Business Context and Reporting Period
Company: Extra Space Storage Inc. (EXR)
Filing Type: Form 8-K (Current Report)
Date of Report: January 17, 2007
Reporting Period: The filing provides unaudited pro forma financial information for the nine months ended September 30, 2006, and the year ended December 31, 2005. It details the completion of 25 property acquisitions during 2006, with 20 acquired in the first nine months and five thereafter.
Key Financial Metrics (Pro Forma)
The following metrics reflect the company's historical results adjusted to include the 25 acquired properties as if they were owned from January 1, 2005.
| Metric (in thousands) | Nine Months Ended Sept 30, 2006 | Year Ended Dec 31, 2005 |
|---|---|---|
| Total Revenues | $152,654 | $151,235 |
| Total Expenses | $107,499 | $114,555 |
| Net Income (Loss) | $9,083 | $(4,969) |
| Basic EPS | $0.17 | $(0.14) |
| Diluted EPS | $0.15 | $(0.14) |
Balance Sheet Highlights (as of Sept 30, 2006 Pro Forma):
- Total Assets: $1,669,165
- Net Real Estate Assets: $1,406,200
- Cash and Cash Equivalents: $116,050
- Total Liabilities: $982,551
- Notes Payable: $825,604
- Notes Payable to Trusts: $119,590
Material Changes and Acquisition Details
The primary material change is the acquisition of 25 self-storage properties in 2006. No single property was individually significant under Regulation S-X Rule 3-14. The pro forma adjustments include:
- Revenue Impact: The acquisitions added approximately $7.56 million in revenue for the nine months ended September 30, 2006, and $16.51 million for the full year 2005.
- Expense Impact: Property operations expenses increased by $2.71 million (9 months) and $7.19 million (full year 2005). Depreciation and amortization increased by $2.32 million (9 months) and $5.48 million (full year 2005).
- Debt Assumption: The pro forma statements reflect the assumption of debt totaling approximately $43.7 million across the acquired properties (comprising assumed debt and new debt), with interest rates ranging from 5.43% to 7.00%.
- Management Fees: Adjustments were made to eliminate third-party management fees paid prior to acquisition, as the properties are now self-managed by EXR.
Outlook, Risks, and Unusual Items
Management Commentary: Management states that the pro forma information is not necessarily indicative of actual future results. The filing notes that five properties acquired in November 2006 were not audited due to immateriality and the burden of incomplete records, though management believes this absence is not material to the understanding of financial results.
Risks and Contingencies:
- Pro Forma Limitations: The financial data is unaudited and based on assumptions that may not reflect actual future performance.
- Unaudited Acquisitions: 16 of the 25 properties were not audited; their financial data is unaudited.
- Related Party Transactions: One property (Extra Space Development, LLC) was owned by certain shareholders of the REIT prior to acquisition, though the transaction was not deemed a typical related party transaction.
Investor Verification Checklist
- Acquisition Costs: Verify the total cash outlay for the 25 properties, specifically the $13.1 million (Neptune, NJ) and $22.5 million (4-property portfolio) transactions noted in the notes.
- Debt Servicing: Confirm the impact of the new and assumed debt ($43.7 million total) on future interest coverage ratios, noting rates between 5.43% and 7.00%.
- Unaudited Data: Review the unaudited financial statements for the 16 non-audited properties to assess potential variances in revenue and expense recognition.
- Pro Forma Adjustments: Scrutinize the elimination of third-party management fees and the specific depreciation/amortization assumptions (39-year life for real estate, 18 months for intangibles).
- Liquidity: Monitor the reduction in cash and cash equivalents from $151.7 million (historical) to $116.1 million (pro forma) due to acquisition funding.