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Extra Space Storage Inc. - Quarter Report: 2012 June (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 June 30, 2012

 

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) 365-4600

 

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 July 31, 2012, was 104,150,848

 

 

 



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

10

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

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

32

ITEM 4. CONTROLS AND PROCEDURES

32

 

 

PART II. OTHER INFORMATION

33

ITEM 1. LEGAL PROCEEDINGS

33

ITEM 1A. RISK FACTORS

33

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

33

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

33

ITEM 4. MINE SAFETY DISCLOSURES

33

ITEM 5. OTHER INFORMATION

33

ITEM 6. EXHIBITS

34

SIGNATURES

35

 

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:

 

·                  adverse 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;

 

·                  the failure of our joint venture partners to fulfill their obligations to us or their pursuit of actions that are inconsistent with our objectives;

 

·                  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

 

·                  difficulties in 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)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Real estate assets, net

 

$

2,278,331

 

$

2,263,795

 

 

 

 

 

 

 

Investments in real estate ventures

 

125,729

 

130,410

 

Cash and cash equivalents

 

185,502

 

26,484

 

Restricted cash

 

37,234

 

25,768

 

Receivables from related parties and affiliated real estate joint ventures

 

15,976

 

18,517

 

Other assets, net

 

65,571

 

51,276

 

Total assets

 

$

2,708,343

 

$

2,516,250

 

 

 

 

 

 

 

Liabilities, Noncontrolling Interests and Equity:

 

 

 

 

 

Notes payable

 

$

1,088,413

 

$

937,001

 

Premium on notes payable

 

3,958

 

4,402

 

Notes payable to trusts

 

119,590

 

119,590

 

Exchangeable senior notes

 

 

87,663

 

Lines of credit

 

100,000

 

215,000

 

Accounts payable and accrued expenses

 

47,123

 

45,079

 

Other liabilities

 

38,616

 

33,754

 

Total liabilities

 

1,397,700

 

1,442,489

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interests and 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, 104,136,770 and 94,783,590 shares issued and outstanding at June 30, 2012, and December 31, 2011, respectively

 

1,041

 

948

 

Paid-in capital

 

1,527,332

 

1,290,021

 

Accumulated other comprehensive deficit

 

(11,525

)

(7,936

)

Accumulated deficit

 

(261,288

)

(264,086

)

Total Extra Space Storage Inc. stockholders’ equity

 

1,255,560

 

1,018,947

 

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

 

29,692

 

29,695

 

Noncontrolling interests in Operating Partnership

 

24,279

 

24,018

 

Other noncontrolling interests

 

1,112

 

1,101

 

Total noncontrolling interests and equity

 

1,310,643

 

1,073,761

 

Total liabilities, noncontrolling interests and equity

 

$

2,708,343

 

$

2,516,250

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Property rental

 

$

79,284

 

$

64,300

 

$

155,128

 

$

125,790

 

Management and franchise fees

 

6,659

 

6,144

 

13,245

 

12,111

 

Tenant reinsurance

 

9,008

 

7,596

 

17,565

 

14,620

 

Total revenues

 

94,951

 

78,040

 

185,938

 

152,521

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operations

 

26,012

 

22,712

 

52,608

 

46,056

 

Tenant reinsurance

 

1,424

 

1,382

 

3,272

 

2,997

 

Acquisition related costs

 

469

 

1,570

 

1,078

 

1,819

 

General and administrative

 

12,545

 

12,432

 

25,185

 

24,090

 

Depreciation and amortization

 

16,626

 

14,092

 

33,150

 

27,677

 

Total expenses

 

57,076

 

52,188

 

115,293

 

102,639

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

37,875

 

25,852

 

70,645

 

49,882

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,854

)

(16,261

)

(33,925

)

(32,675

)

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

 

 

(440

)

(444

)

(868

)

Interest income

 

448

 

189

 

723

 

371

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

1,212

 

1,212

 

2,425

 

2,425

 

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

 

23,681

 

10,552

 

39,424

 

19,135

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

2,698

 

2,376

 

4,994

 

4,187

 

Equity in earnings of real estate ventures - gain on sale of real estate assets

 

 

 

5,429

 

 

Income tax expense

 

(1,634

)

(411

)

(2,584

)

(665

)

Net income

 

24,745

 

12,517

 

47,263

 

22,657

 

Net income allocated to Preferred Operating Partnership noncontrolling interests

 

(1,654

)

(1,552

)

(3,303

)

(3,084

)

Net income allocated to Operating Partnership and other noncontrolling interests

 

(678

)

(356

)

(1,333

)

(663

)

Net income attributable to common stockholders

 

$

22,413

 

$

10,609

 

$

42,627

 

$

18,910

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.12

 

$

0.43

 

$

0.21

 

Diluted

 

$

0.22

 

$

0.12

 

$

0.43

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

Basic

 

102,107,535

 

91,439,042

 

98,497,788

 

89,733,518

 

Diluted

 

106,653,965

 

96,010,848

 

103,063,565

 

94,336,141

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.20

 

$

0.14

 

$

0.40

 

$

0.28

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands)

(unaudited)

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

24,745

 

$

12,517

 

$

47,263

 

$

22,657

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap

 

(3,517

)

(1,837

)

(3,732

)

(674

)

Total comprehensive income

 

21,228

 

10,680

 

43,531

 

21,983

 

Less: comprehensive income attributable to noncontrolling interests

 

2,198

 

1,829

 

4,493

 

3,722

 

Comprehensive income attributable to common stockholders

 

$

19,030

 

$

8,851

 

$

39,038

 

$

18,261

 

 

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
Noncontrolling
Interests and

 

 

 

Partnership

 

Partnership

 

Other

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Deficit

 

Equity

 

Balances at December 31, 2011

 

$

29,695

 

$

24,018

 

$

1,101

 

94,783,590

 

$

948

 

$

1,290,021

 

$

(7,936

)

$

(264,086

)

$

1,073,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon the exercise of options

 

 

 

 

465,035

 

4

 

6,134

 

 

 

6,138

 

Restricted stock grants issued

 

 

 

 

168,052

 

2

 

 

 

 

2

 

Restricted stock grants cancelled

 

 

 

 

(14,592

)

 

 

 

 

 

Issuance of common stock, net of offering costs

 

 

 

 

8,050,000

 

80

 

226,618

 

 

 

226,698

 

Issuance of common stock related to settlement of exchangeable senior notes

 

 

 

 

684,685

 

7

 

 

 

 

7

 

Compensation expense related to stock-based awards

 

 

 

 

 

 

2,321

 

 

 

2,321

 

New issuance of Operating Partnership units

 

 

429

 

 

 

 

 

 

 

429

 

Redemption of Operating Partnership units for cash

 

 

(155

)

 

 

 

 

 

 

(155

)

Net income

 

3,303

 

1,322

 

11

 

 

 

 

 

42,627

 

47,263

 

Other comprehensive loss

 

(35

)

(108

)

 

 

 

 

(3,589

)

 

(3,732

)

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

 

 

 

 

 

 

2,238

 

 

 

2,238

 

Distributions to Operating Partnership units held by noncontrolling interests

 

(3,271

)

(1,227

)

 

 

 

 

 

 

(4,498

)

Dividends paid on common stock at $0.40 per share

 

 

 

 

 

 

 

 

(39,829

)

(39,829

)

Balances at June 30, 2012

 

$

29,692

 

$

24,279

 

$

1,112

 

104,136,770

 

$

1,041

 

$

1,527,332

 

$

(11,525

)

$

(261,288

)

$

1,310,643

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

47,263

 

$

22,657

 

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

 

 

 

 

 

Depreciation and amortization

 

33,150

 

27,677

 

Amortization of deferred financing costs

 

3,370

 

2,233

 

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

 

444

 

868

 

Non-cash interest expense related to amortization of premium on notes payable

 

(631

)

 

Compensation expense related to stock-based awards

 

2,321

 

2,711

 

Distributions from real estate ventures in excess of earnings

 

186

 

5,169

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables from related parties and affiliated real estate joint ventures

 

2,541

 

1,393

 

Other assets

 

1,161

 

4,960

 

Accounts payable and accrued expenses

 

2,044

 

(1,498

)

Other liabilities

 

772

 

(977

)

Net cash provided by operating activities

 

92,621

 

65,193

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of real estate assets

 

(44,685

)

(82,071

)

Development and construction of real estate assets

 

(1,812

)

(4,494

)

Investments in real estate ventures

 

(702

)

(3,405

)

Return of investment in real estate ventures

 

1,848

 

 

Change in restricted cash

 

(11,466

)

(2,202

)

Purchase of notes receivable

 

(7,875

)

 

Purchase of equipment and fixtures

 

(1,223

)

(3,463

)

Net cash used in investing activities

 

(65,915

)

(95,635

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the sale of common stock, net of offering costs

 

226,698

 

112,532

 

Repurchase of exchangeable senior notes

 

(87,663

)

 

Proceeds from notes payable and lines of credit

 

326,481

 

264,686

 

Principal payments on notes payable and lines of credit

 

(290,069

)

(335,693

)

Deferred financing costs

 

(4,791

)

(3,200

)

Redemption of Operating Partnership units held by noncontrolling interest

 

(155

)

(271

)

Net proceeds from exercise of stock options

 

6,138

 

10,505

 

Dividends paid on common stock

 

(39,829

)

(25,575

)

Distributions to noncontrolling interests

 

(4,498

)

(4,105

)

Net cash provided by financing activities

 

132,312

 

18,879

 

Net increase (decrease) in cash and cash equivalents

 

159,018

 

(11,563

)

Cash and cash equivalents, beginning of the period

 

26,484

 

46,750

 

Cash and cash equivalents, end of the period

 

$

185,502

 

$

35,187

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8



Table of Contents

 

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

31,215

 

$

30,400

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

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

 

 

 

 

 

Noncontrolling interests in Operating Partnership

 

$

 

$

2,344

 

Common stock and paid-in capital

 

 

(2,344

)

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

 

 

 

 

 

Other assets

 

$

2,238

 

$

2,091

 

Paid-in capital

 

(2,238

)

(2,091

)

Acquisitions of real estate assets:

 

 

 

 

 

Real estate assets, net

 

$

429

 

$

8,660

 

Notes payable assumed

 

 

(8,660

)

Operating Partnership units issued

 

(429

)

 

Receivable from sale of interest in real estate ventures:

 

 

 

 

 

Other assets

 

$

3,349

 

$

 

Investments in real estate ventures

 

(3,349

)

 

 

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 June 30, 2012, the Company had direct and indirect equity interests in 703 operating storage facilities.  In addition, the Company managed 179 properties for franchisees and third parties, bringing the total number of operating properties which it owns and/or manages to 882.  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. 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 and six months ended June 30, 2012, are not necessarily indicative of results that may be expected for the year ended December 31, 2012. The condensed consolidated balance sheet as of December 31, 2011, 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, 2011, 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

 

June 30, 2012

 

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

 

$

(12,043

)

$

 

$

(12,043

)

$

 

 

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 or six months ended June 30, 2012.  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 or six months ended June 30, 2012.

 

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 management’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, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at June 30, 2012 and December 31, 2011 approximate fair value. The fair value of the Company’s note receivable from Preferred Operating Partnership unit holder is based on the discounted estimated future cash flows of the note (categorized within Level 3 of the fair value hierarchy); the discount rate used approximates the current market rate for loans with similar maturities and credit quality.  The fair values of the Company’s fixed-rate notes payable, notes payable to trusts and exchangeable senior notes, were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality.

 

The fair values of the Company’s note receivable from Preferred Operating Partnership unit holder, fixed-rate notes payable and notes payable to trusts, and exchangeable senior notes are as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

Note receivable from Preferred Operating Partnership unit holder

 

$

106,421

 

$

100,000

 

$

104,049

 

$

100,000

 

Fixed-rate notes payable and notes payable to trusts

 

$

1,148,576

 

$

1,072,355

 

$

1,008,039

 

$

938,681

 

Exchangeable senior notes

 

$

 

$

 

$

92,265

 

$

87,663

 

 

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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 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 as if-converted method. Potential common shares are securities (such as options, 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 had $87,663 of exchangeable senior notes (the “Notes”) issued and outstanding prior to April 2012, when all of the outstanding Notes were surrendered for exchange. Prior to their exchange, the Notes could potentially have had a dilutive effect on the Company’s earnings per share calculations. The Notes were exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the Notes and at the time prior to surrender had an exchange price of $23.20 per share. The Company had irrevocably agreed to pay only cash for the accreted principal amount of the Notes relative to its exchange obligations, but retained the right to satisfy the exchange obligations in excess of the accreted principal amount in cash and/or common stock. Though the Company retained that right, Accounting Standards Codification (“ASC”) 260, “Earnings Per Share,” required an assumption that shares would be used to pay the exchange obligations in excess of the accreted principal amount, and required 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 were included for the three or six months ended June 30, 2011 as the stock price during this time did not exceed the exchange price.  No shares were included for the three or six months ended June 30, 2012, as the Notes were no longer outstanding at June 30, 2012.

 

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 June 30, 2012 and 2011, options to purchase 66,042 and 122,321 shares of common stock, and for the six months ended June 30, 2012 and 2011, options to purchase 48,980 and 99,482  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.

 

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

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income attributable to common stockholders

 

$

22,413

 

$

10,609

 

$

42,627

 

$

18,910

 

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

 

2,325

 

1,910

 

4,625

 

3,754

 

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

 

(1,437

)

(1,437

)

(2,875

)

(2,875

)

Net income for diluted computations

 

$

23,301

 

$

11,082

 

$

44,377

 

$

19,789

 

Weighted average number of common shares outstanding - basic

 

102,107,535

 

91,439,042

 

98,497,788

 

89,733,518

 

Operating Partnership units

 

3,060,467

 

3,049,935

 

3,060,467

 

3,049,935

 

Preferred Operating Partnership units

 

989,980

 

989,980

 

989,980

 

989,980

 

Shares related to Dilutive and Cancelled Stock Options

 

495,983

 

531,891

 

515,330

 

562,708

 

Weighted average number of common shares outstanding - diluted

 

106,653,965

 

96,010,848

 

103,063,565

 

94,336,141

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.12

 

$

0.43

 

$

0.21

 

Diluted

 

$

0.22

 

$

0.12

 

$

0.43

 

$

0.21

 

 

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5.              PROPERTY ACQUISITIONS

 

The following table summarizes the Company’s acquisitions of operating properties for the six months ended June 30, 2012, and does not include improvements made to existing assets:

 

 

 

 

 

 

 

Consideration Paid

 

Acquisition Date Fair Value

 

 

 

Property Location

 

Number of
Properties

 

Date of
Acquisition

 

Total Paid

 

Cash Paid

 

Net
Liabilities/
(Assets)
Assumed

 

Value of
OP Units
Issued

 

Number of
OP Units
Issued

 

Land

 

Building

 

Intangible

 

Closing
costs -
expensed

 

Source of Acquisition

 

Texas

 

1

 

2/29/2012

 

$

9,405

 

$

9,323

 

$

82

 

$

 

 

$

1,036

 

$

8,133

 

$

187

 

$

49

 

Unrelated third party

 

Maryland

 

1

 

3/7/2012

 

6,284

 

5,886

 

21

 

377

 

14,193

 

465

 

5,600

 

128

 

91

 

Unrelated third party

 

Florida

 

3

 

5/2/2012

 

14,942

 

14,792

 

150

 

 

 

1,933

 

12,682

 

321

 

6

 

Unrelated third party

 

Maryland

 

1

 

5/31/2012

 

6,501

 

6,438

 

11

 

52

 

1,814

 

1,185

 

5,051

 

147

 

118

 

Unrelated third party

 

 

6.              VARIABLE INTERESTS

 

The Company has interests in two unconsolidated joint ventures with unrelated third parties which are variable interest entities (“VIEs”). The Company holds 18% and 39% of the equity interests in the VIE joint ventures (“VIE JVs”), and has 50% of the voting rights in each of the VIE JVs. Qualification of each VIE JV 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. Except as disclosed, 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 June 30, 2012 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 material 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. The Company believes the payables to the Company are collectible. Additionally, repossessing and/or selling the self-storage facility and land that collateralize the loans could provide funds sufficient to reimburse the Company.

 

In addition to the VIEs mentioned above, on May 1, 2012, the Company purchased two notes receivable from Capmark Bank for a total of $7,875.  These receivables are due from Spacebox Land O’Lakes, LLC and Spacebox North Fort Myers, LLC (collectively, “Spacebox”), a third party.  The notes bear interest at 15% per annum and are due April 30, 2013.  Spacebox owns two self-storage properties located in Florida, which are collateral for the notes. The Company began performing management services for these two properties at the time of the purchase of the notes receivable, for a management fee of approximately 6% of the cash collected by the properties.  These notes receivable are included in other assets on the condensed consolidated balance sheet.

 

The Company determined that the two Spacebox entities qualify as VIEs because the equity investments at risk for each of these entities were not sufficient based on a qualitative and quantitative analysis performed by the Company. The Company is not the primary beneficiary of either VIE. As of June 30, 2012, the Company’s maximum exposure to loss for these entities is equal to the balance of the notes receivable, accrued interest on the notes receivable, and payables due to the Company.  The payables to the Company consist of amounts owed for expenses paid on behalf of Spacebox by the Company as manager.  The Company believes the notes receivable are collectible.  Also, repossessing and/or selling the self-storage properties that collateralize the loans could provide funds sufficient to reimburse the Company.

 

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The following table compares the Company’s liability balance to the respective VIEs and the maximum exposure to loss related to each VIE as of June 30, 2012, after netting such liability balance:

 

 

 

 

 

 

 

Balance of

 

 

 

Maximum

 

 

 

 

 

Liability

 

Investment

 

Guaranteed

 

Payables to

 

Exposure

 

 

 

 

 

Balance

 

Balance

 

Loan

 

Company

 

to Loss

 

Difference

 

Extra Space of Montrose Avenue LLC

 

$

 

$

1,148

 

$

5,120

 

$

2,205

 

$

8,473

 

$

(8,473

)

Extra Space of Sacramento One LLC

 

 

(964

)

4,307

 

6,131

 

9,474

 

(9,474

)

Spacebox Land O’ Lakes LLC

 

 

 

 

3,684

 

3,684

 

(3,684

)

Spacebox North Fort Myers, LLC

 

 

 

 

4,378

 

4,378

 

(4,378

)

 

 

$

 

$

184

 

$

9,427

 

$

16,398

 

$

26,009

 

$

(26,009

)

 

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 involvement with the Trusts to the maximum exposure to loss the Company is subject to as a result of such involvement as of June 30, 2012:

 

 

 

Notes payable

 

Investment

 

Maximum

 

 

 

 

 

to Trusts

 

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 or six months ended June 30, 2012 or 2011.

 

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

 

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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.

 

The following table summarizes the terms of the Company’s twelve cash flow hedges at June 30, 2012:

 

Hedge Product

 

Original Notional
Amounts

 

Strike

 

Effective Dates

 

Maturity Dates

 

Swap Agreements

 

$8,462 - $63,000

 

2.25% - 6.98%

 

2/1/2009 - 4/30/2012

 

6/30/2013 - 5/1/2020

 

 

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

 

 

 

Classification of

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

Type

 

Income (Expense)

 

2012

 

2011

 

2012

 

2011

 

Swap Agreements

 

Interest expense

 

$

(1,397

)

$

(1,365

)

$

(2,515

)

$

(2,014

)

 

Information relating to the gain (loss) recognized on the interest rate swap agreements is as follows:

 

 

 

Gain (loss)
recognized in OCI

 

Location of amounts

 

Gain (loss) reclassified
from OCI

 

Type

 

June 30, 2012

 

reclassified from OCI
into income

 

For the Six Months
Ended June 30, 2012

 

Swap Agreements

 

$

(3,732

)

Interest expense

 

$

(2,515

)

 

The interest rate swap agreements were highly effective for the three and six months ended June 30, 2012.  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 six months ended June 30, 2012.

 

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

 

 

 

Asset (Liability) Derivatives

 

 

 

June 30, 2012

 

December 31, 2011

 

Derivatives designated as

 

Balance Sheet

 

Fair

 

Balance Sheet

 

Fair

 

hedging instruments:

 

Location

 

Value

 

Location

 

Value

 

Swap Agreements

 

Other liabilities

 

$

(12,043

)

Other liabilities

 

$

(8,311

)

 

8.              EXCHANGEABLE SENIOR NOTES

 

On March 27, 2007, the Company’s Operating Partnership issued $250,000 of 3.625% Exchangeable Senior Notes.  The Notes bore interest at 3.625% per annum and contained an exchange settlement feature, which provided that the Notes could, under certain circumstances, have been exchangeable for cash (up to the principal amount of the Notes) and, with respect to any excess exchange value, for cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the option of the Operating Partnership.

 

On March 1, 2012, the Company announced that the holders of the Operating Partnership’s then-outstanding $87,663 principal amount of 3.625% Exchangeable Senior Notes had the right to surrender their Notes for repurchase by the Operating Partnership on April 1, 2012 for 100% of the principal amount of the Notes, pursuant to the holders’ rights under the indenture governing the Notes.  In addition, the Company announced that the Operating Partnership had given notice of its intention to redeem all of the Notes not otherwise surrendered for repurchase or exchange on April 5, 2012, pursuant to its option under the indenture, at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest to the redemption date. In connection with the redemption, holders of the Notes had the right to exchange their Notes at an exchange rate of 43.1091 shares of the Company’s common stock per $1,000 principal amount of the Notes surrendered.  The Notes surrendered for exchange could be settled in cash or a combination of cash and stock, subject to the determination of the Operating Partnership.

 

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As of April 3, 2012, the Company received notice that the holders of the entire $87,663 principal amount of the Notes had surrendered their Notes for exchange. On April 26, 2012, the Company settled the exchange by paying cash for the principal amount of the Notes, as required by the indenture, and issuing 684,685 shares of common stock for the value in excess of the principal amount.  The issuance of shares was reflected as an increase in paid-in-capital with a corresponding decrease in paid-in-capital attributable to the reacquisition of the equity component of the convertible debt, as discussed below.

 

GAAP requires entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost.  The Company, therefore, accounted for the liability and equity components of the Notes separately.  The equity component was included in paid-in-capital in stockholders’ equity in the condensed consolidated balance sheet, and the value of the equity component was treated as original issue discount for purposes of accounting for the debt component.  The discount was amortized over the period of the debt as additional interest expense.

 

9.              STOCK OFFERING

 

On April 16, 2012, the Company issued and sold 8,050,000 shares of its common stock in a public offering at a price of $28.22 per

share. The Company received gross proceeds of $227,171. Transaction costs were $473, resulting in net proceeds of $226,698.

 

10.       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 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.

 

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.

 

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Table of Contents

 

11.       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 96.3% majority ownership interest therein as of June 30, 2012. The remaining ownership interests in the Operating Partnership (including Preferred OP units) of 3.7% are held by certain former owners of assets acquired by the Operating Partnership.  As of June 30, 2012, the Operating Partnership had 3,060,467 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 OP 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 June 30, 2012, was $29.34 and there were 3,060,467 common OP units outstanding. Assuming that all of the unit holders exercised their right to redeem all of their common OP units on June 30, 2012, and the Company elected to pay the noncontrolling members cash, the Company would have paid $89,794 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.

 

12.       OTHER NONCONTROLLING INTERESTS

 

Other noncontrolling interests represent the ownership interests of various third parties in three consolidated self-storage properties as of June 30, 2012.  Two of these consolidated properties were under development, and one was in the lease-up stage at June 30, 2012.  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 Operating Partnership and other noncontrolling interests in the condensed consolidated statement of operations.

 

13.       EQUITY IN EARNINGS OF REAL ESTATE VENTURES — GAIN ON SALE OF JOINT VENTURE REAL ESTATE ASSETS

 

On January 15, 2012, the Company sold its 40% equity interest in U-Storage de Mexico S.A. and related entities to its joint venture partners for $4,841. The Company received cash of $1,492 and a note receivable of $3,349. No gain or loss was recorded on the sale.

 

On February 17, 2012, a joint venture in which the Company held a 40% equity interest sold its only self-storage property.  The property was located in New York.  As a result of the sale, the joint venture was dissolved, and the Company received cash proceeds which resulted in a gain of $5,429.

 

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14.       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:

 

 

 

June 30, 2012

 

December 31, 2011

 

Balance Sheet

 

 

 

 

 

Investment in real estate ventures

 

 

 

 

 

Rental operations

 

$

125,729

 

$

130,410

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Property management, acquisition and development

 

$

418,189

 

$

250,953

 

Rental operations

 

2,274,303

 

2,243,441

 

Tenant reinsurance

 

15,851

 

21,856

 

 

 

$

2,708,343

 

$

2,516,250

 

 

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Table of Contents

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

6,659

 

$

6,144

 

$

13,245

 

$

12,111

 

Rental operations

 

79,284

 

64,300

 

155,128

 

125,790

 

Tenant reinsurance

 

9,008

 

7,596

 

17,565

 

14,620

 

 

 

$

94,951

 

$

78,040

 

$

185,938

 

$

152,521

 

 

 

 

 

 

 

 

 

 

 

Rental operations

 

41,701

 

35,952

 

83,826

 

72,106

 

Tenant reinsurance

 

1,424

 

1,382

 

3,272

 

2,997

 

 

 

$

57,076

 

$

52,188

 

$

115,293

 

$

102,639

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(7,292

)

$

(8,710

)

$

(14,950

)

$

(15,425

)

Rental operations

 

37,583

 

28,348

 

71,302

 

53,684

 

Tenant reinsurance

 

7,584

 

6,214

 

14,293

 

11,623

 

 

 

$

37,875

 

$

25,852

 

$

70,645

 

$

49,882

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(264

)

$

(823

)

$

(995

)

$

(1,605

)

Rental operations

 

(15,590

)

(15,878

)

(33,374

)

(31,938

)

 

 

$

(15,854

)

$

(16,701

)

$

(34,369

)

$

(33,543

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

445

 

$

187

 

$

717

 

$

366

 

Tenant reinsurance

 

3

 

2

 

6

 

5

 

 

 

$

448

 

$

189

 

$

723

 

$

371

 

 

 

 

 

 

 

 

 

 

 

Interest income on note receivable from Preferred Operating Partnership unit holder

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,212

 

$

1,212

 

$

2,425

 

$

2,425

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures

 

 

 

 

 

 

 

 

 

Rental operations

 

$

2,698

 

$

2,376

 

$

4,994

 

$

4,187

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of real estate ventures-gain on sale of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

 

$

 

$

5,429

 

$

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

1,021

 

$

1,763

 

$

2,421

 

$

3,403

 

Tenant reinsurance

 

(2,655

)

(2,174

)

(5,005

)

(4,068

)

 

 

$

(1,634

)

$

(411

)

$

(2,584

)

$

(665

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

(4,878

)

$

(6,371

)

$

(4,953

)

$

(10,836

)

Rental operations

 

24,691

 

14,846

 

42,922

 

25,933

 

Tenant reinsurance

 

4,932

 

4,042

 

9,294

 

7,560

 

 

 

$

24,745

 

$

12,517

 

$

47,263

 

$

22,657

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

$

937

 

$

852

 

$

1,932

 

$

1,627

 

Rental operations

 

15,689

 

13,240

 

31,218

 

26,050

 

 

 

$

16,626

 

$

14,092

 

$

33,150

 

$

27,677

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Acquisition of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(44,685

)

$

(82,071

)

 

 

 

 

 

 

 

 

 

 

Development and construction of real estate assets

 

 

 

 

 

 

 

 

 

Property management, acquisition and development

 

 

 

 

 

$

(1,812

)

$

(4,494

)

 

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15.       COMMITMENTS AND CONTINGENCIES

 

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

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

Loan

 

 

 

Fair

 

 

 

Date of

 

Maturity

 

Guaranteed

 

Value of

 

 

 

Guaranty

 

Date

 

Loan Amount

 

Assets

 

Extra Space of Montrose Avenue LLC

 

Dec-10

 

Dec-13

 

$

5,120

 

$

8,393

 

Extra Space of Sacramento One LLC

 

Apr-09

 

Apr-14

 

$

4,307

 

$

9,662

 

ESS Baltimore LLC

 

Nov-04

 

Feb-13

 

$

3,991

 

$

6,559

 

 

If the joint ventures default on the loans, the Company may be forced to repay the loans. Repossessing and/or selling the self-storage facilities and land that collateralize the loans could provide funds sufficient to reimburse the Company. The Company has recorded no liability in relation to these guarantees as of June 30, 2012, as the fair value of the guarantees was not material. The Company believes the risk of incurring a material 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 a result of these litigation matters, the Company has recorded a liability of $1,800, which is included in other liabilities on the condensed consolidated balance sheets.  The Company does not believe that it is reasonably likely that the loss related to these litigation matters will be in excess of the current amount accrued.  As of June 30, 2012, 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.

 

16.       SUBSEQUENT EVENTS

 

On July 2, 2012, the Company completed its acquisition of Prudential Real Estate Investors’ (“PREI®”) 94.9% interest in the ESS PRISA III LLC joint venture that was formed in 2005, resulting in full ownership by the Company. The joint venture owned 36 properties located in 18 states.  The Company paid approximately $300,000 to acquire PREI’s interest in the joint venture, consisting of approximately $162,000 in cash consideration and the assumption of an existing loan of $145,000, of which $138,000 related to PREI’s interest.

 

On July 18, 2012, the Company acquired one additional property, located in Colorado, for approximately $7,100.

 

On July 18, 2012, the Company acquired six additional properties for approximately $55,200.  These properties are located in New Jersey and New York.

 

On July 19, 2012, the Company acquired one additional property, located in South Carolina, for approximately $4,650.

 

On July 26, 2012, the Company acquired one additional property, located in California, for approximately $4,850.

 

On July 31, 2012, the Company purchased a parcel of land that was subject to a ground lease on an existing property, located in Maryland, for approximately $3,700.

 

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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, 2011. 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, 2011 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 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 and 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 implement national, regional and local marketing programs, which we believe will attract more customers to our stores at a lower net cost.

 

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·                      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.  We continue to see available acquisitions on which to bid and are seeing increasing prices.  However, we remain a disciplined buyer and look for acquisitions that will strengthen our portfolio and increase stockholder value.

 

·                      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.

 

Recent U.S. and international market and economic conditions have been challenging, with tighter credit conditions and slower growth.  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 June 30, 2012, we owned or had ownership interests in 703 operating self-storage properties. Of these properties, 363 are wholly-owned and 340 are held in joint ventures. In addition, we managed 179 properties for franchisees or third parties, bringing the total number of operating properties that we own and/or manage to 882. These properties are located in 34 states and Washington, D.C.  As of June 30, 2012, we owned and/or managed approximately 64 million square feet of space with approximately 585,000 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.  Our acquisitions and management business have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

 

We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a property to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1, or has been open for three years.

 

As of June 30, 2012, over 495,000 tenants were leasing storage units at our 882 operating properties that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as markets permit.  Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of June 30, 2012, the median length of stay was approximately 13 months. These existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends.  The average annual rent per square foot for our existing customers at these stabilized properties, net of discounts and bad debt, was $13.49 at June 30, 2012, compared to $13.16 at June 30, 2011.  This compares to our average annual rent per square foot for new leases of $14.37 at June 30, 2012, compared to $13.88 at June 30, 2011.  The average discount on new leases for these periods was 5.8% and 6.8%, respectively.

 

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.

 

The following table sets forth additional information regarding the occupancy of our stabilized properties by state as of June 30, 2012 and 2011. The information as of June 30, 2011, is on a pro forma basis as though all the properties owned and/or managed at June 30, 2012, were under our control as of June 30, 2011.

 

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Table of Contents

 

Stabilized Property Data Based on Location

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as
of June 30, 2012 (1)

 

Number of Units
as of June 30, 2011

 

Net Rentable
Square Feet as
of June 30, 2012 (2)

 

Net Rentable
Square Feet as of
June 30, 2011

 

Square Foot
Occupancy %
June 30, 2012

 

Square Foot
Occupancy %
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,402

 

1,396

 

172,999

 

173,419

 

90.5

%

86.7

%

Arizona

 

5

 

2,793

 

2,795

 

356,720

 

356,820

 

85.0

%

89.7

%

California

 

71

 

53,009

 

52,929

 

5,526,619

 

5,541,764

 

85.9

%

83.7

%

Colorado

 

10

 

4,518

 

4,508

 

569,411

 

569,286

 

94.0

%

90.6

%

Connecticut

 

3

 

1,962

 

1,980

 

178,020

 

178,030

 

94.2

%

93.6

%

Florida

 

35

 

22,918

 

23,085

 

2,481,565

 

2,486,315

 

88.0

%

83.6

%

Georgia

 

16

 

8,407

 

8,403

 

1,084,429

 

1,088,994

 

90.1

%

85.3

%

Hawaii

 

2

 

2,792

 

2,799

 

137,869

 

145,812

 

85.9

%

87.5

%

Illinois

 

11

 

7,387

 

7,372

 

806,259

 

806,635

 

91.5

%

83.0

%

Indiana

 

8

 

4,310

 

4,388

 

511,034

 

511,034

 

92.8

%

89.4

%

Kansas

 

1

 

505

 

506

 

50,340

 

50,340

 

92.5

%

95.2

%

Kentucky

 

4

 

2,150

 

2,171

 

254,115

 

254,191

 

93.3

%

91.4

%

Louisiana

 

2

 

1,414

 

1,413

 

150,215

 

150,165

 

91.1

%

90.1

%

Maryland

 

17

 

12,390

 

12,360

 

1,334,699

 

1,334,440

 

90.2

%

88.6

%

Massachusetts

 

29

 

17,499

 

17,514

 

1,792,187

 

1,792,832

 

91.9

%

90.0

%

Michigan

 

2

 

1,026

 

1,020

 

135,842

 

134,674

 

93.5

%

90.3

%

Missouri

 

6

 

3,154

 

3,157

 

375,337

 

374,962

 

92.9

%

91.0

%

Nevada

 

2

 

963

 

989

 

129,214

 

130,040

 

71.8

%

67.2

%

New Hampshire

 

2

 

1,005

 

1,007

 

125,473

 

125,473

 

89.5

%

90.0

%

New Jersey

 

28

 

22,915

 

22,954

 

2,207,571

 

2,209,568

 

91.6

%

89.4

%

New Mexico

 

1

 

538

 

536

 

71,475

 

71,395

 

91.4

%

92.8

%

New York

 

13

 

11,448

 

11,463

 

872,199

 

870,313

 

90.7

%

86.7

%

Ohio

 

14

 

8,147

 

8,315

 

993,854

 

993,889

 

87.8

%

82.2

%

Oregon

 

1

 

768

 

770

 

103,090

 

103,130

 

95.3

%

93.9

%

Pennsylvania

 

9

 

5,725

 

5,776

 

659,845

 

655,555

 

89.9

%

90.3

%

Rhode Island

 

2

 

1,183

 

1,191

 

130,996

 

131,591

 

89.0

%

82.0

%

South Carolina

 

4

 

2,156

 

2,156

 

253,668

 

253,406

 

94.0

%

91.6

%

Tennessee

 

3

 

1,606

 

1,617

 

214,860

 

215,420

 

88.4

%

88.4

%

Texas

 

21

 

13,437

 

13,415

 

1,575,683

 

1,575,706

 

88.4

%

86.4

%

Utah

 

7

 

3,160

 

3,195

 

408,251

 

408,357

 

92.8

%

87.7

%

Virginia

 

6

 

4,288

 

4,296

 

416,202

 

416,552

 

90.4

%

92.9

%

Washington

 

4

 

2,502

 

2,533

 

307,950

 

308,015

 

92.3

%

82.8

%

Total Wholly-Owned Stabilized

 

342

 

227,477

 

228,009

 

24,387,991

 

24,418,123

 

89.3

%

86.5

%

 

23



Table of Contents

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as
of June 30, 2012 (1)

 

Number of Units
as of June 30, 2011

 

Net Rentable
Square Feet as
of June 30, 2012 (2)

 

Net Rentable
Square Feet as of
June 30, 2011

 

Square Foot
Occupancy %
June 30, 2012

 

Square Foot
Occupancy %
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

3

 

1,712

 

1,709

 

206,053

 

205,798

 

90.6

%

88.5

%

Arizona

 

10

 

6,407

 

6,395

 

729,479

 

729,494

 

89.6

%

86.7

%

California

 

83

 

60,105

 

60,024

 

6,177,297

 

6,178,761

 

91.2

%

87.6

%

Colorado

 

2

 

1,316

 

1,310

 

158,543

 

158,783

 

94.0

%

85.6

%

Connecticut

 

8

 

5,988

 

5,993

 

692,963

 

693,408

 

90.2

%

89.3

%

Delaware

 

1

 

589

 

585

 

72,080

 

71,680

 

95.2

%

89.9

%

Florida

 

24

 

19,244

 

19,632

 

1,939,285

 

1,962,905

 

88.6

%

86.1

%

Georgia

 

3

 

1,851

 

1,849

 

240,161

 

240,701

 

88.0

%

80.4

%

Illinois

 

7

 

4,949

 

4,943

 

502,323

 

501,398

 

93.2

%

87.5

%

Indiana

 

6

 

2,431

 

2,419

 

315,141

 

315,151

 

95.3

%

89.8

%

Kansas

 

2

 

835

 

838

 

108,995

 

108,930

 

86.9

%

85.7

%

Kentucky

 

4

 

2,289

 

2,277

 

270,793

 

269,545

 

92.0

%

90.4

%

Maryland

 

15

 

11,877

 

11,839

 

1,160,302

 

1,159,349

 

92.0

%

90.7

%

Massachusetts

 

15

 

7,835

 

7,831

 

893,662

 

895,215

 

88.4

%

88.1

%

Michigan

 

9

 

5,472

 

5,438

 

729,273

 

729,708

 

94.2

%

91.3

%

Missouri

 

1

 

531

 

530

 

61,275

 

61,275

 

94.7

%

93.8

%

Nevada

 

8

 

5,273

 

5,354

 

741,182

 

692,308

 

81.0

%

84.9

%

New Hampshire

 

3

 

1,312

 

1,310

 

137,344

 

137,314

 

90.4

%

91.2

%

New Jersey

 

20

 

14,879

 

14,878

 

1,558,101

 

1,559,726

 

90.1

%

88.1

%

New Mexico

 

9

 

4,652

 

4,655

 

542,723

 

542,327

 

85.4

%

87.1

%

New York

 

19

 

19,021

 

19,026

 

1,554,803

 

1,555,373

 

91.3

%

89.4

%

Ohio

 

12

 

5,400

 

5,442

 

786,354

 

793,084

 

91.7

%

85.0

%

Oregon

 

2

 

1,294

 

1,290

 

136,540

 

136,600

 

97.6

%

90.7

%

Pennsylvania

 

10

 

7,937

 

7,996

 

800,077

 

800,280

 

92.9

%

92.8

%

Tennessee

 

23

 

12,544

 

12,536

 

1,669,916

 

1,668,743

 

88.1

%

88.7

%

Texas

 

19

 

11,742

 

11,762

 

1,531,151

 

1,536,352

 

92.4

%

88.9

%

Virginia

 

17

 

12,018

 

12,022

 

1,268,659

 

1,267,963

 

92.2

%

92.4

%

Washington

 

1

 

548

 

547

 

62,730

 

62,730

 

94.7

%

92.4

%

Washington, DC

 

1

 

1,529

 

1,529

 

101,989

 

101,989

 

93.2

%

94.9

%

Total Joint-Ventures Stabilized

 

337

 

231,580

 

231,959

 

25,149,194

 

25,136,890

 

90.6

%

88.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

578

 

580

 

67,460

 

67,350

 

67.4

%

50.6

%

California

 

41

 

26,778

 

26,924

 

3,412,661

 

3,401,220

 

72.2

%

71.2

%

Colorado

 

4

 

1,523

 

1,516

 

167,265

 

167,300

 

95.2

%

91.3

%

Connecticut

 

1

 

484

 

501

 

61,480

 

61,460

 

81.4

%

66.3

%

Florida

 

17

 

9,028

 

9,072

 

1,103,669

 

1,100,259

 

75.2

%

70.0

%

Georgia

 

2

 

1,435

 

1,426

 

181,425

 

179,525

 

74.0

%

71.2

%

Hawaii

 

3

 

3,492

 

3,492

 

202,693

 

202,296

 

62.4

%

62.6

%

Illinois

 

6

 

3,536

 

3,547

 

350,458

 

352,469

 

84.2

%

69.9

%

Indiana

 

1

 

501

 

501

 

55,225

 

55,225

 

93.2

%

92.5

%

Kansas

 

1

 

468

 

476

 

110,520

 

112,000

 

80.3

%

69.4

%

Kentucky

 

1

 

530

 

522

 

66,100

 

66,100

 

94.3

%

93.8

%

Louisiana

 

1

 

1,014

 

996

 

135,140

 

133,080

 

73.5

%

66.9

%

Maryland

 

8

 

5,039

 

5,022

 

544,265

 

543,140

 

90.4

%

86.7

%

Massachusetts

 

5

 

5,215

 

5,248

 

459,138

 

459,283

 

70.1

%

68.1

%

Missouri

 

2

 

1,206

 

1,206

 

151,776

 

151,307

 

84.1

%

89.7

%

Nevada

 

2

 

1,563

 

1,568

 

170,575

 

170,375

 

75.6

%

78.3

%

New Jersey

 

3

 

1,648

 

1,659

 

180,718

 

178,498

 

84.4

%

76.0

%

New Mexico

 

3

 

1,649

 

1,647

 

188,520

 

188,520

 

83.3

%

84.8

%

North Carolina

 

8

 

5,206

 

5,248

 

577,327

 

578,827

 

87.9

%

81.1

%

Ohio

 

4

 

1,050

 

1,072

 

154,760

 

158,360

 

84.1

%

75.4

%

Pennsylvania

 

16

 

7,326

 

7,382

 

902,810

 

901,110

 

85.4

%

79.4

%

South Carolina

 

2

 

1,154

 

1,169

 

162,487

 

163,267

 

87.7

%

76.3

%

Tennessee

 

3

 

1,498

 

1,497

 

206,135

 

205,225

 

88.8

%

92.0

%

Texas

 

7

 

3,540

 

3,549

 

455,434

 

459,142

 

86.9

%

82.6

%

Utah

 

2

 

1,451

 

1,450

 

211,556

 

211,556

 

84.8

%

83.7

%

Virginia

 

3

 

1,758

 

1,763

 

177,960

 

178,190

 

93.4

%

85.5

%

Washington

 

1

 

466

 

472

 

56,590

 

56,590

 

90.0

%

72.3

%

Washington, DC

 

2

 

1,263

 

1,263

 

112,459

 

112,459

 

93.3

%

94.6

%

Total Managed Stabilized

 

150

 

90,399

 

90,768

 

10,626,606

 

10,614,133

 

79.2

%

75.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stabilized Properties

 

829

 

549,456

 

550,736

 

60,163,791

 

60,169,146

 

88.0

%

85.3

%

 


(1)      Represents unit count as of June 30, 2012, which may differ from June 30, 2011 unit count due to unit conversions or expansions.

 

(2)      Represents net rentable square feet as of June 30, 2012, which may differ from  June 30, 2011 net rentable square feet due to unit conversions or expansions.

 

24



Table of Contents

 

The following table sets forth additional information regarding the occupancy of our lease-up properties by state as of June 30, 2012 and 2011. The information as of June 30, 2011 is on a pro forma basis as though all the properties owned and/or managed at June 30, 2012 were under our control as of June 30, 2011.

 

Lease-up Property Data Based on Location

 

 

 

 

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Company

 

Pro forma

 

Location

 

Number of
Properties

 

Number of Units as
of June 30, 2012 (1)

 

Number of Units as
of June 30, 2011

 

Net Rentable
Square Feet as of
June 30, 2012 (2)

 

Net Rentable
Square Feet as of
June 30, 2011

 

Square Foot
Occupancy %
June 30, 2012

 

Square Foot
Occupancy %
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-owned properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arizona

 

1

 

633

 

644

 

71,355

 

71,355

 

54.5

%

20.0

%

California

 

8

 

5,464

 

4,882

 

592,123

 

518,513

 

71.2

%

56.9

%

Florida

 

6

 

5,133

 

5,244

 

519,480

 

520,095

 

68.1

%

38.1

%

Maryland

 

2

 

1,677

 

1,677

 

172,035

 

172,050

 

61.7

%

34.3

%

Massachusetts

 

1

 

690

 

615

 

73,020

 

74,025

 

76.2

%

72.3

%

New Jersey

 

1

 

575

 

583

 

67,167

 

67,187

 

82.1

%

80.0

%

Oregon

 

1

 

724

 

724

 

75,750

 

76,020

 

94.7

%

64.5

%

Tennessee

 

1

 

519

 

505

 

70,700

 

69,550

 

79.2

%

69.2

%

Total Wholly-Owned in Lease up

 

21

 

15,415

 

14,874

 

1,641,630

 

1,568,795

 

70.6

%

49.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint-venture properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

1

 

970

 

982

 

87,853

 

87,853

 

91.4

%

66.1

%

Illinois

 

2

 

1,311

 

1,307

 

131,470

 

131,418

 

80.9

%

63.3

%

Total Joint-Ventures in Lease up

 

3

 

2,281

 

2,289

 

219,323

 

219,271

 

85.1

%

64.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Colorado

 

2

 

1,087

 

587

 

121,044

 

60,896

 

80.5

%

21.2

%

Florida

 

7

 

4,609

 

4,638

 

458,124

 

458,713

 

65.7

%

50.5

%

Georgia

 

5

 

2,720

 

2,771

 

447,333

 

442,208

 

70.4

%

59.5

%

Illinois

 

3

 

1,915

 

1,934

 

162,414

 

160,235

 

86.7

%

63.8

%

Maryland

 

1

 

955

 

 

88,200

 

 

34.5

%

0.0

%

Massachusetts

 

2

 

1,573

 

558

 

137,287

 

52,868

 

42.6

%

53.9

%

New York

 

1

 

920

 

 

97,084

 

 

23.8

%

0.0

%

North Carolina

 

2

 

1,043

 

659

 

143,725

 

105,991

 

72.1

%

85.2

%

Pennsylvania

 

1

 

852

 

866

 

68,409

 

68,569

 

82.4

%

70.6

%

Rhode Island

 

1

 

969

 

985

 

91,075

 

90,995

 

46.3

%

43.7

%

South Carolina

 

1

 

722

 

742

 

76,435

 

76,435

 

95.0

%

60.4

%

Texas

 

2

 

1,559

 

1,594

 

171,613

 

172,447

 

40.8

%

18.4

%

Utah

 

1

 

430

 

 

65,310

 

 

53.7

%

0.0

%

Total Managed in Lease up

 

29

 

19,354

 

15,334

 

2,128,053

 

1,689,357

 

63.3

%

53.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Lease up Properties

 

53

 

37,050

 

32,497

 

3,989,006

 

3,477,423

 

67.5

%

52.0

%

 


(1) Represents unit count as of June 30, 2012, which may differ from June 30, 2011 unit count due to unit conversions or expansions.

 

(2) Represents net rentable square feet as of June 30, 2012, which may differ from June 30, 2011 net rentable square feet due to unit conversions or expansions.

 

25



Table of Contents

 

RESULTS OF OPERATIONS

 

Comparison of the three and six months ended June 30, 2012 and 2011

 

Overview

 

Results for the three and six months ended June 30, 2012, include the operations of 703 properties (364 of which were consolidated and 339 of which were in joint ventures accounted for using the equity method) compared to the results for the three and six months ended June 30, 2011, which included the operations of 680 properties (326 of which were consolidated and 354 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
June 30,

 

 

 

 

 

For the Six Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rental

 

$

79,284

 

$

64,300

 

$

14,984

 

23.3

%

$

155,128

 

$

125,790

 

$

29,338

 

23.3

%

Management and franchise fees

 

6,659

 

6,144

 

515

 

8.4

%

13,245

 

12,111

 

1,134

 

9.4

%

Tenant reinsurance

 

9,008

 

7,596

 

1,412

 

18.6

%

17,565

 

14,620

 

2,945

 

20.1

%

Total revenues

 

$

94,951

 

$

78,040

 

$

16,911

 

21.7

%

$

185,938

 

$

152,521

 

$

33,417

 

21.9

%

 

Property Rental — The increases in property rental revenues for the three and six months ended June 30, 2012 consist primarily of increases of $9,472 and $18,833, respectively, associated with acquisitions completed in 2012 and 2011.  We completed 55 property acquisitions in 2011 and closed on six property acquisitions during the six months ended June 30, 2012. In addition, increases of  $3,974 and $7,461 resulted from increases in occupancy and rental rates to existing customers at our stabilized properties for the three and six months ended June 30, 2012, respectively.  Occupancy at our stabilized properties increased to 89.3% at June 30, 2012, as compared to 86.5% at June 30, 2011.  Rental rates to new tenants increased by 3.0% over the same period in the prior year. Increases in occupancy at our lease-up properties increased our property rental revenue by $1,538 and $3,044, for the three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

 

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 properties owned by third parties, franchisees and unconsolidated joint ventures. The increase in management and franchise fee revenues is generally due to higher revenues generated at managed properties in 2012 when compared to 2011.

 

Tenant Reinsurance — The increase in tenant reinsurance revenues was primarily due to the increase of overall customer participation to 66.6% at June 30, 2012 compared to 64.0% at June 30, 2011.  In addition, the number of properties that were owned and/or managed by us was 882 at June 30, 2012 compared to 860 at June 30, 2011.

 

Expenses

 

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

 

 

 

For the Three Months Ended
June 30,

 

 

 

 

 

For the Six Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operations

 

$

26,012

 

$

22,712

 

$

3,300

 

14.5

%

$

52,608

 

$

46,056

 

$

6,552

 

14.2

%

Tenant reinsurance

 

1,424

 

1,382

 

42

 

3.0

%

3,272

 

2,997

 

275

 

9.2

%

Acquisition related costs

 

469

 

1,570

 

(1,101

)

(70.1

)%

1,078

 

1,819

 

(741

)

(40.7

)%

General and administrative

 

12,545

 

12,432

 

113

 

0.9

%

25,185

 

24,090

 

1,095

 

4.5

%

Depreciation and amortization

 

16,626

 

14,092

 

2,534

 

18.0

%

33,150

 

27,677

 

5,473

 

19.8

%

Total expenses

 

$

57,076

 

$

52,188

 

$

4,888

 

9.4

%

$

115,293

 

$

102,639

 

$

12,654

 

12.3

%

 

Property OperationsThe increase in property operations expense during the three and six months ended June 30, 2012 consisted primarily of  increases associated with acquisitions completed in 2012 and 2011.  We completed 55 property acquisitions in 2011 and closed on six property acquisitions during the six months ended June 30, 2012.

 

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

 

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Acquisition Related CostsAcquisition related costs relate to acquisition activities during the periods indicated. We acquired four properties during the three months ended June 30, 2012 compared to 24  properties during the same period in 2011.  We acquired six properties during the six months ended June 30, 2012, compared to 24 properties during the same period in 2011.

 

General and AdministrativeGeneral and administrative expenses primarily include all expenses not directly related to the properties, including corporate payroll, travel and professional fees.  These expenses are recognized as incurred. The increase in general and administrative expenses for the six months ended June 30, 2012 was primarily due to the overall cost associated with additional properties. We did not observe any material trends in specific payroll, travel or other expenses that contributed significantly to the increase in general and administrative expenses apart from the increase due to the management of additional properties. During the year ended December 31, 2011, we purchased 55 properties, 40 of which we did not previously manage.  During the six months ended June 30, 2012, we purchased an additional six properties.

 

Depreciation and AmortizationDepreciation and amortization expense increased as a result of the acquisition and development of new properties.  During the six months ended June 30, 2012, we completed the development of one property and acquired six properties.  During the year ended December 31, 2011, we purchased 55 properties and completed the development of five properties.

 

Other Revenues and Expenses

 

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

 

 

 

For the Three Months Ended
June 30,

 

 

 

 

 

For the Six Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(15,854

)

$

(16,261

)

$

407

 

(2.5

)%

$

(33,925

)

$

(32,675

)

$

(1,250

)

3.8

%

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

 

 

(440

)

440

 

(100.0

)%

(444

)

(868

)

424

 

(48.8

)%

Interest income

 

448

 

189

 

259

 

137.0

%

723

 

371

 

352

 

94.9

%

Interest income on note receivable from Preferred Operating Partnership unit holder

 

1,212

 

1,212

 

 

 

2,425

 

2,425

 

 

 

Equity in earnings of real estate ventures

 

2,698

 

2,376

 

322

 

13.6

%

4,994

 

4,187

 

807

 

19.3

%

Equity in earnings of real estate assets - gain on sale of real estate assets

 

 

 

 

 

5,429

 

 

5,429

 

100.0

%

Income tax expense

 

(1,634

)

(411

)

(1,223

)

297.6

%

(2,584

)

(665

)

(1,919

)

288.6

%

Total other expense, net

 

$

(13,130

)

$

(13,335

)

$

205

 

(1.5

)%

$

(23,382

)

$

(27,225

)

$

3,843

 

(14.1

)%

 

Interest ExpenseThe decrease in interest expense for the three months ended June 30, 2012, when compared to the same period last year, was primarily the result of lower interest rates on new and existing loans.  The increase in interest expense for the six months ended June 30, 2012, compared to prior year, was due primarily to costs associated with prepaying certain loans.

 

Non-cash Interest Expense Related to Amortization of Discount on Exchangeable Senior NotesRepresents the amortization of the discount on the Notes, which reflects the effective interest rate relative to the carrying amount of the liability.  All of the outstanding Notes were surrendered for exchange in April 2012.

 

Interest IncomeInterest income represents amounts earned on cash and cash equivalents deposited with financial institutions. The increase in interest income is primarily the result of a higher cash balance during the period ended June 30, 2012 when compared to the prior year.

 

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 and six months ended June 30, 2012 was due primarily to increased revenues at our joint ventures as a result of increases in occupancy and rental rates to new and existing customers and lower property expenses due to reduced utility and snow removal costs.

 

Equity in Earnings of Real Estate Assets - Gain on Sale of Real Estate Assets — In February 2012, a joint venture in which we held a 40% equity interest sold its only self-storage property.  As a result of the sale, the joint venture was dissolved, and we received cash proceeds which resulted in a gain of $5,429.  There was no significant equity in earnings on gains from the sale of real estate assets for the three or six months ended June 30, 2011.

 

Income Tax Expense — For the three and six months ended June 30, 2012 the increase in income tax expense primarily related to increased revenues at our taxable REIT subsidiary.

 

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Table of Contents

 

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
June 30,

 

 

 

 

 

For the Six Months Ended
June 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

2012

 

2011

 

$ Change

 

% Change

 

Net income allocated to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to Preferred Operating Partnership noncontrolling interests

 

$

(1,654

)

$

(1,552

)

$

(102

)

6.6

%

$

(3,303

)

$

(3,084

)

$

(219

)

7.1

%

Net income allocated to Operating Partnership and other noncontrolling interests

 

(678

)

(356

)

(322

)

90.4

%

(1,333

)

(663

)

(670

)

101.1

%

Total income allocated to noncontrolling interests:

 

$

(2,332

)

$

(1,908

)

$

(424

)

22.2

%

$

(4,636

)

$

(3,747

)

$

(889

)

23.7

%

 

Net Income Allocated to Preferred Operating Partnership Noncontrolling InterestsIncome allocated to the Preferred OP units as of June 30, 2012 and 2011 equals the fixed distribution paid to the Preferred OP unit holder, plus approximately 0.9% 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 June 30, 2012 and 2011 represents approximately 2.9% and 3.2%, respectively, of net income after the allocation of the fixed distribution paid to the Preferred OP unit holder.  Income allocated to other noncontrolling interests represents the income 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 and impairment write downs of depreciable real estate assets, 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 June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income attributable to common stockholders

 

$

22,413

 

$

10,609

 

$

42,627

 

$

18,910

 

 

 

 

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

Real estate depreciation

 

14,861

 

12,677

 

29,494

 

25,042

 

Amortization of intangibles

 

988

 

412

 

2,040

 

720

 

Joint venture real estate depreciation and amortization

 

1,828

 

2,057

 

3,602

 

4,132

 

Joint venture gain on sale of properties

 

 

(366

)

(5,429

)

(330

)

Distributions paid on Preferred Operating Partnership units

 

(1,437

)

(1,437

)

(2,875

)

(2,875

)

Income allocated to Operating Partnership noncontrolling interests

 

2,325

 

1,910

 

4,625

 

3,754

 

Funds from operations

 

$

40,978

 

$

25,862

 

$

74,084

 

$

49,353

 

 

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

 

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properties shown below. These results provide information relating to property-level operating changes without the effects of acquisitions or completed developments.

 

 

 

For the Three Months Ended
June 30,

 

Percent

 

For the Six Months Ended
June 30,

 

Percent

 

 

 

2012

 

2011

 

Change

 

2012

 

2011

 

Change

 

Same-store rental and tenant reinsurance revenues

 

$

68,549

 

$

64,232

 

6.7

%

$

134,969

 

$

126,711

 

6.5

%

Same-store operating and tenant reinsurance expenses

 

21,235

 

21,279

 

(0.2

)%

43,447

 

43,874

 

(1.0

)%

Same-store net operating income

 

$

47,314

 

$

42,953

 

10.2

%

$

91,522

 

$

82,837

 

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non same-store rental and tenant reinsurance revenues

 

$

19,743

 

$

7,664

 

157.6

%

$

37,724

 

$

13,699

 

175.4

%

Non same-store operating and tenant reinsurance expenses

 

$

6,201

 

$

2,815

 

120.3

%

$

12,433

 

$

5,179

 

140.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rental and tenant reinsurance revenues

 

$

88,292

 

$

71,896

 

22.8

%

$

172,693

 

$

140,410

 

23.0

%

Total operating and tenant reinsurance expenses

 

$

27,436

 

$

24,094

 

13.9

%

$

55,880

 

$

49,053

 

13.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store square foot occupancy as of quarter end

 

90.4

%

87.7

%

 

 

90.4

%

87.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties included in same-store

 

282

 

282

 

 

 

282

 

282

 

 

 

 

The increases in same-store rental revenues for the three and six months ended June 30, 2012, as compared to the three and six months ended June 30, 2011, was due primarily to a 2.7% increase in occupancy, an 11% decrease in discounts and an average increase of 3.0% in incoming rates to new tenants.  The decrease in same-store operating expenses was primarily due to reduced utility and office expenses.

 

CASH FLOWS

 

Cash flows provided by operating activities were $92,621 and $65,193, respectively, for the six months ended June 30, 2012 and 2011. The increase compared to the same period of the prior year primarily relates to a $24,606 increase in net income and an increase in depreciation and amortization of $5,473.  These increases were offset by a decrease in distributions from real estate ventures in excess of earnings of $4,983.

 

Cash used in investing activities was $65,915 and $95,635, respectively, for the six months ended June 30, 2012 and 2011.  The decrease relates primarily to a decrease of $37,386 in the amount of cash used to acquire real estate assets during 2012 compared to 2011, as well as reductions of cash used for the development and construction of real estate assets of $2,682, and investments in real estate ventures of $2,703.  These decreases were offset by a change in restricted cash of $9,264, and cash used to purchase notes receivable of $7,875.

 

Cash provided by financing activities for the six months ended June 30, 2012 was $132,312 compared to $18,879 for the six months ended June 30, 2011.  The change in cash provided by financing activities related to an increase of $114,166 in proceeds from the sale of common stock, increases in proceeds from notes payable and lines of credit of $61,795 over the same period of the prior year, and a decrease in cash paid for principal payments on notes payable and lines of credit of $45,624.  These were offset by an increase in cash used to repurchase exchangeable senior notes of $87,663, and an increase in dividends paid on common stock of $14,254.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2012, we had $185,502 available in cash and cash equivalents. We intend to use this cash to pay for future acquisitions, to repay debt 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 2011 and the first six months of 2012, 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.

 

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

 

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Table of Contents

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

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

 

10/31/2012

 

LIBOR plus 1.00% - 2.10%

 

(5)

 

Credit Line 2

 

 

74,000

 

2.4%

 

2/13/2009

 

2/13/2014

 

LIBOR plus 2.15%

 

(1,4,5)

 

Credit Line 3

 

 

75,000

 

2.4%

 

6/4/2010

 

5/31/2013

 

LIBOR plus 2.20%

 

(2,4,5)

 

Credit Line 4

 

 

40,000

 

2.4%

 

11/16/2010

 

11/16/2013

 

LIBOR plus 2.20%

 

(3,4,5)

 

Credit Line 5

 

 

50,000

 

2.4%

 

4/29/2011

 

5/1/2014

 

LIBOR plus 2.15%

 

(3,4,5)

 

 

 

$

100,000

 

$

339,000

 

 

 

 

 

 

 

 

 

 

 

 


(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

 

As of June 30, 2012, we had $1,308,003 of debt, resulting in a debt to total capitalization ratio of 28.3%.  As of June 30, 2012, the ratio of total fixed-rate debt and other instruments to total debt was 82.0% (including $519,874 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 June 30, 2012 was 4.5%.  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 June 30, 2012.

 

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, property acquisitions, principal payments under our borrowings and non-recurring capital expenditures. We may from time to time seek to repurchase shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, 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.

 

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.

 

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Table of Contents

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth information on payments due by period as of June 30, 2012:

 

 

 

Payments due by Period:

 

 

 

 

 

Less Than

 

 

 

 

 

After

 

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years

 

Operating leases

 

$

63,912

 

$

7,376

 

$

13,873

 

$

7,545

 

$

35,118

 

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

 

 

 

 

 

 

 

 

 

 

 

Interest

 

358,794

 

58,569

 

100,053

 

59,403

 

140,769

 

Principal

 

1,308,003

 

167,095

 

251,794

 

486,794

 

402,320

 

Total contractual obligations

 

$

1,730,709

 

$

233,040

 

$

365,720

 

$

553,742

 

$

578,207

 

 

At June 30, 2012, the weighted-average interest rate for all fixed-rate loans was 5.1%, and the weighted-average interest rate for all variable-rate loans was 2.0%.

 

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.

 

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 we 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.

 

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Table of Contents

 

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 June 30, 2012, we had approximately $1.3 billion in total debt, of which $235.6 million was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to change by 100 basis points, the effect on interest expense on the variable-rate debt (excluding variable-rate debt with interest rate floors) would affect future earnings and cash flows by approximately $2.1 million annually.

 

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

 

The fair value of the Company’s note receivable from Preferred Operating Partnership unit holder is based on the discounted estimated future cash flows of the note (categorized within Level 3 of the fair value hierarchy); the discount rate used approximates the current market rate for loans with similar maturities and credit quality.  The fair values of the Company’s fixed-rate notes payable, notes payable to trusts and exchangeable senior notes, were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

 

The fair values of our note receivable from Preferred Operating Partnership unit hold, our fixed-rate notes payable and notes payable to trusts, and exchangeable senior notes are as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

Note receivable from Preferred Operating Partnership unit holder

 

$

106,421

 

$

100,000

 

$

104,049

 

$

100,000

 

Fixed-rate notes payable and notes payable to trusts

 

$

1,148,576

 

$

1,072,355

 

$

1,008,039

 

$

938,681

 

Exchangeable senior notes

 

$

 

$

 

$

92,265

 

$

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 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.

 

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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 2011 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. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

10.1

 

Membership Interest Purchase Agreement, dated as of April 13, 2012, between Extra Space Properties Sixty Three LLC and PRISA III Co-Investment LLC (incorporated by reference to the Company’s Form 8-K filed on April 16, 2012).

 

 

 

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 June 30, 2012 are formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (4) the Condensed Consolidated Statement of Equity, (5) the Condensed Consolidated Statements of Cash Flows and (6) notes to these financial statements.

 


* 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, as amended, 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.  Signed originals of these certifications have been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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SIGNATURES

 

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

 

 

EXTRA SPACE STORAGE INC.

 

Registrant

 

 

Date: August 8, 2012

/s/ Spencer F. Kirk

 

Spencer F. Kirk

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: August 8, 2012

/s/ P. Scott Stubbs

 

P. Scott Stubbs

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

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