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EXR > SEC Filings for EXR > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for EXTRA SPACE STORAGE INC.


5-Nov-2012

Quarterly Report

Management's Discussion and Analysis

Amounts in thousands, except property and share data

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our "Unaudited Condensed Consolidated Financial Statements" and the "Notes to Unaudited Condensed Consolidated Financial Statements" appearing elsewhere in this report and the "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Form 10-K for the year ended December 31, 2011. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Statement on Forward-Looking Information." (Amounts in thousands except property and share data unless otherwise stated).

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2011 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.

OVERVIEW

We are a fully integrated, self-administered and self-managed REIT, formed to continue the business commenced in 1977 by our predecessor companies to own, operate, manage, acquire, develop and redevelop professionally managed self-storage properties. We derive our revenues from rents received from tenants under existing leases at each of our self-storage properties; management fees on the properties we manage for joint venture partners, franchisees and unaffiliated third parties; and our tenant reinsurance program. Our management fee is equal to approximately 6% of total revenues generated by the managed properties.

We operate in competitive markets, often where consumers have multiple self-storage properties from which to choose. Competition has impacted, and will continue to impact, our property results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our ability to lease available self-storage units and actively manage rental rates, and on the ability of our tenants to make required rental payments. We believe we are able to respond quickly and effectively to changes in local, regional and national economic conditions by centrally adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems.

We continue to evaluate a range of new initiatives and opportunities in order to enable us to maximize stockholder value. Our strategies to maximize stockholder value include the following:

Maximize the performance of properties through strategic, efficient and proactive management. We pursue revenue-generating and expense-minimizing opportunities in our operations. Our revenue management team seeks to maximize revenue by responding to changing market conditions through our technology system's ability to provide real-time, interactive rental rate and discount management. Our size allows greater ability than the majority of our competitors to


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implement national, regional and local marketing programs, which we believe will attract more customers to our stores at a lower net cost.

Acquire self-storage properties from strategic partners and third parties. Our acquisitions team continues to pursue the acquisition of single properties and multi-property portfolios that we believe can provide stockholder value. We have established a reputation as a reliable, ethical buyer, which we believe enhances our ability to negotiate and close acquisitions. In addition, we believe our status as an UPREIT enables flexibility when structuring deals. We continue to see available acquisitions on which to bid and are seeing increasing prices. However, we remain a disciplined buyer and look for acquisitions that will strengthen our portfolio and increase stockholder value.

Expand our management business. Our management business enables us to generate increased revenues through management fees and expand our geographic footprint. This expanded footprint enables us to reduce our operating costs through economies of scale. In addition, we see our management business as a future acquisition pipeline. We pursue strategic relationships with owners whose properties would enhance our portfolio in the event an opportunity arises to acquire the properties.

Recent U.S. and international market and economic conditions have been challenging, with slower growth. Turbulence in U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the financial condition of our customers. If these market conditions continue, they may result in an adverse effect on our financial condition and results of operations.

PROPERTIES

As of September 30, 2012, we owned or had ownership interests in 720 operating self-storage properties. Of these properties, 416 are wholly-owned and 304 are held in joint ventures. In addition, we managed 190 properties for franchisees or third parties, bringing the total number of operating properties that we own and/or manage to 910. These properties are located in 34 states, Washington, D.C. and Puerto Rico. As of September 30, 2012, we owned and/or managed approximately 66.7 million square feet of space with approximately 610,000 units.

Our properties are generally situated in convenient, highly visible locations clustered around large population centers such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These areas all enjoy above-average population growth and income levels. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. Our acquisitions and management business have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a property to be stabilized once it has achieved either an 80% occupancy rate for a full year measured as of January 1, or has been open for three years.

As of September 30, 2012, over 510,000 tenants were leasing storage units at our 910 operating properties that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as markets permit. Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of September 30, 2012, the median length of stay was approximately 13 months. These existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. The average annual rent per square foot for our existing customers at these stabilized properties, net of discounts and bad debt, was $13.81 at September 30, 2012, compared to $13.50 at September 30, 2011. This compares to our average annual rent per square foot for new leases of $14.43 at September 30, 2012, compared to $13.94 at September 30, 2011. The average discounts during these periods were 4.4% and 5.9%, respectively.

Our property portfolio is made up of different types of construction and building configurations depending on the site and the municipality where it is located. Most often sites are what we consider "hybrid" facilities, a mix of both drive-up buildings and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of facilities featuring ground-floor access only.

The following table sets forth additional information regarding the occupancy of our stabilized properties by state as of September 30, 2012 and 2011. The information as of September 30, 2011, is on a pro forma basis as though all the properties owned and/or managed at September 30, 2012, were under our control as of September 30, 2011.


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Stabilized Property Data Based on Location



                                             Company              Pro forma              Company             Pro forma           Company         Pro forma
                                                                                      Net Rentable         Net Rentable        Square Foot      Square Foot
                                        Number of Units as    Number of Units as    Square Feet as of    Square Feet as of     Occupancy %      Occupancy %
                          Number of      of September 30,      of September 30,       September 30,        September 30,      September 30,    September 30,
Location                  Properties         2012 (1)                2011               2012 (2)               2011               2012             2011

Wholly-owned
properties
Alabama                            4                 1,970                 1,958              233,643              233,454             85.2 %           81.2 %
Arizona                            6                 3,546                 3,544              436,093              436,368             86.5 %           86.7 %
California                        77                57,040                56,900            5,892,866            5,891,909             87.2 %           85.7 %
Colorado                          11                 5,265                 5,257              660,845              661,320             92.5 %           91.6 %
Connecticut                        4                 2,647                 2,661              257,818              257,848             89.3 %           89.3 %
Florida                           37                24,618                24,748            2,636,997            2,639,001             88.5 %           85.5 %
Georgia                           16                 8,406                 8,404            1,087,694            1,088,434             89.3 %           85.5 %
Hawaii                             2                 2,697                 2,796              136,389              138,084             85.3 %           86.4 %
Illinois                          12                 8,044                 8,033              872,081              872,544             92.2 %           84.8 %
Indiana                            8                 4,316                 4,357              510,468              510,459             91.4 %           88.0 %
Kansas                             1                   504                   506               50,340               50,340             91.6 %           91.2 %
Kentucky                           4                 2,150                 2,152              254,115              253,991             93.1 %           89.5 %
Louisiana                          2                 1,414                 1,413              150,215              150,165             93.1 %           88.7 %
Maryland                          19                13,740                13,709            1,475,679            1,472,946             89.2 %           89.9 %
Massachusetts                     31                18,458                18,461            1,907,072            1,908,923             91.1 %           90.3 %
Michigan                           3                 1,781                 1,769              253,312              252,144             91.2 %           89.7 %
Missouri                           6                 3,159                 3,158              375,337              374,987             90.7 %           89.2 %
Nevada                             2                   963                   978              129,214              129,590             72.5 %           68.6 %
New Hampshire                      2                 1,006                 1,007              125,773              125,473             88.3 %           89.6 %
New Jersey                        38                30,118                30,262            2,902,269            2,901,664             89.3 %           88.7 %
New Mexico                         2                 1,193                 1,185              162,864              162,704             89.6 %           90.9 %
New York                          21                17,201                17,568            1,472,490            1,480,677             89.9 %           89.0 %
Ohio                              16                 8,849                 9,008            1,126,519            1,129,589             90.1 %           84.6 %
Oregon                             2                 1,409                 1,410              174,660              174,720             90.8 %           92.0 %
Pennsylvania                       9                 5,721                 5,773              649,855              655,545             90.6 %           90.3 %
Rhode Island                       2                 1,181                 1,188              130,836              131,091             89.3 %           81.2 %
South Carolina                     5                 2,700                 2,702              327,675              328,558             89.1 %           89.9 %
Tennessee                          6                 2,918                 2,930              408,725              409,034             87.9 %           86.2 %
Texas                             25                16,101                16,074            1,895,579            1,894,074             88.6 %           86.5 %
Utah                               8                 3,845                 3,846              485,306              484,358             91.8 %           88.8 %
Virginia                           9                 6,349                 6,357              627,006              627,779             90.1 %           89.4 %
Washington                         5                 3,052                 3,077              370,630              370,745             89.6 %           84.4 %
Total Wholly-Owned
Stabilized                       395               262,361               263,191           28,180,365           28,198,518             89.1 %           87.3 %


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                                             Company              Pro forma             Company             Pro forma           Company         Pro forma
                                                                                      Net Rentable        Net Rentable        Square Foot      Square Foot
                                        Number of Units as    Number of Units as     Square Feet as     Square Feet as of     Occupancy %      Occupancy %
                          Number of      of September 30,      of September 30,     of September 30,      September 30,      September 30,    September 30,
Location                  Properties         2012 (1)                2011               2012 (2)              2011               2012             2011

Joint-venture
properties
Alabama                            2                 1,147                 1,145             145,243              145,063             89.9 %           89.6 %
Arizona                            9                 5,657                 5,641             649,031              649,406             88.2 %           87.8 %
California                        78                56,513                56,389           5,848,023            5,848,467             91.1 %           88.7 %
Colorado                           2                 1,320                 1,314             158,553              158,743             93.0 %           89.1 %
Connecticut                        7                 5,299                 5,302             612,445              612,850             90.0 %           89.1 %
Delaware                           1                   588                   585              71,680               71,680             91.6 %           88.7 %
Florida                           22                17,575                17,937           1,777,090            1,803,551             88.3 %           85.6 %
Georgia                            3                 1,850                 1,848             240,061              240,541             89.1 %           84.0 %
Illinois                           6                 4,324                 4,290             436,086              436,151             92.3 %           87.8 %
Indiana                            6                 2,431                 2,416             315,086              301,466             92.6 %           89.5 %
Kansas                             2                   840                   838             108,820              108,905             88.7 %           84.2 %
Kentucky                           4                 2,289                 2,279             270,013              269,545             92.4 %           90.3 %
Maryland                          13                10,524                10,490           1,021,369            1,020,186             91.8 %           90.5 %
Massachusetts                     13                 6,873                 6,880             776,952              778,852             89.3 %           89.3 %
Michigan                           8                 4,747                 4,695             612,118              612,638             92.1 %           90.5 %
Missouri                           1                   532                   530              61,275               61,275             92.6 %           91.2 %
Nevada                             8                 5,288                 5,320             742,282              692,983             84.3 %           83.7 %
New Hampshire                      3                 1,309                 1,311             137,024              137,474             90.0 %           87.8 %
New Jersey                        18                13,978                13,978           1,482,399            1,484,031             90.1 %           89.5 %
New Mexico                         8                 4,002                 3,994             451,114              451,312             83.4 %           86.9 %
New York                          13                14,075                14,122           1,105,611            1,088,055             91.7 %           91.1 %
Ohio                              10                 4,710                 4,698             655,184              655,864             91.9 %           88.3 %
Oregon                             1                   652                   651              64,970               64,970             95.6 %           94.3 %
Pennsylvania                      10                 7,936                 7,994             799,424              797,230             91.4 %           91.6 %
Tennessee                         20                11,252                11,224           1,475,010            1,475,079             87.9 %           87.9 %
Texas                             17                10,525                10,503           1,388,028            1,388,863             90.5 %           87.8 %
Virginia                          15                10,477                10,481           1,124,111            1,123,586             90.3 %           91.6 %
Washington, DC                     1                 1,529                 1,529             101,989              101,989             91.5 %           92.0 %
Total Joint-Ventures
Stabilized                       301               208,242               208,384          22,630,991           22,580,755             90.1 %           88.7 %

Managed properties
Arizona                            1                   578                   580              67,460               67,350             69.5 %           55.7 %
California                        48                32,769                32,997           4,251,655            4,248,492             74.2 %           72.8 %
Colorado                           4                 1,522                 1,518             167,193              167,290             95.0 %           89.7 %
Connecticut                        1                   484                   496              61,480               61,120             81.8 %           69.0 %
Florida                           17                 9,015                 9,048           1,102,983            1,102,634             77.9 %           73.1 %
Georgia                            2                 1,438                 1,431             183,850              180,350             78.9 %           77.2 %
Hawaii                             3                 3,471                 3,512             203,073              201,632             63.6 %           59.9 %
Illinois                           6                 3,592                 3,593             355,168              355,091             88.1 %           75.5 %
Indiana                            1                   500                   501              55,225               55,225             84.1 %           73.1 %
Kansas                             1                   467                   468             110,320              110,460             81.7 %           68.9 %
Kentucky                           1                   530                   522              66,100               66,100             93.4 %           92.1 %
Louisiana                          1                 1,013                 1,012             134,940              134,995             75.0 %           68.9 %
Maryland                           8                 5,047                 5,018             543,965              543,740             90.8 %           89.2 %
Massachusetts                      5                 5,216                 5,246             459,147              459,237             69.6 %           67.4 %
Missouri                           2                 1,206                 1,206             151,716              152,685             83.2 %           87.0 %
Nevada                             2                 1,562                 1,566             170,575              170,375             75.9 %           80.4 %
New Jersey                         7                 4,126                 4,140             428,475              425,635             71.3 %           67.2 %
New Mexico                         3                 1,644                 1,642             185,195              185,195             83.3 %           84.6 %
North Carolina                     8                 5,149                 5,237             577,133              577,005             81.8 %           80.1 %
Pennsylvania                      16                 7,320                 7,371             902,760              868,515             84.6 %           82.1 %
South Carolina                     1                   605                   616              88,430               88,130             89.9 %           82.2 %
Tennessee                          3                 1,503                 1,496             206,465              205,225             87.5 %           87.7 %
Texas                              8                 4,215                 4,129             551,289              546,014             86.4 %           84.6 %
Utah                               1                   795                   795             136,005              136,005             76.0 %           76.0 %
Virginia                           4                 2,475                 2,478             255,033              255,174             80.8 %           77.4 %
Washington                         1                   468                   464              56,590               56,590             85.3 %           78.9 %
Washington, DC                     2                 1,263                 1,263             112,459              112,459             90.4 %           91.3 %
Puerto Rico                        4                 2,799                 2,799             288,903              288,903             78.5 %           78.5 %
Total Managed
Stabilized                       161               100,772               101,144          11,873,587           11,821,626             78.7 %           76.1 %

Total Stabilized
Properties                       857               571,375               572,719          62,684,943           62,600,899             87.5 %           85.7 %



(1) Represents unit count as of September 30, 2012, which may differ from September 30, 2011 unit count due to unit conversions or expansions.

(2) Represents net rentable square feet as of September 30, 2012, which may differ from September 30, 2011 net rentable square feet due to unit conversions or expansions.


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The following table sets forth additional information regarding the occupancy of our lease-up properties by state as of September 30, 2012 and 2011. The information as of September 30, 2011 is on a pro forma basis as though all the properties owned and/or managed at September 30, 2012 were under our control as of September 30, 2011.

Lease-up Property Data Based on Location



                                              Company              Pro forma              Company             Pro forma           Company         Pro forma
                                                                                       Net Rentable         Net Rentable        Square Foot      Square Foot
                                         Number of Units as    Number of Units as    Square Feet as of    Square Feet as of     Occupancy %      Occupancy %
                           Number of      of September 30,      of September 30,       September 30,        September 30,      September 30,    September 30,
Location                   Properties         2012 (1)                2011               2012 (2)               2011               2012             2011

Wholly-owned properties
. . .
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