EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc. (ESS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: ESS is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and developing self-storage facilities. As of March 31, 2008, the Company owned or had interests in 607 facilities across 33 states and D.C., and managed an additional 47 properties for third parties.

Key Financial Metrics

Note: All figures in thousands except per share data and percentages.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22.2% to $65.7 million, driven primarily by a 23.3% increase in property rental revenue ($57.0 million). This growth was attributed to acquisitions completed in 2007 ($9.3 million impact), rental rate increases at stabilized properties, and higher occupancy at lease-up properties.
• Expense Increases: Total expenses rose 20.9% to $43.7 million. Property operations expenses increased 22.2% due to new acquisitions and higher costs for snow removal and insurance. Depreciation and amortization increased 31.7% due to the expanded property portfolio.
• Investment Loss: The Company recognized a $1.4 million loss on the sale of investments available for sale (auction rate securities) in February 2008, following a liquidity freeze in the credit markets. This was a non-recurring item not present in the prior year.
• Interest Expense: Interest expense increased 22.1% to $16.4 million, largely due to the issuance of $250 million in exchangeable senior notes in March 2007 and new loans for 2007 acquisitions.
• Same-Store Performance: Same-store stabilized rental revenues increased 2.5% year-over-year, with occupancy remaining flat at 84.5%.

Guidance, Outlook, and Risks

Outlook: Management anticipates generally positive self-storage fundamentals in core markets for 2008. While rental activity was flat compared to Q1 2007, the Company expects to grow revenues through rental rate increases and yield management. Property taxes are identified as a primary driver of future expenses.

Liquidity and Capital Resources:

• Cash on hand is $21.0 million, intended for acquisitions and working capital.
• The Company maintains a $100 million revolving line of credit with no outstanding balance as of March 31, 2008.
• As a REIT, the Company must distribute at least 90% of net taxable income, limiting retained cash for liquidity needs.

Risks and Contingencies:

• Market Risk: Exposure to interest rate fluctuations; a 100 basis point change in LIBOR would impact annual interest expense by approximately $1.3 million.
• Guarantees: The Company guarantees $17.9 million in construction loans for unconsolidated joint ventures. Management believes the risk of default is remote.
• Legal: No material litigation is currently pending.
• Forward-Looking Statements: Risks include economic conditions, competition, credit market disruptions, and regulatory changes affecting REITs.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that $71.5 million in principal is due within one year.
• Same-Store Metrics: Confirm the 2.5% revenue growth in the same-store portfolio is sustainable given flat rental activity.
• Interest Rate Exposure: Assess the impact of rising LIBOR on the $127 million of variable-rate debt.
• Dividend Coverage: Review FFO ($17.9 million) against dividend payments ($16.6 million) to ensure coverage ratios remain healthy.
• Contingent Conversion: Monitor the performance of the 14 properties tied to Common Contingent Shares (CCS) and Units (CCU), as 348,274 CCSs and 17,915 CCUs became eligible for conversion in May 2008.