Extra Space Storage Inc. annual report, FY2010

Extra Space Storage Inc. — Fiscal 2010 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2010, with comparative results for 2009 and 2008. Extra Space Storage is a self-administered and self-managed REIT focused on owning, operating, managing, acquiring and developing self-storage facilities through its UPREIT structure.

At year-end, the Company owned interests in 660 operating properties, including 295 wholly owned and 365 held through joint ventures.
It managed an additional 160 properties for franchisees or third parties, for a total of 820 owned or managed properties in 34 states and Washington, D.C.
The portfolio comprised approximately 59 million rentable square feet, 550,000 units and more than 425,000 tenants.
The Company operates through rental operations, property management/acquisition/development and tenant reinsurance.

Financial performance and key metrics

Metric	2010	2009	Change
Total revenue	$281.5 million	$280.1 million	0.5%
Property rental revenue	$232.4 million	$238.3 million	(2.4%)
Management and franchise fees	$23.1 million	$21.0 million	10.3%
Tenant reinsurance revenue	$25.9 million	$20.9 million	23.9%
Income from operations	$90.8 million	$71.9 million	26.3%
Net income	$33.4 million	$39.1 million	(14.6%)
Net income attributable to common stockholders	$26.3 million	$32.0 million	(17.7%)
Basic and diluted EPS	$0.30	$0.37	$(0.07)
Funds from operations	$83.7 million	$90.3 million	(7.3%)
Operating cash flow	$104.8 million	$81.2 million	28.9%

Reported operating margin was approximately 32.3%, compared with 25.7% in 2009. Net income attributable to common stockholders represented approximately 9.4% of revenue, compared with 11.4% in 2009. The filing does not provide a company-defined net profit margin or adjusted EBITDA measure.

Same-store stabilized net operating income increased 3.9% to $147.8 million, with same-store revenue up 2.1% and expenses down 1.1%.
Same-store square-foot occupancy increased to 84.8% from 82.9%.
Total stabilized-property occupancy was 83.5%, compared with 81.6% on a pro forma basis at December 31, 2009.
Average annual rent per square foot at stabilized properties was $13.49, compared with $13.46 in 2009.
Cash dividends paid increased to $0.40 per share from $0.38 per share.

Balance sheet, debt and liquidity

Total assets were $2.25 billion, down from $2.41 billion at December 31, 2009.
Net real estate assets were $1.97 billion, compared with $2.05 billion in 2009.
Total debt, including notes payable, trust obligations, exchangeable senior notes and credit lines, was approximately $1.25 billion.
Debt-to-total-capitalization was 44.1%; the weighted-average interest rate was 4.7%.
Approximately 34.4% of debt, or $429.9 million, was subject to variable interest rates, excluding debt with interest-rate swaps. A 100-basis-point change in applicable rates was estimated to affect annual earnings and cash flow by approximately $3.4 million.
Cash and cash equivalents were $46.8 million, down from $132.0 million at year-end 2009.
Credit-line borrowings totaled approximately $170.5 million at year-end: $100.0 million on the primary line, $30.0 million on the second line, $25.5 million on the third line and $15.0 million on the fourth line.
Contractual obligations totaled $1.62 billion, including $292.9 million of debt principal due in 2011 and $257.8 million due in 2012–2013.
Management stated that operating cash flow would not be sufficient to fund all liquidity needs and expected to rely on secured or unsecured borrowings, joint ventures and equity or debt offerings.

Material changes versus the prior comparable period

Revenue was essentially flat because lower property rental revenue offset growth in management fees and tenant reinsurance.
Property rental revenue declined primarily because 19 properties were contributed to a new unconsolidated joint venture and five properties were deconsolidated under revised VIE accounting guidance.
Management and franchise fee revenue increased as managed third-party properties grew to 160 from 124.
Tenant reinsurance revenue increased as customer participation rose to approximately 60% from 54% and the operated property count increased to 820 from 766.
Total expenses declined 8.4% to $190.7 million. The prior-year period included $18.9 million of development impairment charges and $2.2 million of severance costs; 2010 included a $2.0 million loss on a Memphis office sublease following a tenant bankruptcy.
Income from operations improved substantially despite lower revenue, but net income and FFO declined because 2009 included a $27.9 million gain on repurchase of exchangeable senior notes that did not recur.
Cash flow from operations increased, while financing cash flow shifted from a $91.2 million inflow in 2009 to a $106.3 million outflow in 2010, primarily because of lower debt proceeds and higher principal repayments.
The Company acquired 15 wholly owned properties and completed four wholly owned development projects during 2010.
Adoption of amended ASC 810 guidance resulted in deconsolidation of five joint ventures effective January 1, 2010.

Outlook, management commentary, risks and unusual items

The Company announced a wind-down of development activities in 2009. Six development projects remained in process at December 31, 2010 and were expected to be completed by the end of 2011.
Management intended to focus on proactive revenue management, expansion of third-party management and selective acquisitions from strategic partners and third parties.
No quantitative earnings, revenue or FFO guidance was provided in the filing.
A $82.2 million, 10-year CMBS loan at a fixed 5.8% interest rate was completed on January 18, 2011; proceeds were intended for general corporate purposes and debt repayment.
Key operating risks include competition and new supply, pressure on rents and occupancy, month-to-month lease turnover, economic weakness, rising operating costs and interest rates, and difficulty refinancing or accessing capital markets.
Real estate, environmental, insurance, regulatory, ADA compliance and REIT qualification risks could increase costs or reduce cash available for distribution.
The Company guaranteed approximately $13.5 million of loans for unconsolidated joint ventures. Management assessed the risk of loss as remote and recorded no liability.
The Company reported no material litigation and stated that it was in compliance with all financial covenants at year-end.

Important facts for investors to verify

Reconcile the debt maturity schedule, particularly the $292.9 million of principal due in 2011, against available cash, credit-line capacity and the subsequent $82.2 million CMBS financing.
Assess the sustainability of earnings and FFO excluding the nonrecurring 2009 debt-repurchase gain and the 2009 development impairment charges.
Monitor occupancy, rental-rate growth and new supply in the Company’s major markets, including the performance of lease-up and managed properties.
Review the effect of joint-venture deconsolidations and the Company’s guarantees and maximum exposure to unconsolidated ventures.
Evaluate sensitivity to variable-rate debt, refinancing conditions and potential dilution from future equity or equity-linked financing.
Confirm future development spending and completion timing for the six remaining projects.
Review REIT distribution requirements, taxable REIT subsidiary taxes and the Company’s ability to maintain REIT qualification.