10-KPeriod: FY2005

Extra Space Storage Inc. Annual Report, Year Ended Dec 31, 2005

Filed March 13, 2006For Securities:EXR

Summary

Extra Space Storage Inc. (EXR), a self-administered and self-managed REIT, reported its 2005 annual results, highlighting a significant year of growth and expansion. The company completed a major acquisition of Storage USA (SUSA) in July 2005, significantly increasing its property portfolio and establishing it as the second-largest self-storage operator in the U.S. This strategic move, combined with other acquisitions and joint venture activities, led to a substantial increase in total revenues, driven primarily by property rental and new management/franchise fees. Financially, the company experienced a net loss for the year, partly due to the costs associated with the SUSA acquisition and increased interest expenses from higher debt levels. However, Funds From Operations (FFO) were positive, indicating operational cash flow strength. The company's outlook for 2006 is positive, anticipating continued revenue growth driven by market fundamentals, technology platforms, and a focus on maximizing revenue rather than just occupancy. The company also detailed its financing strategies, liquidity, and risk management, including interest rate hedging, and provided extensive property-level data across its growing portfolio.

Key Highlights

  • 1Acquisition of Storage USA (SUSA) in July 2005, making EXR the second-largest self-storage operator in the U.S. with 631 properties owned or managed.
  • 2Total revenues increased by 105.0% to $134.7 million in 2005, primarily driven by property rental revenue and new management/franchise fees from the SUSA acquisition.
  • 3Positive Funds From Operations (FFO) of $27.2 million for 2005, or $0.70 per share, indicating positive operational cash flow despite a reported net loss.
  • 4Significant increase in debt to $866.8 million as of December 31, 2005, to finance acquisitions, leading to a debt-to-total capitalization ratio of 52.1%.
  • 5Expansion of property portfolio to 546 properties (192 wholly-owned, 354 in joint ventures) with approximately 38 million square feet of rentable space.
  • 6Adoption of new tenant insurance program and leveraging of proprietary technology (STORE) and revenue management team (RevMan) to optimize rental rates and performance.
  • 7Net loss of $4.966 million ($0.14 per share) for 2005, influenced by acquisition costs, increased operating expenses, and interest expenses.

Frequently Asked Questions

The SUSA acquisition, completed in July 2005, was the most significant event for EXR in 2005. It substantially increased the company's scale, making it the second-largest self-storage operator in the U.S. This led to a dramatic increase in total revenues (up 105.0%) and operating expenses. While it incurred acquisition-related costs and increased debt, the integration was largely completed by year-end, with expectations of positive performance trends carrying into 2006.

Growth was primarily financed through a combination of equity issuances, including a public offering of common stock and a private placement, totaling over $270 million in net proceeds. Additionally, the company utilized significant debt financing, including new mortgages and borrowings under its revolving line of credit, to fund acquisitions like SUSA. The company also continued its joint venture strategy to fund development opportunities.

Extra Space Storage anticipates continued strength in self-storage fundamentals in 2006, expecting further revenue growth driven by positive economic conditions in core markets, its expanded portfolio, and the effective use of its technology (STORE) and revenue management capabilities (RevMan). The company aims to maximize sustainable revenue, even if it means slightly lower occupancy levels compared to prior periods, to enhance stockholder value.

Key risks identified include increased competition for property acquisitions and rental rates, potential difficulties in integrating acquired properties, reliance on key personnel, risks associated with real estate investments (including market downturns, interest rate changes, and environmental liabilities), and the need to maintain REIT qualification. The company also notes the illiquidity of real estate and potential impacts of regulatory changes.