Business Context and Reporting Period
Company: Extra Space Storage Inc. (EXR)
Filing Type: Form 8-K (Current Report)
Date of Report: September 10, 2007
Reporting Period: The filing details asset acquisitions completed between December 31, 2006, and August 30, 2007, with pro forma financial data presented for the six months ended June 30, 2007, and the year ended December 31, 2006.
The primary purpose of this filing is to disclose the completion of 23 property acquisitions, including a significant portfolio of 10 properties from AAAAA Rent-A-Space, and to provide unaudited pro forma financial information reflecting these transactions as if they had occurred on January 1, 2006.
Key Financial Metrics
Pro Forma Balance Sheet (as of June 30, 2007):
- Total Assets: $1,993,788,000 (Historical: $1,983,939,000)
- Net Real Estate Assets: $1,691,712,000
- Cash and Cash Equivalents: $40,875,000
- Total Liabilities: $1,310,225,000
- Debt Obligations:
- Notes Payable: $875,730,000
- Notes Payable to Trusts: $119,590,000
- Exchangeable Senior Notes: $250,000,000
- Assumed Debt on Acquisitions: $42,259,000 (across 5 properties)
Pro Forma Statement of Operations (Six Months Ended June 30, 2007):
- Total Revenues: $121,690,000 (Historical: $110,326,000)
- Total Expenses: $81,078,000
- Net Income: $17,910,000 (Historical: $15,165,000)
- Net Income Available to Common Stockholders: $15,035,000
- Diluted Earnings Per Share (EPS): $0.23
Pro Forma Statement of Operations (Year Ended December 31, 2006):
- Total Revenues: $224,531,000 (Historical: $197,264,000)
- Total Expenses: $156,068,000
- Net Income: $22,944,000 (Historical: $14,876,000)
- Net Income Available to Common Stockholders: $17,194,000
- Diluted Earnings Per Share (EPS): $0.30
Material Changes vs. Prior Period
The filing reflects significant growth in the company's asset base and revenue stream due to the acquisition of 23 self-storage properties since December 31, 2006.
- Acquisition Volume: 22 properties were acquired in the first six months of 2007, with one additional property acquired in August 2007. A separate filing is planned for eight properties acquired on August 31, 2007, which are excluded from this pro forma data.
- Significant Transaction: The acquisition of the 10-property AAAAA Rent-A-Space portfolio was deemed significant under Regulation S-X Rule 3-14. Consideration included approximately $137.8 million in total value, comprising Preferred Operating Partnership (OP) Units and the assumption of debt.
- Revenue Impact: Pro forma revenues for the six months ended June 30, 2007, increased by approximately $11.4 million compared to historical results, driven by the inclusion of the acquired properties' operations.
- Expense Impact: Pro forma expenses increased by approximately $8.1 million, primarily due to property operations and increased depreciation/amortization on the new assets.
Guidance, Outlook, and Risks
Management Commentary and Transaction Details:
- Financing Structure: The AAAAA Rent-A-Space transaction utilized a hybrid instrument structure. The company issued 989,980 Preferred OP Units. A portion ($115 million) bears a fixed 5% priority return, while the remainder participates in distributions like common units. The company also loaned $100 million to the holders of these units at 4.85% interest, secured by the units.
- Operational Integration: Post-acquisition, all properties are self-managed, eliminating third-party management fees previously paid by the acquired entities.
- Pro Forma Limitations: Management notes that the pro forma financial information is not necessarily indicative of actual future results and should be read in conjunction with historical statements.
Risks and Contingencies:
- Ground Leases: Four of the 10 AAAAA Rent-A-Space properties are subject to ground leases with terms ending between 2030 and 2061. Future minimum rental payments are significant, totaling over $32 million for periods after 2011.
- Litigation: Management states there is no material litigation pending or threatened against the acquired properties, other than routine legal matters.
- Financial Statement Completeness: For one property acquired from a joint venture (Greenway 27, LLC), only one year of audited financial statements was provided instead of the standard three years due to incomplete records and immateriality. Management asserts this does not materially affect the understanding of financial results.
Investor Verification Checklist
- Debt Assumption: Verify the terms and interest rates of the $42.3 million in debt assumed on five specific properties (average rate 5.82%).
- Preferred OP Units: Review the redemption terms and conversion mechanics of the 989,980 Preferred OP Units issued for the AAAAA Rent-A-Space deal, specifically the 5% fixed return portion and the embedded derivative liability.
- Ground Lease Obligations: Assess the long-term impact of the ground lease commitments for the four AAAAA properties, particularly the payments due after 2011.
- Excluded Assets: Note that eight properties acquired on August 31, 2007, are excluded from this pro forma data and will be reported in a subsequent filing.
- Audit Scope: Confirm the impact of the limited audit scope (one year vs. three years) for the Greenway 27, LLC property on the overall financial assessment.