EXR

Business Context and Reporting Period

Company: Extra Space Storage Inc. (EXR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Extra Space Storage is a self-administered and self-managed Real Estate Investment Trust (REIT) owning, operating, and developing self-storage facilities. As of December 31, 2006, the Company held ownership interests in 567 properties (219 wholly-owned, 348 joint ventures) across 32 states and Washington, D.C., totaling approximately 41 million square feet. Additionally, the Company managed 74 third-party properties, bringing the total managed portfolio to 641 properties. The Company operates in two segments: property management/development and rental operations.

Key Financial Metrics

Note: All dollar amounts are in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 46.4% to $197.3 million, driven primarily by the full-year impact of the Storage USA (SUSA) acquisition completed in July 2005, which added 61 wholly-owned properties and significant joint venture interests. Property rental revenue rose 41.7%.
• Profitability: The Company returned to profitability with Net Income of $14.9 million in 2006, compared to a Net Loss of $5.0 million in 2005. This turnaround was aided by increased rental rates, higher occupancy at lease-up properties, and the stabilization of acquired assets.
• Expense Increases: Total expenses rose 34.4% to $137.6 million. General and administrative expenses increased 47.8% due to the costs of managing the expanded portfolio and integrating SUSA. Interest expense increased 19.8% primarily due to debt assumed in the SUSA acquisition.
• Same-Store Performance: Same-store stabilized rental revenues increased 6.6% for the year, with same-store net operating income rising 7.9%. Year-end same-store occupancy was 85.5%, up slightly from 85.4% in 2005.

Guidance, Outlook, and Risks

Outlook: Management anticipates continued strength in self-storage fundamentals and expects to increase revenues in 2007. The Company plans to utilize its cash on hand and credit facility to purchase additional properties in the first two quarters of 2007. The development pipeline through 2009 includes 27 projects.

Key Risks and Contingencies:

• Competition: Increased development in the industry has led to pricing pressure and discounting in certain markets.
• Debt and Interest Rates: The Company has approximately $948.2 million in debt. While 91% is fixed-rate, a 100 basis point increase in variable rates would increase interest expense by approximately $0.9 million annually.
• REIT Qualification: The Company must distribute at least 90% of its net taxable income to maintain REIT status and avoid corporate income tax.
• Joint Ventures: A significant portion of the portfolio (348 properties) is held in joint ventures, subjecting the Company to risks related to co-venturer financial conditions and decision-making authority.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that a significant portion of notes payable matures between 2008 and 2011, requiring refinancing or repayment.
• Joint Venture Terms: Review the specific profit-sharing and buy-sell rights in the 348 joint venture properties to understand the Company's exposure and upside potential.
• Same-Store Trends: Monitor same-store occupancy and rental rate trends in weaker performing markets (e.g., Detroit, Philadelphia, Southern New Jersey) mentioned in the outlook.
• Contingent Conversion Shares (CCS): Note that 52,349 CCSs became eligible for conversion in early 2007 based on the performance of 14 specific lease-up properties, which could impact share count.
• Capital Expenditures: Assess the impact of ongoing capital improvements to SUSA properties and new development projects on future cash flows.