Business Context and Reporting Period
Company: Extra Space Storage Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 September 30, 2007, the Company held interests in 585 facilities across 33 states and Washington, D.C., comprising approximately 43 million square feet of space.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Total Revenues | $63,826 | $174,152 | $145,089 |
| Net Income | $11,338 | $26,503 | $8,137 |
| Net Income Available to Common Stockholders | $9,828 | $24,993 | $8,137 |
| Funds From Operations (FFO) | $20,799 | $55,985 | $38,836 |
| Diluted EPS | $0.15 | $0.38 | $0.16 |
| Cash Flow from Operating Activities | N/A | $78,852 | $60,716 |
| Cash Flow from Investing Activities | N/A | ($221,007) | ($158,146) |
| Cash Flow from Financing Activities | N/A | $113,184 | $220,463 |
| Total Debt (Notes Payable + Exchangeable Notes) | $1,152,930 | $1,152,930 | $828,584 |
| Cash and Cash Equivalents | $41,830 | $41,830 | $70,801 |
Note: Debt figures include Notes Payable ($902,930) and Exchangeable Senior Notes ($250,000). Notes Payable to Trusts ($119,590) are also outstanding.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 24.7% ($12.6M) for the three months and 20.0% ($29.1M) for the nine months ended September 30, 2007, compared to the prior year. This was driven primarily by property rental revenue increases due to acquisitions, rate hikes, and occupancy improvements.
- Tenant Insurance: Tenant insurance revenue surged 322.8% in the quarter and 201.3% year-to-date following the introduction of a captive insurance program in October 2006.
- Profitability: Net income available to common stockholders more than doubled year-over-year for the nine-month period ($24.99M vs. $8.14M), aided by higher operating income and interest income.
- Acquisitions: The Company acquired 31 properties during the nine months ended September 30, 2007, with total consideration of $306.8 million. Significant acquisitions included a portfolio of 8 properties in California and Hawaii from AAAAA Rent-A-Space.
- Debt Structure: In March 2007, the Company issued $250 million of 3.625% Exchangeable Senior Notes due 2027. Total debt increased significantly to support acquisitions and development.
Guidance, Outlook, and Risks
- Outlook: Management reports a generally positive climate for self-storage. While rental activity was flat compared to Q3 2006, the Company successfully raised same-store and overall portfolio revenue through rate increases. Competition remains a factor, but the Company expects to grow revenues through revenue management systems and property quality.
- Dividends: On October 29, 2007, the Board approved an increase in the annual dividend to $1.00 per share ($0.25 quarterly), effective Q4 2007.
- Liquidity: The Company maintains a $100 million revolving credit line (renewed October 2007) and holds approximately $91 million in cash and short-term investments. Long-term liquidity needs are expected to be met through operating cash flow, borrowings, and equity/debt offerings.
- Risks: Key risks include changes in general economic conditions, competition from new facilities, potential liability for uninsured losses, difficulties in financing acquisitions, and regulatory changes affecting REITs.
- Unusual Items: A one-time fair value adjustment of $1.054 million was recorded related to the Preferred Operating Partnership units following an amendment to the Contribution Agreement in September 2007.
Investor Verification Checklist
- Debt Covenants: Verify compliance with restrictive covenants on approximately $1.3 billion of outstanding debt.
- Preferred OP Units: Review the terms of the $137.8 million Preferred OP Units issued in the AAAAA Rent-A-Space acquisition, specifically the 5% fixed priority return and redemption options.
- Contingent Conversion: Monitor the performance of the 14 early-stage lease-up properties tied to Contingent Conversion Shares (CCS) and Units (CCU), as their conversion dilutes existing shareholders.
- Interest Rate Exposure: Assess the impact of variable rate debt ($92.9 million) on future earnings, noting a 100 basis point LIBOR change would impact annual earnings by approximately $0.9 million.
- Same-Store Performance: Verify the sustainability of the 2.9% same-store rental revenue growth and 86.8% stabilized occupancy rate.