10-QPeriod: Q3 FY2007

Extra Space Storage Inc. Quarterly Report for Q3 Ended Sep 30, 2007

Filed November 7, 2007For Securities:EXR

Summary

Extra Space Storage Inc. (EXR) reported its financial results for the quarterly period ending September 30, 2007. The company demonstrated significant revenue growth, primarily driven by an increase in property rental income, which rose by 23.6% in the third quarter and 19.0% year-to-date compared to the prior year. This growth was fueled by recent acquisitions and a modest increase in rental rates at stabilized properties. While property rental revenue saw a substantial uplift, management and franchise fees remained relatively stable. The company also saw a significant increase in tenant insurance revenue due to the implementation of a captive insurance program. Expenses also rose, largely due to the expansion of the property portfolio through acquisitions and development. The company's balance sheet shows a notable increase in net real estate assets and a corresponding rise in total liabilities, primarily driven by new debt financing to support growth initiatives. Despite increased interest expenses, the company maintained positive net income available to common stockholders, albeit with a lower diluted EPS compared to the prior year due to increased share count.

Key Highlights

  • 1Total revenues increased by 24.7% to $63.8 million for the third quarter of 2007 compared to $51.2 million in the same period of 2006.
  • 2Property rental revenue grew by 23.6% to $55.2 million in Q3 2007, driven by acquisitions and rental rate increases.
  • 3Net income available to common stockholders was $9.8 million ($0.15 per diluted share) for the third quarter of 2007, compared to $4.3 million ($0.08 per diluted share) in Q3 2006.
  • 4The company acquired 31 properties across various locations during the first nine months of 2007 for a total consideration of $306.8 million.
  • 5Total debt increased to $1.3 billion as of September 30, 2007, with a debt-to-total capitalization ratio of 54.0%.
  • 6A new $100 million revolving line of credit was established on October 19, 2007, to fund general corporate purposes and acquisitions.
  • 7The company's portfolio expanded to 585 operating self-storage properties as of September 30, 2007.

Frequently Asked Questions

The primary driver of revenue growth was property rental revenue, which increased by 23.6% to $55.2 million in the third quarter of 2007. This increase was attributed to revenue from recently acquired properties and an increase in rental rates at existing stabilized properties.

Total debt increased significantly to approximately $1.3 billion as of September 30, 2007, leading to a debt-to-total capitalization ratio of 54.0%. This increase reflects financing for acquisitions and development. The company also secured a new $100 million revolving line of credit in October 2007.

The company anticipates a generally positive climate for self-storage, though rental activity was flat year-over-year in Q3 2007. Revenue growth is expected to continue through increased rental rates to existing customers and active management of pricing and promotional strategies. Key expense drivers include property taxes, and the company expects continued competition in its markets. Despite these challenges, the company believes its portfolio quality, revenue management systems, and strong self-storage fundamentals will support revenue growth.

The issuance of Preferred Operating Partnership Units in June and August 2007 resulted in a minority interest on the balance sheet. A significant accounting event occurred on September 28, 2007, when an amendment reclassified these units from a hybrid instrument with an embedded derivative (which had a fair value adjustment impacting net income) to permanent equity. This reclassification eliminated the need for ongoing fair value adjustments to net income.