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Table of Contents

 

 

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

For the quarterly period ended March 31, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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   20-1076777

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2795 East Cottonwood Parkway, Suite 400

Salt Lake City, Utah 84121

(Address of principal executive offices)

Registrant’s telephone number, including area code: (801) 365-4600

 

 

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  ¨

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  x    No  ¨

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   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (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 April 30, 2015, was 116,494,142.

 

 

 


Table of Contents

EXTRA SPACE STORAGE INC.

TABLE OF CONTENTS

 

STATEMENT ON FORWARD-LOOKING INFORMATION

  3   

PART I. FINANCIAL INFORMATION

  4   

ITEM 1. FINANCIAL STATEMENTS

  4   

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

  10   

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

  25   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  37   

ITEM 4. CONTROLS AND PROCEDURES

  38   

PART II. OTHER INFORMATION

  38   

ITEM 1. LEGAL PROCEEDINGS

  38   

ITEM 1A. RISK FACTORS

  38   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  38   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

  39   

ITEM 4. MINE SAFETY DISCLOSURES

  39   

ITEM 5. OTHER INFORMATION

  39   

ITEM 6. EXHIBITS

  40   

SIGNATURES

  41   

 

2


Table of Contents

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information presented 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, management’s examination of historical operating trends and estimates 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 management’s 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:

 

    adverse changes in general economic conditions, the real estate industry and the markets in which we operate;

 

    failure to close pending acquisitions on expected terms, or at all;

 

    the effect of competition from new and existing stores or other storage alternatives, which could cause rents and occupancy rates to decline;

 

    difficulties in our ability to evaluate, finance, complete and integrate acquisitions and developments successfully and to lease up those stores, which could adversely affect our profitability;

 

    potential liability for uninsured losses and environmental contamination;

 

    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 (“REITs”), tenant reinsurance and other aspects of our business, which could adversely affect our results;

 

    disruptions in credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates or at all, which could impede our ability to grow;

 

    increased interest rates and operating costs;

 

    reductions in asset valuations and related impairment charges;

 

    the failure of our joint venture partners to fulfill their obligations to us or their pursuit of actions that are inconsistent with our objectives;

 

    the failure to maintain our REIT status for federal income tax purposes;

 

    economic uncertainty due to the impact of war or terrorism, which could adversely affect our business plan; and

 

    difficulties in our ability to attract and retain qualified personnel and management members.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Extra Space Storage Inc.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share data)

 

     March 31,
2015
    December 31,
2014
 
     (Unaudited)        

Assets:

    

Real estate assets, net

   $ 4,197,853      $ 4,135,696   

Investments in unconsolidated real estate ventures

     85,602        85,711   

Cash and cash equivalents

     45,304        47,663   

Restricted cash

     35,350        25,245   

Receivables from related parties and affiliated real estate joint ventures

     3,136        11,778   

Other assets, net

     96,900        96,014   
  

 

 

   

 

 

 

Total assets

$ 4,464,145    $ 4,402,107   
  

 

 

   

 

 

 

Liabilities, Noncontrolling Interests and Equity:

Notes payable

$ 1,972,957    $ 1,872,067   

Premium on notes payable

  2,534      3,281   

Exchangeable senior notes

  250,000      250,000   

Discount on exchangeable senior notes

  (12,169   (13,054

Notes payable to trusts

  119,590      119,590   

Lines of credit

  99,000      138,000   

Accounts payable and accrued expenses

  71,553      65,521   

Other liabilities

  53,625      54,719   
  

 

 

   

 

 

 

Total liabilities

  2,557,090      2,490,124   
  

 

 

   

 

 

 

Commitments and contingencies

Noncontrolling Interests and Equity:

Extra Space Storage Inc. stockholders’ equity:

Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued or outstanding

  —        —     

Common stock, $0.01 par value, 500,000,000 shares authorized, 116,458,159 and 116,360,239 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

  1,164      1,163   

Additional paid-in capital

  1,998,240      1,995,484   

Accumulated other comprehensive loss

  (7,800   (1,484

Accumulated deficit

  (258,728   (257,738
  

 

 

   

 

 

 

Total Extra Space Storage Inc. stockholders’ equity

  1,732,876      1,737,425   

Noncontrolling interest represented by Preferred Operating Partnership units, net of $120,230 notes receivable

  81,088      81,152   

Noncontrolling interests in Operating Partnership

  92,105      92,422   

Other noncontrolling interests

  986      984   
  

 

 

   

 

 

 

Total noncontrolling interests and equity

  1,907,055      1,911,983   
  

 

 

   

 

 

 

Total liabilities, noncontrolling interests and equity

$ 4,464,145    $ 4,402,107   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

Extra Space Storage Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except share data)

(unaudited)

 

     For the Three Months Ended
March 31,
 
     2015     2014  

Revenues:

    

Property rental

   $ 148,894      $ 132,001   

Tenant reinsurance

     16,510        13,463   

Management fees and other income

     7,750        7,123   
  

 

 

   

 

 

 

Total revenues

  173,154      152,587   
  

 

 

   

 

 

 

Expenses:

Property operations

  47,244      43,482   

Tenant reinsurance

  2,928      2,567   

Acquisition related costs

  869      2,056   

General and administrative

  16,249      15,709   

Depreciation and amortization

  30,428      28,375   
  

 

 

   

 

 

 

Total expenses

  97,718      92,189   
  

 

 

   

 

 

 

Income from operations

  75,436      60,398   

Interest expense

  (21,431   (19,598

Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes

  (697   (662

Interest income

  856      269   

Interest income on note receivable from Preferred Operating Partnership unit holder

  1,213      1,213   
  

 

 

   

 

 

 

Income before equity in earnings of unconsolidated real estate ventures and income tax expense

  55,377      41,620   

Equity in earnings of unconsolidated real estate ventures

  2,650      2,419   

Equity in earnings of unconsolidated real estate ventures—gain on sale of real estate assets and purchase of joint venture partners’ interests

  2,857      —     

Income tax expense

  (2,248   (2,830
  

 

 

   

 

 

 

Net income

  58,636      41,209   

Net income allocated to Preferred Operating Partnership noncontrolling interests

  (2,926   (2,492

Net income allocated to Operating Partnership and other noncontrolling interests

  (1,968   (1,377
  

 

 

   

 

 

 

Net income attributable to common stockholders

$ 53,742    $ 37,340   
  

 

 

   

 

 

 

Earnings per common share

Basic

$ 0.46    $ 0.32   
  

 

 

   

 

 

 

Diluted

$ 0.46    $ 0.32   
  

 

 

   

 

 

 

Weighted average number of shares

Basic

  116,117,615      115,438,325   

Diluted

  122,595,718      121,062,845   

Cash dividends paid per common share

$ 0.47    $ 0.40   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

Extra Space Storage Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands)

(unaudited)

 

     For the Three
Months Ended
March 31,
 
     2015     2014  

Net income

   $ 58,636      $ 41,209   

Other comprehensive loss:

    

Change in fair value of interest rate swaps

     (6,593     (2,747
  

 

 

   

 

 

 

Total comprehensive income

  52,043      38,462   

Less: comprehensive income attributable to noncontrolling interests

  4,617      3,750   
  

 

 

   

 

 

 

Comprehensive income attributable to common stockholders

$ 47,426    $ 34,712   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


Table of Contents

Extra Space Storage Inc.

Condensed Consolidated Statement of Noncontrolling Interests and Equity

(amounts in thousands, except share data)

(unaudited)

 

  Noncontrolling Interests   Extra Space Storage Inc. Stockholders’ Equity  
  Preferred Operating Partnership                                  
  Series A   Series B   Series C   Series D   Operating
Partnership
  Other   Shares   Par
Value
  Additional
Paid-in
Captial
  Accumulated
Other
Comprehensive
Income
  Accumulated
Deficit
  Total
Noncontrolling
Interests and
Equity
 

Balances at December 31, 2014

  $ 14,809      $ 41,903      $ 10,730      $ 13,710      $ 92,422      $ 984        116,360,239      $ 1,163      $ 1,995,484      $ (1,484   $ (257,738   $ 1,911,983   

Issuance of common stock upon the exercise of options

    —          —          —          —          —          —          41,634        —          970        —          —          970   

Restricted stock grants issued

    —          —          —          —          —          —          58,150        1        —          —          —          1   

Restricted stock grants cancelled

    —          —          —          —          —          —          (1,864     —          —          —          —          —     

Compensation expense related to stock-based awards

    —          —          —          —          —          —          —          —          1,142        —          —          1,142   

Net income

    1,668        629        458        171        1,966        2        —          —          —          —          53,742        58,636   

Other comprehensive income

    (46     —          —          —          (231     —          —          —          —          (6,316     —          (6,593

Tax effect from vesting of restricted stock grants and stock option exercises

    —          —          —          —          —          —          —          —          644        —          —          644   

Distributions to Operating Partnership units held by noncontrolling interests

    (1,686     (629     (458     (171     (2,052     —          —          —          —          —          —          (4,996

Dividends paid on common stock at $0.47 per share

    —          —          —          —          —          —          —          —          —          —          (54,732     (54,732
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2015

  $ 14,745      $ 41,903      $ 10,730      $ 13,710      $ 92,105      $ 986        116,458,159      $ 1,164      $ 1,998,240      $ (7,800   $ (258,728   $ 1,907,055   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

 

     For the Three Months
Ended March 31,
 
     2015     2014  

Cash flows from operating activities:

    

Net income

   $ 58,636      $ 41,209   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     30,428        28,375   

Amortization of deferred financing costs

     1,598        1,641   

Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes

     697        662   

Non-cash interest expense related to amortization of premium on notes payable

     (747     (895

Compensation expense related to stock-based awards

     1,142        1,121   

Gain on sale of real estate assets and purchase of joint venture partners’ interests

     (2,857     —     

Distributions from unconsolidated real estate ventures in excess of earnings

     2,601        1,024   

Changes in operating assets and liabilities:

    

Receivables from related parties and affiliated real estate joint ventures

     (2,367     (1,424

Other assets

     (2,637     1,448   

Accounts payable and accrued expenses

     6,032        (7,715

Other liabilities

     (5,087     (874
  

 

 

   

 

 

 

Net cash provided by operating activities

  87,439      64,572   
  

 

 

   

 

 

 

Cash flows from investing activities:

Acquisition of real estate assets

  (77,082   (253,939

Development and redevelopment of real estate assets

  (3,140   (2,820

Change in restricted cash

  (10,105   1,425   

Purchase of equipment and fixtures

  (1,184   (1,274
  

 

 

   

 

 

 

Net cash used in investing activities

  (91,511   (256,608
  

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from notes payable and lines of credit

  290,768      291,157   

Principal payments on notes payable and lines of credit

  (228,878   (127,881

Deferred financing costs

  (1,419   (1,392

Net proceeds from exercise of stock options

  970      1,056   

Dividends paid on common stock

  (54,732   (46,347

Distributions to noncontrolling interests

  (4,996   (4,265
  

 

 

   

 

 

 

Net cash provided by financing activities

  1,713      112,328   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  (2,359   (79,708

Cash and cash equivalents, beginning of the period

  47,663      126,723   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

$ 45,304    $ 47,015   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Extra Space Storage Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

 

     For the Three Months
Ended March 31,
 
     2015     2014  

Supplemental schedule of cash flow information

    

Interest paid

   $ 21,754      $ 16,445   

Income taxes paid

     661        1,244   

Supplemental schedule of noncash investing and financing activities:

    

Tax effect from vesting of restricted stock grants and option exercises

    

Other assets

   $ 644      $ 1,262   

Paid-in capital

     (644     (1,262

Acquisitions of real estate assets

    

Real estate assets, net

   $ 11,009      $ —     

Receivables from related parties and affiliated real estate joint ventures

     (11,009     —     

See accompanying notes to unaudited condensed consolidated financial statements.

 

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EXTRA SPACE STORAGE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Amounts in thousands, except store and share data, unless otherwise stated

1. ORGANIZATION

Extra Space Storage Inc. (the “Company”) is a fully-integrated, 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 properties (“stores”) 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 Company’s interests in its stores is held through its operating partnership, Extra Space Storage LP (the “Operating Partnership”), which was formed on May 5, 2004. The Company’s primary assets are general partner and limited partner interests in the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT (“UPREIT”). The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. 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 stores by acquiring wholly-owned stores or by acquiring an equity interest in real estate entities. At March 31, 2015, the Company had direct and indirect equity interests in 835 stores. In addition, the Company managed 271 stores for third parties, bringing the total number of stores which it owns and/or manages to 1,106. These stores are located in 35 states, Washington, D.C. and Puerto Rico.

The Company operates in three distinct segments: (1) rental operations; (2) tenant reinsurance; and (3) property management, acquisition and development. The rental operations activities include rental operations of stores in which we have an ownership interest. No single tenant accounts for more than 5.0% of rental income. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the Company’s stores. The Company’s property management, acquisition and development activities include managing, acquiring, developing and selling stores.

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 months ended March 31, 2015, are not necessarily indicative of results that may be expected for the year ending December 31, 2015. The condensed consolidated balance sheet as of December 31, 2014 has been derived from the Company’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

Reclassifications

Certain amounts in the Company’s 2014 consolidated financial statements and supporting note disclosures have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported net income or accumulated deficit.

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and disclosures of Components of an Entity.” Under this guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The guidance also requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The Company adopted this guidance effective January 1, 2015. The Company has not previously had discontinued operations and as such, does not expect this guidance to have a significant impact on its consolidated financial statements.

 

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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09 outlines a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact of the adoption of ASU 2014-09 on the Company’s condensed consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a reporting entity to treat a performance target that affects vesting, and that could be achieved after the requisite service period, as a performance condition. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The Company does not expect the adoption of ASU 2014-12 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. ASU 2015-02 amends the criteria for determining if a service provider possesses a variable interest in a VIE, and eliminates the presumption that a general partner should consolidate a limited partnership. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” This guidance requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability. The new guidance will only impact financial statement presentation. The guidance is effective in the first quarter of 2016 and allows for early adoption. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.

3. FAIR VALUE DISCLOSURES

Derivative Financial Instruments

Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate forward curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. In conjunction with the Financial Accounting Standards Board’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2015, the Company had assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

 

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The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

     March 31,
2015
     Fair Value Measurements at Reporting Date Using  

Description

      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Other assets—Cash Flow Hedge Swap Agreements

   $ 688       $ —         $ 688       $ —     

Other liabilities—Cash Flow Hedge Swap Agreements

   $ (7,231    $ —         $ (7,231    $ —     

There were no transfers of assets and liabilities between Level 1 and Level 2 during the three months ended March 31, 2015. The Company did not have any significant assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of March 31, 2015 or December 31, 2014.

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. The Company reviews each store at least annually to determine if any such events or circumstances have occurred or exist. The Company focuses on stores where occupancy and/or rental income have decreased by a significant amount. For these stores, the Company determines whether the decrease is temporary or permanent, and whether the store will likely recover the lost occupancy and/or revenue in the short term. In addition, the Company carefully reviews stores in the lease-up stage and compares actual operating results to original projections.

When the Company determines that an event that may indicate impairment has occurred, the Company compares the carrying value of the related long-lived assets to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the assets exceeds the undiscounted future net operating cash flows attributable to the assets. The impairment loss recognized equals the excess of net carrying value over the related fair value of the assets.

When real estate assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the fair value of the assets, net of selling costs. 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, a valuation allowance is established. The operations of assets held for sale or sold during the period are presented as part of normal operations for all periods presented.

The Company assesses whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired annually and when events or circumstances indicate that there may be impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. 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 of the investment over the fair value of the investment.

In connection with the Company’s acquisition of stores, the purchase price is allocated to the tangible and intangible assets and liabilities acquired based on their fair values, which are estimated using significant unobservable inputs. The value of the tangible assets, consisting of land and buildings, is determined as if vacant. 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 rent lost due to the amount of time required to replace existing customers, which is based on the Company’s historical experience with turnover in its stores. Debt assumed as part of an acquisition is recorded at fair value based on current interest rates compared to contractual rates. Acquisition-related transaction costs are expensed as incurred.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, receivables, other financial instruments included in other assets, accounts payable and accrued expenses, variable-rate notes payable, lines of credit and other liabilities reflected in the condensed consolidated balance sheets at March 31, 2015 and December 31, 2014 approximate fair value.

The fair values of the Company’s notes receivable from Preferred Operating Partnership unit holders were based on the discounted estimated future cash flows of the notes (categorized within Level 3 of the fair value hierarchy); the discount rate used approximated the current market rate for loans with similar maturities and credit quality. The fair values of the Company’s fixed-rate notes payable

 

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and notes payable to trusts were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximated current market rates for loans, or groups of loans, with similar maturities and credit quality. The fair value of the Company’s exchangeable senior notes was estimated using an average market price for similar securities obtained from a third party.

The fair values of the Company’s fixed-rate assets and liabilities were as follows for the periods indicated:

 

     March 31, 2015      December 31, 2014  
     Fair
Value
     Carrying
Value
     Fair
Value
     Carrying
Value
 

Notes receivable from Preferred Operating Partnership unit holders

   $ 129,102       $ 120,230       $ 126,380       $ 120,230   

Fixed rate notes payable and notes payable to trusts

   $ 1,487,014       $ 1,438,400       $ 1,320,370       $ 1,283,893   

Exchangeable senior notes

   $ 310,625       $ 250,000       $ 276,095       $ 250,000   

4. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed using the two-class method by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. All outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common stockholders; accordingly, they are considered participating securities that are included in the two-class method. 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 weighted average number of basic shares and 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 two-class, treasury stock or as if-converted method, whichever is most dilutive. Potential common shares are securities (such as options, convertible debt, Series A Participating Redeemable Preferred Units (“Series A Units”), Series B Redeemable Preferred Units (“Series B Units”), Series C Convertible Redeemable Preferred Units (“Series C Units”), Series D Redeemable Preferred Units (“Series D Units”) and common Operating Partnership units (“OP Units”)) that do not have a current right to participate in earnings of the Company but could do so in the future by virtue of their option, redemption 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 common share, only potential common shares that are dilutive (those that reduce earnings per common share) are included. For the three months ended March 31, 2015 and 2014, options to purchase approximately 19,762 and 18,100 shares of common stock, respectively, were excluded from the computation of earnings per share as their effect would have been anti-dilutive.

The following table presents the number of Preferred Operating Partnership units, and the potential common shares, that were excluded from the computation of earnings per share as their effect would have been anti-dilutive, assuming full conversion at the average share price for the quarter of $65.59.

 

     For the Three Months Ended March 31,  
     2015      2014  
     Number of
Units
     Equivalent
Shares
(if converted)
     Number of
Units
     Equivalent
Shares
(if converted)
 

Series B Units

     1,676,087         638,850         1,342,727         724,232   

Series C Units

     704,016         451,884         407,996         370,585   

Series D Units

     548,390         209,022         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  2,928,493      1,299,756      1,750,723      1,094,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Operating Partnership had $250,000 of its 2.375% Exchangeable Senior Notes due 2033 (the “Notes”) issued and outstanding as of March 31, 2015. The Notes could potentially have a dilutive impact on the Company’s earnings per share calculations. The Notes are exchangeable by holders into shares of the Company’s common stock under certain circumstances per the terms of the indenture governing the Notes. The exchange price of the Notes was $55.62 per share as of March 31, 2015, and could change over time as described in the indenture. The Company has irrevocably agreed to pay only cash for the accreted principal amount of the Notes relative to its exchange obligations, but retained the right to satisfy the exchange obligation in excess of the accreted principal amount in cash and/or common stock.

Though the Company has retained that right, Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” requires an assumption that shares would be used to pay the exchange obligation in excess of the accreted principal amount, and requires that those shares be included in the Company’s calculation of weighted average common shares outstanding for the diluted earnings per share computation. For the three months ended March 31, 2015, 682,502 shares related to the Notes were included in the computation for diluted earnings per share. For the three months ended March 31, 2014, no shares related to the Notes were included in the computation for diluted earnings per share as the exchange price exceeded the per share price of the Company’s common stock during this period.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series A Units for common shares upon redemption, where the Company has the option to redeem in cash or shares 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 Series A 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 ASC 260-10-45-46.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series B Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, the Company divided the total value of the Series B Units outstanding as of March 31, 2015 of $41,902 by the closing price of the Company’s common stock as of March 31, 2015 of $67.57 per share. Assuming full exchange for common shares as of March 31, 2015, 620,127 shares would have been issued to the holders of the Series B Units.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series C Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, the Company divided the total value of the Series C Units outstanding as of March 31, 2015 of $29,639 by the closing price of the Company’s common stock as of March 31, 2015 of $67.57 per share. Assuming full exchange for common shares as of March 31, 2015, 438,641 shares would have been issued to the holders of the Series C Units.

For the purposes of computing the diluted impact on earnings per share of the potential exchange of Series D Units for common shares upon redemption, where the Company has the option to redeem in cash or shares and where the Company has stated the intent and ability to settle the redemption in shares, the Company divided the total value of the Series D Units outstanding as of March 31, 2015 of $13,710 by the closing price of the Company’s common stock as of March 31, 2015 of $67.57 per share. Assuming full exchange for common shares as of March 31, 2015, 202,901 shares would have been issued to the holders of Series D Units.

 

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The computation of earnings per common share was as follows for the periods presented:

 

     For the Three Months Ended
March 31,
 
     2015      2014  

Net income attributable to common stockholders

   $ 53,742       $ 37,340   

Earnings and dividends allocated to participating securities

     (119      (117
  

 

 

    

 

 

 

Earnings for basic computations

  53,623      37,223   

Earnings and dividends allocated to participating securities

  119      —     

Income allocated to noncontrolling interest—Preferred Operating Partnership (Series A Units) and Operating Partnership

  3,635      3,128   

Fixed component of income allocated to noncontrolling interest—Preferred Operating Partnership (Series A Units)

  (1,274   (1,438
  

 

 

    

 

 

 

Net income for diluted computations

$ 56,103    $ 38,913   
  

 

 

    

 

 

 

Weighted average common shares outstanding:

Average number of common shares outstanding—basic

  116,117,615      115,438,325   

Series A Units

  875,480      989,980   

OP Units

  4,365,879      4,334,118   

Unvested restricted stock awards included for treasury stock method

  282,903      —     

Shares related to exchangeable senior notes and dilutive stock options

  953,841      300,422   
  

 

 

    

 

 

 

Average number of common shares outstanding—diluted

  122,595,718      121,062,845   

Earnings per common share

Basic

$ 0.46    $ 0.32   

Diluted

$ 0.46    $ 0.32   

 

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5. STORE ACQUISITIONS

The following table summarizes the Company’s acquisitions of operating stores for the three months ended March 31, 2015, and does not include purchases of raw land or improvements made to existing assets:

 

  Number
of
Stores
  Date of
Acquisition
  Consideration Paid   Acquisition Date Fair Value  

Property Location

Total   Cash
Paid
  Non-cash
gain
  Notes
Receivable
  Previous
equity
interest
  Net
Liabilities/(Assets)
Assumed
  Land   Building   Intangible   Closing costs—
expensed (1)
 

California (2)

    1        3/30/2015      $ 12,699      $ 1,700      $ 1,629      $ 11,009      $ (1,264   $ (375   $ 1,025      $ 11,479      $ 195      $ —     

North Carolina, South Carolina

    2        3/30/2015        13,165        13,143        —          —          —          22        1,763        11,229        144        29   

Virginia

    1        3/17/2015        5,073        5,065        —          —          —          8        118        4,797        81        77   

Texas

    1        2/24/2015        13,570        13,519        —          —          —          51        1,511        11,861        182        16   

Texas

    3        1/13/2015        41,904        41,806        —          —          —          98        12,080        29,489        300        35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2015 Totals

    8        $ 86,411      $ 75,233      $ 1,629      $ 11,009      $ (1,264   $ (196   $ 16,497      $ 68,855      $ 902      $ 157   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This column represents costs paid at closing. The amounts shown exclude other acquisition costs paid before or after the closing date.
(2) This represents the acquisition of a joint venture partners’ interest in Extra Space of Sacramento One LLC (“Sacramento One”), an existing joint venture, for $1,700 in cash. The result of the acquisition is that the Company owns 100% of Sacramento One, which owned one store located in California. Prior to the acquisition date, the Company accounted for its interest in Sacramento One as an equity-method investment, and the Company also held mortgage notes receivable from Sacramento One totalling $11,009, including related interest. The total acquisition date fair value of the Company’s previous equity interest was approximately $365 and is included in consideration transfered. The Company recognized a non-cash gain of $1,629 as a result of remeasuring the fair value of its equity interest held prior to the acquisition. The store is consolidated subsequent to the acquisition as the Company owns 100% of the store.

6. VARIABLE INTERESTS

The Operating Partnership has three wholly-owned unconsolidated subsidiaries (“Trust,” “Trust II” and “Trust III,” together, the “Trusts”) that have issued trust preferred securities to third parties and common securities to the Operating Partnership. The proceeds from the sale of the preferred and common securities were loaned in the form of notes to the Operating Partnership. The Trusts are VIEs because the holders of the equity investment at risk (the trust preferred securities) do not have the power to direct the activities of the entities that most significantly affect the entities’ economic performance because of their lack of voting or similar rights. Because the Operating Partnership’s 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 an equity investment at risk. The Operating Partnership’s 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 for the proceeds as discussed above, which are owed to the Trusts. The Company has also included its investment in the Trusts’ common securities in other assets on the condensed consolidated balance sheets.

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 Company’s 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 Company’s 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 involvement with the Trusts to the maximum exposure to loss the Company is subject to as a result of such involvement as of March 31, 2015:

 

     Notes
payable

to Trusts
     Investment
Balance
     Maximum
exposure
to loss
     Difference  

Trust

   $ 36,083       $ 1,083       $ 35,000       $ —     

Trust II

     42,269         1,269         41,000         —     

Trust III

     41,238         1,238         40,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 119,590    $ 3,590    $ 116,000    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no consolidated VIEs during the three months ended March 31, 2015.

 

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7. DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposure that arises from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. A portion of these changes is excluded from accumulated other comprehensive income as it is allocated to noncontrolling interests. During the three months ended March 31, 2015 and 2014, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company held 23 derivative financial instruments which had a total combined notional amount of $825,987 as of March 31, 2015.

Fair Values of Derivative Instruments

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets:

 

     Asset (Liability) Derivatives  
     March 31,
2015
     December 31,
2014
 

Derivatives designated as hedging instruments:

      

Other assets

   $ 688       $ 3,583   

Other liabilities

   $ (7,231    $ (3,533

 

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Effect of Derivative Instruments

The tables below present the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the periods presented. No tax effect has been presented as the derivative instruments are held by the Company:

 

    

Classification of

Income (Expense)

   For the Three Months
Ended March 31,
 

Type

      2015      2014  

Swap Agreements

   Interest expense    $ (2,297    $ (2,293
     

 

 

    

 

 

 

 

     Gain (loss)
recognized in OCI

March 31,
   

Location of
amounts
reclassified from
OCI into income

   Gain (loss)
reclassifed from
OCI

For the Three
Months Ended
March 31,
 

Type

   2015     2014        2015     2014  

Swap Agreements

   $ (8,875   $ (5,043   Interest expense    $ (2,297   $ (2,293
  

 

 

   

 

 

      

 

 

   

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with some of its derivative counterparties that contain provisions pursuant to which the Company could be declared in default of its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender.

The Company also has an agreement with some of its derivative counterparties that incorporates the loan covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

As of March 31, 2015, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2015, it could have been required to settle its obligations under the agreements at their termination value of $7,740, including accrued interest.

8. EXCHANGEABLE SENIOR NOTES

On June 21, 2013, the Operating Partnership issued $250,000 of its 2.375% Exchangeable Senior Notes due 2033 at a 1.5% discount, or $3,750. Costs incurred to issue the Notes were approximately $1,672. These costs are being amortized as an adjustment to interest expense over five years, which represents the estimated term based on the first available redemption date, and are included in other assets in the condensed consolidated balance sheets. The Notes are general unsecured senior obligations of the Operating Partnership and are fully guaranteed by the Company. Interest is payable on January 1 and July 1 of each year beginning January 1, 2014, until the maturity date of July 1, 2033. The Notes bear interest at 2.375% per annum and contain an exchange settlement feature, which provides that the Notes may, under certain circumstances, be exchangeable for cash (for the principal amount of the Notes) and, with respect to any excess exchange value, for cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s option. The exchange rate of the Notes as of March 31, 2015 was approximately 17.98 shares of the Company’s common stock per $1,000 principal amount of the Notes.

The Operating Partnership may redeem the Notes at any time to preserve the Company’s status as a REIT. In addition, on or after July 5, 2018, 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 the holders of the Notes. 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 July 1 of the years 2018, 2023 and 2028, and upon the occurrence of certain designated events, 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.

 

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GAAP requires entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The Company therefore accounts for the liability and equity components of the Notes separately. The equity component is included in additional paid-in capital in stockholders’ equity in the condensed consolidated balance sheets, 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 as interest expense over the remaining period of the debt through its first redemption date, July 1, 2018. The effective interest rate on the liability component is 4.0%.

Information about the carrying amount of the equity component, the principal amount of the liability component, its unamortized discount and its net carrying amount was as follows for the periods indicated:

 

     March 31,
2015
     December 31,
2014
 

Carrying amount of equity component

   $ 14,496       $ 14,496   
  

 

 

    

 

 

 

Principal amount of liability component

$ 250,000    $ 250,000   

Unamortized discount—equity component

  (9,751   (10,448

Unamortized cash discount

  (2,418   (2,606
  

 

 

    

 

 

 

Net carrying amount of liability component

$ 237,831    $ 236,946   
  

 

 

    

 

 

 

The amount of interest cost recognized relating to the contractual interest rate and the amortization of the discount on the liability component of the Notes were as follows for the periods indicated:

 

     For the Three
Months Ended
March 31,
 
     2015      2014  

Contractual interest

   $ 1,484       $ 1,484   

Amortization of discount

     697         662   
  

 

 

    

 

 

 

Total interest expense recognized

$ 2,181    $ 2,146   
  

 

 

    

 

 

 

9. NONCONTROLLING INTEREST REPRESENTED BY PREFERRED OPERATING PARTNERSHIP UNITS

Classification of Noncontrolling Interests

GAAP 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 company’s 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. 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 Operating Partnership’s preferred units and classifies the noncontrolling interest represented by such preferred units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

Series A Participating Redeemable Preferred 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 stores in exchange for 989,980 Series A Units of the Operating Partnership. The stores are located in California and Hawaii.

On June 25, 2007, the Operating Partnership loaned the holders of the Series A Units $100,000. The note receivable bears interest at 4.85% per annum. During 2013, a loan amendment was signed extending the maturity date to September 1, 2020. The loan is secured by the borrower’s Series A Units. The holders of the Series A Units could redeem up to 114,500 Series A Units prior to the maturity date of the loan. If any redemption in excess of 114,500 Series A Units occurs prior to the maturity date, the holder of the Series A Units is required to repay the loan as of the date of that redemption.

 

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The partnership agreement of the Operating Partnership (as amended, the “Partnership Agreement”) provides for the designation and issuance of the Series A Units. The Series A Units will have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

Under the Partnership Agreement, Series A 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 participates in distributions with, and has a liquidation value equal to, that of the OP Units. The Series A Units are redeemable at the option of the holder, which redemption obligation may be satisfied, at the Company’s option, in cash or shares of its common stock.

On October 3, 2014, the holders of the Series A Units redeemed 114,500 Series A Units for $4,794 in cash and 280,331 shares of common stock. No additional redemption of Series A Units can be made without repayment of the loan. Subsequent to this redemption, the fixed priority return is calculated using the current liquidation value of $101,699. The Series A Units are shown on the balance sheet net of the $100,000 loan because the borrower under the loan receivable is also the holder of the Series A Units.

Series B Redeemable Preferred Units

On April 3, 2014, the Operating Partnership completed the purchase of a store located in Georgia. This store was acquired in exchange for $15,158 of cash and 333,360 Series B Units valued at $8,334.

On August 29, 2013, the Operating Partnership completed the purchase of 19 out of 20 stores affiliated with All Aboard Mini Storage, all of which are located in California. On September 26, 2013, the Operating Partnership completed the purchase of the remaining store. These stores were acquired in exchange for $100,876 of cash (including $98,960 of debt assumed and immediately defeased at closing), 1,342,727 Series B Units valued at $33,568, and 1,448,108 OP Units valued at $62,341.

The Partnership Agreement provides for the designation and issuance of the Series B Units. The Series B Units rank junior to the Series A Units, on parity with the Series C Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The outstanding Series B Units have a liquidation value of $25.00 per unit for a fixed liquidation value of $41,902. Holders of the Series B Units receive distributions at an annual rate of 6%. These distributions are cumulative. The Series B Units will become redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock.

Series C Convertible Redeemable Preferred Units

On November 19, 2013, the Company entered into Contribution Agreements with various entities affiliated with Grupe Properties Co. Inc. (“Grupe”), under which the Company agreed to acquire twelve stores, all of which are located in California. The Company completed the purchase of these stores between December 2013 and May 2014. The Company previously held 35% interests in five of these stores and a 40% interest in one store through six separate joint ventures with Grupe. These stores were acquired in exchange for a total of approximately $45,722 of cash, the assumption of $37,532 in existing debt, and the issuance of 704,016 Series C Units valued at $30,960.

The Partnership Agreement provides for the designation and issuance of the Series C Units. The Series C Units rank junior to the Series A Units, on parity with the Series B Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The outstanding Series C Units have a liquidation value of $42.10 per unit for a fixed liquidation value of $29,639. From issuance to the fifth anniversary of issuance, each Series C Unit holder will receive quarterly distributions equal to the quarterly distribution per OP Unit plus $0.18. Beginning on the fifth anniversary of issuance, each Series C Unit holder will receive a fixed quarterly distribution equal to the aggregate quarterly distribution payable in respect of such Series C Unit during the four quarters immediately preceding the fifth anniversary of issuance, divided by four. These distributions are cumulative. The Series C Units will become redeemable at the option of the holder one year from the date of issuance, which redemption obligation may be satisfied at the

 

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Company’s option in cash or shares of its common stock. The Series C Units will also become convertible into OP Units at the option of the holder one year from the date of issuance, at a rate of 0.9145 OP Units per Series C Unit converted. This conversion option expires upon the fifth anniversary of the date of issuance.

In December 2014, the Operating Partnership loaned certain holders of the Series C Units $20,230. The notes receivable, which are collateralized by the Series C Units, bear interest at 5.0% per annum and mature on December 15, 2024. The Series C Units are shown on the balance sheet net of the $20,230 loan because the borrower under the loan receivable is also the holder of the Series C units.

Series D Redeemable Preferred Units

In December 2014, the Operating Partnership completed the acquisition of a store located in Florida. This store was acquired in exchange for $5,621 in cash and 548,390 Series D Units valued at $13,710.

The Partnership Agreement provides for the designation and issuance of the Series D Units. The Series D Units rank junior to the Series A Units, on parity with the Series B Units and Series C Units, and senior to all other partnership interests of the Operating Partnership with respect to distributions and liquidation.

The Series D Units have a liquidation value of $25.00 per unit, for a fixed liquidation value of $13,710. Holders of the Series D Units receive distributions at an annual rate of 5.0%. These distributions are cumulative. The Series D Units will become redeemable at the option of the holder on the first anniversary of the date of issuance, which redemption obligation may be satisfied at the Company’s option in cash or shares of its common stock.

10. NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP

The Company’s interest in its stores 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. ESS Holding Business Trust II, also a wholly-owned subsidiary of the Company, is a limited partner of the Operating Partnership. Between its general partner and limited partner interests, the Company held a 93.4% ownership interest in the Operating Partnership as of March 31, 2015. The remaining ownership interests in the Operating Partnership (including Preferred Operating Partnership units) of 6.6% are held by certain former owners of assets acquired by the Operating Partnership.

The noncontrolling interest in the Operating Partnership represents 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 stores to the Operating Partnership received limited partnership interests in the form of OP Units. Limited partners who received OP Units in the formation transactions or in exchange for contributions for interests in stores have the right to require the Operating Partnership to redeem part or all of their OP Units for cash based upon the fair market value of an equivalent number of shares of the Company’s common stock (based on the ten-day average trading price) at the time of the redemption. Alternatively, the Company may, in its sole discretion, 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. The ten-day average closing stock price at March 31, 2015 was $67.76 and there were 4,365,879 OP Units outstanding. Assuming that all of the OP Unit holders exercised their right to redeem all of their OP Units on March 31, 2015 and the Company elected to pay the OP Unit holders cash, the Company would have paid $295,832 in cash consideration to redeem the units.

GAAP 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 company’s 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. 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 OP Units and classifies the noncontrolling interest represented by the OP Units as stockholders’ equity in the accompanying condensed consolidated balance sheets. The Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling amount as permanent equity in the condensed consolidated balance sheets. Any noncontrolling interests that fail to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount and (2) the redemption value as of the end of the period in which the determination is made.

 

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11. OTHER NONCONTROLLING INTERESTS

Other noncontrolling interests represent the ownership interests of various third parties in two consolidated joint ventures as of March 31, 2015. One of these consolidated joint ventures owns a single store in California. The second consolidated joint venture owns 19 stores. The ownership interests of the third-party owners range from 1.0% to 3.3%. Other noncontrolling interests are included in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. The income or losses attributable to these third-party owners based on their ownership percentages are reflected in net income allocated to Operating Partnership and other noncontrolling interests in the condensed consolidated statements of operations.

12. EQUITY IN EARNINGS OF UNCONSOLIDATED REAL ESTATE VENTURES—GAIN ON SALE OF REAL ESTATE AND PURCHASE OF JOINT VENTURE PARTNERS’ INTERESTS

In March 2015, ESS PRISA II LLC (“PRISA II”), a joint venture in which the Company holds a 2.0% interest, sold one store located in New York for $90,000. As a result of the sale, PRISA II recognized a gain of $60,496 and the Company recorded its 2.0% portion of the gain, or $1,228.

In March 2015, the Company acquired its joint venture partner’s 82.4% interest in Sacramento One, an existing joint venture which owned one store located in California, for $1,700. In addition, the Company held mortgage notes receivable from Sacramento One totaling $11,009, which were eliminated as a result of the acquisition. Prior to the acquisition, the remaining 17.6% interest was owned by the Company, which accounted for its investment in Sacramento One using the equity method. The Company recorded a non-cash gain of $1,629 related to this transaction, which represents the increase in fair value of the company’s interest in the joint venture from its formation to the acquisition date.

13. SEGMENT INFORMATION

The Company operates in three distinct segments: (1) rental operations; (2) tenant reinsurance; and (3) property management, acquisition and development. Management fees collected for wholly-owned stores are eliminated in consolidation. Financial information for the Company’s business segments is presented below:

 

     March 31,
2015
     December 31,
2014
 

Balance Sheet

     

Investment in unconsolidated real estate ventures

     

Rental operations

   $ 85,602       $ 85,711   
  

 

 

    

 

 

 

Total assets

Rental operations

$ 4,194,744    $ 4,109,673   

Tenant reinsurance

  38,745      39,383   

Property management, acquisition and development

  230,656      253,051   
  

 

 

    

 

 

 
$ 4,464,145    $ 4,402,107   
  

 

 

    

 

 

 

 

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     For the Three Months
Ended March 31,
 
     2015      2014  

Statement of Operations

     

Total revenues

     

Rental operations

   $ 148,894       $ 132,001   

Tenant reinsurance

     16,510         13,463   

Property management, acquisition and development

     7,750         7,123   
  

 

 

    

 

 

 
  173,154      152,587   
  

 

 

    

 

 

 

Operating expenses, including depreciation and amortization

Rental operations

  75,509      69,942   

Tenant reinsurance

  2,928      2,567   

Property management, acquisition and development

  19,281      19,680   
  

 

 

    

 

 

 
  97,718      92,189   
  

 

 

    

 

 

 

Income (loss) from operations

Rental operations

  73,385      62,059   

Tenant reinsurance

  13,582      10,896   

Property management, acquisition and development

  (11,531   (12,557
  

 

 

    

 

 

 
  75,436      60,398   
  

 

 

    

 

 

 

Interest expense

Rental operations

  (21,830   (19,310

Property management, acquisition and development

  399      (288
  

 

 

    

 

 

 
  (21,431   (19,598
  

 

 

    

 

 

 

Non-cash interest expense related to the amortization of discount on equity component of exchangeable senior notes

Property management, acquisition and development

  (697   (662
  

 

 

    

 

 

 

Interest income

Tenant reinsurance

  4      4   

Property management, acquisition and development

  852      265   
  

 

 

    

 

 

 
  856      269   
  

 

 

    

 

 

 

Interest income on note receivable from Preferred Operating Partnership unit holder

Property management, acquisition and development

  1,213      1,213   
  

 

 

    

 

 

 

Equity in earnings of unconsolidated real estate ventures

Rental operations

  2,650      2,419   
  

 

 

    

 

 

 

Equity in earnings of unconsolidated real estate ventures—gain on sale of real estate assets and purchase of partners’ interests

Rental operations

  2,857      —     
  

 

 

    

 

 

 

Income tax expense

Rental operations

  (754   (434

Tenant reinsurance

  (1,874   (3,815

Property management, acquisition and development

  380      1,419   
  

 

 

    

 

 

 
  (2,248   (2,830
  

 

 

    

 

 

 

Net income (loss)

Rental operations

  56,308      44,734   

Tenant reinsurance

  11,712      7,085   

Property management, acquisition and development

  (9,384   (10,610
  

 

 

    

 

 

 
$ 58,636    $ 41,209   
  

 

 

    

 

 

 

Depreciation and amortization expense

Rental operations

$ 28,265    $ 26,460   

Property management, acquisition and development

  2,163      1,915   
  

 

 

    

 

 

 
$ 30,428    $ 28,375   
  

 

 

    

 

 

 

Statement of Cash Flows

Acquisition of real estate assets

Property management, acquisition and development

$ (77,082 $ (253,939
  

 

 

    

 

 

 

Development and redevelopment of real estate assets

Property management, acquisition and development

$ (3,140 $ (2,820
  

 

 

    

 

 

 

 

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14. COMMITMENTS AND CONTINGENCIES

As of March 31, 2015, the Company is involved in various legal proceedings and is subject to various claims and complaints arising in the ordinary course of business. In the opinion of management, such litigation, claims and complaints are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

As of March 31, 2015, the Company was under contract to acquire 42 stores for a total purchase price of $374,283. Of these 42 stores, 34 are scheduled to close in 2015. The remaining stores will close upon completion of construction, expected to occur on various dates in 2016 and 2017.

15. SUBSEQUENT EVENTS

On April 14, 2015, the Company purchased one store located in Texas for $8,650.

On April 15, 2015, the Company purchased a portfolio of 22 stores located in Arizona and Texas for $177,700.

On April 24, 2015, the Company purchased one store located in Georgia for $6,500.

On May 5, 2015 the Company purchased one store located in North Carolina for $11,000.

On May 7, 2015 the Company purchased another store located in Georgia for $6,500.

 

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

Amounts in thousands, except store and share data

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our unaudited “Condensed Consolidated Financial Statements” and the “Notes to Condensed Consolidated Financial Statements (unaudited)” appearing elsewhere in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Form 10-K for the year ended December 31, 2014. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Statement on Forward-Looking Information.”

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2014 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.

OVERVIEW

We are a fully integrated, self-administered and self-managed REIT, formed to continue the business commenced in 1977 by Extra Space Storage LLC and its subsidiaries to own, operate, manage, acquire, develop and redevelop professionally managed self-storage stores.

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

We operate in competitive markets, often where consumers have multiple stores from which to choose. Competition has impacted, and will continue to impact, our store results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our ability to lease available self-storage units and actively manage rental rates, and on the ability of our tenants to make required rental payments. We believe that we are able to respond quickly and effectively to changes in local, regional and national economic conditions by centrally adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems.

We continue to evaluate a range of new initiatives and opportunities in order to enable us to maximize stockholder value. Our strategies to maximize stockholder value include the following:

 

    Maximize the performance of our stores through strategic, efficient and proactive management. We pursue revenue-generating and expense-minimizing opportunities in our operations. Our revenue management team seeks to maximize revenue by responding to changing market conditions through our advanced technology system’s ability to provide real-time, interactive rental rate and discount management. Our size allows us greater ability than the majority of our competitors to implement more effective online marketing programs, which we believe will attract more customers to our stores at a lower net cost.

 

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    Acquire self-storage stores. Our acquisitions team continues to pursue the acquisition of multi-store portfolios and single stores that we believe can provide stockholder value. We have established a reputation as a reliable, ethical buyer, which we believe enhances our ability to negotiate and close acquisitions. In addition, we believe our status as an UPREIT enables flexibility when structuring deals. We continue to see available acquisitions on which to bid and are seeing increasing prices. However, we remain a disciplined buyer and look for acquisitions that will strengthen our portfolio and increase stockholder value.

 

    Expand our management business. Our management business enables us to generate increased revenues through management fees and to expand our geographic footprint. We believe this expanded footprint enables us to reduce our operating costs through economies of scale. In addition, we see our management business as a future acquisition pipeline. We pursue strategic relationships with owners whose stores would enhance our portfolio in the event an opportunity arises to acquire such stores.

PROPERTIES

As of March 31, 2015, we owned, had ownership interests in, or managed 1,106 stores in 35 states, Washington, D.C. and Puerto Rico. Of these 1,106 stores, we owned 565 stores, we held joint venture interests in 270 stores, and our taxable REIT subsidiary, Extra Space Management, Inc., operated an additional 271 stores that are owned by third parties. These operating stores contain approximately 81.8 million square feet of rentable space in approximately 740,000 units.

Our stores are generally situated in convenient, highly visible locations clustered around large population centers such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These areas all enjoy above-average population growth and income levels. The clustering of assets around these population centers enables us to reduce our operating costs through economies of scale. Our acquisitions and management business have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

We consider a store to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a store to be stabilized once it has achieved either an 80% average occupancy rate for a full year measured as of January 1, or has been open for three years.

As of March 31, 2015, approximately 670,000 tenants were leasing storage units at the 1,106 operating stores that we own and/or manage, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as market conditions permit. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. Although leases are short-term in duration, the typical tenant tends to remain at our stores for an extended period of time. For stores that were stabilized as of March 31, 2015, the average length of stay was approximately 13.4 months for tenants that vacated during the preceding twelve month period.

The average annual rent per square foot for our existing customers at stabilized stores, net of discounts and bad debt, was $14.18 for the three months ended March 31, 2015, compared to $13.62 for the same period ended March 31, 2014. Average annual rent per square foot for new leases was $14.56 for the three months ended March 31, 2015, compared to $13.82 for the same period ended March 31, 2014. The average discounts, as a percentage of rental revenues, during these periods were 3.9% and 4.1%, respectively.

Our store portfolio is made up of different types of construction and building configurations depending on the site and the municipality where it is located. Most often sites are what we consider “hybrid” stores, a mix of drive-up and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of stores featuring ground-floor access only.

The following table presents additional information regarding the occupancy of our stabilized stores by state as of March 31, 2015 and 2014. The information as of March 31, 2014 is on a pro forma basis as though all the stores owned and/or managed at March 31, 2015 were under our control as of March 31, 2014.

 

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Stabilized Store Data Based on Location

 

     Number of
Stores
     Company      Pro forma      Company      Pro forma      Company     Pro forma  

Location

      Number of Units
as of
March 31, 2015 (1)
     Number of
Units as of
March 31, 2014
     Net Rentable
Square Feet as of
March 31, 2015 (2)
     Net Rentable
Square Feet as of
March 31, 2014
     Square Foot
Occupancy %
March 31,
2015
    Square Foot
Occupancy %
March 31,
2014
 

Wholly-Owned Stores

                   

Alabama

     5         2,913         2,893         343,516         343,905         88.2     83.0

Arizona

     12         7,666         7,549         889,838         886,003         92.8     87.1

California

     122         91,341         90,581         9,454,957         9,466,712         93.8     89.4

Colorado

     12         5,934         5,820         739,109         736,780         94.2     91.9

Connecticut

     5         3,133         3,126         299,429         300,310         93.9     90.1

Florida

     57         39,416         39,258         4,214,245         4,242,311         92.6     89.7

Georgia

     22         12,977         12,968         1,634,310         1,634,502         90.9     86.6

Hawaii

     5         5,654         5,566         337,637         333,809         93.5     86.4

Illinois

     17         11,935         11,593         1,233,925         1,219,671         90.1     91.1

Indiana

     9         4,765         4,711         555,310         553,558         90.8     89.2

Kansas

     1         507         503         50,361         50,360         88.9     93.0

Kentucky

     4         2,181         2,157         253,741         254,141         91.1     90.5

Louisiana

     2         1,408         1,411         149,990         150,165         91.9     90.9

Maryland

     23         17,373         17,251         1,817,835         1,818,053         91.9     90.8

Massachusetts

     36         22,218         22,023         2,246,607         2,247,053         93.3     90.8

Michigan

     3         1,805         1,791         255,697         251,432         91.3     90.5

Missouri

     6         3,241         3,214         387,551         385,176         89.9     89.7

Nevada

     5         3,190         3,202         549,080         547,154         92.9     86.4

New Hampshire

     2         1,015         1,012         125,748         125,748         96.0     92.8

New Jersey

     49         37,982         37,777         3,686,908         3,678,498         92.9     92.7

New Mexico

     3         1,584         1,571         217,954         217,444         89.1     83.8

New York

     20         17,633         17,621         1,460,818         1,457,940         92.1     89.7

North Carolina

     7         4,851         4,783         510,771         504,170         91.9     84.0

Ohio

     19         10,432         10,273         1,363,811         1,358,325         91.6     89.6

Oregon

     3         2,155         2,148         250,450         250,530         94.4     92.3

Pennsylvania

     9         5,759         5,726         651,576         649,100         91.7     89.3

Rhode Island

     2         1,212         1,183         131,141         131,346         94.5     90.1

South Carolina

     6         3,355         3,322         420,790         418,490         88.9     91.7

Tennessee

     10         5,595         5,513         755,123         753,357         93.9     91.5

Texas

     33         21,597         21,466         2,535,810         2,514,857         90.5     87.6

Utah

     8         4,240         4,053         523,056         503,791         92.5     90.9

Virginia

     29         22,421         22,379         2,402,203         2,383,793         88.3     84.9

Washington

     6         3,589         3,545         428,603         427,773         90.2     89.1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Wholly-Owned Stabilized

  552      381,077      377,989      40,877,900      40,796,257      92.2 %    89.4 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Number of
Stores
     Company      Pro forma      Company      Pro forma      Company     Pro forma  

Location

      Number of Units
as of
March 31, 2015 (1)
     Number of
Units as of
March 31, 2014
     Net Rentable
Square Feet as of
March 31, 2015 (2)
     Net Rentable
Square Feet as of
March 31, 2014
     Square Foot
Occupancy %
March 31,
2015
    Square Foot
Occupancy %
March 31,
2014
 

Joint-Venture Stores

                   

Alabama

     2         1,156         1,149         145,146         145,231         90.2     92.2

Arizona

     7         4,263         4,224         492,603         493,071         92.3     90.8

California

     70         50,593         50,216         5,183,638         5,173,895         94.4     91.8

Colorado

     2         1,322         1,323         159,454         159,443         92.9     90.6

Connecticut

     7         5,316         5,297         611,840         611,790         93.3     92.2

Delaware

     1         592         590         71,705         71,705         93.1     89.3

Florida

     19         15,278         15,198         1,534,938         1,533,311         92.0     90.0

Georgia

     2         1,069         1,059         152,554         151,524         89.4     84.8

Illinois

     5         3,477         3,447         365,165         364,916         91.5     92.7

Indiana

     5         2,214         2,170         287,973         285,386         91.5     89.8

Kansas

     2         842         840         109,195         109,695         91.6     85.6

Kentucky

     4         2,276         2,237         257,439         255,089         89.2     86.7

Maryland

     12         9,816         9,743         954,965         954,725         90.7     89.8

Massachusetts

     13         6,947         6,903         783,629         782,680         91.9     91.5

Michigan

     8         4,830         4,787         614,292         610,718         93.9     91.3

Missouri

     1         535         532         61,075         61,225         86.9     85.7

Nevada

     5         3,030         3,047         327,778         326,863         88.5     87.0

New Hampshire

     2         795         776         84,631         83,615         92.7     91.9

New Jersey

     16         13,004         12,950         1,357,516         1,356,727         90.4     90.6

New Mexico

     7         3,606         3,604         397,044         398,245         91.9     83.8

New York

     12         11,931         11,939         975,514         977,856         92.4     91.3

Ohio

     8         3,998         3,963         531,697         531,412         89.9     89.6

Oregon

     1         654         653         64,970         64,970         92.6     92.5

Pennsylvania

     10         7,981         7,964         805,223         803,620         91.0     89.6

Tennessee

     17         9,458         9,373         1,241,902         1,241,427         92.0     90.7

Texas

     17         10,627         10,561         1,389,061         1,387,664         93.7     92.2

Virginia

     13         9,385         9,361         994,769         994,449         91.7     90.5

Washington, DC

     1         1,547         1,530         102,492         102,017         91.9     91.8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Joint-Venture Stabilized

  269      186,542      185,436      20,058,208      20,033,269      92.4   90.7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Managed Stores

Alabama

  7      2,339      2,339      355,310      355,310      87.3   87.3

Arizona

  3      1,223      1,219      229,967      228,847      92.4   85.8

California

  61      40,929      41,259      5,364,399      5,414,868      89.6   80.7

Colorado

  16      8,365      8,333      1,068,607      1,063,669      92.1   91.1

Connecticut

  1      465      473      61,865      61,600      91.1   87.9

Florida

  36      23,255      23,249      2,811,985      2,850,187      89.6   85.0

Georgia

  11      5,873      5,865      912,964      911,788      90.1   85.4

Hawaii

  6      5,016      5,038      350,372      344,898      89.1   87.3

Illinois

  6      3,612      3,593      393,710      387,345      87.9   89.2

Indiana

  9      5,047      5,034      618,777      618,777      90.6   87.9

Kentucky

  1      552      547      67,268      67,268      98.2   84.9

Louisiana

  1      999      1,005      133,490      134,835      88.3   80.5

Maryland

  14      9,509      9,495      913,327      914,272      88.6   85.1

Mississippi

  2      1,885      1,893      281,558      281,823      89.7   82.8

Missouri

  2      1,119      1,209      127,501      152,141      90.5   89.4

Nevada

  4      3,016      3,050      316,760      315,985      83.0   75.8

New Jersey

  3      1,638      1,619      181,588      181,138      91.7   92.6

New Mexico

  2      1,125      1,120      131,112      131,312      91.5   88.6

North Carolina

  3      1,603      1,571      205,218      205,981      94.2   88.6

Ohio

  8      2,842      2,833      396,676      396,504      92.1   89.3

Pennsylvania

  15      6,950      6,944      859,682      861,372      91.1   86.9

South Carolina

  2      1,171      1,198      153,723      153,723      83.3   84.8

Tennessee

  4      1,978      1,971      278,446      280,471      89.6   89.4

Texas

  24      13,111      12,891      1,775,321      1,737,067      85.6   82.9

Utah

  4      2,021      2,031      314,040      313,715      91.4   88.2

Virginia

  4      2,405      2,404      249,514      249,514      88.0   86.3

Washington, DC

  2      1,267      1,263      112,334      112,409      90.7   89.2

Puerto Rico

  4      2,666      2,694      287,049      287,417      86.8   83.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Managed Stabilized

  255      151,981      152,140      18,952,563      19,014,236      89.4   84.5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Stabilized Stores

  1,076      719,600      715,565      79,888,671      79,843,762      91.6   88.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Represents unit count as of March 31, 2015, which may differ from unit count as of March 31, 2014 due to unit conversions or expansions.
(2) Represents net rentable square feet as of March 31, 2015, which may differ from rentable square feet as of March 31, 2014 due to unit conversions or expansions.

 

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The following table presents additional information regarding the occupancy of our lease-up stores by state as of March 31, 2015 and 2014. The information as of March 31, 2014 is on a pro forma basis as though all the stores owned and/or managed at March 31, 2015 were under our control as of March 31, 2014.

Lease-up Store Data Based on Location

 

     Number of
Stores
     Company      Pro forma      Company      Pro forma      Company     Pro forma  

Location

      Number of Units
as of
March 31, 2015 (1)
     Number of
Units as of
March 31, 2014
     Net Rentable
Square Feet as of
March 31, 2015 (2)
     Net Rentable
Square Feet as of
March 31, 2014
     Square Foot
Occupancy %
March 31,
2015
    Square Foot
Occupancy %
March 31,
2014
 

Wholly-Owned Stores

                   

California (3)

     1         —           569         —           57,898         0.0     95.5

Connecticut

     1         1,105         1,095         89,460         90,210         64.2     0.9

Florida

     1         544         558         81,941         88,172         86.4     43.1

Georgia

     1         598         595         52,365         51,590         92.1     52.9

Illinois

     1         658         585         52,757         47,228         61.2     85.4

Maryland

     1         988         988         103,171         102,777         81.3     44.9

South Carolina

     2         1,251         348         131,887         46,210         57.2     44.5

Texas

     4         2,755         2,760         302,331         93,715         54.8     19.2

Virginia

     1         455         455         56,805         56,805         69.3     63.8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Wholly-Owned in Lease-up

  13      8,354      7,953      870,717      577,800      65.8   42.7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Managed Stores

Colorado

  1      746      —        75,595      —        5.5   0.0

Georgia

  1      578      —        70,330      —        12.1   0.0

Illinois

  1      673      675      46,417      46,599      61.9   18.0

Maryland

  2      918      433      83,359      44,790      49.9   59.5

Massachusetts

  1      902      —        70,076      —        2.6   0.0

New York

  2      2,580      2,234      162,600      128,875      77.8   91.6

North Carolina

  2      770      —        68,736      —        7.8   0.0

South Carolina

  1      1,002      —        97,620      —        38.5   0.0

Texas

  1      609      614      70,251      70,223      70.0   55.3

Utah

  1      516      532      67,037      65,981      86.8   0.7

Virginia

  2      1,058      600      106,126      54,520      70.9   59.9

Washington

  1      729      —        80,880      —        13.3   0.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Managed in Lease-up

  16      11,081      5,088      999,027      410,988      44.8   54.8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Lease-up Stores

  30      20,125      13,041      1,929,233      988,788      53.3   47.7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Represents unit count as of March 31, 2015, which may differ from unit count as of March 31, 2014 due to unit conversions or expansions.
(2) Represents net rentable square feet as of March 31, 2015, which may differ from rentable square feet as of March 31, 2014 due to unit conversions or expansions.
(3) In October 2014, a store located in Venice, California was damaged by fire. During the reconstruction period all units are unavailable.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2015 and 2014

Overview

Results for the three months ended March 31, 2015 included the operations of 835 stores (565 wholly-owned, 20 consolidated joint ventures, and 250 in joint ventures accounted for using the equity method) compared to the results for the three months ended March 31, 2014, which included the operations of 800 stores (527 wholly-owned, 19 consolidated joint ventures, and 254 in joint ventures accounted for using the equity method).

 

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Revenues

The following table presents information on revenues earned for the periods indicated:

 

     For the Three Months
Ended March 31,
     $ Change      % Change  
     2015      2014        

Revenues:

           

Property rental

   $ 148,894       $ 132,001       $ 16,893         12.8

Tenant reinsurance

     16,510         13,463         3,047         22.6

Management fees and other income

     7,750         7,123         627         8.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

$ 173,154    $ 152,587    $ 20,567      13.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Property Rental—The increase in property rental revenues for the three months ended March 31, 2015 was the result of an increase of $7,487 associated with acquisitions completed in 2015 and 2014, and an increase of $9,839 as a result of increases in occupancy and rental rates to new and existing customers at our stabilized stores. We acquired eight operating stores during the three months ended March 31, 2015 and 51 operating stores during 2014. Occupancy at our wholly-owned stabilized stores increased to 92.2% at March 31, 2015, as compared to 89.4% at March 31, 2014. Rental rates to new tenants for the three months ended March 31, 2015 increased an average of approximately 5.0% over the same period in the prior year.

Tenant Reinsurance—The increase in our tenant reinsurance revenues was partially due to the increase in overall customer participation to approximately 70.8% at March 31, 2015 compared to 68.7% at March 31, 2014. In addition, we operated 1,106 stores at March 31, 2015 compared to 1,052 stores at March 31, 2014.

Management Fees and Other Income—Our taxable REIT subsidiary (“TRS”), Extra Space Management, Inc., manages stores owned by our joint ventures and third parties. Management fees represent approximately 6% of cash collected from these stores. We also earn an asset management fee from one of our joint ventures, equal to 0.5% of the total asset value, provided certain conditions are met. The increase in management fee revenues was primarily due to an increase in revenues at the managed stores as a result of increases in occupancy and rental rates, and to an increase in the number of properties managed.

 

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Expenses

The following table presents information on expenses for the periods indicated:

 

     For the Three Months
Ended March 31,
     $ Change      % Change  
     2015      2014        

Expenses:

           

Property operations

   $ 47,244       $ 43,482       $ 3,762         8.7

Tenant reinsurance

     2,928         2,567         361         14.1

Acquisition related costs

     869         2,056         (1,187      (57.7 )% 

General and administrative

     16,249         15,709         540         3.4

Depreciation and amortization

     30,428         28,375         2,053         7.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

$ 97,718    $ 92,189    $ 5,529      6.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Property Operations—The increase in property operations expense during the three months ended March 31, 2015 consisted primarily of increases in expenses associated with acquisitions completed in 2015 and 2014. We acquired eight operating stores during the three months ended March 31, 2015, and 51 operating stores during the year ended December 31, 2014.

Tenant Reinsurance—Tenant reinsurance expense represents the costs that are incurred to provide tenant reinsurance. The increase was primarily due to the increase in the number of stores we owned and/or managed. At March 31, 2015, we owned and/or managed 1,106 stores compared to 1,052 stores at March 31, 2014. In addition, there was an increase of overall customer participation to 70.8% at March 31, 2015 compared to 68.7% at March 31, 2014.

Acquisition Related Costs—These costs relate to acquisition activities during the periods indicated. The decrease in these expenses for the three months ended March 31, 2015 compared to the prior year was due to a decrease in the number of acquisitions completed during these periods. We completed the acquisition of eight stores during the three months ended March 31, 2015 compared to 21 stores during the same period in the prior year.

General and Administrative—General and administrative expenses primarily include all expenses not directly related to our stores, including corporate payroll, travel and professional fees. These expenses are recognized as incurred. General and administrative expenses for the three months ended March 31, 2015 increased when compared to the same period in the prior year primarily due to the overall cost associated with the management of additional stores. At March 31, 2015, we owned and/or managed 1,106 stores compared to 1,052 stores at March 31, 2014. We did not observe any material trends in specific payroll, travel or other expenses that contributed significantly to the increase in general and administrative expenses apart from the increase due to the management of additional stores.

Depreciation and Amortization—Depreciation and amortization expense increased as a result of the acquisition of new stores. We acquired eight stores during the three months ended March 31, 2015 and 51 stores during 2014.

 

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Table of Contents

Other Revenues and Expenses

The following table presents information about other revenues and expenses for the periods indicated:

 

     For the Three Months
Ended March 31,
     $ Change      % Change  
     2015      2014        

Other income and expenses:

           

Interest expense

   $ (21,431    $ (19,598    $ (1,833      9.4

Non-cash interest expense related to amortization of discount on equity component of exchangeable senior notes

     (697      (662      (35      5.3

Interest income

     856         269         587         218.2

Interest income on note receivable from Preferred Operating Partnership unit holder

     1,213         1,213         —           —     

Equity in earnings of unconsolidated real estate ventures

     2,650         2,419         231         9.5

Equity in earnings of unconsolidated real estate ventures—gain on sale of real estate assets and purchase of joint venture partners’ interests

     2,857         —           2,857         100.0

Income tax expense

     (2,248      (2,830      582         (20.6 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expense, net

$ (16,800 $ (19,189 $ 2,389      (12.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense—The increase in interest expense during the three months ended March 31, 2015 was the result of an increase in debt over the same period in the prior year. The total face value of our debt, including our lines of credit, was $2,441,547 at March 31, 2015 compared to $2,121,462 at March 31, 2014.

Non-cash Interest Expense Related to Amortization of Discount on Equity Component of Exchangeable Senior Notes—Represents the amortization of the discount related to the equity component of the exchangeable senior notes issued by our Operating Partnership, which reflects the effective interest rate of 4.0% relative to the carrying amount of the liability.

Interest Income—Interest income represents amounts earned on cash and cash equivalents deposited with financial institutions and interest earned on notes receivable. The increase for the three months ended March 31, 2015 related primarily to an increase in the average balance of notes receivable compared to the same period in the prior year.

Interest Income on Note Receivable from Preferred Operating Partnership Unit Holders—Represents interest on a $100,000 loan to the holders of the Series A Participating Redeemable Preferred Units of our Operating Partnership (“Series A Units”).

Equity in Earnings of Unconsolidated Real Estate Ventures—Equity in earnings of unconsolidated real estate ventures represents the income earned through our ownership interests in unconsolidated joint ventures. The increase for the three months ended March 31, 2015 compared to the same period in the prior year was primarily the result of increases in revenue at the stores owned by the joint ventures. Occupancy at our joint venture stores increased to 92.4% as of March 31, 2015, compared to 90.7% as of March 31, 2014.

Equity in Earnings of Unconsolidated Real Estate Ventures—Gain on Sale of Real Estate Assets and Purchase of Joint Venture Partners’ Interests—During March 2015, one of our joint ventures sold a store located in New York to a third party and recognized a gain of $60,496. We recognized our 2.0% share of this gain, or $1,228. Additionally, in March 2015 we acquired a joint venture partner’s 82.4% equity interest in an existing joint venture. We previously held the remaining 17.6% equity interest in this joint venture. Prior to the acquisition, we accounted for our equity interest in this joint venture as an equity-method investment. We recognized a non-cash gain of $1,629 during the three months ended March 31, 2015 as a result of re-measuring the fair value of our equity interest in this joint venture held before the acquisition.

Income Tax ExpenseFor the three months ended March 31, 2015, the decrease in income tax expense was related to a royalty charged to our TRS by the Operating Partnership for access to and use of customer lists and intellectual property. The effect of this change lowered the taxable income of the TRS, which resulted in lower income tax expense.

 

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Table of Contents

Net Income Allocated to Noncontrolling Interests

The following table presents information on net income allocated to noncontrolling interests for the periods indicated:

 

     For the Three Months
Ended March 31,
     $ Change      % Change  
     2015      2014        

Net income allocated to noncontrolling interests:

           

Net income allocated to Preferred Operating Partnership noncontrolling interests

   $ (2,926    $ (2,492    $ (434      17.4

Net income allocated to Operating Partnership and other noncontrolling interests

     (1,968      (1,377      (591      42.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income allocated to noncontrolling interests:

$ (4,894 $ (3,869 $ (1,025   26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Allocated to Preferred Operating Partnership Noncontrolling Interests—In December 2014, as part of the acquisition of a single store, our Operating Partnership issued 548,390 Series D Units. The Series D Units have a liquidation value of $25.00 per unit, and receive distributions at an annual rate of 5.0%.

Between December 2013 and May 2014, as part of the Grupe acquisition, our Operating Partnership issued 704,016 Series C Units. The Series C Units have a liquidation value of $42.10 per unit. From issuance until the fifth anniversary of issuance, the Series C Units receive distributions at an annual rate of $0.18 plus the then-payable quarterly distribution per OP Unit.

In April 2014, as part of a single store acquisition, our Operating Partnership issued 333,360 Series B Units. In August and September 2013, as part of a portfolio acquisition, our Operating Partnership issued an additional 1,342,727 Series B Units. The Series B Units have a liquidation value of $25.00 per unit and receive distributions at an annual rate of 6%.

Income allocated to the Preferred Operating Partnership noncontrolling interests for the three months ended March 31, 2015 represents the fixed distributions paid to holders of the Series A Units, Series B Units, Series C Units and Series D Units, plus approximately 0.7% of the remaining net income allocated to holders of the Series A Units.

Net Income Allocated to Operating Partnership and Other Noncontrolling Interests—Income allocated to the Operating Partnership represents approximately 3.5% of net income after the allocation of the fixed distribution paid to the Preferred Operating Partnership unit holders for the three months ended March 31, 2015 and 2014.

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 stores and impairment write downs of depreciable real estate assets, 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 condensed consolidated financial statements.

The 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 an indicator of our ability to make cash distributions.

 

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Table of Contents

The following table presents the calculation of FFO for the periods indicated:

 

     For the Three
Months Ended
March 31,
 
     2015     2014  

Net income attributable to common stockholders

   $ 53,742      $ 37,340   

Adjustments:

    

Real estate depreciation

     26,118        23,240   

Amortization of intangibles

     2,797        3,726   

Unconsolidated joint venture real estate depreciation and amortization

     1,057        1,106   

Unconsolidated joint venture gain on sale of real estate and purchase of partners’ interests

     (2,857     —     

Distributions paid on Series A Preferred Operating Partnership units

     (1,274     (1,438

Income allocated to Operating Partnership noncontrolling interests

     4,893        3,869   
  

 

 

   

 

 

 

Funds from operations

$ 84,476    $ 67,843   
  

 

 

   

 

 

 

SAME-STORE RESULTS

We consider our same-store stabilized portfolio to consist of only those stores that 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 presents operating data for our same-store portfolio. We consider the following same-store presentation to be meaningful in regards to the stores shown below because these results provide information relating to store-level operating changes without the effects of acquisitions or completed developments.

 

     For the Three Months
Ended March 31,
    Percent
Change
 
     2015     2014    

Same-store rental and tenant reinsurance revenues

   $ 139,652      $ 128,930        8.3

Same-store operating and tenant reinsurance expenses

     42,278        41,559        1.7
  

 

 

   

 

 

   

 

 

 

Same-store net operating income

  97,374      87,371      11.4

Non same-store rental and tenant reinsurance revenues

  25,752      16,534      55.8

Non same-store operating and tenant reinsurance expenses

  7,894      4,490      75.8

Total rental and tenant reinsurance revenues

  165,404      145,464      13.7

Total operating and tenant reinsurance expenses

  50,172      46,049      9.0

Same-store square foot occupancy as of quarter end

  92.5   89.8

Properties included in same-store

  503      503   

The increase in same-store rental revenues for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, was due primarily to an increase in occupancy of 270 basis points and higher rental rates for both new and existing customers. Rental rates to new tenants for the three months ended March 31, 2015 increased an average of approximately 5.0% compared to the same period in the prior year. Same-store expenses were higher for the three months ended March 31, 2015 due to increases in property tax expense and repairs and maintenance. These increases in expenses were partially offset by decreases in property insurance and property operating expenses during the three months ended March 31, 2015.

CASH FLOWS

Cash flows provided by operating activities were $87,439 and $64,572, respectively, for the three months ended March 31, 2015 and 2014. The increase compared to the same period of the prior year primarily related to an increase in net income of $17,427. The remaining portion of the change related to an increase in accounts payable and accrued expenses of $13,747, an increase in other assets of $4,085 and a decrease in other liabilities of $4,213.

 

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Cash used in investing activities was $91,511 and $256,608, respectively, for the three months ended March 31, 2015 and 2014. The decrease was primarily due to a decrease in acquisition activity. Cash used in the acquisition of real estate assets decrease $176,857 during the three months ended March 31, 2015 compared to the same period in the prior year. We acquired eight stores during the three months ended March 31, 2015 compared to 21 stores acquired during the same period of the prior year.

Cash provided by financing activities was $1,713 and $112,238, respectively, for the three months ended March 31, 2015 and 2014. The change related primarily to an increase of $100,997 in the cash paid for principal payments on notes payable and lines of credit. There was also an increase of $8,385 in the cash paid for dividends on common stock.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2015, we had $45,304 available in cash and cash equivalents. We intend to use this cash to pay for future acquisitions, to repay debt 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.

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 2014 and the first three months of 2015, 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.

The following table presents information on our lines of credit for the periods indicated. All of our lines of credit are guaranteed by us and secured by mortgages on certain real estate assets.

 

     As of March 31, 2015    

Origination
Date

  

Maturity

  

Basis Rate (2)

  

Notes

Line of Credit

   Amount
Drawn
     Capacity      Interest
Rate
            

Credit Line 1

   $ —         $ 85,000         2.1   6/4/2010    6/3/2016    LIBOR plus 1.9%    (3)

Credit Line 2

     —           50,000         1.9   11/16/2010    2/13/2017    LIBOR plus 1.8%    (4)

Credit Line 3

     59,000         80,000         1.9   4/29/2011    11/18/2016    LIBOR plus 1.7%    (4)

Credit Line 4

     40,000         50,000         1.9   9/29/2014    9/29/2017    LIBOR plus 1.7%    (4)
  

 

 

    

 

 

               
$ 99,000    $ 265,000   
  

 

 

    

 

 

               

 

(1) Amounts in thousands
(2) 30-day USD LIBOR
(3) One two-year extension available
(4) Two one-year extensions available

As of March 31, 2015, we had $2,441,547 face value of debt, resulting in a debt to total enterprise value ratio of 23.7%. As of March 31, 2015, the ratio of total fixed-rate debt and other instruments to total debt was 69.2% (including $921,635 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 March 31, 2015 was 3.4%. 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 financial covenants at March 31, 2015.

We expect to fund our short-term liquidity requirements, including operating expenses, recurring capital expenditures, dividends to stockholders, distributions to holders of Operating Partnership 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, we are pursuing additional term loans secured by unencumbered stores.

Our liquidity needs consist primarily of cash distributions to stockholders, store acquisitions, principal payments under our borrowings and non-recurring capital expenditures. We may from time to time seek to repurchase our outstanding debt, shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on

 

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prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. 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 or cash balances 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 Operating Partnership units as currency to fund acquisitions from self-storage owners who desire tax-deferral in their exiting transactions.

OFF-BALANCE SHEET ARRANGEMENTS

Except as disclosed in the notes to our consolidated financial statements of our most recently filed Annual Report on Form 10-K, 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 condensed consolidated 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.

CONTRACTUAL OBLIGATIONS

The following table presents information on future payments due by period as of March 31, 2015:

 

     Payments due by Period:  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      After
5 Years
 

Operating leases

   $ 66,262       $ 5,394       $ 8,541       $ 5,540       $ 46,787   

Notes payable, notes payable to trusts and lines of credit

              

Interest

     359,891         75,166         110,230         64,410         110,085   

Principal

     2,441,547         263,825         741,759         820,741         615,222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

$ 2,867,700    $ 344,385    $ 860,530    $ 890,691    $ 772,094   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The operating leases above include minimum future lease payments on leases for 17 of our operating stores as well as leases of our corporate offices. Two ground leases include additional contingent rental payments based on the level of revenue achieved at the store.

As of March 31, 2015, the weighted average interest rate for all fixed-rate loans was 4.0%, and the weighted-average interest rate for all variable-rate loans was 2.0%.

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 that 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 stores;

 

    prepayment penalties and restrictions on refinancing;

 

    the purchase price of stores acquired with debt financing;

 

    long-term objectives with respect to the financing;

 

    target investment returns;

 

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    the ability of particular stores, 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 stores to which the indebtedness relates. In addition, we may invest in stores subject to existing loans collateralized by mortgages or similar liens on our stores, or we may refinance stores 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 stores, for general working capital or to purchase additional interests in partnerships or joint ventures or for other purposes when we believe it is advisable.

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 at 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Amounts in thousands, except store and share data, unless otherwise stated

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 March 31, 2015, we had $2,441,547 in total face value of debt, of which $753,148 was subject to variable interest rates (excluding debt with interest rate swaps). If LIBOR were to increase or decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt (excluding variable-rate debt with interest rate floors) would increase or decrease future earnings and cash flows by $7,156 annually.

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 fair values of our fixed-rate assets and liabilities were as follows for the periods indicated:

 

     March 31, 2015      December 31, 2014  
     Fair
Value
     Carrying
Value
     Fair
Value
     Carrying
Value
 

Notes receivable from Preferred Operating Partnership unit holders

   $ 129,102       $ 120,230       $ 126,380       $ 120,230   

Fixed rate notes payable and notes payable to trusts

   $ 1,487,014       $ 1,438,400       $ 1,320,370       $ 1,283,893   

Exchangeable senior notes

   $ 310,625       $ 250,000       $ 276,095       $ 250,000   

 

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The fair values of our notes receivable from Preferred Operating Partnership unit holders were based on the discounted estimated future cash flows of the notes (categorized within Level 3 of the fair value hierarchy); the discount rate used approximated the current market rate for loans with similar maturities and credit quality. The fair values of our fixed-rate notes payable and notes payable to trusts were estimated using the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximated current market rates for loans, or groups of loans, with similar maturities and credit quality. The fair value of our exchangeable senior notes was estimated using an average market price for similar securities obtained from a third party.

 

ITEM 4. CONTROLS AND PROCEDURES

(1) 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, or the Exchange Act, 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 for considering the materiality of information and determining our disclosure obligations a timely basis. The disclosure committee meets quarterly and reports directly to our Chief Executive Officer and Chief Financial Officer.

We carried out an evaluation, under the supervision and with the participation of management, including our 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 at the reasonable assurance level as of the end of the period covered by this report.

(2) 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.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are involved in various litigation and legal 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, are expected to have a material adverse effect on our financial condition or results of operations either individually or in the aggregate.

 

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2014 Annual Report on Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

  31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1 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.
101 The following materials from Extra Space Storage Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 are formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (4) the Condensed Consolidated Statement of Noncontrolling Interests and Equity, (5) the Condensed Consolidated Statements of Cash Flows and (6) notes to these financial statements.

 

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SIGNATURES

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.

 

EXTRA SPACE STORAGE INC.

Registrant

Date: May 8, 2015 /s/ Spencer F. Kirk
Spencer F. Kirk

Chief Executive Officer

(Principal Executive Officer)

Date: May 8, 2015 /s/ P. Scott Stubbs
P. Scott Stubbs

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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