Extra Space Storage Inc. quarterly report, Q2 FY2011

Extra Space Storage Inc. — Q2 2011 Form 10-Q Summary

Business context and reporting period

Extra Space Storage Inc. is a self-administered and self-managed REIT that owns, operates, acquires, develops and manages self-storage facilities. The filing covers the three and six months ended June 30, 2011, with prior-period comparisons to June 30, 2010.

At June 30, 2011, the company owned or held interests in 680 operating properties and managed 180 additional properties, for 860 properties across 34 states and Washington, D.C.
The portfolio comprised approximately 62 million square feet and more than 560,000 units. The company had 94.3 million common shares outstanding as of July 30, 2011.
The company continues to wind down development activities; one development project remained in process and was expected to be completed by year-end 2011.

Financial performance and key metrics

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Total revenue	$78.0 million	$68.8 million	$152.5 million	$136.4 million
Income from operations	$25.9 million	$22.8 million	$49.9 million	$43.7 million
Operating margin	33.1%	33.2%	32.7%	32.0%
Net income attributable to common stockholders	$10.6 million	$6.2 million	$18.9 million	$9.7 million
Diluted EPS	$0.12	$0.07	$0.21	$0.11
Funds from operations	$25.9 million	$20.3 million	$49.4 million	$37.7 million
Cash flow from operations	Not provided for quarter	Not provided for quarter	$65.2 million	$46.1 million

Q2 revenue increased 13.5%; six-month revenue increased 11.8%.
Q2 net income attributable to common stockholders increased 71.3%; six-month net income increased 94.0%.
Q2 diluted EPS increased from $0.07 to $0.12, while six-month diluted EPS increased from $0.11 to $0.21.
Same-store revenue increased 4.7% in Q2 and 4.4% for the six-month period. Same-store net operating income increased 7.8% and 6.8%, respectively.
Same-store square-foot occupancy was 89.0% at June 30, 2011, compared with 86.1% on a pro forma basis at June 30, 2010. Total stabilized-property occupancy was 86.5%, compared with 83.7%.
FFO per diluted share is not clearly provided in the filing text; aggregate FFO was $25.9 million for Q2 and $49.4 million for six months.

Balance sheet, debt and liquidity

Total assets were $2.31 billion at June 30, 2011, compared with $2.25 billion at December 31, 2010. Net real estate assets were $2.05 billion.
Cash and cash equivalents were $35.2 million, with restricted cash of $32.7 million.
Total debt, including notes payable, notes payable to trusts, exchangeable senior notes and lines of credit, was approximately $1.19 billion. Debt to total capitalization was 36.5%.
Weighted-average debt interest rate was 4.8%; 71.0% of total debt was fixed-rate or treated as fixed-rate through interest-rate swaps.
Credit facilities had $129.0 million drawn and $315.0 million of total capacity. A $100.0 million facility matured October 31, 2011, with a one-year extension available.
Contractual obligations totaled $1.58 billion, including $1.19 billion of principal and $319.3 million of interest. Principal due within one year totaled $243.4 million.
Management expected to fund operating expenses, recurring capital expenditures, dividends, distributions and debt service through operating cash flow, cash on hand and borrowings. It also expected to pursue additional secured term loans.
The company was in compliance with all financial covenants at June 30, 2011.

Material changes versus the prior comparable period

Property rental revenue increased 13.2% in Q2 and 11.4% for six months, driven by acquisitions, higher occupancy, rental-rate increases and lease-up properties.
Management and franchise fees increased 8.7% in Q2 and 8.1% for six months, supported by growth in third-party managed properties from 140 to 180.
Tenant reinsurance revenue increased 19.8% in Q2 and 19.5% for six months, partly reflecting customer participation rising from approximately 59% to 64%.
Operating expenses increased 13.5% in Q2 and 10.7% for six months. Unrecovered development and acquisition costs rose substantially because of increased acquisition activity.
Equity in earnings of real estate ventures increased 52.4% in Q2 and 36.8% for six months, including a joint-venture property-sale gain.
Cash used for acquisitions rose to $82.1 million from $16.5 million, while development spending declined to $4.5 million from $18.3 million.
The company raised $112.5 million of net proceeds in a May 2011 common-stock offering of 5.34 million shares, contributing to dilution but funding acquisition and liquidity needs.
Net cash provided by financing activities was $18.9 million versus cash used of $126.0 million in the prior-year period, primarily because of the stock offering and higher borrowings.

Guidance, outlook, risks and unusual items

The filing does not provide clear quantitative earnings or FFO guidance.
Management emphasized revenue management, expense control, acquisitions, expansion of the management platform and the use of managed properties as a potential acquisition pipeline.
Management cited seasonal demand, with a greater portion of revenue and profit generally realized from May through September.
Key risks include competition that could reduce rents or occupancy, difficult credit markets, refinancing and capital-raising risk, rising interest rates and operating costs, property impairment, acquisition and integration risk, development delays, regulatory changes and potential loss of REIT status.
A 100-basis-point change in LIBOR was estimated to change annual interest expense and cash flow by approximately $2.4 million, excluding variable-rate debt with interest-rate floors.
The company guaranteed approximately $13.2 million of loans for unconsolidated joint ventures and reported maximum exposure to loss of $18.1 million for two variable-interest joint ventures. No guarantee liability was recorded because management considered material loss unlikely.
Interest-rate swaps had a fair-value liability of $6.7 million at June 30, 2011.
Subsequent to quarter-end, the company acquired three properties in Maryland and Texas for an aggregate $15.3 million.
No material litigation was reported, and management stated that there were no material changes to the risk factors disclosed in the 2010 Form 10-K.

Important facts for investors to verify

Confirm the maturity, extension and refinancing status of the $100.0 million credit facility due October 31, 2011 and other near-term principal obligations.
Reconcile reported FFO to diluted FFO per share and assess the effect of the May stock offering and OP-unit interests on per-share results.
Evaluate whether occupancy and rental-rate gains are sustainable after seasonal effects and amid competitive pressure.
Review acquisition underwriting, lease-up performance and the remaining development project, particularly given higher acquisition spending and unrecovered costs.
Assess liquidity under stressed credit-market and interest-rate conditions, including the company’s reliance on additional secured debt, equity issuance and joint ventures.
Review exposure under joint-venture loan guarantees, interest-rate swaps, exchangeable senior notes and REIT distribution requirements.