EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Extra Space Storage is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and developing self-storage facilities. As of March 31, 2009, the Company owned or had interests in 628 operating facilities and managed an additional 70 properties for third parties, totaling 698 properties across 33 states and Washington, D.C.

Key Financial Metrics

Note: Debt figures include Notes Payable, Notes Payable to Trusts, Exchangeable Senior Notes, and Line of Credit.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.4% to $69.3 million, driven by a 4.2% increase in property rental revenue and a 32.8% increase in tenant reinsurance revenue. Property rental growth was aided by acquisitions and lease-up properties, partially offset by a decline in occupancy at stabilized properties.
• Profitability Surge: Net income attributable to common stockholders increased significantly from $5.7 million to $29.0 million. This was primarily due to a $22.5 million non-cash gain on the repurchase of exchangeable senior notes in March 2009.
• Expense Increases: Total expenses rose 9.7% to $48.0 million. Property operations expenses increased 10.8% due to new acquisitions and higher property taxes/utilities. General and administrative expenses rose 10.5% due to increased income taxes and management of a larger property portfolio.
• Same-Store Performance: On a same-store stabilized basis, rental revenues were flat (-0.1%) and Net Operating Income (NOI) decreased 0.5%. Same-store occupancy declined to 81.3% from 83.7% in the prior year.

Guidance, Outlook, and Risks

Dividend Policy Modification

On April 6, 2009, the Company announced it does not expect to distribute dividends in the second or third quarters of 2009. To satisfy REIT distribution requirements, the Company expects to pay an estimated fourth-quarter dividend of $0.24 to $0.30 per share, utilizing a combination of approximately 10% cash and 90% common stock under IRS Revenue Procedure 2009-15.

Liquidity and Capital Resources

The Company holds $54.5 million in cash and cash equivalents. It has a $100 million revolving line of credit, of which $100 million was drawn as of March 31, 2009. Management notes that liquidity needs will be met through operating cash flow, the credit line, and external capital sources, though credit market disruptions may impact financing terms.

Risks and Contingencies

• Credit Market Disruption: Significant dislocations in credit markets may increase borrowing costs or limit access to capital for acquisitions and development.
• Economic Conditions: General economic downturns may reduce occupancy rates and rental demand.
• Guarantees: The Company guarantees construction loans for two unconsolidated joint ventures totaling $12.8 million, though management believes the risk of default is remote.
• Management Change: Spencer F. Kirk succeeded Kenneth M. Woolley as Chairman and CEO on April 1, 2009.

Investor Verification Checklist

• Debt Repurchase Gain: Verify the impact of the $22.5 million gain on the repurchase of exchangeable senior notes on net income, noting this is a non-recurring item.
• Dividend Structure: Confirm the implications of the proposed 90% stock/10% cash dividend structure for the fourth quarter on shareholder liquidity and tax status.
• Occupancy Trends: Monitor the decline in same-store occupancy (81.3% vs. 83.7%) and its potential impact on future rental revenue growth.
• Debt Maturities: Review the $159.4 million in principal debt payments due within one year and the Company's ability to refinance or repay using the fully drawn credit line.
• FFO vs. Net Income: Compare Funds From Operations ($42.9 million) against Net Income to assess core operating performance excluding the debt repurchase gain.