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EXR > SEC Filings for EXR > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for EXTRA SPACE STORAGE INC.

Form 10-Q for EXTRA SPACE STORAGE INC.


7-Aug-2014

Quarterly Report


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

Amounts in thousands, except property and share data

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, 2013. 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."

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, 2013 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 Extra Space Storage LLC and its subsidiaries to own, operate, manage, acquire, develop and redevelop professionally managed self-storage facilities.

We derive substantially all of our revenues from rents received from tenants under leases at each of our wholly-owned self-storage properties; from management fees on the properties we manage for joint venture partners and unaffiliated third parties; and from our tenant reinsurance program. Our management fee is generally equal to approximately 6% of cash collected from the managed properties. We also receive an asset management fee of 0.5% of the total asset value from one of our joint ventures.

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 that 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 advanced technology system's ability to provide real-time, interactive rental rate and discount management. Our size allows us greater ability than the majority of our competitors to implement more effective online marketing programs, which we believe will attract more customers to our stores at a lower net cost.


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Acquire self-storage properties. Our acquisitions team continues to pursue the acquisition of multi-property portfolios and single properties 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 to expand our geographic footprint. We believe 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 such properties.

PROPERTIES

As of June 30, 2014, we owned, had ownership interests in, or managed 1,071 properties in 35 states, Washington, D.C. and Puerto Rico. Of these 1,071 properties, we owned 535 properties, we held joint venture interests in 272 properties, and our taxable REIT subsidiary, Extra Space Management, Inc., operated an additional 264 properties that are owned by third parties. These operating properties contain approximately 79.0 million square feet of rentable space in approximately 715,000 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% average occupancy rate for a full year measured as of January 1, or has been open for three years.

As of June 30, 2014, approximately 625,000 tenants were leasing storage units at the 1,071 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 market conditions permit. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. 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 June 30, 2014, the average length of stay was approximately 12.8 months for tenants that vacated during the preceding 12 month period.

The average annual rent per square foot for our existing customers at stabilized properties, net of discounts and bad debt, was $14.26 for the three months ended June 30, 2014, compared to $13.67 for the same period ended June 30, 2013. Average annual rent per square foot for new leases was $15.02 for the three months ended June 30, 2014, compared to $14.39 for the same period ended June 30, 2013. The average discounts, as a percentage of rental revenues, during these periods were 3.9% and 4.9%, 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 presents additional information regarding the occupancy of our stabilized properties by state as of June 30, 2014 and 2013. The information as of June 30, 2013 is on a pro forma basis as though all the properties owned and/or managed at June 30, 2014 were under our control as of June 30, 2013.


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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      Number of Units as     Number of Units as    Square Feet as of    Square Feet as of     Occupancy %      Occupancy %
Location                   Properties    of June 30, 2014 (1)     of June 30, 2013     June 30, 2014 (2)      June 30, 2013      June 30, 2014    June 30, 2013

Wholly-Owned Properties
Alabama                             5                   2,889                 2,887              343,162              343,342             89.9 %           88.9 %
Arizona                            11                   6,934                 6,948              814,810              815,673             89.8 %           89.6 %
California                        121                  90,062                89,694            9,363,735            9,355,939             91.6 %           88.9 %
Colorado                           11                   5,362                 5,287              658,216              655,295             94.2 %           94.7 %
Connecticut                         5                   3,122                 3,132              299,970              300,040             93.4 %           92.9 %
Florida                            53                  36,894                37,025            4,004,821            3,995,007             91.3 %           88.7 %
Georgia                            21                  12,344                12,270            1,568,657            1,564,788             88.4 %           87.7 %
Hawaii                              5                   5,623                 6,087              335,465              345,082             90.2 %           79.0 %
Illinois                           18                  12,195                12,053            1,267,517            1,254,932             93.4 %           93.9 %
Indiana                             9                   4,722                 4,706              554,558              552,843             93.2 %           90.6 %
Kansas                              1                     506                   504               50,360               50,360             93.0 %           93.1 %
Kentucky                            4                   2,162                 2,153              254,141              254,015             93.5 %           92.9 %
Louisiana                           2                   1,409                 1,413              150,065              150,015             94.0 %           92.7 %
Maryland                           23                  17,272                17,192            1,818,067            1,820,797             93.7 %           92.2 %
Massachusetts                      35                  21,373                21,318            2,174,836            2,174,459             93.6 %           94.6 %
Michigan                            3                   1,799                 1,789              254,064              254,432             93.3 %           92.8 %
Missouri                            6                   3,217                 3,154              385,226              372,687             93.7 %           91.2 %
Nevada                              5                   3,201                 3,195              548,124              546,699             86.3 %           84.5 %
New Hampshire                       2                   1,010                 1,003              125,748              125,773             93.2 %           91.0 %
New Jersey                         45                  35,406                35,356            3,433,596            3,420,819             94.3 %           93.5 %
New Mexico                          3                   1,569                 1,575              217,644              216,154             86.1 %           87.8 %
New York                           19                  16,798                16,472            1,358,998            1,350,321             91.7 %           90.9 %
North Carolina                      2                   1,282                   909              127,361               96,446             81.9 %           89.5 %
Ohio                               19                  10,341                10,256            1,361,613            1,351,210             91.9 %           91.4 %
Oregon                              3                   2,150                 2,143              250,530              250,410             95.5 %           94.2 %
Pennsylvania                        9                   5,728                 5,696              649,160              648,205             91.5 %           92.0 %
Rhode Island                        2                   1,184                 1,174              131,396              131,391             92.5 %           89.4 %
South Carolina                      5                   2,718                 2,699              329,635              327,880             93.6 %           91.3 %
Tennessee                          10                   5,525                 5,449              753,703              744,710             94.5 %           89.3 %
Texas                              30                  19,301                19,310            2,284,626            2,288,268             90.7 %           89.7 %
Utah                                8                   4,245                 4,050              523,006              504,946             90.5 %           92.9 %
Virginia                           28                  21,580                21,605            2,304,173            2,302,312             85.5 %           85.4 %
Washington                          6                   3,560                 3,536              427,603              427,373             91.2 %           83.9 %
Total Wholly-Owned
Stabilized                        529                 363,483               362,040           39,124,586           38,992,623             91.6 %           90.1 %

Joint-Venture
Properties
Alabama                             2                   1,150                 1,150              145,231              145,213             91.2 %           94.4 %
Arizona                             7                   4,235                 4,219              492,918              492,841             89.9 %           87.6 %
California                         71                  50,996                50,793            5,256,815            5,254,792             93.3 %           92.0 %
Colorado                            2                   1,324                 1,321              159,703              158,653             95.1 %           96.6 %
Connecticut                         7                   5,297                 5,295              611,790              611,790             93.3 %           91.1 %
Delaware                            1                     590                   589               71,705               71,730             92.6 %           91.7 %
Florida                            19                  15,234                15,153            1,532,987            1,520,903             91.4 %           89.4 %
Georgia                             2                   1,063                 1,057              151,724              151,479             89.6 %           85.7 %
Illinois                            5                   3,454                 3,442              365,083              365,283             95.8 %           94.7 %
Indiana                             5                   2,189                 2,170              286,498              284,976             91.5 %           93.5 %
Kansas                              2                     844                   842              109,695              109,485             91.8 %           84.6 %
Kentucky                            4                   2,262                 2,220              257,199              258,645             88.7 %           91.2 %
Maryland                           12                   9,760                 9,677              955,170              953,970             93.0 %           93.3 %
Massachusetts                      13                   6,905                 6,886              783,655              782,236             92.7 %           93.9 %
Michigan                            8                   4,803                 4,773              612,523              612,417             93.1 %           93.0 %
Missouri                            1                     533                   531               61,225               61,225             95.1 %           95.7 %
Nevada                              5                   3,035                 3,053              327,013              327,148             87.6 %           86.6 %
New Hampshire                       3                   1,301                 1,306              137,504              136,724             82.8 %           90.2 %
New Jersey                         16                  12,960                12,945            1,385,979            1,358,342             92.9 %           91.3 %
New Mexico                          7                   3,603                 3,605              398,245              398,350             90.2 %           84.9 %
New York                           13                  14,168                14,110            1,106,431            1,105,422             92.6 %           93.5 %
Ohio                                8                   3,971                 3,954              531,412              531,312             92.2 %           92.4 %
Oregon                              1                     653                   652               64,970               64,970             95.0 %           96.0 %
Pennsylvania                       10                   7,965                 7,954              804,466              800,450             93.5 %           93.5 %
Tennessee                          17                   9,406                 9,329            1,240,917            1,223,661             94.2 %           90.2 %
Texas                              17                  10,579                10,565            1,387,680            1,389,671             94.2 %           93.4 %
Virginia                           13                   9,364                 9,348              994,409              994,226             92.6 %           93.3 %
Washington, DC                      1                   1,530                 1,530              102,017              102,017             93.3 %           94.9 %
Total Joint-Venture
Stabilized                        272                 189,174               188,469           20,334,964           20,267,931             92.7 %           91.8 %


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                                                   Company               Pro forma              Company             Pro forma           Company         Pro forma
                                                                                             Net Rentable         Net Rentable        Square Foot      Square Foot
                               Number of      Number of Units as     Number of Units as    Square Feet as of    Square Feet as of     Occupancy %      Occupancy %
Location                       Properties    of June 30, 2014 (1)     of June 30, 2013     June 30, 2014 (2)      June 30, 2013      June 30, 2014    June 30, 2013
Managed Properties
Alabama                                 7                   2,359                 2,359              358,110              358,110             85.6 %           85.6 %
Arizona                                 3                   1,208                   752              226,407              126,695             82.0 %           78.8 %
California                             59                  39,616                39,764            5,262,235            5,275,904             83.9 %           76.4 %
Colorado                               14                   7,305                 7,290              949,432              946,330             95.3 %           95.5 %
Connecticut                             1                     467                   482               61,600               61,480             86.7 %           85.8 %
Florida                                32                  19,331                18,971            2,311,579            2,248,340             86.4 %           82.1 %
Georgia                                10                   5,260                 5,250              836,749              834,034             87.0 %           84.1 %
Hawaii                                  4                   4,150                 4,100              240,187              242,131             84.7 %           76.9 %
Illinois                                5                   2,939                 2,925              324,150              318,750             95.5 %           90.0 %
Indiana                                 9                   5,038                 5,029              618,777              619,077             93.9 %           80.1 %
Kentucky                                1                     547                   550               67,268               67,268             94.6 %           86.0 %
Louisiana                               1                     999                 1,006              133,435              134,485             85.6 %           82.8 %
Maryland                               10                   6,095                 5,809              614,842              594,432             91.2 %           92.7 %
Massachusetts                           1                   1,098                 1,109              108,405              108,605             93.5 %           89.8 %
Mississippi                             2                   1,890                 1,892              281,508              281,553             87.5 %           81.6 %
Missouri                                2                   1,208                 1,213              151,751              152,841             91.0 %           91.7 %
Nevada                                  4                   3,094                 3,107              315,885              315,935             75.8 %           74.8 %
New Jersey                              7                   4,022                 4,072              428,058              429,153             94.5 %           85.7 %
New Mexico                              2                   1,120                 1,117              131,312              131,552             91.6 %           90.2 %
North Carolina                         10                   5,772                 5,691              704,672              705,182             93.7 %           90.3 %
Ohio                                    8                   2,947                 2,938              428,104              427,574             89.7 %           78.2 %
Pennsylvania                           15                   6,947                 6,962              862,347              858,912             89.3 %           85.6 %
South Carolina                          4                   2,736                 2,744              359,700              359,400             92.7 %           91.9 %
Tennessee                               3                   1,514                 1,508              207,080              207,670             90.6 %           89.6 %
Texas                                  21                  10,982                10,767            1,465,825            1,429,554             83.7 %           83.7 %
Utah                                    3                   1,604                 1,619              257,330              257,400             92.2 %           88.2 %
Virginia                                4                   2,513                 2,517              258,506              258,606             90.9 %           85.2 %
Washington, DC                          2                   1,267                 1,262              112,334              112,409             94.6 %           96.0 %
Puerto Rico                             4                   2,680                 2,722              287,459              287,637             85.1 %           80.6 %
Total Managed Stabilized              248                 146,708               145,527           18,365,047           18,151,019             87.5 %           82.8 %

Total Stabilized Properties         1,049                 699,365               696,036           77,824,597           77,411,573             90.9 %           88.8 %



(1) Represents unit count as of June 30, 2014, which may differ from unit count as of June 30, 2013 due to unit conversions or expansions.

(2) Represents net rentable square feet as of June 30, 2014, which may differ from rentable square feet as of June 30, 2013 due to unit conversions or expansions.


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The following table presents additional information regarding the occupancy of our lease-up properties by state as of June 30, 2014 and 2013. The information as of June 30, 2013 is on a pro forma basis as though all the properties owned and/or managed at June 30, 2014 were under our control as of June 30, 2013.

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      Number of Units as     Number of Units as    Square Feet as of    Square Feet as of     Occupancy %      Occupancy %
Location                   Properties    of June 30, 2014 (1)     of June 30, 2013     June 30, 2014 (2)      June 30, 2013      June 30, 2014    June 30, 2013

Wholly-Owned Properties
. . .
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