Extra Space Storage Inc. - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

Commission File Number: 001-32269

EXTRA SPACE STORAGE INC.

(Exact name of registrant as specified in its charter)

Maryland

20-1076777

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2795 East Cottonwood Parkway

Salt Lake City, Utah

84121

(Address of principal executive offices)

(Zip Code)

Registrant’s 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 ¨ No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as

of September 27, 2004 was 31,169,950.

EXTRA SPACE STORAGE INC.

Table of Contents


PART 1. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Submission of Matters to a Vote of Security Holders	31

Item 5.	Other Information	31

Item 6.	Exhibits and Reports on Form 8-K	31

Note that the financial statements covered in this report represent the results of operations and financial condition of Extra Space Storage LLC and its subsidiaries, the predecessor to Extra Space Storage Inc. and its subsidiaries, prior to the consummation of Extra Space Storage Inc.’s initial public offering and various formation transactions. Due to the timing of the offering and the formation transactions, we do not believe that the results of operations discussion set forth in this document are necessarily indicative of our future operating results as a publicly-held company. The information provided only reflects the operations of the predecessor company for the three and six-month periods ended June 30, 2004 and 2003, and has no relationship to the Company operations on a forward basis.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Extra Space Storage LLC (Extra Space Storage Inc. Predecessor)

Condensed Consolidated Balance Sheets (Unaudited) (in thousands)


	As of June 30, 2004			As of December 31, 2003
Assets:
Real estate assets:
Net operating real estate assets	$	455,629		274,434
Real estate under development		85,232		79,940

Net real estate assets		540,861		354,374

Investments in real estate ventures		7,541		8,438
Cash		2,775		11,746
Restricted cash		8,705		1,558
Receivables from related parties		13,312		2,066
Other assets, net		11,259		5,569

Total assets	$	584,453		383,751

Liabilities, Minority Interests, Redeemable Units and Members’ Equity (Deficit):
Liabilities:
Borrowings	$	431,847		273,808
Accounts payable		548		2,318
Payables to related parties		51,343		24,824
Putable preferred interests in consolidated joint ventures, net		35,303		33,434
Other liabilities		12,979		5,276

Total liabilities		532,020		339,660

Commitments and contingencies (Note 14)

Redeemable minority interest - Fidelity		19,485		17,966
Other minority interests		10,508		4,424

Redeemable Class C Units (liquidation preference of $30,205 at June 30, 2004 and $11,208 at December 31, 2003)		30,205		11,208

Redeemable Class E Units (liquidation preference of $14,900 at June 30, 2004 and December 31, 2003)		14,900		14,900

Members’ equity (deficit):
Class A Units		9,614		5,226

Class B Units (liquidation preference of $65,635 at June 30, 2004 and $64,198 at December 31, 2003)		48,852		48,274
Note receivable from Centershift		—		(4,493	)
Accumulated deficit		(81,131	)	(53,414	)

Total members equity (deficit)		(22,665	)	(4,407	)

Total liabilities, minority interests, redeemable units and members’s equity (deficit)	$	584,453		383,751

The accompanying notes are an integral part of these consolidated financial statements.

Extra Space Storage LLC (Extra Space Storage Inc. Predecessor)

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands)


	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Revenues:
Property rental revenues	$	13,014		$	8,149		$	23,010		$	15,630
Management fees		428			550			976			1,033
Acquisition fees and development fees		134			352			399			604
Other income		353			256			470			370

Total Revenues		13,929			9,307			24,855			17,637

Expenses:
Property operating expenses		5,880			3,641			10,290			7,279
Unrecovered development/acquisition costs and support payments		186			410			684			685
General and administrative expense		3,273			2,056			6,243			4,046
Depreciation and amortization		3,089			1,466			5,766			2,898

Total Operating Expenses		12,428			7,573			22,983			14,908

Income before interest expense, minority interests, equity in earnings of real estate ventures and gain (loss) on sale of real estate assets		1,501			1,734			1,872			2,729

Interest expense		(8,406	)		(4,344	)		(14,773	)		(8,774	)
Minority interest - Fidelity preferred return		(1,124	)		(1,033	)		(2,220	)		(2,032	)

Loss allocated to other minority interests		560			128			1,530			542
Equity in earnings of real estate ventures		433			470			694			871
Gain (loss) on sale of real estate assets		—			672			(171	)		672

Net loss	$	(7,036	)	$	(2,373	)	$	(13,068	)	$	(5,992	)

The accompanying notes are an integral part of these consolidated financial statements.

Extra Space Storage LLC (Extra Space Storage Inc. Predecessor)

Condensed Consolidated Statement of Redeemable Units and Members’ Equity (Deficit) (Unaudited)

(dollars in thousands)


	Redeemable Units								Members’ Equity (Deficit)
	Class C					Class E			Class A					Class B					Note Receivable from Centershift			Accumulated Deficit			Total Members’ Equity (Deficit)
	Units		Amount			Units	Amount		Units		Amount			Units		Amount			Note Receivable from Centershift			Accumulated Deficit			Total Members’ Equity (Deficit)
Balance at December 31, 2003	11,208,161		$	11,208		14,900,000	$	14,900	57,555,105		$	5,226		48,274,083		$	48,274		$	(4,493	)	$	(53,414	)	$	(4,407	)
Member units issued in acquisition of self storage facilities	2,467,715			2,468		—		—	1,593,665			478		241,513			242			—			—			720

Member units issued in exchange for receivables	944,370			944		—		—	6,666,667			2,000		—			—			—			—			2,000

Members units issued to repay borrowings and related party payables	1,466,250			1,466		—		—	862,500			259		—			—			—			—			259
Member units granted to employees	—			—		—		—	4,016,838			1,205		—			—			—			—			1,205
Members units issued in exchange for cash	14,985,500			14,986		—		—	10,015,000			3,005		1,700,000			1,700			—			—			4,705
Redemption of units	(20,835	)		(21	)	—		—	—			—		(222,500	)		(223	)		—			—			(223	)

Redempion of units in exchange for note payable	—			—		—		—	(3,000,000	)		(2,559	)	(1,141,064	)		(1,141	)		—			—			(3,700	)
Redempion of units in exchange for land	(846,396	)		(846	)	—		—	—			—		—			—			—			—			—
Distribution of equity ownership in Extra Space Development	—			—		—		—	—			—		—			—			—			(9,000	)		(9,000	)

Distribution of notes receivable from Centershift	—			—		—		—	—			—		—			—			4,493			(4,493	)		—
Return paid on Class C and Class E Units	—			—		—		—	—			—		—			—			—			(1,156