Jeff Norman - Senior Director, Investor Relations Spencer Kirk - Chief Executive Officer Scott Stubbs - Executive Vice President and Chief Financial Officer.

Christy McElroy - Citigroup Ryan Burke - Green Street Advisors Vikram Malkotra - Morgan Stanley Todd Thomas - KeyBanc Capital Markets Michael Salinsky - RBC Capital Markets Ki Bin Kim - SunTrust Robinson Humphrey George Hoglund - Jefferies Jeremy Metz - UBS.

Good day, ladies and gentlemen and welcome to the Q3 2014 Extra Space Storage Inc. Earnings Conference Call. My name is Shawn and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Mr. Jeff Norman, Senior Director, Investor Relations. Please proceed..

Thank you, Shawn. Welcome to Extra Space Storage’s third quarter 2014 conference call. In addition to our press release, we have furnished un-audited 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, Thursday, October 30, 2014.

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..

Hello, everyone. In the third quarter, we saw steady demand and muted supply. These factors contributed to year-over-year increases in achieved rates and occupancy. As a result, revenue increased 7.2%, NOI grew 9.3%, and occupancy increased 100 basis points. FFO as adjusted increased 26.3%. This is on top of growing 24% the year before.

This quarter marks 4 years of consecutive quarterly double-digit FFO growth. The climate for self storage remains favorable and I believe that we will experience double-digit FFO growth for many quarters to come.

Despite heightened competition for properties on the open market, we continue to grow our portfolio through accretive acquisitions and expansion of our third-party management platform. The relationships with our partners enable us to negotiate mutually beneficial off-market transactions..

Thanks, Spence. Last night, we reported FFO of $0.72 per share for the third quarter. Excluding cost associated with acquisitions and non-cash interest, FFO as adjusted was also $0.72 per share. $0.01 of our beat was due to better-than-expected property performance, including tenant insurance.

The rest of our beat was due to lower income taxes in our taxable REIT subsidiary. Over the last few years, we have researched the tax structure of our TRS, specifically the concept of paying a royalty to the OPREIT for access to its intellectual property.

Charging this type of fee is not uncommon in the insurance industry and can be paid to affiliated companies or third-parties. Recent IRS rulings and expert opinions have given us the necessary comfort to adopt this practice. This change provides the tax benefit for the current year and will provide an ongoing benefit in the years to come.

During the quarter, we acquired three properties for $26.7 million in Florida, Georgia and Texas. Subsequent to the end of the quarter, we acquired two additional properties for $17.5 million located in Colorado and Georgia. We currently have 11 properties under contract for $108.2 million, which should close by the end of the first quarter of 2015.

As of today, we have closed or have under contract $493.2 million. In addition to the $493 million, we have 7 other properties that we will acquire upon completion of construction totaling $69.5 million. These properties are under contract and will open in 2015 and 2016.

The sites are located in Arizona, California, Massachusetts, North Carolina and Texas. Two of these properties totaling $21.9 million will be purchased by a joint venture of which Extra Space will have a 10% equity interest. We have revised our full year 2014 FFO guidance to be from $2.54 to $2.57 per share.

The increase is primarily due to lower income taxes. These estimates include non-cash interest in acquisition-related costs. Adjusting for these items, FFO is estimated to be from $2.58 to $2.61 for the full year. I will now turn the time back to Spencer..

Thank you, Scott. As a management team, our job is to maximize shareholder value. On August 12, we celebrated our 10-year anniversary as a public company. We are now included in the 10-year total return benchmarks with 106 publicly traded REITs.

Since that time, our total return to shareholders has been the highest or second highest of any REIT on the NYSE. It is noteworthy that the total returns of all three storage REITs with a 10-year track record rank in the top 15. It has been a great decade for self storage and I am very pleased with the result we have created for our shareholders.

Let’s turn the time over to Jeff to start the Q&A..

Thank you, Spencer. In order to ensure we have adequate time to address everyone’s questions, I would ask that everyone keep your initial questions brief and if possible limit it to two. If time allows, we will address follow-on questions once everyone has had the opportunity to ask their initial questions.

With that, we will turn the time over to Shawn to start our Q&A session..

Thank you. (Operator Instructions) Your first question comes from the line of Christy McElroy of Citigroup. Please proceed..

Hi, thanks.

When you are buying in these C of O deals, can you talk a little bit about how you think about pricing? And is there a limit to how many you would buy in a given year to limit the dilutive impact, you have been pretty vocal in recent years about not going full on into the development game anymore?.

Yes, Christy, this is Scott. As far as the total dilution we are targeting right now it’s 2% to 3% of your annual FFO. So, we would like to keep it fairly minimal, but also participate as far as how we underwrite them and what kind of returns we are looking for.

It really depends a little bit on the market and the property, but it’s usually anywhere between 150 and 250 basis points over what a stabilized property would go for today..

Okay, go ahead..

And on our prior call, Christy, we talked about that as the management team we have targeted 2% to 3% of our FFO as the target for dilution that we would be willing to accept.

Now, that target may move, but with these C of O opportunities that are present in the selves, we have set a target to make sure that we deliver the earnings that the Street is expecting without massive dilution. We have been down that road before..

Right.

As you continue to gain scale, how do you think about your property management platform today from a profitability perspective? Is it still just sort of a future source for acquisitions and a source of incremental tenant insurance revenues or is it a profitable business?.

It is a profitable business, Christy. You hit the key point on the head and that is it becomes a proprietary off-market acquisition pipeline. That’s why we are doing this. Secondarily, obviously we could like management fees to that point depending on where you put a property into the system.

If you put a single property into Los Angeles, for instance, that’s a very profitable proposition for us. When you go to places where we don’t have the same kind of density, it’s still profitable, but maybe not the same degree.

Tenant insurance obviously works very well and not to be missed with 270 something properties that has provided us a much bigger footprint in the world of digital real estate with Internet searches and dollars that we can allocate to pay-per-click advertising on the Internet. So, the scale is of great benefit.

And I think oftentimes that’s overlooked..

Thank you..

Thank you, Christy..

Thank you. Your next question comes from the line of Ryan Burke of Green Street Advisors. Please proceed..

Hi, good morning. Thanks for the color on development versus acquisition yields.

Are you able to generalize that dynamic on a dollar per square foot basis? So, where are you acquiring these C of O deals on a dollar per square foot basis relative where you could acquire stabilized acquisitions in a given market?.

We haven’t been heavily focused on that, Ryan, for the reason that we feel like when we are buying certificate of occupancy deals, you are effectively eliminating two of the three risks associated with the property, you are eliminating the construction risk, you are eliminating the entitlement risk and we are taking on the lease up risk, which we feel like is acceptable and is something we are good at, something that we can minimize, but we haven’t necessarily looked at it in terms of cost per square foot..

Okay, thank you.

Separate question, Scott on the tax benefit, I just want to clarify one point that I believe in your prepared remarks and that is that if you offered tenant insurance to a third party provider instead of doing it in-house, would you have been able to put this tax structure in place?.

It’s a little different.

We are viewing it more from a taxable REIT subsidiary in the tenant insurance company that we do own as a fee that the company has to pay in order to have access to the intellectual property, the customer base similar to what is being offered to other self storage companies where those tenant insurance companies are paying a similar fee.

So I am not sure if that clarifies it or not, Ryan..

So, I will circle back working on that. And third question and we will jump back in line.

There has been some news on a fire at your Venice Beach property and I don’t want to shine a light on an unfortunate event, but if you could just talk to us generally about how the tenant insurance process goes into play in a scenario like this?.

Yes, so the tenant insurance process, obviously we have to go through the process of them coming in, seeing if there is a total loss. We then work with the adjusters, they make the claim through Beecher Carlson or management and they handle the claims typically if its total loss it would just be paid out immediately.

Those losses we accept some of the risk upfront, so we will have a loss associated with this fire..

Okay. Thank you..

One of the reasons why we feel like it’s a good thing for our customers to have insurance either through us or through the homeowners..

Got it. Thank you..

Thank you. And the next question we have comes from the line of Vikram Malhotra of Morgan Stanley. Please proceed..

Occupancies today, how are you thinking about seasonal trends going into 4Q.

And just associated with that you had a very nice pop in rent growth, can you maybe give us a sense of was there any specific area that kind of gave you that bump up in rents this quarter?.

So from a rent perspective if you look at where our growth is coming from, year-to-date you have had 1.7 come from occupancy. The rest is really coming from rates, those rates then breakdown into increases in street rates, increases to existing customers and increases due to discount savings.

So 1.7% comes from occupancy growth, 4.5% comes from increases in street rates. And then the rest is coming through increases to existing customers and decreases in discounts..

And then as you think about a going into 4Q just kind of interplay between occupancy and rents, can you give us the sense of how you expect the seasonal trends to move?.

Yes, we expect to keep our prices lower in the fourth quarter. So we were quite aggressive in the summer months when we peaked out in occupancy. We expect to be less aggressive in the fall and winter in order to maintain occupancy so that we can push rates again in the summer..

Okay. Thanks guys..

Thanks Vikram..

Thank you. The next question we have comes from the line of Todd Thomas of KeyBanc Capital Markets. Please proceed..

Hi, thanks.

Question for Spencer, I was just wondering if you could just talk about the landscape for new supply today, maybe just give us an update on what you are seeing for the year ahead from a broader industry perspective and whether your view is changed at all since the last update?.

Great question, Todd, I would say on the periphery, my view has changed from the last call. I am still of the opinion that the new supply coming into the market may be keeping pace with the population increase in the country.

One of the revelations that has come I hear a lot of noise about new developments coming out of the ground, but one of the revelations for me has been we have multiple parties often times claiming they have got a parcel under a contract and it happens to be the same parcel. So trying to weed through the noise on this has been problematic.

I talk to a lot of folks in the industry. Obviously, with the performance of self storage everybody wants to get in but land prices are very high, nothing has changed there. The ability to get financing has not improved appreciably.

And at the end of the day Todd, if you are going to compete and pull the value out of that significant investment you are probably going to have line yourself with somebody they can drive the result with the internet. And that means you are probably going to be paying a management fee and giving up some or all of the tenant insurance.

So my outlook for 2015, there will be some supply I don’t think it’s going to be massive and I don’t think it’s going to affect our ability to deliver a decent result in 2015 as well..

Okay.

And then as you think about your investments sort of going forward your deal flow for ‘15 and maybe even ‘16, we have seen more C of O deals and less operating properties, do you think that that comp positions skews even further towards development in C of O deals?.

Not necessarily, I can tell you over the last 4.5 years, we have done $2.06 billion worth of acquisitions, acquisitions tend to be lumpy and I won’t drop or extrapolate the lumpiness of acquisitions and the opportunity of C of O deals into any meaningful trend just yet. I think it’s premature..

Okay.

And if I can just sync one more in for Scott on the tax expense savings, so you mentioned that whether it will be an ongoing expense savings here, guidance implies about $1.5 million of incremental tax expense in the fourth quarter is that sort of the right run rate to think that going forward, so about $6 million per year or will be more chunkier or volatile in nature on a quarterly basis?.

That is the guidance for this year, it could potentially get slightly better in the future, we will just update guidance with our annual guidance this year. I would tell you just to look to our guidance for that number..

Okay..

It could be slightly better next year..

Okay, great. Thank you..

Thanks Todd..

Thank you. And the next question comes from the line of Michael Salinsky of RBC Capital Markets. Please proceed..

Hi.

Scott, just going back to the last question, just thinking about the solar tax credits you are kind of in the – several years in the program and why would that, what could potentially bring that down next year from the run rate of the fourth quarter? I mean is there a potential to get more solar tax credits or what will be the driver that actually pull down is your last comment there?.

Solar taxes are coming down, so solar taxes will actually go away by the end of 2016, the benefit from solar tax. This benefit is actually a royalty fee charged between the OPREIT and TRS, so this is something completely different than solar..

So as you grow the third party management business you would be able charge more royalties and it would actually take your tax expense down, I am just trying to understand the dynamics of that?.

So effectively you are charging a royalty between the insurance company and the OPREIT thus reducing income in the insurance company and reducing your tax expense..

Okay.

Then just my follow-up, Spencer you talked about supply and people owning multiple parcels, are there markets right now that you kind of put on hold, you are just looking at supply coming online anything that concerns you, just from a market standpoint?.

By the way my comment Mike was people claiming to have under contract the same parcel which obviously is not possible. So just small semantic detail there, with regards to markets I will tell you there seems to be a huge amount of interest on the greater Metro New York area. I could also say the same for the core markets in Texas.

And it comes back to the statement that we have made many, many times.

Look I have to look at the micro market, generally a 3 mile ring around the property that is being proposed to ascertain whether you have got parcel that is going to be make sense or perhaps might not make as much sense, lot of markets claim to be over built and you might find a pocket within that market that is unreserved.

So that would make a great deal of sense. So this is on a case-by-case basis, but I will tell you, Texas and New York are the two that we are a bit more cautious in our analysis because of the level of interest that has been generated to put new product into those markets..

Thanks guys. I appreciate the color..

It’s fine..

Thank you. The next question we have comes from the line of Ki Bin Kim of SunTrust Robinson Humphrey. Please proceed..

Thank you.

Just wanted to ask a couple of questions regarding your pricing strategy and some trends that you have been noticing, could you just provide the street rates that you experienced in the third quarter and maybe the promotions on the delta year-over-year?.

So, without getting into specifics for exact times, Ki Bin, I would tell you that during the summer months we saw our street rates 7% to 8% up and then also towards the end of the quarter, they were probably more like 2% to 3% up. It’s obviously at a point in time, but I wouldn’t necessarily focus just on street rates.

I think that you need to also take into account your discounts being down which they were. We saw them go down into high single-digit decreases. And then in addition to that, you also have to look at the discount being offered on the Internet and what percentages closing at that lower rate too..

Okay. And my follow-up is that I think last year heading into the winter, you guys proactively decreased street rates year-over-year and the reasoning was that, that winter customer was of higher value longer term. Just curious how that’s turning out, is it turning out to be, I know it’s a small dataset, but turning out true.

And what is the decision to maybe decrease street rates a little bit couple of months in advance of what you did last year, because it seems like last year you did that in the winter and now you are doing a little bit in the fall, just curious what’s being behind that?.

It’s actually been a pretty similar philosophy. I think that give or take a month or so here, but I think that we have been pretty consistent in decreasing them in the fall and then keeping them flat in the winter effectively. We do see the benefit from these customers and we have seen our average length of stay increase..

Okay, thank you..

Thanks, Ki Bin..

Thank you. The next question we have comes from the line of Tayo Okusanya of Jefferies. Please proceed..

Yes, hi, this is actually George.

One question on the tenant insurance just wondering sort of on the new leases or new tenants that are coming in, what is the overall participation rate?.

George, it’s Spencer. New customers coming in were over 90% and for existing customers were north of 70%..

Okay.

And do you have sort of an update on how high do you think for the overall portfolio that can get to?.

I think we are starting to top out. There might be some incremental gains, George, on this, but when you consider that you have people storing automobiles or you have the small contractor with their own property and casualty policy. This is one of those things that I think we have done a really good job and I won’t bake in a lot more at this point..

And on the occupancy front, since you guys are focusing on keeping higher occupancy in the winter, so what can we expect sort of on a year-over-year basis do you think for maybe like 1Q ‘15?.

I think year-over-year we could potentially see them go another 50 to 100 basis points higher than they did this year..

Okay. Alright, thanks guys..

Thanks, George..

Thank you. (Operator Instructions) The next question we have comes from Ross Nussbaum of UBS. Please proceed..

Hey, good morning. Jeremy Metz here with Ross.

I just want to quickly go back on the C of O deals, I mean, you have been pretty adamant in the past that you are out of the development business, so while you are not necessarily taking on the entitlement development risk here, I am just wondering what gives you the confidence in taking on the multi-year leasing risk again?.

Okay. Jeremy, it’s Spencer. There are three risks that you take when you try to pull a property out of the ground. One is entitlement risk, the second is construction risk, and the third is lease up risk.

So by effectively doing the C of O deal, we have hyped off what I would consider two of the more risky elements of bringing a new property into the market. What I think Extra Space has become really good at is driving traffic to a property. I have confidence in our Internet marketing prowess.

I have confidence in our operational team to capture those rentals when they walk through the door.

And with that on our national platform, I think it’s a reasonable risk to take and it’s something quite frankly that the small guy can’t compete in that arena and we have a symbiotic relationship or the small developer does what they do best and we do what we do best and we replicate it again and again..

Okay, so no real change in thinking though towards more ground-up development done at this point?.

No, we are out of development..

And so I guess then if you have that confidence in the leasing, why the decision to be just 10% minority partner with no real control on these?.

On an earlier call I have talked about keeping dilution of our FFO to 2% to 3% and a JV partner allows us to operate the asset to have a nice take out when they decide to liquidate their position and keep us within the bounds of what we have wanted to do and that has maximized shareholder value by driving the highest and best result on FFO growth quarter in, quarter out..

Okay. Thank you..

Thank you. Sir we have no further questions at this time. (Operator Instructions).

Ladies and gentlemen, we appreciate your interest in Extra Space. We look forward to next quarter’s call. Have a good day..

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day..