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Executives

James Overturf – Director, Risk Management

Kenneth M. Woolley - Chairman of the Board & Chief Executive Officer

Spencer F. Kirk – President & Director

Kent W. Christensen - Chief Financial Officer & Executive Vice President

Karl T. Haas - Chief Operating Officer & Executive Vice President

Analysts

Christeen Kim – Deutsche Bank

David Toti – Lehman Brothers

[Samidh Parikh] – Bank of America

Jordan Sadler – KeyBanc Capital Markets

Paul E. Adornato - BMO Capital Markets

Jeff Donnelly – Wachovia Securities

Chris Pike – Merrill Lynch

Michael Knott- Green Street Advisors

Mike Salinsky – RBC Capital Markets

Buck Horn – Raymond James

Todd Thomas – KeyBanc Capital Markets

Extra Space Storage Inc. (EXR) Q1 2008 Earnings Call April 29, 2008 1:00 PM ET

Operator

Welcome to the Extra Space Storage first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, James Overturf of Extra Space Storage.

James Overturf

Welcome to Extra Space Storage’s first quarter 2008 conference call. With us today are CEO and Chairman of the Board, Kenneth M. Woolley; President, Spencer Kirk; CFO, Kent Christensen; and COO, Karl Haas. In addition to our press release we have 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 statements related to Extra Space Storage’s development acquisition programs, revenues, net operating income, FFO and forward-looking 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. These forward-looking statements represent management’s estimates as of today. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstance.

With that I’d like to turn the call over to Extra Space Storage’s Chairman and CEO, Kenneth M. Woolley.

Kenneth M. Woolley

We have with us today Spencer Kirk, our President; Karl Haas, our Chief Operating Officer; and Ken Christensen, our Chief Financial Officer.

As you can see by our results you can tell that the storage business is not suffering due to the slowdown here in the economy. We do have some weakness in parts of the country but by and large the business is good and we’re very happy with that. We sustained or kept our occupancy stable on a year-on-year basis with rentals for the quarter actually increasing 2% and move-outs decreasing just over 1% on a same store basis during the quarter. So far in April our occupancy has actually increased on a same store basis and rentals are slightly ahead of the year before and the vacates are slightly behind, so this is a good sign during the busy rental season time which we’re just now entering.

Overall we generated $0.28 of FFO for the quarter before on impairment charge which Kent will talk about in more detail regarding our auction rate securities and our development dilution. After the $0.02 impairment and the $0.01 for development dilution we generated a net of $0.25 of FFO per share for the quarter.

Our same store revenues including tenant insurance income was up 3% as we maintained our occupancy and increasing rents to existing customers. We chose to show the same store income with both insurance and without insurance because we have been making a fairly intensive push on encouraging our tenants to purchase tenant insurance from us.

Two of our competing public self-storage companies, Sovran Self Storage and U-Store-It both include the tenant insurance in their same store numbers and public storage doesn’t. We had actually had included it up until this past year and then didn’t include it last year. In the future we’ll show it both ways so you can see it both ways.

The growth rate was within our expectations for the quarter and we’re reasonably pleased with the pace. We do expect however that that pace will increase slightly during the coming quarter. We made no acquisitions during the quarter. While there is still a market out there for buying properties we have raised our cap rates for purchase, the sellers have not been willing to bring down their price and the result has been I guess you call it disintermediation. There has been a slowdown in the number of transactions taking place, not just by ourselves but I think in the market generally sellers still have high expectations.

We’re being more conservative in our buying expectations so it’s slowed down our ability to buy. In talking with our head of development yesterday he feels like he’s just now seeing a few people lower prices which may give us the opportunity to buy more during the coming quarter.

On the development front we have 10 properties that will be opened this year with a total cost of $83.2 million. We had no openings during the first quarter. We expect several properties to open during the second quarter. In total we have 40 properties in our development pipeline at various stages from just the initial contract on the land all the way through construction and just about opening.

Those of you who attended our Investor Day last month saw that these developments will provide us solid opportunity for higher lifetime rates of return than outright purchases and we are expecting these developments to contribute to our FFO growth in the future although in the short run they are diluted in the long run they are accretive. In fact if you took all the developments that we have already opened or will open this year and you mark them to market as if they were fully full they would be accretive to about $0.16 a share in our numbers.

In addition to the Investor Day materials that were added to our website at the time of the Investor Day we’ve also provided a couple of additional tables this quarter which may be of interest to many of you in the supplemental package. One of those tables shows the rental activity for our same store properties rental vacates which we’ll be updating you on in the future so you can see the trend of rental activities and vacates during the quarter.

With that I’d like to turn the call over to Karl Haas, our Chief Operating Officer who will give you more detail on our performance.

Karl T. Haas

As Ken said at the property level we had another good quarter of growth. Our same store grew by 211 properties experienced a 3% increase and a 3.2% increase in net operating income which includes tenant insurance income. Average square foot occupancy during the quarter and at the end of the quarter were flat compared to 2007. Net rentals were up 2% for the quarter and move-outs down 1.1% which we think is a good sign considering all the news about the economy recently. Our expense growth came in at budgeted levels at 2.7%. Our team did a great job of controlling the expenses especially given the large increases in snow removal expenses over last year.

RevPAR for the same store pool increased 2.2% to $13.98 a square foot. The increase came from improved achieved rents from our existing customers. In a year-on-year comparison of street rates we have seen the delta come closer in line to last year in the past month. We anticipate equilibrium by early summer and to have more pricing power as the year continues. We’re continuing to strengthen our grip on unified pricing management at the individual unit level as our technological capabilities allow us to do more to maximize revenue through more data based analysis. That capability is definitely allowing us to price more accurately in tune with customer demand and competition. We have significant technology upgrades going in throughout the organization this year and we are looking forward to applying those upgrades in the pursuit of greater pricing optimization and operating efficiency.

Our entire pool of 615 stabilized properties that we manage had similar results to our same store pool during the quarter. Same store occupancy for this group of properties increased a solid 50 basis points to 84% compared to 83.5% same time in 2007. This we think shows that demand is still strong. Looking at the performance of our markets the top performers were Chicago, Houston, Detroit, Columbus, Dallas, Nashville and San Francisco-Oakland with increases in revenue between 6 %and 13% in those markets. Our four largest markets of Boston, Los Angeles, New York-New Jersey and Baltimore-D.C. all had sound quarters with revenue increases between 2.8% and 4%.

We have been speaking about stabilization of occupancy and revenue in Florida for at least the last few quarters and stabilization has been seen somewhat in Miami, Tampa and a few other smaller markets in Florida. However many markets in Florida continue to struggle, in particular the West Palm Beach market is still not performing. Their properties are well located, we have a good team and we are being proactive with pricing and discounting and we are hopeful that the bottom has been reached. To give you an idea of the impact of Florida on our overall revenue growth without Florida same store stabilized revenue growth with tenant insurance income would have been 3.8% versus the 3% that we reported with Florida included.

Supply has been a discussion point in recent months as well. For Extra Space new supply remains a non-issue in the majority of our major markets. Based on local level surveys by our field staff newly opened projects and projects scheduled to open that will impact our existing properties continue to drop with the exception of the Phoenix and Philadelphia markets.

For the second rental season in a row we recently began our international cable television advertising to drive more traffic to our stores. Our ads began running at the end of March and will run through the end of August. The ads are on specific programs that proved successful last year such as Discovery, Food Network and DIY. We also have some spots in Spike TV for those of you who are closet ultimate fighting fans. We are testing different length ads this year and different messages. The spots direct people to our toll-free number and the website and on the website we’ve already seen significant increases in traffic. We’ll have more data to share on our program the results in our second quarter call.

And now I’d like to turn this call over to Kent Christensen, our CFO.

Kent W. Christensen

Our FFO per share for the first quarter came in at $0.28 as Ken stated before our impairment charge on our auction rate securities and dilution from our development program compared to $0.25 in the same quarter of last year. Taking into consideration the $0.02 from our impairment charge and the $0.01 drag from our recently opened development properties our fully diluted FFO per share for the quarter came in at $0.25.

On February 29 we liquidated our holdings in our auction rate securities for $21.8 million in cash. Our total write down on our auction rate securities from its original investment was $2.6 million. We took a $1.4 million write down in this quarter and a $1.2 million write down in the fourth quarter of last year. We have retained our right to pursue action against the broker-dealer who sold us the securities though a potential settlement cannot be assumed or timed. Our cash today is currently held in Treasury backed securities and we are not exposed in any significant way to the credit markets.

Our financial position improved in almost every aspect. Total revenues increased 22.2% which included a robust 23.3% increase in rental revenues and a 62.3% increase in our tenant insurance revenues. Gross G&A for the quarter was $10.2 million and after deducting management fees of $5.1 million net G&A came in at $5.1 million. Net income excluding the $1.4 million loss on our auction rate securities rose 25.2%.

On the acquisition front we have seen nearly $900 million in properties for sale and have underwritten $280 million of them. This is a decrease from the level of activity we saw in the previous year. Our bids on average have been North of an equivalent 7.25% cap rate.

In the second quarter we anticipate the opening of three development properties at a total cost of $24.7 million. These properties are located in Chicago and Los Angeles. For the year we estimate opening 10 properties for approximately $82 million and we expect 14 completions in 2009 for $146 million. Since January 1 we have closed four construction loans and still find we are able to obtain development financing with favorable terms.

Our previously opened developments continue to add value to the company. Though development does have a short-term drag on our earnings they are extremely valuable in the long term. For example if all the development properties for 2008, 2007 and 2006 are fully stabilized using today’s rates their contribution to FFO of this year would represent a swing of $0.16. For modeling purposes we have estimated our drag from our development program to be approximately $0.06 this year.

At this time we believe our debt is at an appropriate level for the self-storage product type given our stability of cash flows. Our total debt is $1.3 billion which represents percentage of debt to total market cap including OP units of 53.3%. Our debt profile is predominantly fixed rate debt and has well state maturities.

The Fed’s interest rate cuts have benefited our variable rate debt considerably. Our current rate as of the end of the quarter was 4.4% down from 5.9% as of December 31, 2007. Our percentage of fixed rate debt to total debt is 90.4% on all of our fixed and variable rate debt is 5%. We have $100 million available on our line of credit of which none is drawn. The credit market for us is a bit more restrictive but we can get financing. As of today we can obtain on-balance sheet loans from financial institutions. However the CMBS market is not accessible. Our relationship lenders are consistently pitching us on new business.

Underwriting requirements for on-balance sheet loans have changed from where they were a few months ago and debt service coverage has increased. Variable rate loans spread average LIBOR plus 300 and fixed rate loans are going for around 6%. Five and 10-year deals are becoming harder to find as most banks are sticking to the one and three year timeframes.

Even while conventional credit is tight there remains significant interest from large institutional investors to invest in self-storage. We are speaking with potential partners on a regular basis but have no definitive deals at this time. This is another way for Extra Space to finance this growth should the credit markets remain tight.

At this time we reiterate our guidance for the full year of fully diluted FFO in the range of $1.23 to $1.27 per share before development dilution and $1.17 to $1.21 after consideration of the dilution. For the second quarter we estimate that our fully diluted FFO will be in the range of $0.31 to $0.32 per share before development dilution and $0.29 to $0.30 per share after considering this dilution.

Our assumption for our same store revenue and NOI growth for the second quarter is between 3% and 4%. The underlying assumptions behind our annual guidance are listed in our earnings release but I will highlight that it assumes no acquisitions and no settlement with our broker dealer on the auction rate securities.

With that I’ll turn the call back to Ken.

Kenneth M. Woolley

To summarize we’re off to a good start in 2008. Back in February we forecasted same store revenue and NOI growth between 2.5% and 4% for the year. Though we came in at the lower end of the range for the quarter it is the slowest rental period of the year and we’re already seeing improvement.

As I said since I started in this business over 30 years ago I have seen some ups and downs in the business. One of the things that I would say is that during slower times growth does slow and then during better times growth increases but there’s always been growth and our own records over a 20-year period the growth has been in the range of 4.5% in terms of revenue growth. It’s been an excellent industry.

Our data today shows that 50% of our customers are new and have never used self-storage. It’s really interesting when you consider 9% of US households are now using self-storage and yet of our new customers 50% have never used it before.

Who are our customers and why do they come? Our customers come primarily because of some life-changing event. Often it’s a graduation, a wedding, a divorce, a job move, a job loss, a retirement, something that changes in someone’s life. Many of those changes have nothing to do with the upward or downward motions of the economy. They are life changes and I think that that’s one of the reasons that we see self-storage be so stable in these economic times particularly considering when you look at our rentals and vacates of how close they are to the same period of last year.

Our properties are performing positively thanks to our continued pursuit of operating best practice, our technology leadership and our superior locations of many of our properties. For those same reasons we continue to see our ability to raise rents to existing customers. We are however being very competitive particularly in the weaker markets on a price basis.

For example today our street rate prices are lower in Philadelphia area and in Florida but they’re higher in Texas and New England and Chicago. So if you look over the whole country our street prices are about even with last year but they vary highly by parts of the country based upon the economic activity and storage rental activity.

We’re consistently looking for ways to grow by acquisition. However we haven’t been able to buy anything at least in this quarter. We’re optimistic we’ll be able to see some things in the second quarter and we taking a conservative underwriting approach. People have asked us where are you going to get your capital to buy more properties and the answer in the short run is that we have quite a bit of capacity on our lines of credit and our ability to borrow. In the longer run we are looking at a possibility of a joint venture arrangement for some of our properties that will bring more capital into the company so that we can continue to grow.

I’m very confident in Extra Space’s ability to continue to grow revenues and value for our shareholders. Some of you may have come to our recent Investor event in San Francisco or listened to it on the web. I think those attendees came away with understanding better our company where we had all of our procedure management there talking with you.

We are always seeking ways to improve whether it’s through further upgrades of our industry leading operational and technology systems, through stepping up the game with our already great team of people and by adding scale and performance to our quality portfolio.

We appreciate the support of our investors. We’re actually pretty pleased with the performance of our shares as many of your investors made in the last quarter as I think not only ourselves but our peer in the self storage business have gotten the message out that we do well in slower times and I think the market is starting to realize that and we’re happy about that and I would expect that our peers in the self storage business will also put up some good numbers this quarter.

With that I’d like to close and give you an opportunity to ask questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Christeen Kim – Deutsche Bank.

Christeen Kim – Deutsche Bank

Ken, you have mentioned and I know you’ve spoken about this before but joint venturing some of your properties to help improve the balance sheet, it sounds like you’re pretty early in the process. How soon do you think we could hear an update on that or something actually further along?

Kenneth M. Woolley

I think it will probably take a couple of months. We have identified a portfolio of properties that we would like to bring to the market. We have not yet put that out to potential joint venture partners. We have received some interest from some of our current joint venture partners and we know there’s others who are interested. I would say it’s going to be a couple of months. Since we haven’t had a lot of acquisitions in the pipeline we haven’t felt the pressure right now to do that so we haven’t yet gotten it done.

Christeen Kim – Deutsche Bank

In terms of the core operations were there any markets that surprised you this quarter either to the upside or downside?

Karl T. Haas

On the upside I think Austin and Houston and Nashville are somewhat surprises. Houston, the oil industry and the pluses going on there. Nashville is a pleasant surprise and it’s been a long time since we’ve seen anything big there. Nothing on the negative side that’s a big surprise.

Kenneth M. Woolley

I think one of the surprises I have is we continue to see strength in Detroit which is amazing in my view and I’m pleased to see Boston and the whole Northeast doing well for us right now. That’s a pleasant surprise since we have such a big group of properties there.

Christeen Kim – Deutsche Bank

Finally, I know your same store pool is a little different this quarter than Q4, do you know what the sequential change in occupancy was in your new same store portfolio?

Kenneth M. Woolley

If you looked at the current same store pool as of December 31 versus now we actually gained occupancy and I think it’s about 50 basis points.

Kent W. Christensen

Compared to last year it has improved.

Kenneth M. Woolley

If you look at the current 211 and you said what was it as of December 31, 2007 versus December 31, 2006 we were actually behind half a percentage point in that pool as of December 31, 2007 so we picked up 50 basis points to be at break even. We’ve actually gained another 0.1% on that pool through today versus the previous period.

Christeen Kim – Deutsche Bank

That’s the 211?

Kenneth M. Woolley

That’s the 211 so we’ve actually picked up 60 basis points since the first of the year in the first four months.

Operator

Your next question comes from David Toti – Lehman Brothers.

David Toti – Lehman Brothers

There’s been a lot of talk about correlation between your business and markets that are seeing elevated foreclosure levels. It seems like the mix of markets that you’ve seen success in and some softness in don’t really correlate with some of those foreclosure markets. Can you comment a little bit on that?

Kenneth M. Woolley

I think the answer is that our business doesn’t correlate that well with foreclosures. Some other high foreclosure markets are Stockton, California where we’re not doing very well.

Kent W. Christensen

Phoenix, Albuquerque are showing some signs. In those markets where there are foreclosures and basically an overall downturn in the market we are seeing some [inaudible].

Kenneth M. Woolley

Except for Detroit where we’re doing well.

David Toti – Lehman Brothers

Switching over to the development pipeline, you’re obviously not pulling back on any of the existing projects that are underway but in terms of your shadow pipeline are you scaling back the investment dollars or delaying any of the delivery or start times.

Karl T. Haas

We are not. As we’ve discussed previously the development program is a program that’s a five to six year commitment. Once you decide that you’re going to develop a property and put it under contract it’s not until five to six years from now that you see the fruits of that. By pulling back today all it’s doing is hindering our growth three and four and five years from now.

We believe that the development program is a long-term sustainable program that Extra Space should be in for the long run. At the level that we’re at and between 10 and 15 properties a year we think that is sustainable with our current capital structure and we think that it’s bringing a lot of value to the overall company that Extra Space is building in the long term. It is a program that we believe in and we’ll be continuing to do.

David Toti – Lehman Brothers

I assume there’s been no changes to the underwriting in those and you expect to stabilize yields and so forth?

Karl T. Haas

We brought up about 50 basis points while we’re hoping to get on the deals that we’re approving today but as is similar to the acquisitions side we’re finding sellers a little reluctant to bring the price of their land down which is the big component of helping to try and get our yields up on that. We’re slightly higher than what we were a year ago but just slightly higher.

Operator

Your next question comes from [Samidh Parikh] – Bank of America.

Samidh Parikh – Bank of America

Can you quantify or provide additional color on the impact that the increase in ad spending has had on website traffic and how it’s translating into increased rental activity?

Kent W. Christensen

We just started it March 29 and while we’ve seen a spike in hits on the web, we don’t really have the full flow through of the rentals yet.

Samidh Parikh – Bank of America

Given the current disconnect between buyers and sellers in the private transaction market, in your view is buying an additional stake in your joint ventures a better way to put capital to work today than trying to go out and do acquisitions in the market?

Kenneth M. Woolley

With respect to buying an additional stake I think we announced publicly at our Investor event that we have been negotiating to buy an additional stake in one of our Prudential joint ventures, one of the smaller joint ventures, and we had reached agreement to do that and we expect to close on that this quarter. It’s not an either or because we can’t really time when our joint venture partners want to sell their interest.

This is a voluntary thing, this is a negotiated thing and right now except for this one case we don’t have any joint venture partners. When I’m talking about that I’m talking about our larger joint ventures that are interested in selling any of their stake. We’re willing to do both. We view both types of investments as being positive but we really can’t time when we take out one of our larger joint venture partners.

Samidh Parikh – Bank of America

Lastly, could you walk us through the increase in G&A expense this quarter and maybe what we should be expecting for the run rate in the year?

Karl T. Haas

The run rate for this quarter should be very comparable to what we’re going to see for the remainder of this year. We’re not seeing anything unique in this quarter that would be different for the rest of the year and the increases from the previous year do a lot to the acquisitions that we did last year, bring on a number of properties and the G&A cost increase for that, an overall increase just because salaries have gone up 4% to 5% and then a slight increase in the amount of long term compensation for some of our executive team.

Operator

Your next question comes from Jordan Sadler – KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Just following up on a previous question on the purchase of the joint venture partners’ interest that you announced at the Investor Day, what is the motive of the partner of Prudential looking to reduce exposure?

Kenneth M. Woolley

First of all this is a single client account at Prudential and that single client account was reducing their overall investment in real estate. It was not a multi-client account. I’m not sure the whole reason behind it. What’s interesting is that there are other accounts at Prudential who would like to increase their exposure to self-storage and have indicated that they would like to look at other opportunities to buy with us but because of their internal mechanisms they’re not really allowed to sell between one account to the other. Otherwise I think they’d be acquiring their own joint venture.

Our corporate General Counsel just came over to me and said that we haven’t actually reached a final agreement with Prudential on the exact terms of this deal. We’ve reached a tentative verbal agreement but we haven’t actually got it in writing so it could still come unwound and I was probably a little bit premature in mentioning either at our Investor Day or now. But since I mentioned the Investor Day I brought it up here. That’s one of the reasons it hasn’t closed, because there’s a few deal points that we haven’t finely negotiated.

Jordan Sadler – KeyBanc Capital Markets

Assuming that it were to get done what cap rate are we expecting.

Kenneth M. Woolley

It’s a cap rate in the same ballpark of what we’re buying other properties in the $7.25 million range.

Jordan Sadler – KeyBanc Capital Markets

That would be financed under the line, at this point?

Kenneth M. Woolley

Yes. It’s about a $44 million purchase.

Jordan Sadler – KeyBanc Capital Markets

The TV, the media spending, could you give us a guestimate as to roughly how much that is going to cost you in the second and third quarters?

Kent W. Christensen

I think last year we spent about $700,000 and I think we’re going to double that this year. It’s going to be about $1.4 million.

Jordan Sadler – KeyBanc Capital Markets

That would be roughly evenly split between the second and third quarters at this point?

Kent W. Christensen

Yes.

Kenneth M. Woolley

That TV advertising gets spread out over all the properties through the joint ventures and through the individual properties. It’s spread evenly. It doesn’t all go the Extra Space properties.

Jordan Sadler – KeyBanc Capital Markets

You said it was national in scope?

Kenneth M. Woolley

Yes, it is national.

Kent W. Christensen

Well, it’s cable. It’s purchased cable so that it’s bought on bulk basis throughout the country.

Kenneth M. Woolley

All those people up in Billings, Montana have to come down to Salt Lake to rent, to see the ad.

Jordan Sadler – KeyBanc Capital Markets

Moving over to the investment environment a little bit, could you talk about what you’re seeing out there in terms of flow, how that has changed?

Karl T. Haas

On the acquisition?

Jordan Sadler – KeyBanc Capital Markets

Whatever’s for sale, of course.

Karl T. Haas

Correct. There are less properties for sale than there were a year ago and the motivated sellers are individuals that for one reason or another are needing to unwind the investment that they have in self-storage. We are still not seeing any distressed sales, properties that have gone into foreclosure, anything like that. The opportunities that we’re seeing are partnerships, joint ventures that are needing to unwind because one partner or another is wanting to exit the self-storage investment and so they’re coming to market with the portfolio or individual assets. We hope in the future that we’re seeing more of these kinds of one-off and small portfolios of properties that could come for sale that could be in a more distressed situation that are going to lead to opportunities for Extra Space but we still haven’t seen that yet.

Jordan Sadler – KeyBanc Capital Markets

Lastly, Ken, on the debt, upcoming maturities, where do you stand on some of the upcoming role, the stuff that’s starting to expire later this year?

Karl T. Haas

We only have about $40 million this year that will expire. Next year we have about $300 million that comes due. We are seeing lots of interest from the current banks and institutions that do lending for $50 to $75 million chunks on balance sheet, variable rate debt, secured and so we believe that the amount of debt that we have coming due this year and next year can be easily refinanced with the current relationships that we have and with the banks that we have a good relationship with.

Extra Space historically has had a long time relationship with a number of different banks that have loaned us money and we’ve paid them back and we think that those relationships are going to pay off over the next couple of years as we need to roll these loans that we have. That being said we’ve looked at the debt, the loan to value on all of the debt that’s expiring next year as currently because the NOI of these properties have gone up, it’s between 60% and 65%. All we need to do is get a 60% to 65% loan to value and we can replace the loans that we currently have.

Jordan Sadler – KeyBanc Capital Markets

That’s secured term loan?

Karl T. Haas

That’s correct. The loans that are expiring are secured term loans or CMBS loans and we would anticipate if the CMBS market doesn’t open back up to replace those that it would be secured term loans.

Jordan Sadler – KeyBanc Capital Markets

How far out in front of it do you want to be? When should we expect to see you moving?

Karl T. Haas

It would be only a couple of months generally before, two to three months before the term expires that we’d be going to market and shopping the loans.

Kenneth M. Woolley

Part of the reason is there’s defeasance on these CMBS loans and there’s no reason that we should pay a defeasance to pay off these CMBS loans early. It would just be a bad economic move for us.

Operator

Your next question comes from Paul Adornato - BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets

I was wondering if you could compare your overall stance coming into this busy season compared to previous years, that is would you consider yourselves more aggressive or more defensive coming into this busy season in terms of pricing, etc.

Kent W. Christensen

If you took the last three to five years we would probably call it more aggressive but last year we took a pretty aggressive stand on rates starting in March and April and we lowered rates, as far as street rates, in a lot of markets and this year we really are about at that same level, actually in some markets a little bit less. We’re being very aggressive in markets where we see resistance in the marketplace to rentals. I’d say we’re as aggressive as last year.

Paul E. Adornato - BMO Capital Markets

To clarify on development financing, Kent, you mentioned that development financing is available to you but do you actually separately finance your developments or do you use your line or other resources rather than tap traditional construction markets?

Kent W. Christensen

To date Extra Space has always financed its construction projects with construction loans in many cases through local banks or regional banks and we continue to employ that process with the construction projects we have going on now. We can obtain 80% to 85% loan to cost on these construction projects which is a very good use of our money while the project is being built and then those loans allow us to get the property opened and then the loan stays on the properties firm anywhere from 18 to 36 months while we are allowed to get the properties leased up.

At that point the properties would roll into some longer-term financing. That financing is still very available to us today. You have to remember self-storage is a small product type compared to other real estate products. We’re going to the banks asking for $5 to $8 million loans and that’s a really good size for banks that want to still use their balance sheet to do lending.

Paul E. Adornato - BMO Capital Markets

What’s your sense about how those banks that you’re using are financing other storage developers out there?

Kent W. Christensen

Again, that’s a mixed bag. We’re getting reports that the banks are not lending to the new Mom and Pop operator who is deciding to build their first self storage property but if it’s an established self storage operator and they have a good track record then there still is money available for individuals and Mom and Pops and organizations who are wanting to do construction.

But as Karl spoke about we’re not seeing a lot of development taking place in any of our markets other than a couple and there’s not a lot of construction that’s going on right now. That’s a dual factor I think and that’s financing is one piece but it’s becoming more and more and more difficult for cities and counties and places to allow us to build our self storage properties. It’s just becoming more difficult.

Kenneth M. Woolley

I had lunch last week with the owner of one of the larger door manufacturers who indicated to me that their business was down. Every self-storage has to have doors and there’s only four our five major door manufacturers in the US and they’re not sure why, but I think that’s more to do with financing and permits than anything else. It really bodes well for the existing properties, that’s what it does.

Operator

Your next question comes from Jeff Donnelly – Wachovia.

Jeff Donnelly – Wachovia Securities

Kent, the first question, really a point of clarification, did your original same store and line guidance for 2008 include the tenant insurance income or did it exclude it.

Kent W. Christensen

It excluded it, this is the first time we reported it with the tenant insurance income.

Jeff Donnelly – Wachovia Securities

A question for the team as well and maybe Ken you’ll take this one, I’m trying to find a point where you’re seeing capitalization rates in the market today for the sorts of product you would be interested in. What’s that spread between how you’re now underwriting property and where you think sellers would sell? What returns are you or do you think your competitor is looking for?

Kenneth M. Woolley

First of all, last year we bought all of our stabilized properties at around the 7% cap rate. That cap rate is defined as normalized updated property taxes included, a management fee of 6% included or applied, and that is the actual run rate of cash flows as opposed to a pro forma in the future cap rate or any backward looking cap rate. That’s how we define cap rate. We bought $385 million worth at that rate or in that rate. The problem is we only bought one on-market deal of the 32 properties we’ve purchased. We were basically overbid on everything we bought except on this one deal which meant that the transactions taking place in the market were taking place in the mid-sixes not or even lower.

We had one large buyer last year and the year before that was really buying in the fives with the hope of somehow improving operations and getting the cap rates up. Today the sellers are still asking in the low to mid-sixes and we’re up there in the 7.25 range and we’re not buying much. There’s a slight slackening according to what Jim Stevens, our head of acquisitions is saying. He’s seeing a slight decrease in prices, increase in cap rate going on in the marketplace today but it’s not very dramatic.

It’s hard to define that cap rate because there are transactions and there have been a lot of transactions taking place in the low to mid-sixes that we haven’t participated in because it would be dilutive to our company. Our company stock is not trading at a cap rate of six, it’s trading at a higher cap rate. If we start buying at six we’re just diluting our shareholders.

Jeff Donnelly – Wachovia Securities

What about some of the larger portfolios out there, anecdotally we’ve heard OB companies is looking to sell assets, some or all. Any sense how significant a portfolio such as that or others could be out there in the market and where pricing might be on a trade such as that?

Kent W. Christensen

I really don’t have a comment on that.

Jeff Donnelly – Wachovia Securities

One follow up, Kent, back to my original question, if your guidance excluded the tenant insurance income does that mean it’s necessarily short thin this quarter versus your original guidance or am I not interpreting that right?

Kent W. Christensen

Maybe I misspoke when you asked the question a minute ago. What I thought you asked was did our same store guidance as far as what we thought the NOI increase going to be on our same store included tenant insurance and it did not but tenant insurance was included in our FFO guidance for the year.

All we’ve done is taken it out of a specific line item as far as tenant insurance and tenant income and expense and included the appropriate amount of tenant insurance that’s being sold at our same store properties in the same store numbers. It’s not changing any of our numbers, it’s only changing how it is we’re reporting where the insurance is showing up. Did that make sense?

Jeff Donnelly – Wachovia Securities

It does. I thought before that your same store in a wide range which is 2.5% to I can’t remember off the top of my head, 2.5% to 4% I think.

Kent W. Christensen

2.5% to 4% and with tenant insurance included it would be higher than that.

Operator

Your next question comes from Derek Bower – Merrill Lynch.

Chris Pike – Merrill Lynch

Kent, I wanted to circle back with respect to your comments on the debt maturities and your ability to term those out, is the short answer that while let’s say rates are going to be a bit higher of what’s turning you’re going to be able to get more proceeds so your overall interest payment will be in line?

Kent W. Christensen

As we roll the loans next year if we want to try to get a higher loan to value that could result in more proceeds. My comment a minute ago was along the lines of if we didn’t get any additional proceeds all we did was roll the loan then we should have a substantial appetite from banks and other financing organizations to do the loans that we would need to be able to roll our debt but I think that there could be some opportunity as these loans roll that we would be able to get a higher loan to value than where they’re currently at and potentially have some additional proceeds which would then take the total interest expense up a little because we would have a larger loan with a slightly higher interest rate but then we would have cash available for us to be able to do acquisitions.

Chris Pike – Merrill Lynch

If we just roll whatever is in place is there a base assumption in terms of what the overall marginal increase in borrowing cost is going to be?

Kent W. Christensen

Right now we’re seeing between 5.75% and 6% would be what we would be able to roll those loans at a fixed rate at. If you look at the difference between where the loans are at today and that’s the pricing today and that would be the difference.

Chris Pike – Merrill Lynch

Back to Karl’s question with respect to the $1.4 million of TV ad spend and I think Kent indicated that it’s going to be spent pro rata or will be split up across both the wholly owned, the joint venture then the managed properties, assuming that the managed properties pay their own pro rata share of that your joint venture partners, you’re only going to take for your ownership interest in that. Is the $1.4 million the total spend of the program or is the $1.4 million going to be the cost to EXR?

Kent W. Christensen

The total spend of the program. So about one-third of that would be hitting our properties.

Kenneth M. Woolley

The one-third that hits our properties is already in our NOI budgeted numbers. It’s not an extra thing.

Chris Pike – Merrill Lynch

Call center, we’re still waiting for thoughts on that. I was wondering if there’s any update on that front and if there’s any incremental costs associated with moving, establishing, setting one up later on in the year and baked into the 08 numbers?

Kent W. Christensen

Chris, we’re still heavily in the process of evaluating the status of our call center whether doing it internal or external, other factors about the call center and all the costs associated with that. The best we can tell right now is the impact on this calendar year is probably not going to be any material number.

The evaluation for next year is still in process to try and determine where we think we are. The reason I can say that is the contract that we have for our call center right now runs through the end of the year. That’s why we don’t think there’s any impact this year and going into next year we’re still evaluating that. We don’t know yet.

Chris Pike – Merrill Lynch

An interesting comment Karl had with respect, or maybe it was Ken, with respect to the retention and the new customers versus the old customer. I don’t know if Spencer wants to chime in here, but is it too early to draw any distinction between buyer tastes with respect to some of the new breed of folks who are renting storage for the first time versus the more traditional or the tenured users of storage? Are you seeing retention higher with the new folks versus the old folks or is it still too early to pull any quantifiable data out of that stuff?

Kenneth M. Woolley

Chris, the new folks are no different than the new folks a year ago or two or three years ago. In other words what we’re tracking is that 50% of the customers coming in never used self-storage before just like a year ago and two years ago and five years ago. The nature of the tenants don’t seem to be any different. We are seeing just a slight slow down in our vacates on a year-on-year basis but it’s just 1% or 2%. It’s not enough to cause a trend.

In all of our analysis of vacates after rent increases we have seen no change in the rate of vacating as a result of various pricing increases and you have to get prices going up over 10% before you see any demonstrable change in the behavior of tenants in terms of their move-out rate. As long as we keep our rental increases reasonably modest it doesn’t seem to impact our move-out rates. You can raise someone 8% versus 0% and the move-out rate doesn’t change. At least that’s statistically what occurs.

Chris Pike – Merrill Lynch

So there’s no real difference, just one sample is the newer breed and the older sample is the newer breed from last year.

Kenneth M. Woolley

There’s no way to know that there’s any difference in the new people than there was the new people a few years ago.

Operator

Your next question comes from Michael Knott- Green Street Advisors.

Michael Knott- Green Street Advisors

Can you provide a little color on the potential JV transaction that you’re talking about bringing to market? I know you probably can’t say too much but can you help us rough size it and do you view this more as an alternative source of capital or do you see yourselves as incrementally moving even more towards the joint venture business model?

Kenneth M. Woolley

It’s more a source of capital for us and it’s also a way to upgrade our portfolio. I really don’t want to comment yet on the exact size of it but it would be enough so that we would be able to have more capital to acquire and keep our leverage ratios not too far out of line. It’s a dual purpose. One is to increase the average portfolio quality of our wholly owned stores and the other would be to give us capital for acquisitions. One of the things we’ve been doing is our acquisitions on average have been higher quality than our portfolio as a whole.

Michael Knott- Green Street Advisors

Karl, can you give a little more color on, I thought you made the comment earlier that you were expecting street rates and existing customer rates to merge later in the summer. Did I hear that right? Can you provide a little more color on that thought?

Karl T. Haas

What I think what I said was we are hoping that we will get a little bit more traction on street rates later in the year. We’ve been very aggressive on street rates and part of it is we’re succeeding. We wanted to see an improvement in our square foot occupancy delta and we have achieved some of that. Like in Detroit where we lowered rates a couple years ago, we’ve now got the occupancy up and now have been able to bring rates back up. Our overall goal is to be able to get a little bit more push on the street rates as the year goes on. No real change in our strategy on existing customer rate increases.

Michael Knott- Green Street Advisors

I appreciate the disclosure on the rental and vacating activity. Can you provide maybe one more data point? The 21,000 rentals, what percentage of total units in the same store pool would that represent and then what’s the magnitude of the increase as you get into the busy leasing season?

Kenneth M. Woolley

I’m not sure we understand your question. If you look at the table that’s in the supplementaries I think it’s the same store pool that’s in the table, isn’t it? It’s 573 same store properties that are mature.

Kent W. Christensen

For the 211 stores it’s more in the range of about 7,000.

Operator

Your next question comes from Michael Salinsky – RBC.

Mike Salinsky – RBC Capital Markets

Real quickly going back to the joint venture you were talking about possibly forming. I’m assuming that would be only stabilized property that you’re putting in there. There wouldn’t be any development properties offloaded into there, correct?

Kenneth M. Woolley

That’s correct.

Mike Salinsky – RBC Capital Markets

In terms of timing on that is that a second quarter event or is that a second half of the year event?

Kenneth M. Woolley

It’s probably a second half of the year event.

Mike Salinsky – RBC Capital Markets

Ken, in your comments you touched on about 40 properties you had in the total pipeline right now, what is the total size of that in terms of dollar volume?

Kent W. Christensen

The total is around $200 million. But the 40 would be over a three to four year period of time.

Mike Salinsky – RBC Capital Markets

That’s $200 million in addition to what you’ve shown for 2008 and 2009?

Kent W. Christensen

No, that would be the total. Because we’ve reported the $146 million for next year and the amount for this year of $80 million, it’s probably $300 million.

Mike Salinsky – RBC Capital Markets

In the guidance you added a disclosure to talk about $1 to $1.2 million of tax expense related to the management company. Is that something new or is that already included from the previous guidance that you were just clarifying?

Kent W. Christensen

The line item is not new, the amount is new, not new it’s higher than what we had previously forecasted. Our tenant insurance business runs through our TRS and that business is, Karl and his team have done such an outstanding job that we now have to pay taxes and we’re monitoring that as we ended up last year further ahead than what we anticipated we used up any net operating loss carry forwards that we had and as we did our tax returns for this calendar year we realized that will, the potential for having the tax expense for this year has increased higher than what we had originally anticipated, a small amount.

Mike Salinsky – RBC Capital Markets

Looking in general at the tenant rate now, the tenant base, is the tenant becoming a little more price conscientious or are you pushing along very good increases? What are you hearing from the tenants right now, essentially?

Kent W. Christensen

We don’t necessarily depend on the ad hoc comments. It’s a revenue management group is constantly monitoring the data from all of our existing customers, watching the rate increases and every quarter we’ve been getting reports from them and we really haven’t seen any change. People move out when they’re ready to move out and our rate increases don’t seem to be accelerating their decision.

Operator

Your next question comes from Buck Horn – Raymond James.

Buck Horn – Raymond James

Could you just mention what was your insurance penetration rate on tenants at the end of the quarter and what’s a reasonable goal you think you can get to by year-end?

Karl T. Haas

We’re currently at about 38%. We ended last year at about 34% and we’re over 90% of new customer penetration and our goal for year right now is about 40%. Ken thinks that goal may be a little bit low and we very well may exceed it but our goal for the year is 40%.

Buck Horn – Raymond James

Maybe as a bigger picture question, when you’re measuring the performance of certain regional markets and you’re looking at how they’re performing, it seems to me that there seem to be some markets like Detroit, like Columbus, a few others out there that where foreclosures are happing but those are more likely to be sub prime or primary residences where people are actually living.

Then of course you have markets like West Palm and Phoenix and Vegas or other places where you had a lot of investor speculation in housing and the foreclosures are happening to vacant units, what are your thoughts on that trend and on balance do you still think foreclosures is a non-issue for you?

Kenneth M. Woolley

I can’t say it’s a non-issue. First of all I don’t have a thought of that distinction of those different kinds of foreclosures. I think that the fact that we’re doing well in Columbus and we’re doing well in Detroit and we’re not doing as well in Stockton, California and the San Bernardino areas isn’t an indication of anything except that the economies are weaker in Stockton and San Bernardino. I don’t think we really have an answer for you with respect to the correlations like that. I really don’t have. I think one of the interesting things is it’s probably less correlated than everybody wants to think it is.

Operator

Your last question comes from Todd Thomas – KeyBanc Capital Markets.

Todd Thomas – KeyBanc Capital Markets

Can you give a little more color on the Florida market, what you’re seeing in terms of demand and what the overall environment is like? And then also how long you think it will take to bottom out and start to rebound.

Karl T. Haas

I’ll take a crack and then I’ll let Ken follow up. West Palm Beach and West Florida continue to be the worst. We feel like we’re hitting the bottom but it’s hard to say. West Palm Beach especially seems to have a lot of bad things happening there. Surprisingly, Miami and Fort Lauderdale where there’s a lot of news about all the empty condos and things like that, we haven’t been hurt anywhere near as badly there as we have been in West Palm Beach and on the West Coast and as far as recovery I think we all believe that Florida will be a good market for us in the long term. We’re continuing to develop there and the dynamics are there that in the long run it should settle down and the good news is there’s not a lot of new product coming on board.

Kenneth M. Woolley

It appears to me that it’s bottoming out because if you look at the year-on-year numbers they’re not as bad now as they were just one quarter ago. Revenues are for the 53 Florida properties down 2.7%, occupancy is down 1.6%. It seems to have stabilized in Tampa where revenues are up 0.6% and occupancy is up 0.2%. Miami is down 2.1% in revenues and occupancy is down 1.6% but I think that’s an improvement over where it was just one quarter ago. I would say we’re probably have bottomed out and that we’re probably going to see a gradual upturn right now.

Operator

At this time we don’t have any further questions in the queue.

Kenneth M. Woolley

Thank you very much for listening to the conference call and being interested in our company. We welcome all of you as shareholders and analysts and we’d be happy to talk to you individually when you’d like to and we look forward to talking to you again in the next quarter.

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Source: Extra Space Storage Inc. Q1 2008 Earnings Call Transcript
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