EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, managing, acquiring, and developing self-storage facilities. As of September 30, 2008, the Company owned or had interests in 617 facilities in 33 states and D.C., and managed an additional 67 properties for third parties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 9.4% for the quarter and 16.5% for the nine-month period compared to 2007. This was driven by acquisitions, rental rate increases at stabilized properties, and higher occupancy at lease-up properties.
• Expense Increases: Total expenses rose 10.7% (quarter) and 18.0% (nine months). Increases were primarily due to property operations costs associated with new acquisitions and higher utility/snow removal costs.
• Investment Portfolio: The Company liquidated its holdings of auction rate securities (ARS) in February 2008, recognizing a $1.4 million loss on sale. Consequently, interest income decreased significantly compared to the prior year.
• Joint Ventures: Equity in earnings of real estate ventures increased 54.5% for the quarter, largely due to increasing the Company's interest in the VRS Self Storage LLC joint venture from 5% to 45% in July 2008.
• Capital Structure: In May 2008, the Company completed a public offering of 14.95 million shares, raising net proceeds of approximately $232.7 million, significantly boosting cash reserves.

Guidance, Outlook, and Risks

• Outlook: Management anticipates generally stable self-storage fundamentals in core markets. They expect to increase revenues for the remainder of 2008 through rental rate increases and active revenue management, despite flat rental activity and slightly increased vacates.
• Liquidity: The Company holds $112.1 million in cash, bolstered by recent equity offerings. However, due to REIT distribution requirements (90% of taxable income), substantial cash balances are unlikely to be maintained. Future liquidity needs will be met through operating cash flow, the $100 million credit line (currently undrawn), and external capital markets.
• Risks:
  • Credit Markets: Significant disruptions in credit markets may increase borrowing costs, limit refinancing options, and hinder acquisition capabilities.
  • Competition: New facilities and storage alternatives could pressure rents and occupancy rates.
  • Economic Conditions: General economic downturns, inflation, and energy costs could adversely affect tenant ability to pay and overall demand.
• Subsequent Events: Following the quarter-end, the Company sold 3.0 million shares for ~$44.1 million, acquired six properties in New York and Indiana, and repurchased ~$40.3 million of exchangeable senior notes.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that $282.6 million in principal payments are due within one year.
• Interest Rate Exposure: Confirm the impact of variable rate debt ($110.7 million) on future earnings given potential LIBOR fluctuations.
• Same-Store Performance: Review same-store stabilized property results (86.0% occupancy, 1.9% revenue growth YTD) to gauge organic growth independent of acquisitions.
• Capital Expenditures: Assess the $42.1 million spent on development and construction during the nine-month period against future development pipeline needs.
• Joint Venture Guarantees: Review the $18.0 million in guaranteed construction loans for unconsolidated partnerships and the associated risk of default.