UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2009 |
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Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
Commission File Number: 001-32269
EXTRA SPACE STORAGE INC.
(Exact name of registrant as specified in its charter)
Maryland |
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20-1076777 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
2795 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(Address of principal executive offices)
Registrants telephone number, including area code: (801) 562-5556
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrants common stock, par value $0.01 per share, as of October 30, 2009 was 86,432,213.
EXTRA SPACE STORAGE INC.
2
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information set forth in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as believes, expects, estimates, may, will, should, anticipates, or intends or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation, managements examination of historical operating trends and estimate of future earnings, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that managements expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in Part II. Item 1A. Risk Factors below and in Part I. Item 1A. Risk Factors included in our most recent Annual Report on Form 10-K. Such factors include, but are not limited to:
· changes in general economic conditions and in the markets in which we operate;
· the effect of competition from new self-storage facilities or other storage alternatives, which could cause rents and occupancy rates to decline;
· potential liability for uninsured losses and environmental contamination;
· difficulties in our ability to evaluate, finance and integrate acquired and developed properties into our existing operations and to lease up those properties, which could adversely affect our profitability;
· the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts, or REITs, which could increase our expenses and reduce our cash available for distribution;
· the possibility that the joint venture transaction with Harrison Street Real Estate Capital, LLC may not close on the terms previously disclosed or at all, or that the expected benefits from the transaction may not be realized;
· recent disruptions in credit and financial markets and resulting difficulties in raising capital at reasonable rates, which could impede our ability to grow;
· delays in the development and construction process, which could adversely affect our profitability;
· economic uncertainty due to the impact of war or terrorism, which could adversely affect our business plan; and
· our ability to attract and retain qualified personnel and management members.
3
Extra Space Storage Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
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September 30, 2009 |
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December 31, 2008 |
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(unaudited) |
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(As revised-see Note 2) |
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Assets: |
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Real estate assets: |
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Net operating real estate assets |
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$ |
1,989,675 |
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$ |
1,938,922 |
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Real estate under development |
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52,942 |
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58,734 |
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Net real estate assets |
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2,042,617 |
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1,997,656 |
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Investments in real estate ventures |
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132,356 |
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136,791 |
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Cash and cash equivalents |
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100,992 |
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63,972 |
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Restricted cash |
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42,083 |
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38,678 |
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Receivables from related parties and affiliated real estate joint ventures |
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3,377 |
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11,335 |
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Other assets, net |
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47,725 |
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42,576 |
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Total assets |
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$ |
2,369,150 |
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$ |
2,291,008 |
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Liabilities, Noncontrolling Interests and Equity: |
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Notes payable |
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$ |
1,044,446 |
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$ |
943,598 |
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Notes payable to trusts |
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119,590 |
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119,590 |
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Exchangeable senior notes |
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95,163 |
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209,663 |
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Discount on exchangeable senior notes |
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(4,639 |
) |
(13,031 |
) |
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Lines of credit |
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100,000 |
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27,000 |
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Accounts payable and accrued expenses |
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40,636 |
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35,128 |
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Other liabilities |
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25,219 |
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22,267 |
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Total liabilities |
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1,420,415 |
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1,344,215 |
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Commitments and contingencies |
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Equity: |
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Extra Space Storage Inc. stockholders equity: |
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Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued or outstanding |
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Common stock, $0.01 par value, 300,000,000 shares authorized, 86,435,938 and 85,790,331 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively |
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864 |
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858 |
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Paid-in capital |
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1,132,865 |
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1,130,964 |
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Accumulated other comprehensive deficit |
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(1,584 |
) |
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Accumulated deficit |
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(248,533 |
) |
(253,052 |
) |
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Total Extra Space Storage Inc. stockholders equity |
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883,612 |
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878,770 |
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Noncontrolling interest represented by Preferred Operating Partnership units, net of $100,000 note receivable |
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29,941 |
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29,837 |
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Noncontrolling interest in Operating Partnership |
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34,153 |
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36,628 |
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Other noncontrolling interests |
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1,029 |
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1,558 |
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Total noncontrolling interests and equity |
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948,735 |
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946,793 |
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Total liabilities, noncontrolling interests and equity |
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$ |
2,369,150 |
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$ |
2,291,008 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
Extra Space Storage Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share data)
(unaudited)
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Three months ended September 30, |
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Nine months ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(As revised-see Note 2) |
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(As revised-see Note 2) |
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Revenues: |
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Property rental |
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$ |
60,380 |
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$ |
59,997 |
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$ |
178,494 |
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$ |
174,906 |
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Management and franchise fees |
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5,191 |
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5,417 |
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15,685 |
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15,837 |
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Tenant reinsurance |
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5,542 |
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4,265 |
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15,246 |
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11,723 |
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Other income |
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191 |
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169 |
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201 |
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425 |
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Total revenues |
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71,304 |
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69,848 |
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209,626 |
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202,891 |
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Expenses: |
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Property operations |
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23,022 |
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21,367 |
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67,456 |
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62,871 |
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Tenant reinsurance |
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1,264 |
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1,426 |
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3,996 |
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3,958 |
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Unrecovered development and acquisition costs |
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22 |
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39 |
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18,905 |
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1,631 |
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Severance costs associated with wind-down of development program |
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1,400 |
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General and administrative |
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9,982 |
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10,316 |
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31,195 |
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30,378 |
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Depreciation and amortization |
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13,797 |
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12,355 |
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39,160 |
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35,633 |
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Total expenses |
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48,087 |
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45,503 |
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162,112 |
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134,471 |
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Income before interest, equity in earnings of real estate ventures, gain on repurchase of exchangeable senior notes, loss on sale of investments available for sale and income tax expense |
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23,217 |
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24,345 |
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47,514 |
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68,420 |
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Interest expense |
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(17,697 |
) |
(15,904 |
) |
(49,308 |
) |
(48,220 |
) |
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Non-cash interest expense related to amortization of discount on exchangeable senior notes |
|
(430 |
) |
(1,059 |
) |
(1,834 |
) |
(3,147 |
) |
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Interest income |
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245 |
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1,280 |
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1,098 |
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2,575 |
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Interest income on note receivable from Preferred Operating Partnership unit holder |
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1,213 |
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1,213 |
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3,638 |
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3,638 |
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Equity in earnings of real estate ventures |
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1,752 |
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2,015 |
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5,288 |
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4,610 |
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Gain on repurchase of exchangeable senior notes |
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27,576 |
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Loss on sale of investments available for sale |
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(1,415 |
) |
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Income tax expense |
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(726 |
) |
(3 |
) |
(2,317 |
) |
(190 |
) |
||||
Net income |
|
7,574 |
|
11,887 |
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31,655 |
|
26,271 |
|
||||
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Net income allocated to Preferred Operating Partnership noncontrolling interests |
|
(1,506 |
) |
(1,570 |
) |
(4,681 |
) |
(4,627 |
) |
||||
Net income allocated to Operating Partnership and other noncontrolling interests |
|
(101 |
) |
(401 |
) |
(929 |
) |
(896 |
) |
||||
Net income attributable to common stockholders |
|
$ |
5,967 |
|
$ |
9,916 |
|
$ |
26,045 |
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$ |
20,748 |
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|
|
|
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|
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Net income per common share |
|
|
|
|
|
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|
|
|
||||
Basic |
|
$ |
0.07 |
|
$ |
0.13 |
|
$ |
0.30 |
|
$ |
0.28 |
|
Diluted |
|
$ |
0.07 |
|
$ |
0.13 |
|
$ |
0.30 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
86,437,877 |
|
82,184,631 |
|
86,260,442 |
|
74,116,345 |
|
||||
Diluted |
|
91,548,984 |
|
87,710,663 |
|
91,321,503 |
|
79,673,881 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash dividends paid per common share |
|
$ |
|
|
$ |
0.25 |
|
$ |
0.25 |
|
$ |
0.75 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
Extra Space Storage Inc.
Condensed Consolidated Statement of Equity
(in thousands, except share data)
(unaudited)
|
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Noncontrolling Interests |
|
Extra Space Storage Inc. Stockholders Equity |
|
||||||||||||||||||||||
|
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Preferred |
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Operating |
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Other |
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Shares |
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Par Value |
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Paid-in |
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Accumulated |
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Accumulated |
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Total |
|
||||||||
Balances
at December 31, 2008 (as revised - |
|
$ |
29,837 |
|
$ |
36,628 |
|
$ |
1,558 |
|
85,790,331 |
|
$ |
858 |
|
$ |
1,130,964 |
|
$ |
|
|
$ |
(253,052 |
) |
$ |
946,793 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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||||||||
Restricted stock grants issued |
|
|
|
|
|
|
|
545,365 |
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5 |
|
|
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|
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5 |
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||||||||
Restricted stock grants cancelled |
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|
|
|
|
|
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(14,686 |
) |
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|
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|
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|
||||||||
Compensation expense related to stock-based awards |
|
|
|
|
|
|
|
|
|
|
|
2,952 |
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|
|
|
|
2,952 |
|
||||||||
Noncontrolling interest consolidated as business acquisition |
|
|
|
|
|
726 |
|
|
|
|
|
|
|
|
|
|
|
726 |
|
||||||||
Investments from other noncontrolling interests |
|
|
|
|
|
(615 |
) |
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|
|
|
|
|
|
|
|
|
(615 |
) |
||||||||
Repurchase of equity portion of exchangeable senior notes |
|
|
|
|
|
|
|
|
|
|
|
(2,053 |
) |
|
|
|
|
(2,053 |
) |
||||||||
Conversion of Operating Partnership units to common stock |
|
|
|
(1,003 |
) |
|
|
114,928 |
|
1 |
|
1,002 |
|
|
|
|
|
|
|
||||||||
Conversion of Operating Partnership units to cash |
|
|
|
(1,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(1,908 |
) |
||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income (loss) |
|
4,681 |
|
1,569 |
|
(640 |
) |
|
|
|
|
|
|
|
|
26,045 |
|
31,655 |
|
||||||||
Change in fair value of interest rate swap |
|
(17 |
) |
(67 |
) |
|
|
|
|
|
|
|
|
(1,584 |
) |
|
|
(1,668 |
) |
||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,987 |
|
||||||||
Distributions to Operating Partnership units held by noncontrolling interests |
|
(4,560 |
) |
(1,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(5,626 |
) |
||||||||
Dividends paid on common stock at $0.25 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,526 |
) |
(21,526 |
) |
||||||||
Balances at September 30, 2009 |
|
$ |
29,941 |
|
$ |
34,153 |
|
$ |
1,029 |
|
86,435,938 |
|
$ |
864 |
|
$ |
1,132,865 |
|
$ |
(1,584 |
) |
$ |
(248,533 |
) |
$ |
948,735 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
Extra Space Storage Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
Nine months ended September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
(As revised-see Note 2) |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income |
|
$ |
31,655 |
|
$ |
26,271 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
39,160 |
|
35,633 |
|
||
Amortization of deferred financing costs |
|
2,978 |
|
2,640 |
|
||
Non-cash interest expense related to amortization of discount on exchangeable senior notes |
|
1,834 |
|
3,147 |
|
||
Gain on repurchase of exchangeable senior notes |
|
(27,576 |
) |
|
|
||
Compensation expense related to stock-based awards |
|
2,952 |
|
2,804 |
|
||
Loss on investments available for sale |
|
|
|
1,415 |
|
||
Unrecovered development and acquisition costs |
|
18,905 |
|
1,631 |
|
||
Severance costs associated with wind-down of development program |
|
1,400 |
|
|
|
||
Distributions from real estate ventures in excess of earnings |
|
4,665 |
|
4,001 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Receivables from related parties and affiliated real estate joint ventures |
|
(10,610 |
) |
(4,475 |
) |
||
Other assets |
|
(3,934 |
) |
(3,062 |
) |
||
Accounts payable and accrued expenses |
|
4,176 |
|
5,138 |
|
||
Other liabilities |
|
487 |
|
883 |
|
||
Net cash provided by operating activities |
|
66,092 |
|
76,026 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Acquisition of real estate assets |
|
(27,378 |
) |
(55,602 |
) |
||
Development and construction of real estate assets |
|
(57,905 |
) |
(43,757 |
) |
||
Proceeds from sale of real estate assets |
|
4,652 |
|
340 |
|
||
Investments in real estate ventures |
|
(2,535 |
) |
(48,941 |
) |
||
Return of investment in real estate ventures |
|
|
|
764 |
|
||
Net proceeds from sale of investments available for sale |
|
|
|
21,812 |
|
||
Change in restricted cash |
|
(3,395 |
) |
(3,816 |
) |
||
Purchase of equipment and fixtures |
|
(799 |
) |
(1,368 |
) |
||
Net cash used in investing activities |
|
(87,360 |
) |
(130,568 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Repurchase of exchangeable senior notes |
|
(80,853 |
) |
|
|
||
Proceeds from notes payable and lines of credit |
|
382,879 |
|
4,063 |
|
||
Principal payments on notes payable and lines of credit |
|
(207,981 |
) |
(24,097 |
) |
||
Deferred financing costs |
|
(6,697 |
) |
(740 |
) |
||
Investments from noncontrolling interests |
|
|
|
1,174 |
|
||
Redemption of Operating Partnership units held by noncontrolling interest |
|
(1,908 |
) |
|
|
||
Proceeds from issuance of common shares, net |
|
|
|
232,718 |
|
||
Net proceeds from exercise of stock options |
|
|
|
1,917 |
|
||
Dividends paid on common stock |
|
(21,526 |
) |
(57,672 |
) |
||
Distributions to noncontrolling interests in Operating Partnership |
|
(5,626 |
) |
(8,122 |
) |
||
Net cash provided by financing activities |
|
58,288 |
|
149,241 |
|
||
Net increase in cash and cash equivalents |
|
37,020 |
|
94,699 |
|
||
Cash and cash equivalents, beginning of the period |
|
63,972 |
|
17,377 |
|
||
Cash and cash equivalents, end of the period |
|
$ |
100,992 |
|
$ |
112,076 |
|
|
|
|
|
|
|
||
Supplemental schedule of cash flow information |
|
|
|
|
|
||
Interest paid, net of amounts capitalized |
|
$ |
46,006 |
|
$ |
42,158 |
|
|
|
|
|
|
|
||
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
||
Conversion of Operating Partnership Units held by noncontrolling interests for common stock |
|
$ |
1,003 |
|
$ |
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
Extra Space Storage Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Amounts in thousands, except property and share data
1. ORGANIZATION
Extra Space Storage Inc. (the Company) is a self-administered and self-managed real estate investment trust (REIT), formed as a Maryland corporation on April 30, 2004 to own, operate, manage, acquire, develop and redevelop professionally managed self-storage facilities located throughout the United States. The Company continues the business of Extra Space Storage LLC and its subsidiaries, which had engaged in the self-storage business since 1977. The Companys interest in its properties is held through its operating partnership, Extra Space Storage LP (the Operating Partnership), which was formed on May 5, 2004. The Companys primary assets are general partner and limited partner interests in the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Internal Revenue Code). To the extent the Company continues to qualify as a REIT, it will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to its stockholders.
The Company invests in self-storage facilities by acquiring or developing wholly-owned facilities or by acquiring an equity interest in real estate entities. At September 30, 2009, the Company had direct and indirect equity interests in 635 operating storage facilities located in 33 states and Washington, D.C. In addition, the Company managed 114 properties for franchisees and third parties, bringing the total number of operating properties which it owns and/or manages to 749.
The Company operates in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance. The Companys property management, acquisition and development activities include managing, acquiring, developing and selling self-storage facilities. On June 2, 2009, the Company announced the wind-down of its development activities. As of September 30, 2009, there were 14 development projects in process that the Company expects to complete by the fourth quarter of 2010. The rental operations activities include rental operations of self-storage facilities. No single tenant accounts for more than 5% of rental income. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the Companys self storage facilities.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of results that may be expected for the year ended December 31, 2009. The Condensed Consolidated Balance Sheet as of December 31, 2008 has been derived from the Companys audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and Form 8-K dated June 5, 2009, updating Items 6, 7 and 8 of the Companys Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (SEC).
Reclassifications
Certain amounts in the 2008 financial statements and supporting note disclosures have been reclassified to conform to the current year presentation. Such reclassification did not impact previously reported net income or accumulated deficit.
Revisions to Prior Period Numbers
Effective January 1, 2009, the Company adopted certain recently issued accounting standards that required the Company to retroactively adopt the presentation and disclosure requirements and to restate prior period financial statements as noted in Recently Issued Accounting Standards, below. The Company also revised the amounts allocated to its noncontrolling interests in its Operating Partnership and calculated earnings per share for 2008.
8
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements Accounting Standards Codification (ASC) 820, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurement. This guidance applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements. The Company adopted this guidance for financial assets and liabilities effective January 1, 2008 and for non-financial assets and liabilities effective January 1, 2009. In April 2009, the FASB issued the following updates that provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:
· FASB Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820-10-65). This update provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that may indicate that a transaction is not orderly. It reaffirms the need to exercise judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.
· FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial Instruments (ASC 320-10-65). This update requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, it requires the disclosures in summarized financial information at interim reporting periods. Companies will also be required to disclose the method and significant assumptions used to estimate the fair value of financial instruments and describe any changes in the methods or methodology occurring during the period.
The Company adopted these updates effective June 30, 2009 and has applied the guidance to all periods presented. The adoption of this guidance did not have any impact on the Companys net income, cash flows, or financial position.
In December 2007, the FASB issued revised Statement No. 141, Business Combinations (ASC 805) (FAS 141(R)). This guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the assets acquired and liabilities assumed. Generally, assets acquired and liabilities assumed in a transaction are recorded at the acquisition-date fair value with limited exceptions. The guidance also changed the accounting treatment and disclosure for certain specific items in a business combination. The Company adopted this guidance for all acquisitions subsequent to January 1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB No. 51 (ASC 810-10-65) (FAS 160). This guidance establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the companys equity. In addition, the guidance also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. If noncontrolling interests are determined to be redeemable, they are to be carried at the higher of (a) their carrying value or (b) their redeemable value as of the balance sheet date and reported as temporary equity. The Company adopted this guidance effective January 1, 2009, and has applied it to all periods presented.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (ASC 815). This guidance changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures stating how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. The Company adopted this guidance effective January 1, 2009 and expanded the disclosures relating to derivative instruments included in its consolidated financial statements.
In May 2008, the FASB issued Statement of Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (ASC 470-20-65) (FSP APB 14-1). Under this guidance, entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion should separately account for the liability and equity components of the instrument in a manner that reflects the issuers economic interest cost. The effect of the adoption on the Companys exchangeable senior notes is that the equity component is included in the paid-in-capital section of stockholders equity on the consolidated balance sheet and the value of the equity
9
component is treated as original issue discount for purposes of accounting for the debt component. The original issue discount is amortized over the period of the debt as additional interest expense. This guidance is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. The Company adopted this guidance effective January 1, 2009.
In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (ASC 350-30). This guidance amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. This guidance is effective for fiscal years beginning after December 31, 2008 and has been adopted by the Company for all acquisitions subsequent to January 1, 2009.
In June 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (ASC 260-10). This guidance provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method as described in FASB Statement No. 128, Earnings per Share (ASC 260) (FAS 128). This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and the Company adopted this guidance effective January 1, 2009 and has applied it to all periods presented.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (ASC 855). This guidance is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance requires disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting this date, that is, whether this date represents the date the financial statements were issued or were available to be issued. The Company adopted this guidance effective April 1, 2009.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), (ASC 810) (FAS 167), which amends guidance for determining whether an entity is a variable interest entity, or VIE, and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entitys economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. This guidance is effective for the first annual reporting period that begins after November 15, 2009, with early adoption prohibited. The Company is currently evaluating the effect of the adoption of this guidance on its financial statements.
On June 30, 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (ASC 105-10-05). The standard establishes the FASB Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the Codification effective September 30, 2009 and has included the references to the Codification, as appropriate, in these consolidated financial statements.
Fair Value Disclosures
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides information for each major category of assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
||||||||
Description |
|
September 30, 2009 |
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other liabilities - Swap Agreement 1 |
|
$ |
(526 |
) |
$ |
|
|
$ |
(526 |
) |
$ |
|
|
Other liabilities - Swap Agreement 2 |
|
(742 |
) |
|
|
(742 |
) |
|
|
||||
Other liabilities - Swap Agreement 3 |
|
(400 |
) |
|
|
(400 |
) |
|
|
||||
Total |
|
$ |
(1,668 |
) |
$ |
|
|
$ |
(1,668 |
) |
$ |
|
|
10
The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Long-lived assets held for use are evaluated for impairment when events or circumstances indicate there may be impairment. When such an event occurs, the Company compares the carrying value of these long-lived assets to the undiscounted future net operating cash flows attributable to the assets using significant unobservable inputs. An impairment loss is recorded if the net carrying value of the assets exceeds the undiscounted future net operating cash flows attributable to the asset. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.
When real estate assets are identified as held for sale, the Company discontinues depreciating the assets and estimates the fair value of the assets, net of selling costs, using significant unobservable inputs. If the estimated fair value, net of selling costs, of the assets that have been identified as held for sale is less than the net carrying value of the assets, then a valuation allowance is established. The operations of assets held for sale or sold during the period are generally presented as discontinued operations for all periods presented.
The Company assesses whether there are any indicators that the value of its investments in unconsolidated real estate ventures may be impaired when events or circumstances indicate there may be an impairment. An investment is impaired if the Companys estimate of the fair value of the investment is less than its carrying value using significant unobservable inputs. To the extent impairment has occurred, and is considered to be other-than-temporary, the loss is measured as the excess of the carrying amount over the fair value of the investment.
In connection with the Companys acquisition of properties, the assets are valued as tangible and intangible assets and liabilities acquired based on their fair values using significant unobservable inputs. The value of the tangible assets, consisting of land and buildings, are determined as if vacant, that is, at replacement cost. Intangible assets, which represent the value of existing tenant relationships, are recorded at their fair values based on the avoided cost to replace the current leases. The Company measures the value of tenant relationships based on the Companys historical experience with turnover in its facilities. Debt assumed as part of an acquisition is recorded at fair value based on current interest rates compared to contractual rates.
On June 2, 2009, the Company announced the wind-down of its development activities. As a result of this change, the Company reviewed its properties under construction, unimproved land and its investments in development joint ventures for potential impairments. This review included the preparation of updated models based on current market conditions, obtaining appraisals and reviewing recent sales and list prices of undeveloped land and mature self storage facilities. Based on this review, the Company identified certain assets as being impaired. The impairments relating to long lived assets where the Company intends to complete the development and hold the asset are the result of the estimated future undiscounted cash flows being less than the current carrying value of the assets. The Company compared the carrying value of certain undeveloped land and seven condominiums that the Company intends to sell to the fair market value of similar undeveloped land and condominiums. For the assets that the Company intends to sell, where the current estimated fair market value less costs to sell was below the carrying value, the Company reduced the asset to the current fair market value less selling costs and recorded an impairment charge. The impairments relating to investments in development joint ventures are the result of the Company comparing the estimated current fair market value to the carrying value of the investment. For those investments in development joint ventures where the current estimated fair market value was below the carrying value, the Company reduced the investment to the current fair market value through an impairment charge.
The following table provides information for each major category of assets and liabilities that are measured at fair value on a non-recurring basis:
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|||||||||||
Description |
|
September 30, 2009 |
|
Quoted
Prices in |
|
Significant
Other |
|
Significant |
|
Total Gains (Losses) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-lived assets held and used |
|
$ |
12,392 |
|
$ |
|
|
$ |
|
|
$ |
12,392 |
|
$ |
(6,862 |
) |
Investments in real estate ventures |
|
9,934 |
|
|
|
|
|
9,934 |
|
(2,936 |
) |
|||||
Real estate assets held for sale included in net real estate assets |
|
11,275 |
|
|
|
|
|
11,275 |
|
(9,085 |
) |
|||||
|
|
$ |
33,601 |
|
$ |
|
|
$ |
|
|
$ |
33,601 |
|
$ |
(18,883 |
) |
11
3. NET INCOME PER SHARE
Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued and is calculated using either the treasury stock or if-converted method. Potential common shares are securities (such as options, warrants, convertible debt, Contingent Conversion Shares (CCSs), Contingent Conversion Units (CCUs), exchangeable Series A Participating Redeemable Preferred Operating Partnership units (Preferred OP units) and exchangeable Operating Partnership units (OP units)) that do not have a current right to participate in earnings but could do so in the future by virtue of their option or conversion right. In computing the dilutive effect of convertible securities, net income is adjusted to add back any changes in earnings in the period associated with the convertible security. The numerator also is adjusted for the effects of any other non-discretionary changes in income or loss that would result from the assumed conversion of those potential common shares. In computing diluted earnings per share, only potential common shares that are dilutive, or reduce earnings per share, are included.
The Companys Operating Partnership has $95,163 principal amount of exchangeable senior notes issued and outstanding as of September 30, 2009 that also can potentially have a dilutive effect on its earnings per share calculations. The exchangeable senior notes are exchangeable by holders into shares of the Companys common stock under certain circumstances per the terms of the indenture governing the exchangeable senior notes. The exchangeable senior notes are not exchangeable unless the price of the Companys common stock is greater than or equal to 130% of the applicable exchange price for a specified period during a quarter, or unless certain other events occur. The exchange price was $23.48 per share at September 30, 2009, and could change over time as described in the indenture. The price of the Companys common stock did not exceed 130% of the exchange price for the specified period of time during the third quarter of 2009; therefore holders of the exchangeable senior notes may not elect to convert them during the fourth quarter of 2009.
The Company has irrevocably agreed to pay only cash for the accreted principal amount of the exchangeable senior notes relative to its exchange obligations, but has retained the right to satisfy the exchange obligations in excess of the accreted principal amount in cash and/or common stock. Though the Company has retained that right, FAS 128 (ASC 260) requires an assumption that shares will be used to pay the exchange obligations in excess of the accreted principal amount, and requires that those shares be included in the Companys calculation of weighted average common shares outstanding for the diluted earnings per share computation. No shares were included in the computation at September 30, 2009 or 2008 because there was no excess over the accreted principal for the period.
For the purposes of computing the diluted impact on earnings per share of the potential conversion of Preferred OP units into common shares, where the Company has the option to redeem in cash or shares as discussed in Note 16 and where the Company has stated the positive intent and ability to settle at least $115,000 of the instrument in cash (or net settle a portion of the Preferred OP units against the related outstanding note receivable), only the amount of the instrument in excess of $115,000 is considered in the calculation of shares contingently issuable for the purposes of computing diluted earnings per share as allowed by paragraph 29 of FAS 128 (ASC 260-10-45-46.)
For the three months ended September 30, 2009 and 2008, options to purchase 4,458,370 and 1,356,592 shares of common stock and for the nine months ended September 30, 2009 and 2008, 5,237,237 and 903,180 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive. All unreleased restricted stock grants have been included in basic and diluted shares outstanding as required by EITF 03-6-1 (ASC 260) because such shares earn a non-forfeitable dividend and carry voting rights.
12
The computation of net income per common share is as follows:
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net income attributable to common stockholders |
|
$ |
5,967 |
|
$ |
9,916 |
|
$ |
26,045 |
|
$ |
20,748 |
|
Add: Income allocated to noncontrolling interest - Preferred Operating Partnership and Operating Partnership |
|
1,777 |
|
2,118 |
|
6,250 |
|
5,926 |
|
||||
Subtract: Fixed component of income allocated to noncontrolling interest - Preferred Operating Partnership |
|
(1,438 |
) |
(1,438 |
) |
(4,313 |
) |
(4,313 |
) |
||||
Net income for diluted computations |
|
$ |
6,306 |
|
$ |
10,596 |
|
$ |
27,982 |
|
$ |
22,361 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Average number of common shares outstanding - basic |
|
86,437,877 |
|
82,184,631 |
|
86,260,442 |
|
74,116,345 |
|
||||
Operating Partnership units |
|
3,917,941 |
|
4,109,034 |
|
3,917,941 |
|
4,109,034 |
|
||||
Preferred Operating Partnership units |
|
989,980 |
|
989,980 |
|
989,980 |
|
989,980 |
|
||||
Dilutive and cancelled stock options and CCS/CCU conversions |
|
203,186 |
|
427,018 |
|
153,140 |
|
458,522 |
|
||||
Average number of common shares outstanding - diluted |
|
91,548,984 |
|
87,710,663 |
|
91,321,503 |
|
79,673,881 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.07 |
|
$ |
0.13 |
|
$ |
0.30 |
|
$ |
0.28 |
|
Diluted |
|
$ |
0.07 |
|
$ |
0.13 |
|
$ |
0.30 |
|
$ |
0.28 |
|
4. REAL ESTATE ASSETS
The components of real estate assets are summarized as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
|
|
|
|
||
Land - operating |
|
$ |
490,693 |
|
$ |
461,883 |
|
Land - development |
|
41,658 |
|
64,392 |
|
||
Buildings and improvements |
|
1,638,817 |
|
1,555,598 |
|
||
Intangible assets - tenant relationships |
|
33,355 |
|
33,234 |
|
||
Intangible lease rights |
|
6,150 |
|
6,150 |
|
||
|
|
2,210,673 |
|
2,121,257 |
|
||
Less: accumulated depreciation and amortization |
|
(220,998 |
) |
(182,335 |
) |
||
Net operating real estate assets |
|
1,989,675 |
|
1,938,922 |
|
||
Real estate under development |
|
52,942 |
|
58,734 |
|
||
Net real estate assets |
|
$ |
2,042,617 |
|
$ |
1,997,656 |
|
|
|
|
|
|
|
||
Real estate assets held for sale included in net real estate assets |
|
$ |
11,275 |
|
$ |
|
|
Real estate assets held for sale include five parcels of vacant land and seven condominiums.
On April 10, 2009, the Company sold vacant land in Los Angeles, California for cash of $4,652. A loss of $343 was recorded as a result of this sale, and is included in unrecovered development and acquisition costs in the condensed consolidated statement of operations.
13
5. PROPERTY ACQUISITIONS
The following table shows the Companys acquisitions of operating properties for the nine months ended September 30, 2009, and does not include purchases of raw land or improvements made to existing assets:
|
|
|
|
|
|
Consideration Paid |
|
Acquisition Date Fair Value |
|
|
|
|||||||||||||
Property Location |
|
Number
of |
|
Date of |
|
Total Paid |
|
Cash Paid |
|
Net |
|
Land |
|
Building |
|
Intangible |
|
Closing |
|
Source of Acquisition |
|
|||
Virginia |
|
1 |
|
1/23/2009 |
|
$ |
7,425 |
|
$ |
7,438 |
|
$ |
(13 |
) |
2,076 |
|
5,175 |
|
122 |
|
52 |
|
Unrelated franchisee |
|
Under FAS 141(R) (ASC 805), the Company treats property acquisitions as businesses and records the assets and the liabilities at their fair values as of the acquisition date. Acquisition-related transaction costs are expensed as incurred.
6. INVESTMENTS IN REAL ESTATE VENTURES
Investments in real estate ventures consisted of the following:
|
|
Equity |
|
Excess Profit |
|
Investment balance at |
|
||||
|
|
Ownership % |
|
Participation % |
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Extra Space West One LLC (ESW) |
|
5% |
|
40% |
|
$ |
1,254 |
|
$ |
1,492 |
|
Extra Space West Two LLC (ESW II) |
|
5% |
|
40% |
|
4,778 |
|
4,874 |
|
||
Extra Space Northern Properties Six LLC (ESNPS) |
|
10% |
|
35% |
|
1,431 |
|
1,482 |
|
||
Extra Space of Santa Monica LLC (ESSM) |
|
48% |
|
43% |
|
2,464 |
|
3,225 |
|
||
Clarendon Storage Associates Limited Partnership (Clarendon) |
|
50% |
|
50% |
|
3,242 |
|
3,318 |
|
||
PRISA Self Storage LLC (PRISA) |
|
2% |
|
17% |
|
11,966 |
|
12,460 |
|
||
PRISA II Self Storage LLC (PRISA II) |
|
2% |
|
17% |
|
10,286 |
|
10,431 |
|
||
PRISA III Self Storage LLC (PRISA III) |
|
5% |
|
20% |
|
3,886 |
|
4,118 |
|
||
VRS Self Storage LLC (VRS) |
|
45% |
|
9% |
|
46,001 |
|
47,488 |
|
||
WCOT Self Storage LLC (WCOT) |
|
5% |
|
20% |
|
5,046 |
|
5,229 |
|
||
Storage Portfolio I LLC (SP I) |
|
25% |
|
40% |
|
16,401 |
|
17,471 |
|
||
Storage Portfolio Bravo II (SPB II) |
|
20% |
|
25-45% |
|
15,175 |
|
14,168 |
|
||
U-Storage de Mexico S.A. and related entities (U-Storage) |
|
35-40% |
|
35-40% |
|
7,370 |
|
9,205 |
|
||
Other minority owned properties |
|
10-50% |
|
10-50% |
|
3,056 |
|
1,830 |
|
||
|
|
|
|
|
|
$ |
132,356 |
|
$ |
136,791 |
|
In these joint ventures, the Company and the joint venture partner generally receive a preferred return on their invested capital. To the extent that cash/profits in excess of these preferred returns are generated through operations or capital transactions, the Company would receive a higher percentage of the excess cash/profits than its equity interest.
The components of equity in earnings of real estate ventures consist of the following:
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Equity in earnings of ESW |
|
$ |
294 |
|
$ |
333 |
|
$ |
878 |
|
$ |
1,027 |
|
Equity in earnings (losses) of ESW II |
|
(9 |
) |
(12 |
) |
(19 |
) |
(50 |
) |
||||
Equity in earnings of ESNPS |
|
119 |
|
62 |
|
215 |
|
182 |
|
||||
Equity in earnings (losses) of ESSM |
|
(68 |
) |
|
|
(68 |
) |
|
|
||||
Equity in earnings of Clarendon |
|
101 |
|
33 |
|
285 |
|
221 |
|
||||
Equity in earnings of PRISA |
|
177 |
|
183 |
|
324 |
|
526 |
|
||||
Equity in earnings of PRISA II |
|
138 |
|
154 |
|
415 |
|
451 |
|
||||
Equity in earnings of PRISA III |
|
63 |
|
77 |
|
179 |
|
204 |
|
||||
Equity in earnings of VRS |
|
517 |
|
648 |
|
1,569 |
|
779 |
|
||||
Equity in earnings of WCOT |
|
56 |
|
78 |
|
184 |
|
225 |
|
||||
Equity in earnings of SP I |
|
183 |
|
339 |
|
648 |
|
892 |
|
||||
Equity in earnings of SPB II |
|
27 |
|
146 |
|
260 |
|
467 |
|
||||
Equity in earnings (losses) of U-Storage |
|
(8 |
) |
(18 |
) |
1 |
|
(134 |
) |
||||
Equity in earnings (losses) of other minority owned properties |
|
162 |
|
(8 |
) |
417 |
|
(180 |
) |
||||
|
|
$ |
1,752 |
|
$ |
2,015 |
|
$ |
5,288 |
|
$ |
4,610 |
|
Equity in earnings (losses) of ESW II, SP I and SPB II include the amortization of the Companys excess purchase price of $25,713 of these equity investments over its original basis. The excess basis is amortized over 40 years.
Variable Interests in Unconsolidated Real Estate Joint Ventures:
The Company has an interest in one unconsolidated joint venture with unrelated third parties (Eastern Avenue) which is a variable interest entity (VIEs). The Company holds a 10% equity interest in Eastern Avenue, but has 50% of the voting rights. The Company also is the guarantor of the construction loan of Eastern Avenue. Qualification as a VIE was based on the disproportionate voting and ownership percentages. The Company performed a probability-based cash flow analysis for
14
this joint venture to determine which party was the primary beneficiary of the VIE. This analysis was performed using the Companys best estimates of the future cash flows based on its historical experience with numerous similar assets. As a result of this analysis, the Company determined that it was not the primary beneficiary of Eastern Avenue as the Company does not receive a majority of the joint ventures expected residual returns or bear a majority of the expected losses. Accordingly, this interest is recorded using the equity method.
Eastern Avenue owns a single pre-stabilized self-storage property. The joint venture is financed through a combination of (1) equity contributions from the Company and its joint venture partner, (2) mortgage notes payable and (3) payables to the Company for working capital. The payables to the Company are generally amounts owed for expenses paid on behalf of the joint venture by the Company as manager. The Company performs management services for the Eastern Avenue joint venture in exchange for a management fee of approximately 6% of cash collected by the property. The Companys joint venture partner can replace the Company as manager of the property upon written notice. The Company has not provided financial or other support during the periods presented to Eastern Avenue that it was not previously contractually obligated to provide.
As of September 30, 2009, there was no amount for Eastern Avenue included in Investments in Real Estate on the Companys consolidated balance sheet. No liability was recorded associated with the Companys guarantee of the construction loan of Eastern Avenue. The Companys maximum exposure to loss for this joint venture as of September 30, 2009 is the total of the guaranteed loan balance, the payables due to the Company and the Companys investment balances in the joint venture. The Company believes that the risk of incurring a loss as a result of having to perform on the guarantee is remote and therefore no liability has been recorded. Also, repossessing and/or selling the self-storage facility and land that collateralize the loan could provide funds sufficient to reimburse the Company. Additionally, the Company believes the payables to the Company are collectible. The following table compares the liability balance and the maximum exposure to loss related to Eastern Avenue as of September 30, 2009:
|
|
|
|
|
|
Balance of |
|
|
|
Maximum |
|
|
|
||||||
|
|
Liability |
|
Investment |
|
Guaranteed |
|
Payables to |
|
exposure |
|
|
|
||||||
|
|
Balance |
|
balance |
|
loan |
|
Company |
|
to loss |
|
Difference |
|
||||||
Eastern Avenue |
|
$ |
|
|
$ |
|
|
$ |
5,448 |
|
$ |
1,624 |
|
$ |
7,072 |
|
$ |
(7,072 |
) |
Variable Interests in Consolidated Real Estate Joint Ventures
The Company has variable interests in five consolidated joint ventures with third parties (the VIE JVs) which are VIEs. The VIE JVs are financed through a combination of (1) equity contributions from the Company and its joint venture partners, (2) mortgage notes payable and (3) payables to the Company for working capital. The payables to the Company are generally amounts owed for expenses paid on behalf of the joint ventures by the Company as manager. The Company owns 10% to 72% of the common equity interests in the VIE JVs. The Company performed probability-based cash flow projections for each venture using the Companys best estimates of future revenues and expenses based on historical experience with numerous similar assets. According to these analyses, the joint ventures were determined to be VIEs based on an assessment that the equity financing was inadequate to support operations. The Company was also determined to be the primary beneficiary of each of the VIE JVs, as it receives the majority of the benefits and/or bears the majority of the expected losses of each as a result of its ownership and the management agreements. Therefore, each of the VIE JVs are consolidated with the assets and liabilities of each joint venture included in the Companys consolidated financial statements, with intercompany balances and transactions eliminated.
In July 2009, the Company purchased a lenders interest in a note payable to a joint venture that owns a single property located in Chicago, IL. The note was to Extra Space of Montrose, a joint venture in which the Company owns a 10% interest, and was guaranteed by the Company. This joint venture was considered a nonconsolidated VIE as of June 30, 2009. The Company considers the purchase of this loan to be a reconsideration event and has determined that the Company now bears the majority of the risk of loss for the joint venture. As a result of this loan purchase by the Company, the joint venture is now a consolidated VIE JV. The assets and liabilities were recorded at fair value as required by FAS 141(R) (ASC 805).
In January 2009, the Company purchased a lenders interest in a construction loan to a joint venture that owns a single property located in Sacramento, CA. The construction loan was to ESS of Sacramento One LLC, a joint venture in which the Company owns a 50% interest, and was guaranteed by the Company. This joint venture was not consolidated and was not considered a VIE JV as of December 31, 2008. The Company considers the purchase of this loan to be a reconsideration event and now considers ESS of Sacramento One LLC to be a VIE JV and has determined that the Company now bears the majority of the risk of loss of the joint venture. As a result of this loan purchase by the Company, the joint venture is now consolidated. The assets and liabilities were recorded at fair value as required by FAS 141(R) (ASC 805).
15
The Company performs development services for ESS of Plantation LLC in exchange for a development fee of 1% of budgeted costs, respectively. The Company performs management services for Extra Space of Montrose Avenue LLC, ESS of Sacramento One LLC, ES of Washington Avenue LLC and ES of Franklin Blvd. LLC in exchange for a management fee of approximately 6% of cash collected by the properties.
The table below illustrates the financing of each of the VIE JVs as well as the carrying amounts of the related assets and liabilities as of September 30, 2009:
Joint |
|
Equity |
|
Excess |
|
Total Assets |
|
Notes Payable |
|
Payables |
|
Payables |
|
Companys |
|
JV
Partners |
|
||||||
Extra Space of Montrose Avenue LLC |
|
10 |
% |
40 |
% |
$ |
8,535 |
|
$ |
|
|
$ |
8,593 |
|
$ |
281 |
|
$ |
(50 |
) |
$ |
(289 |
) |
ESS of Sacramento One LLC |
|
50 |
% |
50 |
% |
10,278 |
|
5,072 |
|
5,174 |
|
72 |
|
(570 |
) |
530 |
|
||||||
ES of Washington Avenue LLC |
|
50 |
% |
50 |
% |
9,903 |
|
5,049 |
|
2,951 |
|
469 |
|
717 |
|
717 |
|
||||||
ES of Franklin Blvd LLC |
|
50 |
% |
50 |
% |
7,043 |
|
5,165 |
|
2,012 |
|
106 |
|
(120 |
) |
(120 |
) |
||||||
ESS of Plantation LLC |
|
72 |
% |
40 |
% |
2,096 |
|
|
|
15 |
|
49 |
|
1,472 |
|
560 |
|
||||||
|
|
|
|
|
|
$ |
37,855 |
|
$ |
15,286 |
|
$ |
18,745 |
|
$ |
977 |
|
$ |
1,449 |
|
$ |
1,398 |
|
Except as disclosed above, the Company has not provided financial or other support during the periods presented to these VIEs that it was not previously contractually obligated to provide. The Company has guaranteed the notes payable for these VIEs, with the exception of ESS Sacramento One LLC. The notes payable are secured by the related self-storage properties and are non-recourse. If the joint ventures default on the loans, the Company may be forced to repay its portion of the balance owed. However, repossessing and/or selling the self-storage facilities and land that collateralize the loans could provide funds sufficient to reimburse the Company, and the Company believes that the risk of incurring a loss as a result of having to perform on the guarantees is remote.
7. OTHER ASSETS
The components of other assets are summarized as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
|
|
|
|
||
Equipment and fixtures |
|
$ |
11,481 |
|
$ |
10,671 |
|
Less: accumulated depreciation |
|
(8,634 |
) |
(7,309 |
) |
||
Other intangible assets |
|
3,303 |
|
3,296 |
|
||
Deferred financing costs, net |
|
14,433 |
|
12,330 |
|
||
Prepaid expenses and deposits |
|
8,697 |
|
5,828 |
|
||
Accounts receivable, net |
|
12,335 |
|
11,120 |
|
||
Fair value of interest rate swaps |
|
|
|
647 |
|
||
Investments in Trusts |
|
3,590 |
|
3,590 |
|
||
Deferred tax asset |
|
2,520 |
|
2,403 |
|
||
|
|
$ |
47,725 |
|
$ |
42,576 |
|
16
8. NOTES PAYABLE
The components of notes payable are summarized as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
Fixed Rate |
|
|
|
|
|
||
Mortgage and construction loans with banks (inclulding loans subject to interest rate swaps) bearing interest at fixed rates between 4.24% and 7.30%. The loans are collateralized by mortgages on real estate assets and the assignment of rents. Principal and interest payments are made monthly with all outstanding principal and interest due between March 2010 and August 2019. |
|
$ |
878,468 |
|
$ |
818,166 |
|
|
|
|
|
|
|
||
Variable Rate |
|
|
|
|
|
||
Mortgage and construction loans with banks bearing floating interest rates (including loans subject to reverse interest rate swaps) based on LIBOR and Prime. Interest rates based on LIBOR are between LIBOR plus 1.45% (1.70% and 1.89% at September 30, 2009 and December 31, 2008 respectively) and LIBOR plus 4.0% (4.25% and 4.44% at September 30, 2009 and December 31, 2008, respectively). Interest rates based on Prime are at Prime plus 1.50% (4.75% and 4.75% at September 30, 2009 and December 31, 2008, respectively). The loans are collateralized by mortgages on real estate assets and the assignment of rents. Principal and interest payments are made monthly with all outstanding principal and interest due between October 2009 and September 2014. |
|
165,978 |
|
125,432 |
|
||
|
|
$ |
1,044,446 |
|
$ |
943,598 |
|
Certain mortgage and construction loans with variable rate debt are subject to interest rate floors ranging from 5.0% to 6.5%.
Real estate assets are pledged as collateral for the notes payable. The Company is subject to certain restrictive covenants relating to the outstanding notes payable. The Company was in compliance with all covenants at September 30, 2009.
9. DERIVATIVES
FASB Statement No. 133 (ASC 815), Derivatives and Hedging (FAS 133) requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. A company must designate each qualifying hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in foreign operation.
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with Companys fixed and variable-rate borrowings. In accordance with FAS 133 (ASC 815) the Company designates certain interest rate swaps as cash flow hedges of variable-rate borrowings and the remainder as fair value hedges of fixed-rate borrowings.
The following table summarizes the terms of the Companys derivative financial instruments at September 30, 2009:
Hedge Product |
|
Hedge Type |
|
Notional Amount |
|
Strike |
|
Effective Date |
|
Maturity |
|
|
Reverse Swap Agreement |
|
Fair Value |
|
$ |
61,770 |
|
LIBOR plus 0.65% |
|
10/31/2004 |
|
6/1/2009 |
|
Swap Agreement 1 |
|
Cash Flow |
|
63,000 |
|
4.24% |
|
2/1/2009 |
|
6/30/2013 |
|
|
Swap Agreement 2 |
|
Cash Flow |
|
26,000 |
|
6.32% |
|
7/1/2009 |
|
7/1/2014 |
|
|
Swap Agreement 3 |
|
Cash Flow |
|
8,462 |
|
6.98% |
|
7/27/2009 |
|
6/27/2016 |
|
|
17
Monthly interest payments were recognized as an increase or decrease in interest expense as follows:
|
|
Classification of |
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||
Type |
|
Income (Expense) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Reverse Swap Agreement |
|
Interest expense |
|
$ |
|
|
$ |
186 |
|
$ |
916 |
|
$ |
194 |
|
Swap Agreement 1 |
|
Interest expense |
|
(307 |
) |
|
|
(609 |
) |
|
|
||||
Swap Agreement 2 |
|
Interest expense |
|
(124 |
) |
|
|
(124 |
) |
|
|
||||
Swap Agreement 3 |
|
Interest expense |
|
(49 |
) |
|
|
(49 |
) |
|
|
||||
|
|
|
|
$ |
(480 |
) |
$ |
186 |
|
$ |
134 |
|
$ |
194 |
|
Information relating to the gains recognized on the swap agreements is as follows:
|
|
Gain/(loss) |
|
Location of |
|
Gain/(loss) |
|
||
Type |
|
Nine months ended |
|
reclassified from |
|
Nine months ended September 30, 2009 |
|
||
Swap Agreement 1 |
|
$ |
(526 |
) |
Interest expense |
|
$ |
|
|
Swap Agreement 2 |
|
(742 |
) |
Interest expense |
|
|
|
||
Swap Agreement 3 |
|
(400 |
) |
Interest expense |
|
|
|
||
|
|
$ |
(1,668 |
) |
|
|
$ |
|
|
The Swap Agreements were highly effective for the three and nine months ended September 30, 2009.
The balance sheet classification and carrying amounts of the interest rate swaps are as follows:
|
|
Asset/(Liability) Derivatives |
|
||||||||
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||
Derivatives designated as hedging |
|
Balance Sheet |
|
Fair |
|
Balance Sheet |
|
Fair |
|
||
instruments: |
|
Location |
|
Value |
|
Location |
|
Value |
|
||
Reverse Swap Agreement (expired 6/1/2009) |
|
n/a |
|
$ |
|
|
Other assets |
|
$ |
647 |
|
Swap Agreement 1 |
|
Other liabilities |
|
(526 |
) |
n/a |
|
|
|
||
Swap Agreement 2 |
|
Other liabilities |
|
(742 |
) |
n/a |
|
|
|
||
Swap Agreement 3 |
|
Other liabilities |
|
(400 |
) |
n/a |
|
|
|
||
|
|
|
|
$ |
(1,668 |
) |
|
|
$ |
647 |
|
10. NOTES PAYABLE TO TRUSTS
During July 2005, ESS Statutory Trust III (the Trust III), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $40,000 of preferred securities which mature on July 31, 2035. In addition, the Trust III issued 1,238 of Trust common securities to the Operating Partnership for a purchase price of $1,238. On July 27, 2005, the proceeds from the sale of the preferred and common securities of $41,238 were loaned in the form of a note to the Operating Partnership (Note 3). Note 3 has a fixed rate of 6.91% through July 31, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum. The interest on Note 3, payable quarterly, will be used by the Trust III to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after July 27, 2010.
During May 2005, ESS Statutory Trust II (the Trust II), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership, issued an aggregate of $41,000 of preferred securities which mature on June 30, 2035. In addition, the Trust II issued 1,269 of Trust common securities to the Operating Partnership for a purchase price of $1,269. On May 24, 2005, the proceeds from the sale of the preferred and common securities of $42,269 were loaned in the form of a note to the Operating Partnership (Note 2). Note 2 has a fixed rate of 6.67% through June 30, 2010, and then will be payable at a variable rate equal to the three-month LIBOR plus 2.40% per annum. The interest on Note 2, payable quarterly, will be used by the Trust II to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after June 30, 2010.
18
During April 2005, ESS Statutory Trust I (the Trust), a newly formed Delaware statutory trust and a wholly-owned, unconsolidated subsidiary of the Operating Partnership issued an aggregate of $35,000 of trust preferred securities which mature on June 30, 2035. In addition, the Trust issued 1,083 of trust common securities to the Operating Partnership for a purchase price of $1,083. On April 8, 2005, the proceeds from the sale of the trust preferred and common securities of $36,083 were loaned in the form of a note to the Operating Partnership (the Note). The Note has a variable rate equal to the three-month LIBOR plus 2.25% per annum. The interest on the Note, payable quarterly, will be used by the Trust to pay dividends on the trust preferred securities. The trust preferred securities may be redeemed by the Trust with no prepayment premium after June 30, 2010.
The Company follows FASB Interpretation No. 46R (ASC810), Consolidation of Variable Interest Entities (FIN 46(R)) which addresses the consolidation of VIEs. Under FIN 46(R) (ASC 810) Trust, Trust II and Trust III are VIEs because the holders of the equity investment at risk (the trust preferred securities) do not have adequate decision making ability over the trusts activities because of their lack of voting or similar rights. Because the Operating Partnerships investment in the trusts common securities was financed directly by the trusts as a result of its loan of the proceeds to the Operating Partnership, that investment is not considered to be an equity investment at risk. The Operating Partnerships investment in the trusts is not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk, and therefore the Operating Partnership cannot be the primary beneficiary of the trusts. Since the Company is not the primary beneficiary of the trusts, they have not been consolidated. A debt obligation has been recorded in the form of notes as discussed above for the proceeds, which are owed to the Trust, Trust II and Trust III by the Company. The Company has also recorded its investment in the trusts common securities as other assets.
The Company has not provided financing or other support during the periods presented to the trusts that it was not previously contractually obligated to provide. The Companys maximum exposure to loss as a result of its involvement with the trusts is equal to the total amount of the notes discussed above less the amounts of the Companys investments in the trusts common securities. The net amount is the notes payable that the trusts owe to third parties for their investments in the trusts preferred securities. Following is a tabular comparison of the liabilities the Company has recorded as a result of its involvements with the trusts to the maximum exposure to loss the Company is subject to related to the trusts as of September 30, 2009:
|
|
Notes payable |
|
|
|
|
|
|||
|
|
to Trusts as of |
|
Maximum |
|
|
|
|||
|
|
September 30, 2009 |
|
exposure to loss |
|
Difference |
|
|||
Trust |
|
$ |
36,083 |
|
$ |
35,000 |
|
$ |
1,083 |
|
Trust II |
|
42,269 |
|
41,000 |
|
1,269 |
|
|||
Trust III |
|
41,238 |
|
40,000 |
|
1,238 |
|
|||
|
|
$ |
119,590 |
|
$ |
116,000 |
|
$ |
3,590 |
|
As noted above, these differences represent the amounts that the trusts would repay the Company for its investment in the trusts common securities.
11. EXCHANGEABLE SENIOR NOTES
On March 27, 2007, our Operating Partnership issued $250,000 of its 3.625% Exchangeable Senior Notes due April 1, 2027 (the Notes). Costs incurred to issue the Notes were approximately $5,700. The remaining portion of these costs are being amortized over five years, which represents the estimated term of the Notes, and are included in other assets in the condensed consolidated balance sheet as of September 30, 2009. The Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on April 1 and October 1 of each year until the maturity date of April 1, 2027. The Notes bear interest at 3.625% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash (up to the principal amount of the Notes) and, with respect to any excess exchange value, for cash, shares of our common stock or a combination of cash and shares of our common stock at an exchange rate of approximately 43.1091 shares per one thousand dollars principal amount of Notes at the option of the Operating Partnership.
The Operating Partnership may redeem the Notes at any time to preserve the Companys status as a REIT. In addition, on or after April 5, 2012, the Operating Partnership may redeem the Notes for cash, in whole or in part, at 100% of the principal amount plus accrued and unpaid interest, upon at least 30 days but not more than 60 days prior written notice to holders of the Notes.
19
The holders of the Notes have the right to require the Operating Partnership to repurchase the Notes for cash, in whole or in part, on each of April 1, 2012, April 1, 2017 and April 1, 2022, and upon the occurrence of a designated event, in each case for a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. Certain events are considered Events of Default, as defined in the indenture governing the Notes, which may result in the accelerated maturity of the Notes.
Adoption of FSP APB 14-1(ASC 470-20)
In May 2008, the FASB issued FSP ABP 14-1 (ASC 470-20). Under this guidance entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion should separately account for the liability and equity components of the instrument in a manner that reflects the issuers economic interest cost. The Company retroactively adopted FSP APB 14-1 (ASC 470-20) effective January 1, 2009. As a result, the liability and equity components of the Notes are now accounted for separately. The equity component is included in the paid-in-capital section of stockholders equity on the condensed consolidated balance sheet, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. The discount is being amortized over the period of the debt as additional interest expense.
Information about the carrying amounts of the equity component, the principal amount of the liability component, its unamortized discount, and its net carrying amount are as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
Carrying amount of equity component |
|
$ |
19,726 |
|
$ |
21,779 |
|
|
|
|
|
|
|
||
Principal amount of liability component |
|
$ |
95,163 |
|
$ |
209,663 |
|
Unamortized discount |
|
(4,639 |
) |
(13,031 |
) |
||
Net carrying amount of liability component |
|
$ |
90,524 |
|
$ |
196,632 |
|
The discount will be amortized over the remaining period of the debt through its first redemption date (April 1, 2012). The effective interest rate on the liability component is 5.75%. The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component is as follows:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Contractual interest |
|
$ |
870 |
|
$ |
2,266 |
|
$ |
3,723 |
|
$ |
6,798 |
|
Amortization of discount |
|
430 |
|
1,059 |
|
1,834 |
|
3,147 |
|
||||
Total interest expense recognized |
|
$ |
1,300 |
|
$ |
3,325 |
|
$ |
5,557 |
|
$ |
9,945 |
|
Repurchases of Notes
FSP APB 14-1 (ASC 470-20) requires that the value of the consideration paid to repurchase the Notes be allocated (1) to the extinguishment of the liability component and (2) the reacquisition of the equity component. The amount allocated to the extinguishment of the liability component is equal to the fair value of that component immediately prior to extinguishment. The difference between the consideration attributed to the extinguishment of the liability component and the sum of (a) the net carrying amount of the repurchased liability component, and (b) the related unamortized debt issuance costs is recognized as a gain on debt extinguishment. The remaining settlement consideration is allocated to the reacquisition of the equity component of the repurchased Notes, and recognized as a reduction of stockholders equity.
20
Information on the repurchases and the related gains is as follows:
|
|
May 2009 |
|
March 2009 |
|
October 2008 |
|
|||
|
|
|
|
|
|
|
|
|||
Principal amount repurchased |
|
$ |
43,000 |
|
$ |
71,500 |
|
$ |
40,337 |
|
Amount allocated to: |
|
|
|
|
|
|
|
|||
Extinguishment of liability component |
|
$ |
35,000 |
|
$ |
43,800 |
|
$ |
30,696 |
|
Reacquisition of equity component |
|
1,340 |
|
713 |
|
1,025 |
|
|||
Total cash paid for repurchase |
|
$ |
36,340 |
|
$ |
44,513 |
|
$ |
31,721 |
|
|
|
|
|
|
|
|
|
|||
Exchangeable senior notes repurchased |
|
$ |
43,000 |
|
$ |
71,500 |
|
$ |
40,337 |
|
Extinguishment of liability component |
|
(35,000 |
) |
(43,800 |
) |
(30,696 |
) |
|||
Discount on exchangeable senior notes |
|
(2,349 |
) |
(4,208 |
) |
(2,683 |
) |
|||
Related debt issuance costs |
|
(558 |
) |
(1,009 |
) |
(646 |
) |
|||
Gain on repurchase |
|
$ |
5,093 |
|
$ |
22,483 |
|
$ |
6,312 |
|
12. LINES OF CREDIT
On October 19, 2007, the Operating Partnership entered into a $100,000 revolving line of credit (the Credit Line) that matures October 31, 2010 with two one-year extensions available. The Company intends to use the proceeds of the Credit Line to repay debt and for general corporate purposes. The Credit Line has an interest rate of between 100 and 205 basis points over LIBOR, depending on certain financial ratios of the Company (1.25% at September 30, 2009). The Credit Line is collateralized by mortgages on certain real estate assets. As of September 30, 2009, the Credit Line had $100,000 of capacity based on the assets collateralizing the Credit Line. $100,000 and $27,000 was drawn on the Credit Line as of September 30, 2009 and December 31, 2008, respectively. The Company is subject to certain restrictive covenants relating to the Credit Line. The Company was in compliance with all covenants as of September 30, 2009.
On February 13, 2009, the Company entered into a $50,000 revolving secured line of credit (the Secondary Credit Line) that is collateralized by mortgages on certain real estate assets and matures on February 13, 2012. The Company intends to use the proceeds of the Secondary Credit Line to repay debt and for general corporate purposes. The Secondary Credit Line has an interest rate of LIBOR plus 325 basis points (3.50% at September 30, 2009). As of September 30, 2009, there were no amounts drawn on the Secondary Credit Line. The Company is subject to certain restrictive covenants relating to the Secondary Credit Line. The Company was in compliance with all covenants as of September 30, 2009.
13. OTHER LIABILTIES
The components of other liabilities are summarized as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
|
|
|
|
||
Deferred rental income |
|
$ |
11,898 |
|
$ |
12,535 |
|
Lease obligation liability |
|
6,237 |
|
3,029 |
|
||
Fair value of interest rate swaps |
|
1,668 |
|
|
|
||
Income taxes payable |
|
176 |
|
2,825 |
|
||
Other miscellaneous liabilities |
|
5,240 |
|
3,878 |
|
||
|
|
$ |
25,219 |
|
$ |
22,267 |
|
14. RELATED PARTY AND AFFILIATED REAL ESTATE JOINT VENTURE TRANSACTIONS
The Company provides management and development services to certain joint ventures, franchises, third parties and other related party properties. Management agreements provide generally for management fees of 6% of cash collected from properties for the management of operations at the self-storage facilities.
21
Management fee revenues for related parties and affiliated real estate joint ventures are summarized as follows:
|
|
|
|
Three Months Ended September 30, |
|
Nine Months ended September 30, |
|
||||||||
Entity |
|
Type |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
ESW |
|
Affiliated real estate joint ventures |
|
$ |
100 |
|
$ |
107 |
|
$ |
302 |
|
$ |
325 |
|
ESW II |
|
Affiliated real estate joint ventures |
|
79 |
|
80 |
|
233 |
|
231 |
|
||||
ESNPS |
|
Affiliated real estate joint ventures |
|
111 |
|
118 |
|
339 |
|
349 |
|
||||
ESSM |
|
Affiliated real estate joint ventures |
|
5 |
|
|
|
5 |
|
|
|
||||
PRISA |
|
Affiliated real estate joint ventures |
|
1,188 |
|
1,289 |
|
3,619 |
|
3,810 |
|
||||
PRISA II |
|
Affiliated real estate joint ventures |
|
993 |
|
1,053 |
|
2,995 |
|
3,110 |
|
||||
PRISA III |
|
Affiliated real estate joint ventures |
|
422 |
|
448 |
|
1,263 |
|
1,329 |
|
||||
VRS |
|
Affiliated real estate joint ventures |
|
281 |
|
298 |
|
848 |
|
881 |
|
||||
WCOT |
|
Affiliated real estate joint ventures |
|
361 |
|
389 |
|
1,093 |
|
1,154 |
|
||||
SP I |
|
Affiliated real estate joint ventures |
|
310 |
|
336 |
|
937 |
|
974 |
|
||||
SPB II |
|
Affiliated real estate joint ventures |
|
236 |
|
247 |
|
712 |
|
753 |
|
||||
Various |
|
Franchisees, third parties and other |
|
1,105 |
|
1,052 |
|
3,339 |
|
2,921 |
|
||||
|
|
|
|
$ |
5,191 |
|
$ |
5,417 |
|
$ |
15,685 |
|
$ |
15,837 |
|
Receivables from related parties and affiliated real estate joint ventures are summarized as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
|
|
|
|
||
Development fees receivable |
|
$ |
250 |
|
$ |
1,382 |
|
Other receivables from properties |
|
3,127 |
|
9,953 |
|
||
|
|
$ |
3,377 |
|
$ |
11,335 |
|
Development fees receivable consist of amounts due for development services from third parties and unconsolidated affiliated joint ventures. The Company earns development fees of 1% - 6% of budged costs on development projects. Other receivables from properties consist of amounts due for management fees and expenses paid by the Company on behalf of the properties that the Company manages. The Company believes that all of these related party and affiliated joint venture receivables are fully collectible. The Company did not have any payables to related parties at September 30, 2009 or December 31, 2008.
Centershift, a related party service provider, is partially owned by certain directors and members of management of the Company. Effective January 1, 2004, the Company entered into a license agreement with Centershift to secure a perpetual right for continued use of STORE (the site management software used at all sites operated by the Company) in all aspects of the Companys property acquisition, development, redevelopment and operational activities. The Company paid Centershift $352 and $274 for the three months ended September 30, 2009 and 2008, respectively, and $820 and $701 for the nine months ended September 30, 2009 and 2008, respectively, relating to the purchase of software and to license agreements.
The Company has entered into an aircraft dry lease and service and management agreement with SpenAero, L.C. (SpenAero), an affiliate of Spencer F. Kirk, the Companys Chairman and Chief Executive Officer. Under the terms of the agreement, the Company pays a defined hourly rate for use of the aircraft. The Company paid SpenAero and related entities $151 and $85 for the three months ended September 30, 2009 and 2008, respectively, and $623 and $296, for the nine months ended September 30, 2009 and 2008, respectively. The services that the Company receives from SpenAero are similar in nature and price to those that are provided to third parties.
15. STOCKHOLDERS EQUITY
The Companys charter provides that it can issue up to 300,000,000 shares of common stock, $0.01 par value per share, 4,100,000 CCSs, $.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. As of September 30, 2009, 86,435,938 shares of common stock were issued and outstanding and no shares of preferred stock or CCSs were issued and outstanding.
All holders of the Companys common stock are entitled to receive dividends and to one vote on all matters submitted to a vote of stockholders. The transfer agent and registrar for the Companys common stock is American Stock Transfer & Trust Company.
Unlike the Companys shares of common stock, CCSs did not carry any voting rights. Upon the achievement of certain performance thresholds relating to 14 properties, a portion of the CCSs were automatically converted into shares of the Companys common stock. Each CCS was convertible on a one-for-one basis into shares of common stock, subject to customary anti-dilution adjustments. Beginning with the quarter ended March 31, 2006, and ending with the quarter ended December 31, 2008, the Company calculated the net operating income from the 14 wholly-owned properties over the 12-month period ending in such quarter. Within 35 days following the end of each quarter referred to above, some of the CCSs
22
were converted so that the total percentage of CCSs issued in connection with the formation transactions that had been converted to common stock was equal to the percentage determined by dividing the net operating income for such period in excess of $5,100 by $4,600. The 1,087,790 CCSs remaining unconverted through the calculation made in respect of the 12-month period ended December 31, 2008 were cancelled as of February 4, 2009 and restored to the status of authorized but unissued shares of common stock.
16. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS
On June 15, 2007, the Operating Partnership entered into a Contribution Agreement with various limited partnerships affiliated with AAAAA Rent-A-Space to acquire ten self-storage facilities (the Properties) in exchange for the issuance of newly designated Preferred OP units of the Operating Partnership. The self-storage facilities are located in California and Hawaii.
On June 25 and 26, 2007, nine of the ten properties were contributed to the Operating Partnership in exchange for consideration totaling $137,800. Preferred OP units totaling 909,075, with a value of $121,700, were issued along with the assumption of approximately $14,200 of third-party debt, of which $11,400 was paid off at close. The final property was contributed on August 1, 2007 in exchange for consideration totaling $14,700. 80,905 Preferred OP units with a value of $9,800 were issued along with $4,900 of cash.
On June 25, 2007, the Operating Partnership loaned the holders of the Preferred OP units $100,000. The note receivable bears interest at 4.85%, and is due September 1, 2017. The loan is secured by the borrowers Preferred OP units. The holders of the Preferred OP units can convert up to 114,500 Preferred OP units prior to the maturity date of the loan. If any redemption in excess of 114,500 Preferred OP units occurs prior to the maturity date, the holder of the Preferred OP units is required to repay the loan as of the date of that Preferred OP unit redemption. Preferred OP units are shown on the balance sheet net of the $100,000 loan under the guidance in EITF No. 85-1, Classifying Notes Receivable for Capital,(ASC 505-10) because the borrower under the loan receivable is also the holder of the Preferred OP units.
The Operating Partnership entered into a Second Amended and Restated Agreement of Limited Partnership (the Partnership Agreement) which provides for the designation and issuance of the Preferred OP units. The Preferred OP units will have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.
Under the Partnership Agreement, Preferred OP units in the amount of $115,000 bear a fixed priority return of 5% and have a fixed liquidation value of $115,000. The remaining balance will participate in distributions with and have a liquidation value equal to that of the common OP units. The Preferred OP units became redeemable at the option of the holder on September 1, 2008, which redemption obligation may be satisfied, at the Companys option, in cash or shares of its common stock.
On September 18, 2008, the Operating Partnership entered into a First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Extra Space Storage LP to clarify certain tax-related provisions relating to the Preferred OP units.
The Company adopted the revisions to FAS 160 (ASC 810) effective January 1, 2009. FAS 160 (ASC 810) requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the companys equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. FAS 160 (ASC 810) was required to be adopted prospectively with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. As a result of the issuance of the revisions to FAS 160 (ASC 810), the guidance in EITF Topic D-98 (ASC 480-10-S99), Classification and Measurement of Redeemable Securities was amended to include redeemable noncontrolling interests within its scope. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.
The Company has evaluated the terms of the Preferred OP units, and as a result of the adoption FAS 160 (ASC 810) the Company reclassified the noncontrolling interest represented by the Preferred OP units to stockholders equity in the accompanying condensed consolidated balance sheets. In periods subsequent to the adoption of FAS 160 (ASC 810) the Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the consolidated balance sheets. Any noncontrolling interests that fail to quality as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
23
17. NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP
The Companys interest in its properties is held through the Operating Partnership. ESS Holding Business Trust I, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The Company, through ESS Holding Business Trust II, a wholly owned subsidiary of the Company, is also a limited partner of the Operating Partnership. Between its general partner and limited partner interests, the Company held a 94.63% majority ownership interest therein as of September 30, 2009. The remaining ownership interests in the Operating Partnership (including Preferred OP units) of 5.37% are held by certain former owners of assets acquired by the Operating Partnership, which include officers and a director of the Company. As of September 30, 2009, the Operating Partnership had 3,917,941 common OP units outstanding.
The noncontrolling interest in the Operating Partnership represents common OP units that are not owned by the Company. In conjunction with the formation of the Company and as a result of subsequent acquisitions, certain persons and entities contributing interests in properties to the Operating Partnership received limited partnership units in the form of either OP units or CCUs. Limited partners who received OP units in the formation transactions or in exchange for contributions for interests in properties have the right to require the Operating Partnership to redeem part or all of their common OP units for cash based upon the fair market value of an equivalent number of shares of the Companys common stock (10 day average) at the time of the redemption. Alternatively, the Company may, at its option, elect to acquire those OP units in exchange for shares of its common stock on a one-for-one basis, subject to anti-dilution adjustments provided in the Partnership Agreement. When the Company elects to exchange the OP units for shares of its common stock, the noncontrolling interest is reduced by the fair value of the OP units on the day of exchange, and the Companys equity is increased for the fair value of the common stock issued with the difference being recorded to the Companys retained earnings. The ten day average closing stock price at September 30, 2009 was $10.81 and there were 3,917,941 OP units outstanding. Assuming that all of the unit holders exercised their right to redeem all of their common OP units on September 30, 2009 and the Company elected to pay the noncontrolling members cash, the Company would have paid $42,353 in cash consideration to redeem the OP units.
During April 2009, 114,928 OP units were redeemed in exchange for the Companys common stock. During July 2009, 232,099 OP units were redeemed in exchange for $1,908 in cash.
Unlike the OP units, CCUs did not carry any voting rights. Upon the achievement of certain performance thresholds relating to 14 properties, a portion of the CCUs automatically converted into OP units. Each CCU was convertible on a one-for-one basis into OP units, subject to customary anti-dilution adjustments. Beginning with the quarter ended March 31, 2006, and ending with the quarter ended December 31, 2008, the Company calculated the net operating income from the 14 wholly-owned properties over the 12-month period ending in such quarter. Within 35 days following the end of each quarter referred to above, some of the CCUs were converted so that the total percentage of CCUs issued in connection with the formation transactions that were converted to OP units was equal to the percentage determined by dividing the net operating income for such period in excess of $5,100 by $4,600. The 55,957 CCUs remaining unconverted through the calculation made in respect of the 12-month period ended December 31, 2008 were cancelled as of February 4, 2009.
The Company adopted the revisions to FAS 160 (ASC 810) effective January 1, 2009. FAS 160 (ASC 810) requires a company to present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the companys equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and requires changes in ownership interest to be accounted for similarly as equity transactions. FAS 160 (ASC 810) was required to be adopted prospectively with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. As a result of the issuance of the revisions to FAS 160 (ASC 810), the guidance in EITF Topic D-98 (ASC 480-10-S99), Classification and Measurement of Redeemable Securities was amended to include redeemable noncontrolling interests within its scope. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.
The Company has evaluated the terms of the common OP units, and as a result of the adoption of FAS 160 (ASC 810), the Company reclassified the noncontrolling interest in the Operating Partnership to stockholders equity in the accompanying condensed consolidated balance sheets. In periods subsequent to the adoption of FAS 160 (ASC 810), the Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the consolidated balance sheets. Any noncontrolling interests that fail to quality as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
24
18. OTHER NONCONTROLLING INTERESTS
Other noncontrolling interests represent the ownership interests of various third parties in eleven consolidated self-storage properties as of September 30, 2009. Three of these consolidated properties were under development, and eight were in the lease-up stage during the nine months ended September 30, 2009. The ownership interests of the third party owners range from 10% to 90%. As required by FAS 160 (ASC 810), other noncontrolling interests are included in the stockholders equity section of the Companys consolidated balance sheet. The income or losses attributable to these third party owners based on their ownership percentages are reflected in net income allocated to the Operating Partnership and other noncontrolling interests in the consolidated statement of operations.
In April 2009, the Company requested a capital contribution from its partners in Westport Ewing LLC, a consolidated joint venture, in order to refinance the joint ventures loan with its current lender. The partners were unable to provide their pro rata share of the funds required to satisfy the bank and deeded their interest in Westport Ewing LLC to the Company on June 1, 2009. As a result, the property held by this joint venture became a wholly owned property of the Company. The Company recorded a loss of $800 related to the reassessment of the fair value of the property.
19. STOCK-BASED COMPENSATION
The Company has the following plans under which shares were available for grant at September 30, 2009:
· The 2004 Long-Term Incentive Compensation Plan as amended and restated effective March 25, 2008, and
· The 2004 Non-Employee Directors Share Plan (together, the Plans).
Option grants are issued with an exercise price equal to the closing price of the Companys common stock on the date of grant. Unless otherwise determined by the Compensation, Nominating and Governance Committee at the time of grant, options vest ratably over a four-year period beginning on the date of grant. Each option will be exercisable once it has vested. Options are exercisable at such times and subject to such terms as determined by the Compensation, Nominating and Governance Committee, but under no circumstances will be exercised if such exercise would cause a violation of the ownership limit in the Companys charter. Options expire 10 years from the date of grant.
Also, as defined under the terms of the Plans, restricted stock grants may be awarded. The stock grants are subject to a performance or vesting period over which the restrictions are lifted and the stock certificates are given to the grantee. During the performance or vesting period, the grantee is not permitted to sell, transfer, pledge, encumber or assign shares of restricted stock granted under the Plans, however the grantee has the ability to vote the shares and receive non-forfeitable dividends paid on the shares. The forfeiture and transfer restrictions on the shares lapse over a four-year period beginning on the date of grant.
As of September 30, 2009, 3,545,816 shares were available for issuance under the Plans.
Option Grants to Employees
A summary of stock option activity is as follows:
Options |
|
Number of Shares |
|
Weighted Average |
|
Weighted Average |
|
Aggregate Intrinsic |
|
||
Outstanding at December 31, 2008 |
|
2,841,923 |
|
$ |
14.76 |
|
|
|
|
|
|
Granted |
|
723,000 |
|
6.22 |
|
|
|
|
|
||
Forfeited |
|
(97,750 |
) |
13.11 |
|
|
|
|
|
||
Outstanding at September 30, 2009 |
|
3,467,173 |
|
$ |
13.03 |
|
6.91 |
|
$ |
1,540 |
|
Vested and Expected to Vest |
|
3,203,459 |
|
$ |
13.68 |
|
6.59 |
|
$ |
2,268 |
|
Ending Exercisable |
|
2,218,695 |
|
$ |
14.39 |
|
5.67 |
|
$ |
|
|
The aggregate intrinsic value in the table above represents the total value (the difference between the Companys closing stock price on the last trading day of the third quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. The amount of aggregate intrinsic value will change based on the fair market value of the Companys stock.
25
The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following assumptions:
|
|
Nine Months Ended September 30, |
|
||
|
|
2009 |
|
2008 |
|
Expected volatility |
|
48 |
% |
30 |
% |
Dividend yield |
|
3.5 |
% |
6.4 |
% |
Risk-free interest rate |
|
2.3 |
% |
3.0 |
% |
Average expected term (years) |
|
5 |
|
5 |
|
The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility, dividend yield and average expected term. The forfeiture rate, which is estimated at a weighted-average of 16.7% of unvested options outstanding as of September 30, 2009, is adjusted based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates.
The Company recorded compensation expense relating to outstanding options of $143 and $324 for the three months ended September 30, 2009 and 2008, respectively, and $620 and $819 for the nine months ended September 30, 2009 and 2008, respectively. The Company received cash from the exercise of options of $0 and $1,123 for the three months ended September 30, 2009 and 2008, respectively, and $0 and $2,063 for the nine months ended September 30, 2009 and 2008, respectively. At September 30, 2009, there was $1,138 of total unrecognized compensation expense related to non-vested stock options under the Companys 2004 Long-Term Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 2.8 years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized compensation expense at September 30, 2009, noted above does not necessarily represent the expense that will ultimately be realized by the Company in the Statement of Operations.
Common Stock Granted to Employees and Directors
The Company granted 6,500 and 4,200 shares of common stock to certain employees and directors, without monetary consideration under the Plans during the three months ended September 30, 2009 and 2008, respectively, and 545,365 and 358,139 shares during the nine months ended September 30, 2009 and 2008, respectively. The Company recorded compensation expense related to outstanding shares of common stock granted to employees and directors of $648 and $496 for the three months ended September 30, 2009 and 2008, respectively, and $2,332 and $1,985 for the nine months ended September 30, 2009 and 2008, respectively.
The fair value of common stock awards is determined based on the closing trading price of the Companys common stock on the grant date. A summary of the Companys employee share grant activity is as follows:
Restricted Stock Grants |
|
Shares |
|
Weighted-Average |
|
|
Unreleased at December 31, 2008 |
|
441,204 |
|
$ |
16.21 |
|
Granted |
|
545,365 |
|
6.17 |
|
|
Released |
|
(193,662 |
) |
13.42 |
|
|
Cancelled |
|
(14,686 |
) |
10.84 |
|
|
Unreleased at September 30, 2009 |
|
778,221 |
|
$ |
9.97 |
|
26
20. INCOME TAXES
As a REIT, the Company is generally not subject to federal income tax with respect to that portion of its income which is distributed annually to its stockholders. However, the Company has elected to treat one of its corporate subsidiaries, Extra Space Management, Inc., as a taxable REIT subsidiary (TRS). In general, the Companys TRS may perform additional services for tenants and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. The Company accounts for income taxes in accordance with the provisions of FASB Statement No. 109 (ASC 740) Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities.
The income tax provision is comprised of the following components:
|
|
Nine months ended September 30, 2009 |
|
|||||||
|
|
Federal |
|
State |
|
Total |
|
|||
Current |
|
$ |
2,219 |
|
$ |
215 |
|
$ |
2,434 |
|
Deferred benefit |
|
(107 |
) |
(10 |
) |
(117 |
) |
|||
Total tax expense |
|
$ |
2,112 |
|
$ |
205 |
|
$ |
2,317 |
|
The major sources of temporary differences stated at their deferred tax effect are as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
Captive insurance subsidiary |
|
$ |
57 |
|
$ |
109 |
|
Fixed assets |
|
(263 |
) |
34 |
|
||
Various liabilities |
|
845 |
|
1,042 |
|
||
Stock compensation |
|
1,881 |
|
1,218 |
|
||
State net operating losses |
|
903 |
|
587 |
|
||
|
|
3,423 |
|
2,990 |
|
||
Valuation allowance |
|
(903 |
) |
(587 |
) |
||
Net deferred tax asset |
|
$ |
2,520 |
|
$ |
2,403 |
|
The state income tax net operating losses expire between 2012 and 2027 and have been fully reversed through the valuation allowance.
21. UNRECOVERED DEVELOPMENT AND ACQUISITION COSTS AND SEVERANCE COSTS ASSOCIATED WITH THE WIND-DOWN OF DEVELOPMENT PROGRAM
On June 2, 2009, the Company announced that it had begun the wind-down of its development program. As a result of the decision, the Company incurred $18,883 of impairment charges in order to write down the carrying value of undeveloped land, development projects that will be completed and investments in development projects to their estimated fair values less cost to sell. In addition, the Company recorded severance costs of $1,400. The Company expects to complete the remaining development properties currently under construction (13 wholly owned and one joint venture) by the fourth quarter of 2010.
Unrecovered development and acquisition costs incurred during the nine months ended September 30, 2008 include $1,257 relating to due diligence costs that were part of an unsuccessful attempt by the Company to purchase a large portfolio of properties in May and June of 2008. The remainder of these costs relate to entitlement and other due diligence work done on development projects that the Company elected not to pursue.
27
22. SEGMENT INFORMATION
The Company operates in three distinct segments: (1) property management, acquisition and development; (2) rental operations; and (3) tenant reinsurance. With the increased profitability and revenue growth in tenant reinsurance, the Company has started reporting this segment separately from the property management, acquisition and development segment. Financial information for the Companys business segments is set forth below:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
Balance Sheet |
|
|
|
|
|
||
Investment in real estate ventures |
|
|
|
|
|
||
Rental operations |
|
$ |
132,356 |
|
$ |
136,791 |
|
|
|
|
|
|
|
||
Total assets |
|
|
|
|
|
||
Property management, acquisition and development |
|
$ |
470,190 |
|
$ |
466,474 |
|
Rental operations |
|
1,884,260 |
|
1,811,417 |
|
||
Tenant reinsurance |
|
14,700 |
|
13,117 |
|
||
|
|
$ |
2,369,150 |
|
$ |
2,291,008 |
|
28
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Statement of Operations |
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
5,382 |
|
$ |
5,586 |
|
$ |
15,886 |
|
$ |
16,262 |
|
Rental operations |
|
60,380 |
|
59,997 |
|
178,494 |
|
174,906 |
|
||||
Tenant reinsurance |
|
5,542 |
|
4,265 |
|
15,246 |
|
11,723 |
|
||||
|
|
$ |
71,304 |
|
$ |
69,848 |
|
$ |
209,626 |
|
$ |
202,891 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses, including depreciation and amortization |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
11,602 |
|
$ |
10,723 |
|
$ |
53,902 |
|
$ |
33,103 |
|
Rental operations |
|
35,221 |
|
33,354 |
|
104,214 |
|
97,410 |
|
||||
Tenant reinsurance |
|
1,264 |
|
1,426 |
|
3,996 |
|
3,958 |
|
||||
|
|
$ |
48,087 |
|
$ |
45,503 |
|
$ |
162,112 |
|
$ |
134,471 |
|
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) before interest, equity in earnings of real estate ventures, gain on repurchase of exchangeable senior notes, loss on sale of investments available for sale and income tax expense |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
(6,220 |
) |
$ |
(5,137 |
) |
$ |
(38,016 |
) |
$ |
(16,841 |
) |
Rental operations |
|
25,159 |
|
26,643 |
|
74,280 |
|
77,496 |
|
||||
Tenant reinsurance |
|
4,278 |
|
2,839 |
|
11,250 |
|
7,765 |
|
||||
|
|
$ |
23,217 |
|
$ |
24,345 |
|
$ |
47,514 |
|
$ |
68,420 |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
(746 |
) |
$ |
(1,384 |
) |
$ |
(2,728 |
) |
$ |
(4,148 |
) |
Rental operations |
|
(17,381 |
) |
(15,579 |
) |
(48,414 |
) |
(47,219 |
) |
||||
|
|
$ |
(18,127 |
) |
$ |
(16,963 |
) |
$ |
(51,142 |
) |
$ |
(51,367 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
262 |
|
$ |
1,245 |
|
$ |
1,082 |
|
$ |
2,452 |
|
Tenant reinsurance |
|
(17 |
) |
35 |
|
16 |
|
123 |
|
||||
|
|
$ |
245 |
|
$ |
1,280 |
|
$ |
1,098 |
|
$ |
2,575 |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income on note receivable from Preferred Operating Partnership unit holder |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
1,213 |
|
$ |
1,213 |
|
$ |
3,638 |
|
$ |
3,638 |
|
|
|
|
|
|
|
|
|
|
|
||||
Equity in earnings of real estate ventures |
|
|
|
|
|
|
|
|
|
||||
Rental operations |
|
$ |
1,752 |
|
$ |
2,015 |
|
$ |
5,288 |
|
$ |
4,610 |
|
|
|
|
|
|
|
|
|
|
|
||||
Gain on repurchase of exchangeable senior notes |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
|
|
$ |
|
|
$ |
27,576 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss on sale of investments available for sale |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(1,415 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Income tax expense |
|
|
|
|
|
|
|
|
|
||||
Tenant reinsurance |
|
$ |
(726 |
) |
$ |
(3 |
) |
$ |
(2,317 |
) |
$ |
(190 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
(6,217 |
) |
$ |
(4,066 |
) |
$ |
(10,765 |
) |
$ |
(16,504 |
) |
Rental operations |
|
9,530 |
|
13,079 |
|
31,154 |
|
34,887 |
|
||||
Tenant reinsurance |
|
4,261 |
|
2,874 |
|
11,266 |
|
7,888 |
|
||||
|
|
$ |
7,574 |
|
$ |
11,887 |
|
$ |
31,655 |
|
$ |
26,271 |
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
$ |
1,598 |
|
$ |
368 |
|
$ |
2,402 |
|
$ |
1,094 |
|
Rental operations |
|
12,199 |
|
11,987 |
|
36,758 |
|
34,539 |
|
||||
|
|
$ |
13,797 |
|
$ |
12,355 |
|
$ |
39,160 |
|
$ |
35,633 |
|
|
|
|
|
|
|
|
|
|
|
||||
Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
||||
Acquisition of real estate assets |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
|
|
|
|
$ |
(27,378 |
) |
$ |
(55,602 |
) |
||
|
|
|
|
|
|
|
|
|
|
||||
Development and construction of real estate assets |
|
|
|
|
|
|
|
|
|
||||
Property management, acquisition and development |
|
|
|
|
|
$ |
(57,905 |
) |
$ |
(43,757 |
) |
29
23. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed a construction loan for an unconsolidated partnership that owns a property in Baltimore, Maryland. The property is owned by a joint venture in which the Company has a 10% equity interest. This guarantee was entered into in November 2004. At September 30, 2009, the total amount of guaranteed mortgage debt relating to this joint venture was $5,448. This mortgage loan matures on December 12, 2009. If the joint venture defaults on the loan, the Company may be forced to repay the loan. Repossessing and/or selling the self-storage facility and land that collateralize the loan could provide funds sufficient to reimburse the Company. The estimated fair market value of the encumbered assets at September 30, 2009 was $6,981. The Company recorded no liability in relation to this guarantee as of September 30, 2009, as the fair value of the guarantee was not material. To date, the joint venture has not defaulted on its mortgage debt. The Company believes the risk of incurring a loss as a result of having to perform on this guarantee is remote.
The Company has been involved in routine litigation arising in the ordinary course of business. As of September 30, 2009, the Company was not involved in any material litigation nor, to its knowledge, was any material litigation threatened against it, or its properties.
24. SUBSEQUENT EVENTS
During October 2009, the Company repurchased $7,500 principal amount of Notes. The Company paid cash of $6,881 to repurchase the Notes, exclusive of $4 paid for interest accrued on the repurchased Notes through the date of repurchase.
The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on November 5, 2009.
30
Extra Space Storage Inc.
Managements Discussion and Analysis
Amounts in thousands, except property and share data
ITEM 2. MANAGEMENTS 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 contained in this report and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2008, as updated in our Form 8-K filed on June 5, 2009. The Company makes 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 are in thousands (except property and share data and 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 U.S. generally accepted accounting principles (GAAP). Certain amounts in the unaudited condensed consolidated financial statements have been restated to reflect the retroactive application of new accounting standards. 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, 2008, as updated in our Form 8-K filed on June 5, 2009, 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 which we have used are appropriate and correct based on information available at the time that 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.
31
OVERVIEW
We are a fully integrated, self-administered and self-managed real estate investment trust, or REIT, formed to continue the business commenced in 1977 by our predecessor companies to own, operate, manage, acquire and redevelop professionally managed self-storage properties. We derive substantially all of our revenues from rents received from tenants under existing leases at each of our self-storage properties, from management fees on the properties we manage for joint-venture partners, franchisees and unaffiliated third parties and from our tenant reinsurance program. Our management fee is equal to approximately 6% of cash collected 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, to 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 systems ability to provide real-time, interactive rental rate and discount management. Our size allows greater ability than the majority of our competitors to implement national, regional and local marketing programs, which we believe will attract more customers to our stores at a lower net cost.
· 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 that strengthen our acquisition pipeline through agreements which give us first right of refusal to purchase the managed property in the event of a potential sale.
· Acquire self-storage properties from strategic partners and third parties. Our acquisitions team continues to selectively 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.
Recent U.S. and international market and economic conditions have been unprecedented and challenging, with tighter credit conditions and slower growth through the second half of 2008 and the first three quarters of 2009. For the nine months ended September 30, 2009, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit and other macro-economic factors have contributed to increased market volatility and diminished expectations for the global economy and increased market uncertainty and instability. Continued 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, 2009, we owned or had ownership interests in 635 operating self-storage properties. Of these properties, 286 are wholly-owned and 349 are held in joint ventures. In addition, we managed an additional 114 properties for franchisees or third parties bringing the total number of operating properties which we own and/or manage to 749. These properties are located in 33 states and Washington, D.C. As of September 30, 2009, we owned and/or managed approximately 54 million square feet of space with more than 350,000 customers.
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.
We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has
32
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. 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, 2009, the median length of stay was approximately eleven months.
Our property portfolio is a 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 on a state-by-state basis as of September 30, 2009 and 2008. The information as of September 30, 2008 is on a pro forma basis as though all the properties owned and/or managed at September 30, 2009 were under our control as of September 30, 2008.
Stabilized Property Data Based on Location
|
|
|
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Location |
|
Number of |
|
Number of Units as of |
|
Number of Units as of |
|
Net Rentable Square |
|
Net Rentable Square Feet as of |
|
Square Foot |
|
Square Foot |
|
Wholly-owned properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
1 |
|
586 |
|
581 |
|
77,550 |
|
76,000 |
|
83.8 |
% |
80.1 |
% |
Arizona |
|
5 |
|
2,828 |
|
2,845 |
|
347,098 |
|
347,413 |
|
85.9 |
% |
85.8 |
% |
California |
|
46 |
|
36,921 |
|
37,148 |
|
3,642,589 |
|
3,636,146 |
|
83.0 |
% |
85.8 |
% |
Colorado |
|
8 |
|
3,791 |
|
3,802 |
|
476,484 |
|
476,434 |
|
84.9 |
% |
89.0 |
% |
Connecticut |
|
3 |
|
2,028 |
|
2,026 |
|
178,115 |
|
178,190 |
|
81.3 |
% |
78.3 |
% |
Florida |
|
31 |
|
20,508 |
|
20,587 |
|
2,184,769 |
|
2,185,445 |
|
81.5 |
% |
82.2 |
% |
Georgia |
|
12 |
|
6,423 |
|
6,430 |
|
836,922 |
|
835,632 |
|
82.1 |
% |
87.1 |
% |
Hawaii |
|
2 |
|
2,857 |
|
2,869 |
|
145,616 |
|
149,922 |
|
81.7 |
% |
85.0 |
% |
Illinois |
|
5 |
|
3,322 |
|
3,290 |
|
342,239 |
|
342,319 |
|
83.3 |
% |
81.4 |
% |
Indiana |
|
6 |
|
3,486 |
|
3,526 |
|
412,785 |
|
415,107 |
|
83.8 |
% |
87.3 |
% |
Kansas |
|
1 |
|
506 |
|
504 |
|
50,190 |
|
49,740 |
|
88.5 |
% |
88.0 |
% |
Kentucky |
|
3 |
|
1,578 |
|
1,582 |
|
194,001 |
|
194,270 |
|
90.9 |
% |
88.6 |
% |
Louisiana |
|
2 |
|
1,412 |
|
1,405 |
|
150,335 |
|
148,315 |
|
83.4 |
% |
90.8 |
% |
Maryland |
|
10 |
|
7,936 |
|
7,945 |
|
847,487 |
|
847,054 |
|
86.8 |
% |
84.3 |
% |
Massachusetts |
|
26 |
|
15,253 |
|
15,278 |
|
1,570,320 |
|
1,573,009 |
|
84.7 |
% |
84.7 |
% |
Michigan |
|
2 |
|
1,026 |
|
1,038 |
|
135,026 |
|
136,466 |
|
84.9 |
% |
90.7 |
% |
Missouri |
|
6 |
|
3,146 |
|
3,148 |
|
374,277 |
|
374,357 |
|
85.3 |
% |
86.0 |
% |
Nevada |
|
2 |
|
1,239 |
|
1,254 |
|
132,015 |
|
132,215 |
|
86.9 |
% |
88.1 |
% |
New Hampshire |
|
2 |
|
1,006 |
|
1,006 |
|
125,473 |
|
125,909 |
|
86.3 |
% |
88.7 |
% |
New Jersey |
|
23 |
|
18,818 |
|
18,860 |
|
1,835,446 |
|
1,836,691 |
|
85.0 |
% |
86.1 |
% |
New Mexico |
|
1 |
|
545 |
|
538 |
|
71,705 |
|
68,310 |
|
84.9 |
% |
86.4 |
% |
New York |
|
10 |
|
8,657 |
|
8,688 |
|
608,590 |
|
609,976 |
|
83.0 |
% |
82.1 |
% |
Ohio |
|
4 |
|
2,026 |
|
2,026 |
|
273,772 |
|
273,492 |
|
86.0 |
% |
86.8 |
% |
Oregon |
|
1 |
|
766 |
|
766 |
|
102,990 |
|
103,450 |
|
86.0 |
% |
83.9 |
% |
Pennsylvania |
|
9 |
|
6,572 |
|
6,572 |
|
689,540 |
|
684,983 |
|
85.1 |
% |
86.0 |
% |
Rhode Island |
|
1 |
|
729 |
|
729 |
|
75,521 |
|
75,521 |
|
84.2 |
% |
89.8 |
% |
South Carolina |
|
3 |
|
1,553 |
|
1,554 |
|
178,749 |
|
178,719 |
|
86.7 |
% |
89.3 |
% |
Tennessee |
|
6 |
|
3,692 |
|
3,502 |
|
487,774 |
|
474,327 |
|
79.5 |
% |
85.8 |
% |
Texas |
|
20 |
|
12,379 |
|
12,415 |
|
1,402,957 |
|
1,402,408 |
|
86.2 |
% |
87.5 |
% |
Utah |
|
3 |
|
1,540 |
|
1,537 |
|
210,561 |
|
210,526 |
|
86.4 |
% |
92.6 |
% |
Virginia |
|
5 |
|
3,561 |
|
3,579 |
|
346,872 |
|
346,907 |
|
84.8 |
% |
87.2 |
% |
Washington |
|
4 |
|
2,550 |
|
2,542 |
|
308,115 |
|
306,025 |
|
93.1 |
% |
90.9 |
% |
Total Wholly-Owned Stabilized |
|
263 |
|
179,240 |
|
179,572 |
|
18,815,883 |
|
18,795,278 |
|
84.2 |
% |
85.6 |
% |
33
|
|
|
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Location |
|
Number of |
|
Number of Units as of |
|
Number of Units as of |
|
Net Rentable Square |
|
Net Rentable Square |
|
Square Foot |
|
Square Foot |
|
Joint-venture properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
3 |
|
1,705 |
|
1,710 |
|
205,638 |
|
205,833 |
|
82.8 |
% |
85.9 |
% |
Arizona |
|
11 |
|
6,838 |
|
6,862 |
|
751,414 |
|
751,184 |
|
82.4 |
% |
86.6 |
% |
California |
|
77 |
|
55,145 |
|
55,158 |
|
5,636,807 |
|
5,639,736 |
|
85.4 |
% |
88.8 |
% |
Colorado |
|
2 |
|
1,329 |
|
1,334 |
|
158,483 |
|
158,413 |
|
82.2 |
% |
85.3 |
% |
Connecticut |
|
8 |
|
5,993 |
|
5,992 |
|
692,446 |
|
693,032 |
|
80.3 |
% |
79.7 |
% |
Delaware |
|
1 |
|
585 |
|
588 |
|
71,655 |
|
71,655 |
|
91.1 |
% |
90.3 |
% |
Florida |
|
23 |
|
19,192 |
|
19,240 |
|
1,941,103 |
|
1,938,665 |
|
81.2 |
% |
84.2 |
% |
Georgia |
|
3 |
|
1,870 |
|
1,889 |
|
245,270 |
|
246,926 |
|
79.9 |
% |
83.6 |
% |
Illinois |
|
7 |
|
4,665 |
|
4,679 |
|
503,626 |
|
504,181 |
|
85.7 |
% |
86.0 |
% |
Indiana |
|
7 |
|
2,767 |
|
2,771 |
|
366,173 |
|
365,963 |
|
86.7 |
% |
85.8 |
% |
Kansas |
|
3 |
|
1,210 |
|
1,215 |
|
160,060 |
|
161,500 |
|
82.3 |
% |
85.0 |
% |
Kentucky |
|
4 |
|
2,279 |
|
2,286 |
|
269,916 |
|
268,358 |
|
84.1 |
% |
87.5 |
% |
Maryland |
|
14 |
|
11,071 |
|
11,111 |
|
1,083,140 |
|
1,081,427 |
|
86.5 |
% |
85.0 |
% |
Massachusetts |
|
17 |
|
9,218 |
|
9,246 |
|
1,046,848 |
|
1,047,458 |
|
82.6 |
% |
82.8 |
% |
Michigan |
|
10 |
|
5,919 |
|
5,947 |
|
784,243 |
|
787,118 |
|
85.2 |
% |
88.9 |
% |
Missouri |
|
2 |
|
953 |
|
952 |
|
117,945 |
|
117,715 |
|
83.6 |
% |
90.1 |
% |
Nevada |
|
7 |
|
4,619 |
|
4,611 |
|
619,358 |
|
618,818 |
|
82.5 |
% |
85.6 |
% |
New Hampshire |
|
3 |
|
1,317 |
|
1,320 |
|
137,594 |
|
138,234 |
|
85.5 |
% |
86.0 |
% |
New Jersey |
|
21 |
|
15,666 |
|
15,675 |
|
1,647,176 |
|
1,647,956 |
|
83.4 |
% |
84.1 |
% |
New Mexico |
|
9 |
|
4,680 |
|
4,698 |
|
542,709 |
|
537,802 |
|
86.2 |
% |
86.7 |
% |
New York |
|
21 |
|
21,641 |
|
21,659 |
|
1,734,340 |
|
1,736,140 |
|
87.5 |
% |
88.8 |
% |
Ohio |
|
11 |
|
5,017 |
|
5,023 |
|
755,307 |
|
754,657 |
|
80.2 |
% |
82.7 |
% |
Oregon |
|
2 |
|
1,291 |
|
1,294 |
|
136,500 |
|
136,980 |
|
86.7 |
% |
86.9 |
% |
Pennsylvania |
|
10 |
|
7,229 |
|
7,228 |
|
764,885 |
|
764,980 |
|
85.7 |
% |
86.8 |
% |
Rhode Island |
|
1 |
|
607 |
|
607 |
|
73,880 |
|
73,880 |
|
68.3 |
% |
77.0 |
% |
Tennessee |
|
22 |
|
11,765 |
|
11,792 |
|
1,548,968 |
|
1,547,659 |
|
84.6 |
% |
86.6 |
% |
Texas |
|
18 |
|
11,704 |
|
11,744 |
|
1,547,980 |
|
1,549,866 |
|
82.4 |
% |
83.2 |
% |
Utah |
|
1 |
|
520 |
|
520 |
|
59,000 |
|
59,300 |
|
86.3 |
% |
81.1 |
% |
Virginia |
|
16 |
|
11,274 |
|
11,278 |
|
1,191,683 |
|
1,191,543 |
|
86.2 |
% |
87.6 |
% |
Washington |
|
1 |
|
545 |
|
551 |
|
62,730 |
|
62,730 |
|
86.5 |
% |
83.1 |
% |
Washington, DC |
|
1 |
|
1,535 |
|
1,536 |
|
102,003 |
|
102,003 |
|
90.1 |
% |
92.6 |
% |
Total Stabilized Joint-Ventures |
|
336 |
|
230,149 |
|
230,516 |
|
24,958,880 |
|
24,961,712 |
|
84.3 |
% |
86.2 |
% |
Managed properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
2 |
|
825 |
|
825 |
|
95,175 |
|
95,175 |
|
82.7 |
% |
82.5 |
% |
California |
|
5 |
|
3,380 |
|
3,365 |
|
400,135 |
|
399,070 |
|
75.2 |
% |
76.9 |
% |
Colorado |
|
1 |
|
339 |
|
339 |
|
31,629 |
|
31,639 |
|
94.4 |
% |
84.4 |
% |
Florida |
|
1 |
|
651 |
|
650 |
|
52,066 |
|
51,966 |
|
85.7 |
% |
89.3 |
% |
Georgia |
|
5 |
|
2,709 |
|
2,742 |
|
401,789 |
|
411,664 |
|
73.2 |
% |
77.3 |
% |
Illinois |
|
4 |
|
2,319 |
|
2,329 |
|
261,394 |
|
248,460 |
|
73.3 |
% |
71.9 |
% |
Indiana |
|
1 |
|
502 |
|
500 |
|
55,425 |
|
55,425 |
|
65.4 |
% |
69.1 |
% |
Kansas |
|
3 |
|
1,516 |
|
1,534 |
|
226,470 |
|
225,460 |
|
72.3 |
% |
74.3 |
% |
Kentucky |
|
1 |
|
539 |
|
541 |
|
66,000 |
|
65,900 |
|
78.3 |
% |
76.3 |
% |
Maryland |
|
12 |
|
7,644 |
|
7,675 |
|
842,289 |
|
847,513 |
|
75.1 |
% |
76.0 |
% |
Massachusetts |
|
1 |
|
1,186 |
|
1,200 |
|
108,830 |
|
108,980 |
|
67.4 |
% |
63.3 |
% |
Missouri |
|
3 |
|
1,533 |
|
1,525 |
|
305,888 |
|
306,333 |
|
72.2 |
% |
80.0 |
% |
Nevada |
|
2 |
|
1,576 |
|
1,576 |
|
170,775 |
|
171,555 |
|
82.7 |
% |
87.4 |
% |
New Jersey |
|
5 |
|
4,334 |
|
4,341 |
|
418,300 |
|
419,435 |
|
82.7 |
% |
77.2 |
% |
New Mexico |
|
2 |
|
1,106 |
|
1,106 |
|
131,907 |
|
131,967 |
|
87.3 |
% |
84.7 |
% |
New York |
|
1 |
|
704 |
|
703 |
|
83,055 |
|
77,955 |
|
82.3 |
% |
86.1 |
% |
Ohio |
|
4 |
|
1,094 |
|
1,095 |
|
167,060 |
|
162,200 |
|
55.5 |
% |
61.3 |
% |
Pennsylvania |
|
20 |
|
8,384 |
|
8,376 |
|
1,021,451 |
|
1,022,497 |
|
61.6 |
% |
63.2 |
% |
Tennessee |
|
2 |
|
882 |
|
884 |
|
131,140 |
|
130,385 |
|
87.4 |
% |
86.8 |
% |
Texas |
|
4 |
|
2,232 |
|
2,244 |
|
302,249 |
|
301,519 |
|
83.5 |
% |
86.9 |
% |
Utah |
|
1 |
|
371 |
|
371 |
|
46,805 |
|
46,905 |
|
96.3 |
% |
97.7 |
% |
Virginia |
|
4 |
|
2,767 |
|
2,781 |
|
274,583 |
|
270,002 |
|
84.5 |
% |
84.0 |
% |
Washington, DC |
|
2 |
|
1,255 |
|
1,255 |
|
111,759 |
|
111,759 |
|
89.0 |
% |
85.9 |
% |
Total Stabilized Managed Properties |
|
86 |
|
47,848 |
|
47,957 |
|
5,706,174 |
|
5,693,764 |
|
74.6 |
% |
75.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stabilized Properties |
|
685 |
|
457,237 |
|
458,045 |
|
49,480,937 |
|
49,450,754 |
|
83.1 |
% |
84.8 |
% |
(1) Represents unit count as of September 30, 2009, which may differ from September 30, 2008 unit count due to unit conversions or expansions.
(2) Represents net rentable square feet as of September 30, 2009, which may differ from September 30, 2008 net rentable square feet due to unit conversions or expansions.
The following table sets forth additional information regarding the occupancy of our lease-up properties on a state-by-state basis as of September 30, 2009 and 2008. The information as of September 30, 2008 is on a pro forma basis as though all the properties owned and/or managed at September 30, 2009 were under our control as of September 30, 2008.
34
Lease-up Property Data Based on Location
|
|
|
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Company |
|
Pro forma |
|
Location |
|
Number of Properties |
|
Number
of Units as of |
|
Number
of Units as of |
|
Net
Rentable Square |
|
Net
Rentable Square |
|
Square
Foot |
|
Square
Foot |
|
Wholly-owned properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
9 |
|
6,532 |
|
4,284 |
|
718,706 |
|
463,743 |
|
35.9 |
% |
26.2 |
% |
Florida |
|
2 |
|
1,668 |
|
816 |
|
156,445 |
|
72,395 |
|
17.8 |
% |
0.0 |
% |
Illinois |
|
4 |
|
2,715 |
|
1,913 |
|
276,435 |
|
202,925 |
|
44.7 |
% |
24.1 |
% |
Maryland |
|
2 |
|
1,393 |
|
635 |
|
149,937 |
|
79,958 |
|
49.2 |
% |
45.9 |
% |
Massachusetts |
|
3 |
|
2,062 |
|
2,032 |
|
206,947 |
|
212,402 |
|
65.9 |
% |
73.0 |
% |
New Jersey |
|
1 |
|
636 |
|
635 |
|
57,190 |
|
57,325 |
|
64.9 |
% |
32.4 |
% |
Oregon |
|
1 |
|
741 |
|
|
|
76,100 |
|
|
|
0.0 |
% |
0.0 |
% |
South Carolina |
|
1 |
|
622 |
|
488 |
|
74,657 |
|
59,367 |
|
86.9 |
% |
87.6 |
% |
Total Wholly-Owned Lease up |
|
23 |
|
16,369 |
|
10,803 |
|
1,716,417 |
|
1,148,115 |
|
42.0 |
% |
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint-venture properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
7 |
|
4,864 |
|
2,873 |
|
531,785 |
|
329,202 |
|
38.9 |
% |
58.1 |
% |
Florida |
|
1 |
|
906 |
|
807 |
|
113,485 |
|
109,401 |
|
47.0 |
% |
37.4 |
% |
Illinois |
|
2 |
|
1,764 |
|
1,811 |
|
190,703 |
|
190,733 |
|
78.6 |
% |
76.1 |
% |
Maryland |
|
1 |
|
853 |
|
859 |
|
71,349 |
|
71,349 |
|
75.3 |
% |
75.6 |
% |
New Jersey |
|
1 |
|
712 |
|
712 |
|
59,993 |
|
60,098 |
|
33.6 |
% |
0.0 |
% |
Rhode Island |
|
1 |
|
483 |
|
494 |
|
56,045 |
|
55,645 |
|
70.4 |
% |
57.8 |
% |
Total Lease up Joint-Ventures |
|
13 |
|
9,582 |
|
7,556 |
|
1,023,360 |
|
816,428 |
|
51.2 |
% |
56.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
1 |
|
627 |
|
|
|
77,452 |
|
|
|
4.8 |
% |
0.0 |
% |
California |
|
2 |
|
1,739 |
|
1,594 |
|
237,259 |
|
189,730 |
|
46.2 |
% |
45.8 |
% |
Colorado |
|
1 |
|
522 |
|
536 |
|
61,070 |
|
60,870 |
|
73.0 |
% |
35.9 |
% |
Florida |
|
7 |
|
4,910 |
|
1,396 |
|
453,828 |
|
134,781 |
|
19.1 |
% |
18.1 |
% |
Georgia |
|
7 |
|
4,752 |
|
4,025 |
|
665,720 |
|
521,810 |
|
42.8 |
% |
25.9 |
% |
Massachusetts |
|
3 |
|
2,155 |
|
1,590 |
|
204,112 |
|
151,479 |
|
48.3 |
% |
45.9 |
% |
New Jersey |
|
1 |
|
848 |
|
860 |
|
77,895 |
|
77,905 |
|
55.8 |
% |
45.1 |
% |
New York |
|
1 |
|
905 |
|
|
|
45,875 |
|
|
|
15.0 |
% |
0.0 |
% |
Pennsylvania |
|
2 |
|
1,990 |
|
1,994 |
|
173,044 |
|
174,211 |
|
35.7 |
% |
26.7 |
% |
Tennessee |
|
1 |
|
505 |
|
510 |
|
69,550 |
|
68,960 |
|
60.8 |
% |
51.7 |
% |
Utah |
|
1 |
|
658 |
|
|
|
75,451 |
|
|
|
46.6 |
% |
0.0 |
% |
Virginia |
|
1 |
|
476 |
|
480 |
|
63,809 |
|
63,809 |
|
40.3 |
% |
20.6 |
% |
Total Lease up Managed Properties |
|
28 |
|
20,087 |
|
12,985 |
|
2,205,065 |
|
1,443,555 |
|
38.3 |
% |
32.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease up Properties |
|
64 |
|
46,038 |
|
31,344 |
|
4,944,842 |
|
3,408,098 |
|
42.2 |
% |
40.1 |
% |
(1) Represents unit count as of September 30, 2009, which may differ from September 30, 2008 unit count due to unit conversions or expansions.
(2) Represents net rentable square feet as of September 30, 2009, which may differ from September 30, 2008 net rentable square feet due to unit conversions or expansions.
RESULTS OF OPERATIONS
Comparison of the three and nine months ended September 30, 2009 and 2008
Overview
Results for the three and nine months ended September 30, 2009 include the operations of 635 properties (293 of which were consolidated and 342 of which were in joint ventures accounted for using the equity method) compared to the results for the three and nine months ended September 30, 2008, which included the operations of 617 properties (272 of which were consolidated and 345 of which were in joint ventures accounted for using the equity method).
Revenues
The following table sets forth information on revenues earned for the periods indicated:
|
|
Three Months Ended September 30, |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
||||||||||
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
2009 |
|
2008. |
|
$ Change |
|
% Change |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Property rental |
|
$ |
60,380 |
|
$ |
59,997 |
|
$ |
383 |
|
0.6 |
% |
$ |
178,494 |
|
$ |
174,906 |
|
$ |
3,588 |
|
2.1 |
% |
Management and franchise fees |
|
5,191 |
|
5,417 |
|
(226 |
) |
(4.2 |
)% |
15,685 |
|
15,837 |
|
(152 |
) |
(1.0 |
)% |
||||||
Tenant reinsurance |
|
5,542 |
|
4,265 |
|
1,277 |
|
29.9 |
% |
15,246 |
|
11,723 |
|
3,523 |
|
30.1 |
% |
||||||
Other income |
|
191 |
|
169 |
|
22 |
|
13.0 |
% |
201 |
|
425 |
|
(224 |
) |
(52.7 |
)% |
||||||
Total revenues |
|
$ |
71,304 |
|
$ |
69,848 |
|
$ |
1,456 |
|
2.1 |
% |
$ |
209,626 |
|
$ |
202,891 |
|
$ |
6,735 |
|
3.3 |
% |
Property Rental The increase in property rental revenues for the three and nine months ended September 30, 2009 consists of $2,880 and $7,567, respectively associated with acquisitions and consolidations completed during 2009 and 2008
35
and $777 and $2,178 respectively from increases in occupancy and rental rates at lease-up properties. These increases were offset by decreases of $3,274 and $6,157, respectively in revenues at stabilized properties due mainly to a decrease in occupancy and incoming rental rates compared with the same periods in the prior year.
Management and Franchise Fees Our taxable REIT subsidiary, Extra Space Management, Inc. manages properties owned by our joint ventures, franchisees and third parties. Management and franchise fees generally represent 6% of cash collected from properties owned by unconsolidated joint ventures, franchisees and third parties. Revenues from management fees and franchise fees have remained stable compared to the previous year.
Tenant Reinsurance The increase in tenant reinsurance revenues is due to the increase of overall customer participation to approximately 55% at September 30, 2009 compared to approximately 46% at September 30, 2008.
Expenses
The following table sets forth information on expenses for the periods indicated:
|
|
Three Months Ended September 30, |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
||||||||||
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Property operations |
|
$ |
23,022 |
|
$ |
21,367 |
|
$ |
1,655 |
|
7.7 |
% |
$ |
67,456 |
|
$ |
62,871 |
|
$ |
4,585 |
|
7.3 |
% |
Tenant reinsurance |
|
1,264 |
|
1,426 |
|
(162 |
) |
(11.4 |
)% |
3,996 |
|
3,958 |
|
38 |
|
1.0 |
% |
||||||
Unrecovered development and acquisition costs |
|
22 |
|
39 |
|
(17 |
) |
(43.6 |
)% |
18,905 |
|
1,631 |
|
17,274 |
|
1,059.1 |
% |
||||||
Severance costs associated with wind-down of development program |
|
|
|
|
|
|
|
|
|
1,400 |
|
|
|
1,400 |
|
100.0 |
% |
||||||
General and administrative |
|
9,982 |
|
10,316 |
|
(334 |
) |
(3.2 |
)% |
31,195 |
|
30,378 |
|
817 |
|
2.7 |
% |
||||||
Depreciation and amortization |
|
13,797 |
|
12,355 |
|
1,442 |
|
11.7 |
% |
39,160 |
|
35,633 |
|
3,527 |
|
9.9 |
% |
||||||
Total expenses |
|
$ |
48,087 |
|
$ |
45,503 |
|
$ |
2,584 |
|
5.7 |
% |
$ |
162,112 |
|
$ |
134,471 |
|
$ |
27,641 |
|
20.6 |
% |
Property Operations The increase in property operations expense during the three months ended September 30, 2009 consists of $972 related to increases in expenses at lease up properties, and $984 related to property acquisitions and consolidations completed in 2009 and 2008, offset by a decrease of $301 related to lower expenses at stabilized properties. For the nine months ended September 30, 2009, the increase was primarily due to $2,746 related to property acquisitions and consolidations completed in 2009 and 2008 and $1,934 related to increases in expenses at lease up properties. For the nine months ended September 30, 2009, the property operations expense at stabilized properties also increased due to increases in telephone and property taxes.
Tenant Reinsurance Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. During 2008 and the first three quarters of 2009, the tenant reinsurance program increased overall customer participation to approximately 55% at September 30, 2009 compared to approximately 46% September 30, 2008.
Unrecovered Development and Acquisition Costs These costs relate to unsuccessful development and acquisition activities during the periods indicated. On June 2, 2009, the Company announced that it had begun a wind-down of its development program. As a result of the decision, the Company recorded $18,883 of one time impairment charges in order to write down the carrying value of undeveloped land, development projects that will be completed and investments in development projects to their estimated fair values less cost to sell. There were no significant unrecovered development and acquisition costs during the three months ended September 30, 2009 or 2008. The unrecovered development and acquisition costs incurred during the nine months ended September 30, 2008 include $1,257 relating to due diligence costs that were part of an unsuccessful attempt by the Company to purchase a large portfolio of properties during the second quarter of 2008. The remainder of these costs relate to entitlement and other due diligence work done on development projects that the Company elected not to pursue.
Severance costs associated with wind-down of development program On June 2, 2009, the Company announced that it has begun a wind-down of its development program. As a result of the decision, the Company recorded severance costs of $1,400.
General and Administrative The increase in general and administrative expenses for the nine months ended September 30, 2009 was due to the overall cost associated with the management of our properties which increased as we operated 741 properties as of September 30, 2009 compared to 684 properties as of September 30, 2008.
Depreciation and Amortization The increase in depreciation and amortization expense is a result of additional properties that were added through acquisitions and development in 2009 and 2008.
36
Other Revenues and Expenses
The following table sets forth information on other revenues and expenses for the periods indicated:
|
|
Three Months Ended September 30, |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
||||||||||
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
||||||
Other revenue and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest expense |
|
$ |
(17,697 |
) |
$ |
(15,904 |
) |
$ |
(1,793 |
) |
11.3 |
% |
$ |
(49,308 |
) |
$ |
(48,220 |
) |
$ |
(1,088 |
) |
2.3 |
% |
Non-cash interest expense related to amortization of discount on exchangeable senior notes |
|
(430 |
) |
(1,059 |
) |
629 |
|
(59.4 |
)% |
(1,834 |
) |
(3,147 |
) |
1,313 |
|
(41.7 |
)% |
||||||
Interest income |
|
245 |
|
1,280 |
|
(1,035 |
) |
(80.9 |
)% |
1,098 |
|
2,575 |
|
(1,477 |
) |
(57.4 |
)% |
||||||
Interest income on note receivable from Preferred Operating Partnership unit holder |
|
1,213 |
|
1,213 |
|
|
|
|
|
3,638 |
|
3,638 |
|
|
|
|
|
||||||
Equity in earnings of real estate ventures |
|
1,752 |
|
2,015 |
|
(263 |
) |
(13.1 |
)% |
5,288 |
|
4,610 |
|
678 |
|
14.7 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gain on repurchase of exchangeable senior notes |
|
|
|
|
|
|
|
|
|
27,576 |
|
|
|
27,576 |
|
100.0 |
% |
||||||
Loss on sale of investments available for sale |
|
|
|
|
|
|
|
|
|
|
|
(1,415 |
) |
1,415 |
|
(100.0 |
)% |
||||||
Income tax expense |
|
(726 |
) |
(3 |
) |
(723 |
) |
24,100.0 |
% |
(2,317 |
) |
(190 |
) |
(2,127 |
) |
1,119.5 |
% |
||||||
Total other revenue (expense) |
|
$ |
(15,643 |
) |
$ |
(12,458 |
) |
$ |
(3,185 |
) |
25.6 |
% |
$ |
(15,859 |
) |
$ |
(42,149 |
) |
$ |
26,290 |
|
(62.4 |
)% |
Interest Expense The increase in interest expense for the three months ended September 30, 2009 was primarily the result of $61,770 of debt that had a reverse interest rate swap that expired, thus increasing the interest rate on the debt. The increase in interest expense for the nine months ended September 30, 2009 relates primarily to an increase in debt of $94,000 over the prior year.
Non-cash Interest Expense Related to Amortization of Discount on Exchangeable Senior Notes The decrease in non-cash interest expense related to the amortization of discount on exchangeable senior notes for the three and nine months ended September 30, 2009 was due to the Company repurchasing a total of $154,837 of its notes in 2008 and 2009. The discount associated with the repurchased notes was written off as a result of these repurchases which decreased the ongoing amortization of the discount in 2009 when compared to 2008.
Interest Income The decrease in interest income is primarily due to the decrease in our investments available for sale from $21,812 to $0 in early 2008 in addition to the decrease in cash compared to the same periods in the prior year.
Interest Income on Note Receivable from Preferred Operating Partnership Unit Holder Represents interest on a $100,000 loan to the holders of the Preferred OP units.
Equity in Earnings of Real Estate Ventures The decrease in equity in earnings of real estate ventures for the three months ended September 30, 2009 is due primarily to decreased revenues at these joint ventures. The increase in equity in earnings of real estate ventures for the nine months ended September 30, 2009 compared to the prior year is due primarily to the increase in our investment in the VRS joint venture from 5% to 45% on July 1, 2008.
Gain on Repurchase of Exchangeable Senior Notes This amount represents the gain recorded on the repurchase of $114,500 principal amount of our exchangeable senior notes in March and May 2009. There were no repurchases of exchangeable senior notes during the nine months ended September 30, 2008.
Loss on Sale of Investments Available for Sale This amount represents the loss recorded on February 29, 2008 related to the liquidation of auction rates securities held in investments available for sale. There was no loss for the three or nine months ended September 30, 2009.
Income tax expense The increase in income tax expense relates to our net operating loss carryforward being used completely in 2008 in addition to the increased profitability of our TRS.
37
Net Income Allocated to Noncontrolling Interests
The following table sets forth information on net income allocated to noncontrolling interests for the periods indicated:
|
|
Three Months Ended September 30, |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
||||||||||
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
||||||
Net income allocated to noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income allocated to Preferred Operating Partnership noncontrolling interests |
|
$ |
(1,506 |
) |
$ |
(1,570 |
) |
$ |
64 |
|
(4.1 |
)% |
$ |
(4,681 |
) |
$ |
(4,627 |
) |
$ |
(54 |
) |
1.2 |
% |
Net income allocated to Operating Partnership and other non-controlling interests |
|
(101 |
) |
(401 |
) |
300 |
|
(74.8 |
)% |
(929 |
) |
(896 |
) |
(33 |
) |
3.7 |
% |
||||||
Total income allocated to noncontrolling interests: |
|
$ |
(1,607 |
) |
$ |
(1,971 |
) |
$ |
364 |
|
(18.5 |
)% |
$ |
(5,610 |
) |
$ |
(5,523 |
) |
$ |
(87 |
) |
1.6 |
% |
Net income allocated to Preferred Operating Partnership noncontrolling interests Income allocated to the Preferred Operating Partnership equals the fixed distribution paid to the Preferred OP unit holder plus approximately 1.1% and 1.1%, respectively, of the remaining net income allocated after the adjustment for the fixed distribution paid as of September 30, 2009 and 2008.
Net income allocated to Operating Partnership and other noncontrolling interests Income allocated to the Operating Partnership as of September 30, 2009 and 2008 represents approximately 4.3% and 4.7%, respectively, of net income after the allocation of the fixed distribution paid to the Preferred OP unit holder. Loss allocated to other noncontrolling interests represents the losses allocated to partners in consolidated joint ventures on eight properties that were in the lease-up phase during the three and nine months ended September 30, 2009.
FUNDS FROM OPERATIONS
Funds from Operations (FFO) provides relevant and meaningful information about our operating performance that is necessary, along with net income and cash flows, for an understanding of our operating results. We believe FFO is a meaningful disclosure as a supplement to net earnings. Net earnings assume that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. The values of real estate assets fluctuate due to market conditions and we believe FFO more accurately reflects the value of our real estate assets. FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (NAREIT) as net income computed in accordance with GAAP, excluding gains or losses on sales of operating properties, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in our consolidated financial statements.
Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income as an indication of our performance, as an alternative to net cash flow from operating activities, as a measure of liquidity, or as an indicator of our ability to make cash distributions. The following table sets forth our calculation of FFO for the three and nine months ended September 30, 2009 and 2008:
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net income attributable to common stockholders |
|
$ |
5,967 |
|
$ |
9,916 |
|
$ |
26,045 |
|
$ |
20,748 |
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustments: |
|
|
|
|
|
|
|
|
|
||||
Real estate depreciation |
|
12,959 |
|
10,791 |
|
35,943 |
|
30,526 |
|
||||
Amortization of intangibles |
|
198 |
|
1,066 |
|
1,446 |
|
3,503 |
|
||||
Joint venture real estate depreciation and amortization |
|
1,475 |
|
1,534 |
|
4,284 |
|
3,644 |
|
||||
Joint venture (gain) loss on sale of properties |
|
(20 |
) |
|
|
168 |
|
|
|
||||
Distributions paid on Preferred Operating Partnership units |
|
(1,438 |
) |
(1,438 |
) |
(4,313 |
) |
(4,313 |
) |
||||
Income allocated to Operating Partnership noncontrolling interests |
|
1,777 |
|
2,118 |
|
6,250 |
|
5,926 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Funds from operations |
|
$ |
20,918 |
|
$ |
23,987 |
|
$ |
69,823 |
|
$ |
60,034 |
|
38
SAME-STORE STABILIZED PROPERTY RESULTS
We consider our same-store stabilized portfolio to consist of only those properties which were wholly-owned at the beginning and at the end of the applicable periods presented that have achieved stabilization as of the first day of such period. The following table sets forth operating data for our same-store portfolio (revenues include tenant reinsurance income). We consider the following same-store presentation to be meaningful in regards to the properties shown below. These results provide information relating to property-level operating changes without the effects of acquisitions or completed developments.
|
|
Three Months Ended September 30, |
|
Percent |
|
Nine Months Ended September30, |
|
Percent |
|
||||||||
|
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
||||
Same-store rental and tenant reinsurance revenues |
|
$ |
57,013 |
|
$ |
59,703 |
|
(4.5 |
)% |
$ |
170,402 |
|
$ |
174,819 |
|
(2.5 |
)% |
Same-store operating and tenant reinsurance expenses |
|
20,253 |
|
20,495 |
|
(1.2 |
)% |
60,256 |
|
60,751 |
|
(0.8 |
)% |
||||
Same-store net operating income |
|
36,760 |
|
39,208 |
|
(6.2 |
)% |
110,146 |
|
114,068 |
|
(3.4 |
)% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non same-store rental and tenant reinsurance revenues |
|
8,909 |
|
4,559 |
|
95.4 |
% |
23,338 |
|
11,810 |
|
97.6 |
% |
||||
Non same-store operating and tenant reinsurance expenses |
|
4,033 |
|
2,298 |
|
75.5 |
% |
11,196 |
|
6,078 |
|
84.2 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total rental and tenant reinsurance revenues |
|
65,922 |
|
64,262 |
|
2.6 |
% |
193,740 |
|
186,629 |
|
3.8 |
% |
||||
Total operating and tenant reinsurance expenses |
|
24,286 |
|
22,793 |
|
6.6 |
% |
71,452 |
|
66,829 |
|
6.9 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same-store square foot occupancy as of quarter end |
|
84.2 |
% |
85.6 |
% |
|
|
84.2 |
% |
85.6 |
% |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Properties included in same-store |
|
252 |
|
252 |
|
|
|
252 |
|
252 |
|
|
|
||||
The decrease in same-store rental revenues for the three and nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 was due to decreased rental rates to incoming customers and a reduction in occupancy. The decrease in same-store operating expenses was primarily due to lower payroll, advertising and insurance expenses.
CASH FLOWS
Cash flows provided by operating activities were $66,092 and $76,026, respectively, for the nine months ended September 30, 2009 and 2008. The decrease compared to the prior year primarily relates to the decrease in net income exclusive of gain on sale of exchangeable notes and unrecovered development costs and severance costs relating to the wind-down of our development program.
Cash used in investing activities was $87,360 and $130,568, respectively, for the nine months ended September 30, 2009 and 2008. The decrease relates primarily to the $44,100 decrease in investments in real estate ventures as we increased our ownership in the VRS Self Storage LLC joint venture in 2008 and had no similar large investment increases in 2009. In addition, the acquisition of real estate assets decreased from $55,602 in 2008 to $27,378 in 2009. These decreases were partially offset by the increase of investing in development and construction of real estate assets of $14,126 over the prior year.
Cash provided by financing activities was $58,288 and $149,241, respectively, for the nine months ended September 30, 2009 and 2008. The decrease in cash provided by financing activities is primarily the result of $232,718 in proceeds received as a result of issuing common stock in 2008 compared to $0 in 2009. In addition, during the nine months ended September 30, 2009, we drew an additional $73,000 on our lines of credit and obtained proceeds of $309,879 from additional notes payable, compared to proceeds of only $4,063 from notes payable and lines of credit during the nine months ended September 30, 2008. This was offset by the increase of $80,853 in the amount paid by the Company to repurchase a portion of our exchangeable senior notes, and repayment of $207,981 of debt during the nine months ended September 30, 2009 compared to repayments of only $24,097 for the nine months ended September 30, 2008.
OPERATIONAL SUMMARY
Our net operating income for the nine months ended September 30, 2009 decreased on a same-store basis with decreases in revenues and decreases in expenses. Same-store revenue decreased 2.5% and net operating income decreased 3.4%. Same-store expenses showed a modest year-on-year decrease of 0.8 %. Occupancy decreased to 84.2 % as compared to 85.6% for the same period of the previous year.
39
Stabilized properties located in Massachusetts, New York, Northern California, Texas, and Washington, D.C. were the top performing assets for the nine months ended September 30, 2009. Stabilized properties located in Arizona, Florida, Georgia and Southern California performed below the portfolio average.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, we had $100,992 available in cash and cash equivalents. We intend to use this cash to repay debt scheduled to mature in 2009 and 2010 and for general corporate purposes. We are required to distribute at least 90% of our net taxable income, excluding net capital gains, to our stockholders on an annual basis to maintain our qualification as a REIT. Recently issued guidance from the IRS allows for up to 90% of a REITs dividends to be paid with its common stock in 2009 if certain conditions are met.
On April 6, 2009, we announced modifications to our 2009 dividend distributions. We did not pay a dividend in the second or third quarters of 2009. We expect to pay a fourth quarter dividend, which when combined with the first quarter cash dividend of $0.25 per share, previously paid on March 31, 2009, is expected to satisfy the REIT distribution requirements and allow us to avoid the payment of corporate income tax for the year.
Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. During 2008 and the first nine months of 2009 we experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
On October 19, 2007, we entered into a $100,000 revolving line of credit (the Credit Line). We intend to use the proceeds of the Credit Line to repay debt and for general corporate purposes. The Credit Line has an interest rate of between 100 and 205 basis points over LIBOR, depending on certain of our financial ratios (1.25% at September 30, 2009). The Credit Line is collateralized by mortgages on certain real estate assets. The Credit Line matures on October 31, 2010 with two one-year extensions available. Outstanding balances on the Credit Line at September 30, 2009 and December 31, 2008 were $100,000 and $27,000, respectively. We are subject to certain restrictive covenants relating to the Credit Line. The Company was in compliance with all covenants as of September 30, 2009.
On February 13, 2009, we entered into a $50,000 revolving secured line of credit (the Secondary Credit Line) that is collateralized by mortgages on certain real estate assets and matures on February 13, 2012. We intend to use the proceeds of the Secondary Credit Line to repay debt and for general corporate purposes. The Secondary Credit Line has an interest rate of LIBOR plus 325 basis points (3.50% at September 30, 2009). As of September 30, 2009, there were no amounts drawn on the Secondary Credit Line. We are subject to certain restrictive covenants relating to the Secondary Credit Line. The Company was in compliance with all covenants as of September 30, 2009.
As of September 30, 2009, we had $1,359,199 of debt, resulting in a debt to total capitalization ratio of 58.5%. As of September 30, 2009, the ratio of total fixed rate debt and other instruments to total debt was 80.4% (including $97,581 on which we have interest rate swaps that have been included as fixed-rate debt). The weighted average interest rate of the total of fixed and variable rate debt at September 30, 2009 was 5.0%. Certain of our real estate assets are pledged as collateral for our debt. We are subject to certain restrictive covenants relating to our outstanding debt. We were in compliance with all covenants at September 30, 2009.
We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of OP units and interest on our outstanding indebtedness out of our operating cash flow, cash on hand and borrowings under our lines of credit. In addition, the Company is actively pursuing additional term loans secured by unencumbered properties.
Our liquidity needs consist primarily of cash distributions to stockholders, facility development, property acquisitions, principal payments under our borrowings and non-recurring capital expenditures. In addition, we evaluate, on an ongoing basis, the merits of strategic acquisitions and other relationships, which may require us to raise additional funds. We do not expect that our operating cash flow will be sufficient to fund our liquidity needs and instead expect to fund such needs out of additional borrowings of secured or unsecured indebtedness, joint ventures with third parties, and from the proceeds of public and private offerings of equity and debt. Additional capital may not be available on terms favorable to us or at all. Any additional issuance of equity or equity-linked securities may result in dilution to our stockholders. In addition, any new securities we issue could have rights, preferences and privileges senior to holders of our common stock. We may also use OP units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.
40
The U.S. credit markets are experiencing significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to make acquisitions and fund current development projects. In addition, the financial condition of the lenders of our credit facilities may worsen to the point that they default on their obligations to make available to us the funds under those facilities. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. These disruptions in the financial market may have other adverse effects on us or the economy generally, which could cause our stock price to decline.
OFF-BALANCE SHEET ARRANGEMENTS
Except as disclosed in the notes to our financial statements, we do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our financial statements, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Our exchangeable senior notes provide for excess exchange value to be paid in shares of our common stock if our stock price exceeds a certain amount. See the notes to our financial statements for a further description of our exchangeable senior notes.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of September 30, 2009:
|
|
Payments due by Period: |
|
|||||||||||||
|
|
|
|
Less Than |
|
|
|
|
|
After |
|
|||||
|
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
|||||
Operating leases |
|
$ |
64,126 |
|
$ |
5,861 |
|
$ |
10,801 |
|
$ |
8,889 |
|
$ |
38,575 |
|
Notes payable, notes payable to trusts, exchangeable senior notes and lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest |
|
493,243 |
|
66,820 |
|
112,818 |
|
92,421 |
|
221,184 |
|
|||||
Principal |
|
1,359,199 |
|
173,978 |
|
253,171 |
|
266,853 |
|
665,197 |
|
|||||
Total contractual obligations |
|
$ |
1,916,568 |
|
$ |
246,659 |
|
$ |
376,790 |
|
$ |
368,163 |
|
$ |
924,956 |
|
At September 30, 2009, the weighted-average interest rate for all fixed rate loans was 5.5%, and the weighted-average interest rate for all variable rate loans was 3.0%.
FINANCING STRATEGY
We will continue to employ leverage in our capital structure in amounts reviewed from time to time by our board of directors. Although our board of directors has not adopted a policy which limits the total amount of indebtedness that we may incur, we will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or variable rate. In making financing decisions, we will consider factors including but not limited to:
· the interest rate of the proposed financing;
· the extent to which the financing impacts flexibility in managing our properties;
· prepayment penalties and restrictions on refinancing;
41
· the purchase price of properties acquired with debt financing;
· long-term objectives with respect to the financing;
· target investment returns;
· the ability of particular properties, and our Company as a whole, to generate cash flow sufficient to cover expected debt service payments;
· overall level of consolidated indebtedness;
· timing of debt and lease maturities;
· provisions that require recourse and cross-collateralization;
· corporate credit ratios including debt service coverage, debt to total capitalization and debt to undepreciated assets; and
· the overall ratio of fixed and variable rate debt.
Our indebtedness may be recourse, non-recourse or cross-collateralized. If the indebtedness is non-recourse, the collateral will be limited to the particular properties to which the indebtedness relates. In addition, we may invest in properties subject to existing loans collateralized by mortgages or similar liens on our properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to refinance investments, including the redevelopment of existing properties, for general working capital or to purchase additional interests in partnerships or joint ventures or for other purposes when we believe it is advisable.
During 2008 and through September 30, 2009, we repurchased $154,837 in aggregate principal amount of our exchangeable senior notes for $112,574 in cash. We may from time to time seek to retire, repurchase or redeem our additional outstanding debt including our exchangeable senior notes as well as shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
SEASONALITY
The self-storage business is subject to seasonal fluctuations. A greater portion of revenues and profits are realized from May through September. Historically, our highest level of occupancy has been as of the end of July, while our lowest level of occupancy has been in late February and early March. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year.
Market Risk
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income, cash flows and fair values of financial instruments are dependent upon prevailing market interest rates.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
As of September 30, 2009, we had $1.4 billion in total debt, of which $266.0 million was subject to variable interest rates. If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable rate debt would increase or decrease future earnings and cash flows by $1.8 million annually (amount excludes debt that has interest rate floors).
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
The aggregate fair value of our fixed rate notes payable and notes payable to trusts at September 30, 2009 was $1.2 billion.
42
The carrying value of these fixed rates notes payable and notes payable to trusts at September 30, 2009 was $1.0 billion. The fair value of the exchangeable senior notes at September 30, 2009 was $126.0 million. The carrying value of the exchangeable senior notes at September 30, 2009 was $95.2 million.
(i) Disclosure Controls and Procedures
We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of disclosure controls and procedures in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We have a disclosure committee that is responsible to ensure that all disclosures made by the Company to its security holders or to the investment community will be accurate and complete and fairly present the Companys financial condition and results of operations in all material respects, and are made on a timely basis as required by applicable laws, regulations and stock exchange requirements.
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(ii) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in various litigation and proceedings in the ordinary course of business. We are not a party to any material litigation or legal proceedings, or to the best of our knowledge, any threatened litigation or legal proceedings, which, in the opinion of management, will have a material adverse effect on our financial condition or results of operations either individually or in the aggregate.
There have been no material changes in our risk factors from those disclosed in our 2008 Annual Report on Form 10-K.
On November 5, 2009, we issued 217,930 shares of common stock to Kenneth M. Woolley, a member of our board of directors, in exchange for an equal number of Operating Partnership (OP) units of our Operating Partnership. The OP units were tendered to us for redemption in accordance with the terms and provisions of the partnership agreement of our Operating Partnership. The shares were issued in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. We received no additional consideration for the redemption.
43
None.
None.
None.
10.1 |
|
Third Amendment to the Contribution Agreement between Extra Space Storage LLC and HSRE-ESP IA, LLC. |
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|
31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* |
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Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
*These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Extra Space Storage Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXTRA SPACE STORAGE INC. |
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Registrant |
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Date: November 5, 2009 |
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/s/ Spencer F. Kirk |
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Spencer F. Kirk |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 5, 2009 |
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/s/ Kent W. Christensen |
|
|
Kent W. Christensen |
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|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
45