31, 2010

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

141,525

 

$

140,560

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Property management, acquisition and development

 

$

381,887

 

$

400,910

 

Rental operations

 

1,855,845

 

1,831,150

 

Tenant reinsurance

 

15,385

 

16,408

 

 

 

$

2,253,117

 

$

2,248,468

 

 

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For the Three Months Ended March 31,

 

 

 

2011

 

2010

 

Statement of Operations

 

 

 

 

 

Total revenues

 

 

 

 

 

Property management, acquisition and development

 

$

5,967

 

$

5,552

 

Rental operations

 

61,490

 

56,143

 

Tenant reinsurance

 

7,024

 

5,892

 

 

 

$

74,481

 

$

67,587

 

 

 

 

 

 

 

Operating expenses, including depreciation and amortization

 

 

 

 

 

Property management, acquisition and development

 

$

12,681

 

$

11,567

 

Rental operations

 

36,155

 

33,934

 

Tenant reinsurance

 

1,615

 

1,223

 

 

 

$

50,451

 

$

46,724

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 

 

 

Property management, acquisition and development

 

$

(6,714

)

$

(6,015

)

Rental operations

 

25,335

 

22,209

 

Tenant reinsurance

 

5,409

 

4,669

 

 

 

$

24,030

 

$

20,863

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Property management, acquisition and development

 

$

(782

)

$

(787

)

Rental operations

 

(16,060

)

(16,891

)

 

 

$

(16,842

)

$

(17,678

)

 

 

 

 

 

 

Interest income

 

 

 

 

 

Property management, acquisition and development

 

$

179

 

$

322

 

Tenant reinsurance

 

3

 

3

 

 

 

$

182

 

$

325

 

 

 

 

 

 

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

 

 

 

 

Property management, acquisition and development

 

$

1,213

 

$

1,213

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

Rental operations

 

$

1,811

 

$

1,501

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

Tenant reinsurance

 

$

(254

)

$

(1,045

)

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

Property management, acquisition and development

 

$

(6,104

)

$

(5,267

)

Rental operations

 

11,086

 

6,819

 

Tenant reinsurance

 

5,158

 

3,627

 

 

 

$

10,140

 

$

5,179

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

Property management, acquisition and development

 

$

774

 

$

441

 

Rental operations

 

12,811

 

11,978

 

 

 

$

13,585

 

$

12,419

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

Property management, acquisition and development

 

$

(3,811

)

$

(2,962

)

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

Property management, acquisition and development

 

$

(3,431

)

$

(6,019

)

 

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12.       COMMITMENTS AND CONTINGENCIES

 

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

 

 

 

 

 

 

 

Guaranteed

 

Estimated

 

 

 

 

 

Loan

 

Loan Amount

 

Fair Market

 

 

 

Date of

 

Maturity

 

at March 31,

 

Value of

 

 

 

Guaranty

 

Date

 

2011

 

Assets

 

Extra Space of Montrose Avenue LLC

 

Dec-10

 

Dec-13

 

$

4,332

 

$

8,504

 

Extra Space of Sacramento One LLC

 

Apr-09

 

Apr-11

 

$

5,000

 

$

9,828

 

ESS Baltimore LLC

 

Nov-04

 

Feb-13

 

$

4,092

 

$

6,783

 

 

If the joint ventures default on the loans, the Company may be forced to repay the loans. Repossessing and/or selling the self-storage facilities and land that collateralizes the loans could provide funds sufficient to reimburse the Company. The Company has recorded no liability in relation to these guarantees as of March 31, 2011, as the fair value of the guarantees was not material. The Company believes the risk of incurring a loss as a result of having to perform on these guarantees is unlikely.

 

The Company has been involved in routine litigation arising in the ordinary course of business. As of March 31, 2011, the Company was not involved in any material litigation nor, to its knowledge, was any material litigation threatened against it which, in the opinion of management, is expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

13.       SUBSEQUENT EVENTS

 

Subsequent to the end of the quarter, the Company purchased four properties for a total of $18,015.  These properties are located in California, Tennessee, Texas and Utah.

 

On April 29, 2011, the Company closed on a revolving credit facility of $50,000 with an interest rate of LIBOR plus 275 basis points. The credit facility has a 3 year term and is secured by mortgages on certain real estate assets.

 

18



Table of Contents

 

Extra Space Storage Inc.

Management’s Discussion and Analysis

Amounts in thousands, except property and share data

 

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

 

CAUTIONARY LANGUAGE

 

The following discussion and analysis should be read in conjunction with our “Unaudited Condensed Consolidated Financial Statements” and the “Notes to Unaudited Condensed Consolidated Financial Statements” appearing elsewhere in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2010. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.” (Amounts in thousands except property and share data unless otherwise stated).

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2010, describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time that they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

 

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

 

OVERVIEW

 

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

 

We operate in competitive markets, often where consumers have multiple self-storage properties from which to choose. Competition has impacted, and will continue to impact, our property results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our ability to lease available self-storage units, to actively manage rental rates, and on the ability of our tenants to make required rental payments. We believe we are able to respond quickly and effectively to changes in local, regional and national economic conditions by centrally adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems.

 

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

 

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

 

19



Table of Contents

 

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

 

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

 

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

 

U.S. and international market and economic conditions have been challenging, with tighter credit conditions and slower growth.  For the three months ended March 31, 2011, concerns about the systemic impact of inflation, energy costs, geopolitical issues, and other macro-economic factors have contributed to market volatility and diminished expectations for the global economy.  Turbulence in U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the financial condition of our customers.  If these market conditions continue, they may result in an adverse effect on our financial condition and results of operations.

 

PROPERTIES

 

As of March 31, 2011, we owned or had ownership interests in 662 operating self-storage properties. Of these properties, 300 are wholly-owned and 362 are held in joint ventures. In addition, we managed an additional 167 properties for franchisees or third parties bringing the total number of operating properties that we own and/or manage to 829.  These properties are located in 34 states and Washington, D.C.  As of March 31, 2011, we owned and/or managed approximately 60 million square feet of space with more than 550,000 units.

 

Our properties are generally situated in convenient, highly visible locations clustered around large population centers such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These areas all enjoy above-average population growth and income levels. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale.

 

We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a property to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1, or has been open for three years. Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of March 31, 2011, the median length of stay was approximately eleven months.  The average annual rent per square foot at these stabilized properties was $13.25 at March 31, 2011, compared to $13.39 at March 31, 2010.

 

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

 

20



Table of Contents

 

The following table sets forth additional information regarding the occupancy of our stabilized properties on a state-by-state basis as of March 31, 2011 and 2010. The information as of March 31, 2010 is on a pro forma basis as though all the properties owned and/or managed at March 31, 2011 were under our control as of March 31, 2010.

 

Stabilized Property Data Based on Location

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as of
March 31, 2011 (1)

 

Number of Units as of
March 31, 2010

 

Net Rentable Square 
Feet as of
March 31, 2011 (2)

 

Net Rentable Square 
Feet as of 
March 31, 2010

 

Square Foot 
Occupancy % 
March 31, 2011

 

Square Foot 
Occupancy % 
March 31, 2010

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,368

 

1,368

 

173,869

 

173,753

 

78.7

%

81.1

%

Arizona

 

5

 

2,795

 

2,808

 

356,520

 

346,998

 

89.2

%

83.5

%

California

 

45

 

35,498

 

35,593

 

3,539,919

 

3,539,517

 

84.0

%

80.0

%

Colorado

 

8

 

3,786

 

3,780

 

475,636

 

476,484

 

85.8

%

85.9

%

Connecticut

 

3

 

1,978

 

2,021

 

177,985

 

178,040

 

88.2

%

81.1

%

Florida

 

28

 

18,228

 

18,274

 

1,944,269

 

1,944,910

 

84.5

%

80.4

%

Georgia

 

12

 

6,422

 

6,423

 

837,168

 

836,897

 

84.9

%

80.9

%

Hawaii

 

2

 

2,800

 

2,856

 

145,828

 

145,624

 

86.7

%

78.2

%

Illinois

 

7

 

4,497

 

4,500

 

466,959

 

467,339

 

80.3

%

78.2

%

Indiana

 

6

 

3,466

 

3,478

 

412,709

 

412,709

 

85.2

%

84.6

%

Kansas

 

1

 

506

 

507

 

50,310

 

50,310

 

88.3

%

80.6

%

Kentucky

 

3

 

1,563

 

1,576

 

193,901

 

194,001

 

92.0

%

88.7

%

Louisiana

 

2

 

1,412

 

1,412

 

150,035

 

150,035

 

85.7

%

81.1

%

Maryland

 

12

 

9,323

 

9,355

 

1,017,301

 

1,018,449

 

85.9

%

84.8

%

Massachusetts

 

28

 

16,742

 

16,764

 

1,715,372

 

1,720,361

 

85.6

%

81.6

%

Michigan

 

2

 

1,018

 

1,026

 

134,674

 

135,026

 

86.8

%

86.3

%

Missouri

 

6

 

3,152

 

3,136

 

374,962

 

374,342

 

85.3

%

83.7

%

Nevada

 

1

 

463

 

463

 

57,550

 

56,850

 

73.7

%

77.7

%

New Hampshire

 

2

 

1,007

 

1,007

 

125,473

 

125,473

 

87.5

%

85.7

%

New Jersey

 

24

 

19,350

 

19,420

 

1,888,611

 

1,890,826

 

87.4

%

83.6

%

New Mexico

 

1

 

539

 

541

 

71,475

 

71,555

 

88.2

%

82.4

%

New York

 

11

 

9,211

 

9,252

 

709,936

 

675,494

 

85.2

%

81.7

%

Ohio

 

2

 

1,185

 

1,183

 

156,519

 

156,839

 

84.6

%

86.3

%

Oregon

 

1

 

770

 

767

 

103,130

 

103,150

 

88.9

%

86.3

%

Pennsylvania

 

9

 

5,782

 

5,792

 

655,735

 

653,975

 

86.8

%

85.6

%

Rhode Island

 

1

 

715

 

720

 

75,336

 

75,721

 

89.0

%

82.4

%

South Carolina

 

4

 

2,160

 

2,173

 

253,406

 

253,406

 

87.3

%

83.2

%

Tennessee

 

3

 

1,620

 

1,628

 

215,420

 

215,090

 

82.8

%

77.2

%

Texas

 

16

 

10,170

 

10,203

 

1,144,948

 

1,144,201

 

86.0

%

85.1

%

Utah

 

6

 

2,680

 

2,654

 

350,197

 

347,704

 

85.7

%

84.2

%

Virginia

 

5

 

3,525

 

3,528

 

334,767

 

334,802

 

87.3

%

84.4

%

Washington

 

4

 

2,540

 

2,547

 

308,015

 

308,015

 

71.8

%

88.5

%

Total Wholly-Owned Stabilized

 

263

 

176,271

 

176,755

 

18,617,935

 

18,577,896

 

85.2

%

82.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,708

 

1,705

 

205,798

 

205,638

 

85.4

%

85.0

%

Arizona

 

11

 

6,813

 

6,827

 

767,385

 

751,979

 

86.8

%

82.9

%

California

 

78

 

58,286

 

58,432

 

5,972,493

 

5,949,181

 

84.6

%

82.6

%

Colorado

 

2

 

1,310

 

1,323

 

158,523

 

158,603

 

82.8

%

82.0

%

Connecticut

 

8

 

5,991

 

5,980

 

692,872

 

691,306

 

85.9

%

81.0

%

Delaware

 

1

 

585

 

582

 

71,740

 

71,680

 

86.5

%

89.4

%

Florida

 

27

 

21,839

 

21,916

 

2,274,037

 

2,275,429

 

82.9

%

78.8

%

Georgia

 

3

 

1,848

 

1,872

 

240,701

 

245,755

 

78.7

%

78.4

%

Illinois

 

12

 

8,904

 

8,898

 

958,215

 

959,383

 

86.7

%

82.3

%

Indiana

 

7

 

2,776

 

2,774

 

366,293

 

366,333

 

87.5

%

86.0

%

Kansas

 

3

 

1,222

 

1,213

 

163,750

 

160,220

 

78.6

%

80.8

%

Kentucky

 

4

 

2,276

 

2,272

 

269,545

 

269,197

 

90.1

%

83.9

%

Maryland

 

16

 

12,737

 

12,780

 

1,228,268

 

1,227,441

 

87.4

%

83.0

%

Massachusetts

 

17

 

9,226

 

9,242

 

1,045,813

 

1,049,425

 

84.4

%

81.5

%

Michigan

 

10

 

5,896

 

5,922

 

782,538

 

784,683

 

86.5

%

81.9

%

Missouri

 

2

 

959

 

959

 

118,245

 

118,045

 

82.3

%

79.3

%

Nevada

 

8

 

5,361

 

5,390

 

692,583

 

694,188

 

82.4

%

81.0

%

New Hampshire

 

1

 

525

 

530

 

53,409

 

54,009

 

89.6

%

84.4

%

New Jersey

 

18

 

13,251

 

13,268

 

1,416,750

 

1,417,909

 

85.3

%

83.4

%

New Mexico

 

9

 

4,662

 

4,672

 

542,423

 

542,899

 

84.8

%

83.9

%

New York

 

20

 

22,065

 

22,068

 

1,714,314

 

1,714,641

 

86.5

%

84.6

%

Ohio

 

13

 

5,859

 

5,855

 

870,490

 

872,260

 

80.9

%

80.5

%

Oregon

 

2

 

1,292

 

1,292

 

136,920

 

136,610

 

88.5

%

85.3

%

Pennsylvania

 

11

 

8,908

 

8,913

 

873,800

 

873,336

 

88.6

%

85.3

%

Rhode Island

 

3

 

1,544

 

1,569

 

184,590

 

185,870

 

72.7

%

68.6

%

Tennessee

 

24

 

13,151

 

13,192

 

1,746,393

 

1,747,471

 

84.6

%

82.5

%

Texas

 

22

 

13,767

 

13,809

 

1,808,470

 

1,808,283

 

83.7

%

82.9

%

Utah

 

1

 

523

 

521

 

59,350

 

58,950

 

85.0

%

86.7

%

Virginia

 

19

 

13,575

 

13,557

 

1,411,987

 

1,410,962

 

88.8

%

86.1

%

Washington

 

1

 

546

 

546

 

62,730

 

62,730

 

87.0

%

83.2

%

Washington, DC

 

1

 

1,529

 

1,533

 

101,989

 

102,003

 

90.7

%

93.9

%

Total Stabilized Joint-Ventures

 

357

 

248,934

 

249,412

 

26,992,414

 

26,966,419

 

85.0

%

82.6

%

 

21



Table of Contents

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as of
March 31, 2011 (1)

 

Number of Units as of
March 31, 2010

 

Net Rentable Square 
Feet as of
March 31, 2011 (2)

 

Net Rentable Square 
Feet as of
March 31, 2010

 

Square Foot 
Occupancy %
March 31, 2011

 

Square Foot 
Occupancy %
March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

580

 

581

 

67,350

 

67,350

 

45.0

%

32.6

%

California

 

9

 

6,520

 

6,564

 

822,435

 

814,479

 

78.1

%

71.8

%

Colorado

 

8

 

2,801

 

2,774

 

325,037

 

331,566

 

86.4

%

84.4

%

Florida

 

16

 

7,659

 

7,713

 

924,945

 

867,182

 

71.7

%

69.2

%

Georgia

 

6

 

3,619

 

3,645

 

507,237

 

508,757

 

73.4

%

70.9

%

Illinois

 

6

 

3,669

 

3,741

 

384,694

 

399,179

 

70.2

%

73.9

%

Indiana

 

3

 

1,701

 

1,711

 

182,879

 

188,119

 

77.6

%

76.0

%

Kansas

 

4

 

1,986

 

1,997

 

338,140

 

339,200

 

76.3

%

73.7

%

Kentucky

 

1

 

527

 

531

 

66,100

 

66,000

 

89.5

%

84.8

%

Louisiana

 

1

 

995

 

1,008

 

133,130

 

106,873

 

68.4

%

63.8

%

Maryland

 

15

 

9,225

 

9,384

 

1,044,604

 

1,047,940

 

79.2

%

74.0

%

Massachusetts

 

2

 

2,105

 

2,110

 

189,859

 

190,019

 

78.4

%

73.3

%

Missouri

 

3

 

1,526

 

1,532

 

302,498

 

305,138

 

76.2

%

76.2

%

Nevada

 

2

 

1,572

 

1,576

 

170,575

 

170,775

 

77.5

%

77.4

%

New Jersey

 

5

 

4,126

 

4,124

 

389,655

 

387,103

 

85.9

%

82.8

%

New Mexico

 

2

 

1,103

 

1,101

 

132,182

 

131,782

 

87.3

%

85.4

%

New York

 

1

 

691

 

704

 

82,755

 

83,055

 

94.5

%

77.2

%

North Carolina

 

5

 

3,550

 

3,599

 

377,613

 

379,130

 

70.4

%

75.0

%

Ohio

 

4

 

1,074

 

1,087

 

157,960

 

161,760

 

68.5

%

59.8

%

Pennsylvania

 

20

 

8,334

 

8,380

 

1,016,586

 

1,017,471

 

74.6

%

65.5

%

South Carolina

 

2

 

1,171

 

1,023

 

163,267

 

142,307

 

70.9

%

78.2

%

Tennessee

 

3

 

1,499

 

1,496

 

205,565

 

205,315

 

86.1

%

86.5

%

Texas

 

8

 

4,110

 

4,170

 

543,414

 

543,164

 

79.3

%

78.4

%

Virginia

 

4

 

2,745

 

2,767

 

274,198

 

274,483

 

85.4

%

83.0

%

Washington

 

1

 

479

 

482

 

56,590

 

56,590

 

64.8

%

64.5

%

Washington, DC

 

2

 

1,263

 

1,263

 

112,459

 

112,459

 

86.9

%

85.2

%

Total Stabilized Managed Properties

 

134

 

74,630

 

75,063

 

8,971,727

 

8,897,196

 

76.9

%

73.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stabilized Properties

 

754

 

499,835

 

501,230

 

54,582,076

 

54,441,511

 

83.8

%

81.1

%

 


(1)       Represents unit count as of March 31, 2011, which may differ from March 31, 2010 unit count due to unit conversions or expansions.

 

(2)       Represents net rentable square feet as of March 31, 2011, which may differ from March 31, 2010 net rentable square feet due to unit conversions or expansions.

 

The following table sets forth additional information regarding the occupancy of our lease-up properties on a state-by-state basis as of March 31, 2011 and 2010. The information as of March 31, 2010 is on a pro forma basis as though all the properties owned and/or managed at March 31, 2011 were under our control as of March 31, 2010.

 

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
March 31, 2011 (1)

 

Number of Units as of
March 31, 2010

 

Net Rentable Square 
Feet as of
March 31, 2011 (2)

 

Net Rentable Square 
Feet as of
March 31,  2010

 

Square Foot 
Occupancy %
March 31, 2011

 

Square Foot 
Occupancy %
March 31, 2010

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

648

 

 

71,355

 

 

6.2

%

0.0

%

California

 

13

 

9,261

 

7,838

 

1,006,822

 

865,355

 

56.1

%

35.9

%

Florida

 

7

 

5,723

 

4,127

 

556,815

 

402,420

 

32.8

%

18.2

%

Georgia

 

4

 

1,993

 

1,999

 

252,086

 

252,779

 

66.4

%

55.0

%

Illinois

 

2

 

1,397

 

1,472

 

151,005

 

150,850

 

60.5

%

39.4

%

Maryland

 

3

 

2,431

 

775

 

235,455

 

69,885

 

28.0

%

40.8

%

Massachusetts

 

1

 

611

 

593

 

73,225

 

72,125

 

62.9

%

54.8

%

New Jersey

 

2

 

1,244

 

1,292

 

127,030

 

127,550

 

63.3

%

38.2

%

New York

 

1

 

670

 

670

 

42,811

 

42,313

 

67.2

%

65.4

%

Oregon

 

1

 

726

 

744

 

76,170

 

75,995

 

50.0

%

15.0

%

Texas

 

2

 

1,071

 

1,087

 

153,010

 

156,050

 

62.2

%

71.3

%

Total Wholly-Owned Lease up

 

37

 

25,775

 

20,597

 

2,745,784

 

2,215,322

 

49.7

%

38.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

3

 

2,100

 

2,346

 

192,263

 

214,931

 

70.2

%

41.6

%

Illinois

 

2

 

1,307

 

999

 

131,418

 

107,475

 

54.8

%

56.4

%

Total Lease up Joint-Ventures

 

5

 

3,407

 

3,345

 

323,681

 

322,406

 

64.0

%

46.5

%

 

22



Table of Contents

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as of
March 31, 2011 (1)

 

Number of Units as of
March 31, 2010

 

Net Rentable Square 
Feet as of
March 31, 2011 (2)

 

Net Rentable Square 
Feet as of
March 31, 2010

 

Square Foot 
Occupancy %
March 31, 2011

 

Square Foot 
Occupancy %
March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

2

 

1,740

 

1,743

 

236,289

 

236,239

 

67.5

%

54.8

%

Florida

 

9

 

6,515

 

5,998

 

623,828

 

555,725

 

46.6

%

25.1

%

Georgia

 

6

 

3,581

 

3,597

 

534,646

 

535,724

 

56.6

%

44.0

%

Illinois

 

3

 

1,939

 

1,991

 

160,678

 

162,679

 

54.5

%

40.2

%

Massachusetts

 

2

 

1,197

 

1,208

 

123,048

 

123,833

 

51.1

%

33.2

%

New Jersey

 

1

 

846

 

848

 

78,295

 

77,895

 

78.5

%

61.6

%

New York

 

1

 

906

 

910

 

46,197

 

46,197

 

42.2

%

29.1

%

North Carolina

 

1

 

451

 

451

 

80,067

 

80,067

 

76.7

%

46.3

%

Pennsylvania

 

2

 

1,984

 

1,991

 

173,019

 

173,019

 

57.5

%

43.0

%

Rhode Island

 

1

 

985

 

985

 

90,995

 

92,050

 

32.9

%

4.9

%

South Carolina

 

1

 

745

 

767

 

76,435

 

76,875

 

46.3

%

9.0

%

Tennessee

 

1

 

505

 

506

 

69,550

 

69,550

 

67.2

%

58.3

%

Texas

 

1

 

934

 

934

 

103,350

 

103,350

 

20.4

%

5.7

%

Utah

 

1

 

655

 

654

 

75,801

 

75,601

 

82.2

%

65.7

%

Virginia

 

1

 

458

 

476

 

63,859

 

63,709

 

64.8

%

45.9

%

Total Lease up Managed Properties

 

33

 

23,441

 

23,059

 

2,536,057

 

2,472,513

 

54.5

%

37.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Lease up Properties

 

75

 

52,623

 

47,001

 

5,605,522

 

5,010,241

 

52.7

%

38.3

%

 


(1) Represents unit count as of March 31, 2011, which may differ from March 31, 2010 unit count due to unit conversions or expansions.

 

(2) Represents net rentable square feet as of March 31, 2011, which may differ from March 31, 2010 net rentable square feet due to unit conversions or expansions.

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended March 31, 2011 and 2010

 

Overview

 

Results for the three months ended March 31, 2011 include the operations of 662 properties (301 of which were consolidated and 361 of which were in joint ventures accounted for using the equity method) compared to the results for the three months ended March 31, 2010, which included the operations of 643 properties (275 of which were consolidated and 368 of which were in joint ventures accounted for using the equity method).

 

Revenues

 

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

 

 

 

For the Three Months Ended
March 31,

 

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Property rental

 

$

61,490

 

$

56,143

 

$

5,347

 

9.5

%

Management and franchise fees

 

5,967

 

5,552

 

415

 

7.5

%

Tenant reinsurance

 

7,024

 

5,892

 

1,132

 

19.2

%

Total revenues

 

$

74,481

 

$

67,587

 

$

6,894

 

10.2

%

 

Property Rental — The increases in property rental revenues for the three months ended March 31, 2011 consists primarily of an increase of $2,025 as a result of increases in occupancy and rental rates to new and existing customers at our stabilized properties, an increase of $1,519 related to increases in occupancy at our lease-up properties, and an increase of $2,723 associated with acquisitions completed in 2011 and 2010, offset by a $920 decrease associated with the sale of 19 properties to Harrison Street Real Estate Capital, LLC (Harrison Street) in January 2010.

 

Management and Franchise Fees — Our taxable REIT subsidiary, Extra Space Management, Inc. manages properties owned by our joint ventures, franchisees and third parties.  Management and franchise fees generally represent 6% of revenues generated from

 

23



Table of Contents

 

properties owned by third parties, franchisees, and unconsolidated joint ventures. The increase in management and franchise fees is related to the additional fees earned from the joint venture with Harrison Street and to the increase in third-party managed properties compared to the same period in the prior year.  We managed 167 third-party properties as of March 31, 2011 compared to 125 third-party properties as of March 31, 2010.

 

Tenant Reinsurance — The increase in tenant reinsurance revenues was due to the increase of overall customer participation to approximately 61% at March 31, 2011 compared to approximately 57% at March 31, 2010.

 

Expenses

 

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

 

 

 

For the Three Months Ended 
March 31,

 

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operations

 

$

23,344

 

$

21,956

 

$

1,388

 

6.3

%

Tenant reinsurance

 

1,615

 

1,223

 

392

 

32.1

%

Unrecovered development and acquisition costs

 

249

 

70

 

179

 

255.7

%

General and administrative

 

11,658

 

11,056

 

602

 

5.4

%

Depreciation and amortization

 

13,585

 

12,419

 

1,166

 

9.4

%

Total expenses

 

$

50,451

 

$

46,724

 

$

3,727

 

8.0

%

 

Property OperationsThe increase in property operations expense during the three months ended March 31, 2011 consists primarily of increases of $1,311 associated with acquisitions completed in 2011 and 2010 and $387 related to increases in expenses at our stabilized and lease-up properties offset by a decrease of $310 related to the sale of 19 properties to Harrison Street in January 2010.

 

Tenant ReinsuranceTenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance.

 

Unrecovered Development and Acquisition CostsUnrecovered development and acquisition costs for the three months ended March 31, 2011 and 2010 relate to unsuccessful development activities and costs associated with the acquisition of properties during the periods indicated.  The increase was due to increased acquisition activity over the prior year.  Subsequent to the quarter end, we purchased four properties for a total of $18,015.

 

General and AdministrativeThe increase in general and administrative expenses for the three months ended March 31, 2011 was primarily due to the overall cost associated with the management of additional properties.  We managed 167 third-party properties as of March 31, 2011 compared to 125 third-party properties as of March 31, 2010.  In addition, we purchased 15 properties and opened four development properties in 2010.

 

Depreciation and AmortizationDepreciation and amortization expense increased as a result of the acquisition of 15 properties and the completion of four developments in 2010.

 

24



Table of Contents

 

Other Revenues and Expenses

 

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

 

 

 

For the Three Months Ended 
March 31,

 

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

Other revenue and expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(16,414

)

$

(17,274

)

$

860

 

(5.0

)%

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

 

(428

)

(404

)

(24

)

5.9

%

Interest income

 

182

 

325

 

(143

)

(44.0

)%

Interest income on note receivable from Preferred Operating Partnership unit holder

 

1,213

 

1,213

 

 

 

Equity in earnings of real estate ventures

 

1,811

 

1,501

 

310

 

20.7

%

Income tax expense

 

(254

)

(1,045

)

791

 

(75.7

)%

Total other revenue (expense)

 

$

(13,890

)

$

(15,684

)

$

1,794

 

(11.4

)%

 

Interest ExpenseThe decrease in interest expense for the three months ended March 31, 2011 was primarily the result of a change in interest rate for the notes payable to Trusts from a fixed interest rate of 6.9% to a variable rate of LIBOR plus 2.4% (2.7% at March 31, 2011).

 

Non-cash Interest Expense Related to Amortization of Discount on Exchangeable Senior NotesRepresents the amortization of the discount on exchangeable senior notes which reflects the effective interest rate relative to the carrying amount of the liability.

 

Interest IncomeThe decrease in interest income for the three months ended March 31, 2011, when compared to the same period in the prior year was primarily due to a lower average cash balance.  Cash and cash equivalents at March 31, 2011 was $42,555 compared to $108,740 at March 31, 2010.

 

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

 

Equity in Earnings of Real Estate VenturesThe increase in equity in earnings of real estate ventures for the three months ended March 31, 2011 was due to increased revenues at these joint ventures as a result of increases in occupancy and rental rates to new and existing customers.  In addition, during October 2010, the Company obtained its joint venture partners’ equity interests in three joint ventures that each owned a single pre-stabilized property.

 

Income Tax Expense — The decrease in income tax expense relates to a $1,388 solar tax credit that was partially offset by increased taxes resulting from increased tenant reinsurance income earned by our taxable REIT subsidiary.

 

Net Income Allocated to Noncontrolling Interests

 

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

 

 

 

For the Three Months Ended 
March 31,

 

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

Net income allocated to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Net income allocated to Preferred Operating Partnership noncontrolling interests

 

$

(1,532

)

$

(1,479

)

$

(53

)

3.6

%

Net income allocated to Operating Partnership and other noncontrolling interests

 

(307

)

(132

)

(175

)

132.6

%

Total income allocated to noncontrolling interests:

 

$

(1,839

)

$

(1,611

)

$

(228

)

14.2

%

 

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Table of Contents

 

Net Income Allocated to Preferred Operating Partnership Noncontrolling InterestsIncome allocated to the Preferred Operating Partnership as of March 31, 2011 and 2010 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.

 

Net Income Allocated to Operating Partnership and Other Noncontrolling InterestsIncome allocated to the Operating Partnership as of March 31, 2011 and 2010 represents approximately 3.5% and 4.0%, respectively, of net income after the allocation of the fixed distribution paid to the Preferred OP unit holder.  Loss allocated to other noncontrolling interests represents the losses allocated to partners in consolidated joint ventures.

 

FUNDS FROM OPERATIONS

 

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

 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2011

 

2010

 

Net income attributable to common stockholders

 

$

8,301

 

$

3,568

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

Real estate depreciation

 

12,365

 

11,659

 

Amortization of intangibles

 

308

 

183

 

Joint venture real estate depreciation and amortization

 

2,075

 

1,754

 

Joint venture loss on sale of properties

 

36

 

 

Distributions paid on Preferred Operating Partnership units

 

(1,438

)

(1,438

)

Income allocated to Operating Partnership noncontrolling interests

 

1,844

 

1,628

 

 

 

 

 

 

 

Funds from operations

 

$

23,491

 

$

17,354

 

 

SAME-STORE STABILIZED PROPERTY RESULTS

 

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

 

26



Table of Contents

 

 

 

For the Three Months 
Ended March 31,

 

Percent

 

 

 

2011

 

2010

 

Change

 

Same-store rental and tenant reinsurance revenues

 

$

58,168

 

$

55,843

 

4.2

%

Same-store operating and tenant reinsurance expenses

 

20,517

 

20,267

 

1.2

%

Same-store net operating income

 

$

37,651

 

$

35,576

 

5.8

%

 

 

 

 

 

 

 

 

Non same-store rental and tenant reinsurance revenues

 

$

10,346

 

$

6,192

 

67.1

%

Non same-store operating and tenant reinsurance expenses

 

$

4,442

 

$

2,912

 

52.5

%

 

 

 

 

 

 

 

 

Total rental and tenant reinsurance revenues

 

$

68,514

 

$

62,035

 

10.4

%

Total operating and tenant reinsurance expenses

 

$

24,959

 

$

23,179

 

7.7

%

 

 

 

 

 

 

 

 

Same-store square foot occupancy as of quarter end

 

85.4

%

82.5

%

 

 

 

 

 

 

 

 

 

 

Properties included in same-store

 

253

 

253

 

 

 

 

The increase in same-store rental revenues for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 was due primarily to increased rental rates to incoming and existing customers and increased occupancy.  The increase in same-store operating expenses for the three months ended March 31, 2011 as compared to March 31, 2010 was primarily due to increased property taxes and payroll expense.

 

CASH FLOWS

 

Cash flows provided by operating activities were $30,002 and $16,015, respectively, for the three months ended March 31, 2011 and 2010. The increases compared to the same period of the prior year primarily relates to a $4,961 increase in net income and an $8,583 change in other assets.

 

Cash used in investing activities was $20,657 for the three months ended March 31, 2011 compared to the cash provided by investing activities of $11,821 for the three months ended March 31, 2010. The decrease relates primarily to the sale of 19 properties to Harrison Street in January 2010 for $15,750, whereas no sales occurred during the first quarter 2011.  In addition, there was a decrease in the change in restricted cash of $16,275.

 

Cash used in financing activities was $13,540 and $51,046 for the three months ended March 31, 2011 and 2010, respectively.  The decrease in cash used in financing activities was primarily the result of an increase in proceeds from notes payable and lines of credit of $101,416 over the same period of the prior year offset by an increase in cash paid for principal payments on notes payable and lines of credit of $66,776.  In addition, dividends paid on common stock increased $3,674.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2011, we had $42,555 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.

 

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 and the first three months of 2011, 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.

 

27



Table of Contents

 

The following table sets forth information on our lines of credit for the periods indicated:

 

 

 

As of March 31, 2011

 

 

 

 

 

 

 

 

 

Line of Credit

 

Amount
Drawn

 

Capacity

 

Interest 
Rate

 

Origination 
Date

 

Maturity

 

Basis Rate

 

Notes

 

Credit Line 1

 

$

100,000

 

$

100,000

 

1.2

%

10/19/2007

 

10/31/2011

 

LIBOR plus 1.0% - 2.1%

 

(1),(5)

 

Credit Line 2

 

 

50,000

 

3.7

%

2/13/2009

 

2/13/2013

 

LIBOR plus 3.5%

 

(1),(4),(5)

 

Credit Line 3

 

25,000

 

45,000

 

3.7

%

6/4/2010

 

5/31/2013

 

LIBOR plus 3.5%

 

(2),(4),(6)

 

Credit Line 4

 

 

40,000

 

4.5

%

11/16/2010

 

11/16/2013

 

LIBOR plus 3.2% with floor of 4.5%

 

(3),(4),(5)

 

 

 

$

125,000

 

$

235,000

 

 

 

 

 

 

 

 

 

 

 

 


(1) One year extension available

(2) One two-year extension available

(3) Two one-year extensions available

(4) Guaranteed by the Company

(5) Secured by mortgages on certain real estate assets

(6) Secured by mortgages on certain lease-up real estate assets

 

 

As of March 31, 2011, we had $1,247,786 of debt, resulting in a debt to total capitalization ratio of 39.6%.  As of March 31, 2011, the ratio of total fixed rate debt and other instruments to total debt was 72.4% (including $211,463 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 March 31, 2011 was 4.9%.  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 March 31, 2011.

 

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 lines of credit. In addition, we are 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 or cash balances 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 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 current 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 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.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

Except as disclosed in the notes to our condensed consolidated 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 condensed consolidated 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. For a further description of our exchangeable senior notes, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission.

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth information on payments due by period as of March 31, 2011:

 

 

 

Payments due by Period:

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

After 5 Years

 

Operating leases

 

$

65,769

 

$

6,949

 

$

13,410

 

$

8,945

 

$

36,465

 

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

 

 

 

 

 

 

 

 

 

 

 

Interest

 

327,880

 

54,676

 

91,275

 

63,394

 

118,535

 

Principal

 

1,247,786

 

365,675

 

106,286

 

367,931

 

407,894

 

Total contractual obligations

 

$

1,641,435

 

$

427,300

 

$

210,971

 

$

440,270

 

$

562,894

 

 

At March 31, 2011, the weighted-average interest rate for all fixed rate loans was 5.5%, and the weighted-average interest rate for all variable rate loans was 3.2%.

 

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 that limits the total amount of indebtedness that we may incur, we will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or variable rate. In making financing decisions, we will consider factors including but not limited to:

 

·                       the interest rate of the proposed financing;

 

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

 

·                       prepayment penalties and restrictions on refinancing;

 

·                       the purchase price of properties acquired with debt financing;

 

·                       long-term objectives with respect to the financing;

 

·                       target investment returns;

 

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

 

·                       overall level of consolidated indebtedness;

 

·                       timing of debt and lease maturities;

 

·                       provisions that require recourse and cross-collateralization;

 

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

 

·                       the overall ratio of fixed and variable rate debt.

 

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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.

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

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

 

Interest Rate Risk

 

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

 

As of March 31, 2011, we had approximately $1.2 billion in total debt, of which $344.1 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 $2.4 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.

 

The fair values of our notes receivable and our fixed rate notes payable, notes payable to trusts and exchangeable senior notes are as follows:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

Note receivable from Preferred Operating Partnership unit holder

 

$

114,167

 

$

100,000

 

$

115,696

 

$

100,000

 

Fixed rate notes payable and notes payable to trusts

 

$

771,129

 

$

815,990

 

$

777,575

 

$

731,588

 

Exchangeable senior notes

 

$

115,490

 

$

87,663

 

$

118,975

 

$

87,663

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

(1)                                 Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the

 

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Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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

 

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

 

(2)                                 Changes in internal control over financial reporting

 

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

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in our 2010 Annual Report on Form 10-K.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. REMOVED AND RESERVED

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1*

 

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

 

 

 

101

 

The following materials from Extra Space Storage Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 are formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets,

 

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(2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statement of Equity, (4) the Condensed Consolidated Statements of Cash Flows and (5) related notes to these financial statements, tagged as blocks of text.

 


*These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Extra Space Storage Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

SIGNATURES

 

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

 

 

 

EXTRA SPACE STORAGE INC.

 

 

Registrant

 

 

 

Date: May 6, 2011

 

/s/ Spencer F. Kirk

 

 

Spencer F. Kirk

 

 

Chairman and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: May 6, 2011

 

/s/ Kent W. Christensen

 

 

Kent W. Christensen

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

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