Business Context and Reporting Period
Extra Space Storage Inc. filed this Form 8-K on July 14, 2005, to report the completion of a major acquisition. The Company, through its subsidiaries Extra Space Storage LLC and Extra Space Storage LP, closed the purchase of the Storage USA self-storage business from Security Capital Self Storage Incorporated and affiliates of Prudential Insurance Company of America.
Key Financial Metrics and Transaction Details
The transaction involved the acquisition of 61 wholly-owned self-storage properties, an equity interest in 54 joint venture properties, and the assumption of management for 84 franchise and managed properties. A total of 259 properties were contributed to five limited liability companies (JVs) co-owned by the Company and Prudential.
| Metric | Total Value |
|---|---|
| Total Acquisition Cost | $1,788.5 million |
| Debt Financing (JV portion) | $290.4 million |
| Equity Investment by Company Subsidiaries | $38.2 million |
| Initial Company Subsidiary Interest | 2% to 5% per JV |
| Property Management Fee | 6% of gross revenues |
Regarding new debt obligations, the Company secured a $100 million bridge loan maturing November 11, 2005, at LIBOR plus 150 basis points. Additionally, three mortgage loans totaling $313 million ($101 million, $112 million, and $100 million) were entered into with fixed rates between 5.26% and 5.285%, maturing between 2010 and 2015. A $28 million acquisition loan at LIBOR plus 200 basis points was also secured.
The Company issued approximately 1,470,150 units of limited partnership interest (ESS OP Units) valued at approximately $22.7 million to sellers. These units are exchangeable for common stock one year post-closing.
Material Changes
This filing represents a significant expansion of the Company's asset base and geographic footprint through the acquisition of the Storage USA business. The transaction introduces new debt obligations and creates a complex joint venture structure with Prudential for 259 properties, altering the Company's capital structure and operational scope.
Outlook, Risks, and Contingencies
Management Commentary and Structure: The Company and Prudential have entered into agreements governing the five JVs. Joint approval is required for major decisions including acquisitions, dispositions, financing, and leasing. The Company acts as the property manager for a 6% fee. Buy-sell rights for both parties become effective two years after closing.
Risks and Contingencies:
- Debt Covenants: The bridge loan, mortgage loans, and acquisition loan contain customary events of default that could result in the acceleration of all amounts payable.
- Refinancing Risk: The $100 million bridge loan is required to be repaid with proceeds from equity offerings.
- Financial Reporting: Pro forma financial information and financial statements of the business acquired are not included in this filing and will be submitted by amendment within 71 calendar days.
Investor Verification Checklist
- Verify the final purchase price adjustments and any subsequent issuance of ESS OP Units.
- Monitor the Company's ability to repay the $100 million bridge loan via equity offerings before the November 11, 2005 maturity.
- Review the upcoming 71-day amendment for pro forma financial information to assess the impact on earnings and leverage.
- Confirm the status of the registration statement for the resale of shares underlying the ESS OP Units, required within 12 months of closing.
- Assess the integration risks associated with managing 84 franchise properties and the 54 joint venture properties.