EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc. (EXR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Extra Space Storage is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and managing self-storage facilities. As of December 31, 2009, the Company owned or had ownership interests in 642 operating properties and managed an additional 124 properties for third parties, totaling 766 properties across 33 states and Washington, D.C. The portfolio contains approximately 55 million square feet of rentable space.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.6% to $280.5 million, driven by a 30.1% increase in tenant reinsurance revenue and acquisitions, partially offset by a 2.9% decrease in same-store rental revenues due to lower occupancy and incoming rental rates.
• Operating Expenses: Total expenses increased 15.4% to $208.6 million. This was primarily due to a one-time $18.9 million impairment charge related to the wind-down of the development program and $2.2 million in severance costs.
• Net Income Decline: Net income attributable to common stockholders decreased 10.6% to $32.0 million, impacted by the development impairment charges and higher interest expense, despite a $27.9 million gain on the repurchase of exchangeable senior notes.
• Dividend Reduction: Cash dividends paid per share dropped significantly from $1.00 in 2008 to $0.38 in 2009, reflecting the challenging economic environment and reduced cash flow.
• Debt Increase: Total indebtedness increased by approximately $120 million to $1.407 billion, with a debt-to-total-capitalization ratio of 57.1%.

Guidance, Outlook, and Risks

• Development Wind-Down: On June 2, 2009, the Company announced the wind-down of its development activities. As of year-end, ten development projects remained in the pipeline, with the Company recording significant impairment charges on undeveloped land and projects.
• Strategic Focus: Management is shifting focus to maximizing performance of existing properties, expanding the management business (generating fees on third-party properties), and selective acquisitions.
• Liquidity and Credit Markets: The Company highlighted significant disruptions in credit markets, which have widened spreads and made financing less attractive. The Company maintains $132 million in cash and has access to $150 million in credit lines (with $100 million drawn on the primary line).
• Key Risks:
  • Economic Conditions: Adverse economic conditions may lower occupancy and rental rates.
  • Competition: Increased supply in certain markets limits revenue growth.
  • Debt Refinancing: The Company relies on refinancing existing debt and external capital sources to meet liquidity needs and fund distributions required to maintain REIT status.
  • Interest Rate Risk: Approximately 21.6% of debt is subject to variable interest rates.

Investor Verification Checklist

• Development Impairment: Verify the magnitude of the $18.9 million impairment charge and the status of the remaining 10 development projects.
• Dividend Sustainability: Assess the ability to maintain or restore dividend levels given the reduction to $0.38 per share and the requirement to distribute 90% of taxable income to maintain REIT status.
• Debt Maturities: Review the schedule of debt maturities, noting $179 million due in 2010, and the Company's ability to refinance in a tight credit market.
• Same-Store Performance: Monitor same-store stabilized property results, which showed a 2.9% revenue decline and 4.3% net operating income decline in 2009.
• Joint Venture Exposure: Evaluate the financial health of joint venture partners, as the Company relies on them for equity capital in many properties.