Extra Space Storage Inc. (EXR)

Q2 2010 Earnings Call

July 29, 2010 1:00 PM ET

Executives

Clint Halverson – Investor Relations

Spencer Kirk – Chairman and CEO

Kent Christensen – Chief Financial Officer

Karl Haas – Chief Operating Officer

Analysts

Eric Wolfe – Citi

Christy McElroy – UBS

Ki Bin Kim – Macquarie

David Toti – FBR Capital Markets

Todd Thomas – KeyBanc Capital Markets

Todd Stender – Wells Fargo

Paula Poskon – Robert W. Baird

Smedes Rose – Keefe, Bruyette & Woods

Michael Knott – Green Street Advisors

Mike Salinsky – RBC Capital Markets

Presentation

Operator

Greetings. And welcome to the Extra Space Storage Second Quarter 2010 Earnings Conference Call. At this all, participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Clint Halverson with Extra Space Storage. Thank you. You may begin.

Clint Halverson

Thank you, [Mann]. Welcome to Extra Space Storage second quarter 2010 conference call. In addition to our press release, we’ve also furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to Extra Space Storage's development and acquisition programs, revenues and operating income, FFO and guidance.

We encourage all of our listeners to review a more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC. Forward-looking statements represent management's estimates as of today, Thursday, July 29, 2010. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

I would now like to turn the call over to Spencer Kirk, Chairman and Chief Executive Officer.

Spencer Kirk

Hello, everyone. Thank you for joining us today. With me are Kent Christensen, our Chief Financial Officer and Karl Haas, our Chief Operating Officer.

For some time now I have spoken of the principle of LIFO or last in, first out. And in comparison to other real estate assets, self storage would be among the last to move into the recession then it would be among the first to recover.

I'm pleased to report that this theory seems to be playing out. In the second quarter our portfolio performance turned positive with year-on-year improvement for each month within the quarter on almost every metric. For the second quarter we reported $0.22 of FFO per share with revenue and NOI both positive. Our out performance was primarily due to an occupancy increase of 220 basis points, an increase in rental activity of more than 4% and a year-over-year increase in achieved asking rates of 4%. During the quarter, we completed two state-of-the-art development projects, which will further contribute to our internal growth.

We have seen a slight pick up in activity in the acquisitions market and are diligently looking for accretive opportunities. We acquired four properties, three of which came from our third party management program, a proven acquisition source to fuel our external growth.

We made further improvements to our balance sheet, paid off some debt early and increased our financial flexibility with the recent placement of a revolving line of credit for up to $45 million with Wells Fargo. We continue to believe that the current economic cycle will be a gradual recovery back to pre-recession levels.

With that said, our high quality portfolio, advanced operating platform and embedded growth from the stabilization of our development pipeline position us to participate fully in whatever recovery may be ahead. As a result, we have grown more confident in our expectations for the remainder of the year.

I will now turn the call over to Karl to discuss operations.

Karl Haas

Thanks, Spence. We have pleased with the way our stores performed in the second quarter with improvements in virtually all the metric as we return to a normalized level of move-outs. Our same store net operating income was up 2.8% for the quarter from the same period last year and up 2.5% sequentially from the first quarter. This quarter is marked by a return to a more normal level of move-outs, which was out paced by increase in year-over-year move-ins.

The level of move-outs this quarter is in line with historical trends. This is further confirmation that the recovery in our business at large continues. Importantly, the gain in net rentals is not driven by higher levels of discounting. On that front, discounts as a percentage of rental income remain in line with what we are offering in the second quarter 2009.

The improvements in same store net operating income include increases in same store occupancy of 220 basis points, increases in same store revenue of 2.3% and a slight increase in expenses, which were only up 1.3%. The improvement in occupancy in the quarter is a 15 consecutive month of improvement. We have continued to see the results of active expense management as expenses have decreased by 0.4% year-to-date, basically flat with 2009.

Our relatively strong performance during both the challenging and improving time is a testament to our platform. Our revenue management systems, internet marketing and national call center have allowed to us effectively read economic and market conditions on a local level and translate that into pricing changes by channel in the field. We continue to invest resources in our web technology and the results have exceeded our expectations.

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