Extra Space Storage CEO Discusses Q2 Results - Earnings Call Transcript

Extra Space Storage, Inc. (EXR)

Q2 2012 Earnings Call

July 31, 2012 01:00 pm ET


Clint Halverson - Vice President of Investor Relations

Spencer Kirk - Chief Executive Officer

Karl Haas - VP & COO

Scott Stubbs - Executive VP & CFO


Swaroop Yalla - Morgan Stanley

Michael Knott - Green Street Advisors

David Toti - Cantor Fitzgerald

Christine McElroy - USB

Ki Bin Kim - Macquarie

Eric Wolfe - Citi

Smedes Rose - KBW

Todd Thomas - KeyBank Capital Markets

RJ Milligan - Raymond James & Associates

Paula Poskon - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Tayo Okusanya - Jefferies

Mike Bilerman - Citi



Good day, ladies and gentlemen and welcome to the second quarter Extra Space Storage, Inc earnings conference call. My name is Brie, and I will be your operator for today. At this all, participants are in listen-only mode. Later, we will conduct a question-and-answer. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would like to turn the conference over to your host for today, Mr. Clint Halverson, Vice President of Investor Relations. Please proceed.

Clint Halverson

Thank you, Brie. Welcome to Extra Space Storage's second quarter 2012 conference call. In addition to our press release, we have furnished unaudited supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.

Forward-looking statements represent management’s estimates as of today, Tuesday July 31, 2012. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

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

Spencer Kirk

Thanks, Clint. Hello, everyone and thank you for joining us today. With me are Karl Haas, our

Chief Operating Officer, and Scott Stubbs, our Chief Financial Officer.

It was another very good quarter for Extra Space. We achieved year-over-year FFO growth of 41%. Our properties and our systems are performing very well. During the quarter, we increased same-store revenues 6.7%, and reduced expenses which resulted in double-digit NOI growth of 10.2%. I give credit where credit is due. To our people.

I think our 2,400 employees, who have worked hard and dedicated themselves to executing on the fundamentals of our business. Our internal and external growth efforts have been highly effective in acquiring quality well-located assets.

We have acquired 51 properties so far in 2012, 36 of which are from Prudential, and we have an additional nine properties under contract. We are disciplined in our acquisition approach and purchased assets when it makes financial sense for our shareholders.

As the country's largest third-party management company with 519 assets under management, we continue to assert and demonstrate that this is a viable off market acquisition pipeline. Of the 51 assets acquired this year, 76% came from these existing relationships.

Our company is driven by an entrepreneurial culture of innovation and growth and we push for continuous improvement in all areas of our business. This development and implementation of system-wide innovations will continue to improve our performance.

I would now like to turn the call over to Karl to talk about our operational success in more detail.

Karl Haas

Thanks, Spence. As Spencer noted, we saw excellent revenue growth of 6.7% in the second quarter. There are a few primary factors that drove this top line growth.

First, the latest version of our revenue management software is working well. We are gaining a better understanding of the price elasticity of demand for storage at a property level. We are often asked about our rental volume for a given period. Although the rental volume is significant, it is more important to maximize the long-term revenue growth of those rentals with the correct mix of incoming price, discount and rate increases over time.

Second, we continue to gain market share from our smaller competitors by leveraging our size, resources and sophisticated systems, we are driving traffic to our websites and properties. We are capturing more than our fair share of the rentals while lowering our overall cost per acquisition. Lastly, we are not seeing any new supply.

As we mentioned in the last quarter, our same-store pool of 282 properties includes 19 sites that over three years old and are in the final stages of lease up. As a result, during the second quarter, we received almost a 0.8% of top line benefit from these assets. By stripping these 19 properties out of the same-store pool, our top line revenue growth would have been 5.9% versus the 6.7%.

Same-store year-over-year expenses were down slightly, primarily due to lower utility cost as a result of our investment in sustainability initiatives. We are also seeing lower credit card processing fees, thanks to new regulations. While we continue to implement processes and invest in systems that create efficiencies, we don't expect our expense growth rate to continue at the levels it's been at Q1 and Q2.

Expense will return to more normal levels as we move through the year. With occupancy at historically high levels, discounts and promotions are down 11% for the quarter. When combined, all these factors bode well for the remainder of the year.

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