EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A fully-integrated, self-administered, and self-managed Real Estate Investment Trust (REIT) owning, operating, managing, acquiring, and developing self-storage facilities. As of March 31, 2007, the Company had interests in 571 facilities across 32 states and Washington, D.C., with approximately 46 million square feet of space.

Key Financial Metrics

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

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.5% to $53.8 million. Property rental revenue rose 18.0% ($46.2M vs $39.2M), driven by acquisitions ($4.7M), rental rate increases at stabilized properties ($1.9M), and occupancy gains at lease-up properties ($0.4M). Tenant insurance revenue surged 132.7% due to the rollout of a captive insurance program at all wholly-owned properties in late 2006.
• Profitability: Net income increased significantly to $6.5 million from $0.7 million, primarily due to higher operating income and increased interest income ($1.4M vs $0.5M) from short-term investments.
• Debt Structure: Total debt increased to $1.24 billion. This includes the issuance of $250 million in 3.625% Exchangeable Senior Notes in March 2007. Interest expense rose 11.8% to $13.4 million.
• Same-Store Performance: Same-store stabilized rental revenues increased 5.8%, and same-store net operating income (NOI) increased 8.4%. Same-store occupancy remained stable at 84.7% (vs 84.6% in 2006).

Guidance, Outlook, and Risks

Outlook: Management anticipates generally positive self-storage fundamentals in core markets for the remainder of 2007. While rental activity was flat compared to Q1 2006, the Company successfully raised revenues through rate increases. The Company expects to grow revenues in 2007, supported by revenue management systems and marketing initiatives. Property taxes are identified as the primary driver of future expense increases due to reassessments on acquired properties.

Liquidity: The Company maintains $35.1 million in cash and $286.4 million in short-term investments (primarily auction rate securities). It has a $100 million revolving credit facility with approximately $81 million available. Long-term liquidity needs will be funded through operating cash flow, borrowings, and equity/debt offerings.

Risks and Contingencies:

• Market Risks: Exposure to general economic conditions, competition from new facilities, and interest rate fluctuations (93% of debt is fixed rate).
• Operational Risks: Difficulties in integrating acquisitions, delays in development, and regulatory changes affecting REITs.
• Guarantees: The Company guarantees $13.1 million in construction loans for unconsolidated joint ventures; management believes the risk of default is remote.
• Forward-Looking Statements: Actual results may differ due to risks including war, terrorism, and changes in the regulatory environment.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of principal payments, noting $14.0 million due within one year and significant maturities in 2008-2009.
• Short-Term Investments: Confirm the liquidity status of the $286.4 million in auction rate securities (ARS) and variable rate demand notes, as these may be subject to market freezes.
• Contingent Conversion Shares (CCS): Monitor the conversion of CCS and CCUs based on the performance of 14 specific pre-stabilized properties, which recently triggered the conversion of 448,001 CCSs.
• Property Tax Exposure: Assess the impact of property tax reassessments on future operating margins, particularly for recently acquired assets.
• Acquisition Pipeline: Review the status of the 17 development projects in the pipeline for 2007-2008 and the $12.5 million acquisition of a facility in Annapolis, MD, completed in April 2007.