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

Ki Bin Kim - SunTrust Robinson Humphrey Jeff Becker - Bank of America Merrill Lynch George Hoglund - Jefferies R.J. Milligan - Robert W. Baird Vikram Malhotra - Morgan Stanley Todd Thomas - KeyBanc Capital Markets Todd Stender - Wells Fargo Ryan Burke - Green Street Advisors Jeremy Metz - UBS Ross Nussbaum - UBS Jonathan Hughes - Raymond James.

Good day, ladies and gentlemen and welcome to the Extra Space Storage Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, there we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to Jeff Norman, Senior Director of Investor Relations. Sir, you may begin..

Thank you, Shannon. Welcome to Extra Space Storage’s second quarter 2015 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, Thursday, July 30, 2015.

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..

Thanks Jeff. Hello, everyone. For quite sometime I have wondered when our business would go from being great to just really good. Through the first two quarters it continues to be great. We reached a record high occupancy of 94.5%, while producing same-store revenue growth of 9.4%.

Year-over-year, NOI grew 12.1%, FFO as adjusted grew 17.2% and we increased our dividend by over 25%. This kind of growth is directly attributable to accretive acquisitions, muted new supply and our ability to source higher value customers online. We have been acquisitive year-to-date we have closed over 350 million in acquisition.

In addition last month we announce the definitive merger agreement to acquire SmartStop, the seventh largest storage company in the U.S. or approximately 1.3 billion. The single transaction will add 122 owned stores, 42 managed stores and will increase our footprint by 15%, including this transaction we will likely acquire 1.8 billion in 2015.

Customer acquisition on the internet is about size and scale. With these acquisitions in the growth of our third-party management business we will finished that year with over 1,300 stores on the Extra Space platform.

The expansion of our physical and digital footprint allowed us to reach more customers than ever before and increases operational efficiencies. As I have said it is a great time to be in storage. I’ll now turn the time over to Scott..

Thanks, Spencer. Last night, we reported FFO of $0.72 per share for the quarter. Excluding costs associated with acquisitions and non-cash interest, FFO as adjusted was $0.75 per share, exceeding the high-end of our guidance by $0.01. The beat was primarily the result of better-than-expected property performance.

Our same-store revenue growth was driven by increased occupancy, higher rates to new and existing customers and lower discounts. Some of our standout market in terms of revenue growth includes Atlanta at 11%, Los Angeles and San Francisco at 12%, Orlando at 15%, Sacramento at 16% and Denver at 17%.

Our platform continues to maximize results in this favorable operating environment. As Spencer mentioned we've been busy deploying capital, we closed on 31 stores for 262 million in the quarter. Two of which were properties that would purchased upon completion of construction.

We also purchased the remaining 1% of the joint venture partners interested in 19 store portfolio for 1.3 million. Subsequent to the end of the quarter we acquired a certificate of occupancy store with the JV partner for 5.4 million.

We currently have three operating stores under contract for 27 million these acquisitions should close before the end of the year. In addition, we have another 16 certificate of occupancy stores under contract. The total purchase price of these stores is a $172 million of which $36 million is expected to close in 2015.

Additional details related to our C of O deals can be found in our supplemental package that’s posted on our website. Last month, we announced the SmartStop acquisition and we completed an equity offering. The offering was well received and we issued 6.3 million shares at $68.15 per share. This resulted in gross proceeds of $431 million.

We're well into the process of securing additional debt to fund the balance of the SmartStop acquisition. The financing will include CMBS debt, secured bank loans and draws on our revolving lines of credit. These draws will be turned out in the three to six months following close.

The SmartStop acquisition as well as our strong year-to-date results requires to revise our guidance. These adjustments assume an October 1, closing of SmartStop. Our revised full-year FFO guidance is $2.89 to $2.96 per share.

Our FFO is adjusted is $2.99 to $3.06 per share, our guidance includes dilution from our certificate of occupancy deals and acquisitions that operate below our portfolio average as well as the additional shares issued in our June offering. I will now turn the time back to Spencer..

Thank you, Scott. Through acquisitions joint ventures and third-party management, we continue to expand our portfolio and consolidate stores under the increasingly potent Extra Space brand. By the end of 2015, we will have closed approximately $4 billion in acquisitions over the last five years and there's still room to grow.

Fundamentals of the storage industry continue to be favorable and we are leveraging our scalable platform to maximize revenue NOI and FFO. I am pleased with the outstanding performance of our team, we have driven 19 consecutive quarters of double-digit FFO growth. I’ll now turn the time back to Jeff to start our 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 an opportunity to ask their initial questions. With that, we’ll start our Q&A session..

Thank you. [Operator Instructions] Our first question comes from Ki Bin Kim with SunTrust Robinson Humphrey. You may begin..

Thank you. So as you almost approach public storage’s scale and you have been growing pretty quickly. Do you think, you’ve already comfortable, you maximize the benefits from economies of scale or being bigger and being more present on the web or do you think if there's more to be add, I think get closer to like 2,000 property..

Ki Bin. It’s Spencer. We think that there is upside we’re pleased with our performance. We’re pleased with our potency, but the game is far from over and we need to continue to expand our footprint the Internet is about size and scale and we’re going to continue..

Okay, and just curious.

Is there anything else that you guys have changed the pricing strategy or the way you advertise in the web this past couple of quarters that you found to be [indiscernible] a little more use but then it has in the past?.

Not a lot of changes in the last two quarters Ki Bin, we continue to refine our models, we continue to refine our approach and we continue to go after the higher value customers..

Okay that's from me. Thank you..

Thanks..

Thank you. Our next question is from Jeff Becker with Bank of America. You may begin..

Good afternoon. Just I guess talking – I guess a little bit more about Spencer your initial comments that you’ve been waiting for that turn I guess from great to good. It sounds like we’re still in the great fees. At the same time we’re seeing some mixed economic data look what should we be really focused on here going forward the next six months here.

As we head into the Fed hike is it just slowly improving economy, the housing market, consumer seems to be mixed here.

So what do you think we should focus on?.

There is no one single thing I would ask you to focus on Jeff. The overall health of the U.S. economy is the single biggest determinant for how we’re going to do, as you look at storage operators they have done well in spite of what I would call a less than robust economy.

So for the next 12 to 18 months, I think the two things that we need to underscore again, again and again. Number one, there is very little new supply today and for the foreseeable future that bodes well.

Number two, the Internet, old rule is changed, the Internet is not the great equalizer it’s the great divider and we continue to use it to our advantage..

Okay, thank you.

And then my second question is can you comment on the cap rates for the 29 assets that you're acquiring?.

Yes, the assets that we acquired in the second quarter I would tell you are on the lower end. I mean typically we are looking at year-one cap rates of 6 to 6.5.

The forward-looking first-year cap rates for the management fee and we have acquired a portfolio in Dallas it was actually below that, but we feel like there is a fair amount of upside and it should grow from there. There is some lease about set in there, in fact one of them is just opening today..

Great. Thank you..

Thanks Jeff..

Thanks Jeff..

Thank you. Our next question comes from George Hoglund with Jefferies. You may begin..

Hi, guys.

Can you just comment on some of the larger expense growth in certain markets like 8.5% in New York and obviously Atlanta had a 15% expense growth?.

Yes, the major areas of our expense growth we see above average is one or two things, you have seen some higher than expected snow removal this year, and then the second one is just property taxes.

It depends on when these assets get reassessed so your other one in Atlanta is its a little skewed by a land lease it was basically an increase in the timing of when the land lease expense was reassessed..

Okay, and then just one thing on the financing front, we are seeing a large SmartStop acquisition coming up, any sort of change in your thought process in terms of potentially at some point adding unsecured bond offering into the mix?.

So right now I would tell you our balance sheet is largely investment grade. I think if you look at our ratios and things we are very close. There is a few things keeping us from being rated and right now those issues focus more on covenants as well as across the provisions in unsecured debt.

So to date, we are going to operate similar to a rated entity, but right now we do not have any eminent plans to become a rated entity..

Okay, thanks guys..

Thanks George..

Thank you. Our next question comes from R.J. Milligan with Baird. You may begin..

Hey, good afternoon guys.

Question on your underwriting of the CFO deals, can you talk about maybe how that’s changed or different expectations over the past year given the improvement in fundamentals?.

So RJ, this is Scott. We actually haven’t changed your underwriting I think that we still been pretty consistent in how we underwrite these deals. I think that if anything were being surprised on the upside meeting these assets are leasing up quicker than expected, but at the same time that could change.

So some of these CFO deals we’re looking at today, one or two of them are opening in early 2018 now so your problem with becoming more aggressive in the short-term is these assets maybe more of a long-term play. So we pro forma them more with three to four-year lease ups, 36 month lease ups being pretty standard..

Okay, and my second question is on the increased guidance same-store NOI for the year up to about 200 basis points the midpoint.

Can you talk about the different drivers of that increase? What was going on in the second quarter that surprised you guys the upside?.

The two things that are really been better than we expected. One is our occupancy, our occupancy, we expected to peak it about 94%, 94.5%. The second one is we think – the second part of occupancy as we think it will continue to be strong for the year.

We expect our occupancy delta to average 1.5% to 2% and then the second one is discounts, discounts are been significantly below where we originally estimated..

Great. Thanks guys..

Thanks RJ..

Thank you. And our next question comes from Vikram Malhotra with Morgan Stanley. You may begin..

Thank you. Just on that occupancy comment, if you would have kind of – if you look at all your assets and break them up into maybe three buckets.

What proportion would you say obviously based on every submarket has different peak occupancies, but what proportion would you say it’s kind of that in your view peak occupancy versus maybe just way below where you think you can really get a lot more gains in the next 12 months?.

So I would tell you in terms of number of properties that we think there's a lot of upside on its minimal right now.

Most of our properties are above 90% I mean we do have a few that maybe have some functional issues the most of our properties are actually more in the 95% range, we do have few that are full completely 100% full and we have a few that are in the upper 70s just because maybe they're too big or new competitors come in right nearby..

So it seems like the kind of one in the data since very, very small right now most of them are kind of near or at that biggest level?.

Yes, that’s correct..

And then just on the rate growth that you saw it was use of the discounts the price you but if we look forward kind of how sustainable is this you know kind of mid-single digit growth in terms of the overall rent per square foot growth?.

As far as how long it goes I think its difficult to say I think supplies going to play into that your other thing is the usage of storage and how your rates compared [indiscernible] apartment rates and things like that the rate per square foot.

We have some markets were they approach that but the one thing you do have going for you in storage is it's in frequent transaction. So someone knows what they're supposed to pay in rent because typically they have friends that rent for they know a lot of other renters and so they know what your average rental rate is.

But at the same time people don't rent self storage very often. So they typically just end up paying what the marketed..

Okay thank you..

Thanks Vikram..

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital Markets. You may begin..

Yes, hi thanks. Just want to dig in a little further on the scalability of the property type Spencer you mention the importance of growing your digital footprint.

I am not suggesting growth for growth's sake but how important is the growth of your digital footprint when it comes to driving core growth and that something that you can quantify or discuss is a pertain decision to buy property how is that factored into the equation when you look at new investments?.

Todd it your lucky day we are fortunate to have James over to our Executive VP over marketing and Internet Google with that question over James let him take it..

Hi, Todd I guess just walked by the room at the wrong time here, but it influences our decision is that 30% or 40% decision no, I think it’s around the edges right now.

But thanks the data that we how do you know where were going to be able to have a little better impact on the marketing side with certain acquisitions, we will acquire properties in areas that we currently don't have scale its going to be a little more difficult to you know get those listings up in a quick fashion, but we do know the benefit will be there.

If we acquire property like say Los Angeles, Chicago or Dallas the impact is almost immediate. Especially for it’s a smaller operator we've seen huge upside in terms of their Internet traffic. So it does influence our decision but mostly goes back to the underwriting and the revenue assumptions.

We are always have battles in our [RAC] about it being too aggressive or too conservative.

I think we've been properly valuing properties, but we do see the Internet being more and more of a factor in terms of customer acquisition going forward and we will look for those opportunities where the small providers can't compete with us and so we will look for those opportunities in the future..

Okay and then with regard to SmartStop and that transaction how did you value the third-party management agreement that [indiscernible] as part of that transaction overall.

What’s that opportunity like for you?.

So we feel like it’s a big opportunity Todd they have two more funds that are going to be raising money and buying properties. So we and those management contracts are coming our way. In terms of how we value to put a cap on we viewed more is a benefit and so therefore we are maybe willing to pay more aggressive cap rate on the existing assets.

We didn't necessarily say is worth X because those management contracts are month-to-month and you know we don't expect them to go anywhere but at the same time we don't put a huge amount of value on that..

Okay thank you..

Thanks Todd..

Thank you. Our next question comes from Todd Stender with Wells Fargo. You may begin..

Hi, thanks.

C of O activity continues to astound we see activity you guys are doing especially across the industries as well? Is there a general increase in lenders in the space I wanted to speak how you guys assess who supplying liquidity to developers? How were thinking about increasing your supply of these assets and you guys potentially taking more incremental risk.

Just seeing how you are thinking about the front end on the lending side..

Yes, on the lending side I think the lenders are still conservative. A well-capitalized developer is going to be able to get loan, I think the majority of these developers we work with our well-capitalized. We want to make sure that our developers have the ability to absorb losses, if that's required and that they can perform to our standards.

So you know I think that lenders are willing to lend. But I don't think they're willing to lend at the rate that is going to cause significant new supply at this time..

Okay, thanks. That’s helpful, Scott. And just going back to the third-party management again the shift is more towards the C of O deals and not stabilize facilities that you guys manage. But just wanted to get your current thoughts and how you are looking at that potential pipeline to acquire your third-party asset..

So, Todd, its Spencer. Nothing is shifted we’re very interested in stabilized assets, because you take that stabilized asset put it into our operating platform. And that's where you squeeze a lot of incremental performance out of what we would generally consider an under managed asset.

So it hasn’t been a shift of the C of O, we like stabilized assets, when we think that the market is wide open for additional operational consolidation. My personal math is if there are 54,000 self storage facilities in the U.S.

you could probably knock 30,000 of those out as being too small too old or in the wrong markets for us, you take out another 4,000 to 5,000 for the larger national operators, not still at least some more around 19,000 to 20,000 properties that are wide-open for operational or financial consolidation and we think there's plenty of room to grow on both fronts..

Great, thanks, Spencer..

Thanks, Todd..

Thank you. Our next question comes from [Neil Macklin] with RBC Capital Markets. You may begin..

Hey, guys, good morning out there. First question is on rent growth and trends you know given that we’ve seen a pickup in housing velocity vis-a-vis existing home sales, just strength out of that market and that is your number one demand generator at the residential market. And we’ve seen you know wage pressure kind of pick up recently.

Do you think that even the supply make come on and you know 24 months more than it is now, we could see a ramp up still rental rate growth, given that strong correlation with the housing market and you guys performance..

Neil, its Scott. So first of all I think we do see some correlation with the housing market but it’s not a perfect correlation. I think the thing that is you know has the highest correlation is change. So whether that’s a housing or it changes someone’s personal life you know that's what causing people to rent self storage.

They all have a need coming in the door, we think that those needs are going to continue and as long as new supply is low, we think that we’ll have pricing power..

Okay. And then Spencer I guess this one for you. Talking to some brokers and it seems like in those certain markets like Denver for example, there's like probably 50 or so permits for storage and probably new things only you know 8 to 10 will be actually delivered near-term.

Can you explain or help explain why there's a large disconnect between permits and then actually getting approved. I mean I know some fallout just by the nature of the permitting process.

But can you maybe give some color on the difficulty or complexity to get a permit from you know start to go to ground break time?.

Yes. So there are a lot of factors in there, one of the biggest ones is self storage is not a welcome asset class in most neighborhoods.

We don’t provide a lot of jobs, we don't collect a lot of tax revenue and most municipalities don't roll out the red carpet, you throw in the cost of land because everybody is trying to develop just not folks that can do storage.

If you look at the lending environment probably one of the biggest ones Neil that I have observed is the risk versus reward curve shifted and it's not in favor of the developer.

So the local developer has an ability to go out and get the property entitled if they're lucky and get it constructed on budget if they're lucky and then they were left with the questions. Now what do I do? Because I can’t take out a yellow page out anymore and I’m in no man's land.

Oh, I need to align myself with the management company that can drive traffic to this property and I’m going to pay management fees and probably going to give up some or all of the tenant insurance. I’m going to get to downstream to bunch of other crossing at the end of the day. I’m going to make a lot less money than I would've made otherwise.

So the return on these investments for these guys trying to go out and get a permit I think there's some hesitation. I think land costs are higher than a lot of people have thought that would be permitting is more difficult. I can tell you I have two cases in California on properties that we have worked on it.

It took more than 10 years to get a permit in some prime locations. So this is not easily done in some locations, yes, you're seeing some development come out of the ground inside Denver. Sure, across the country we still maintain an assert that the rate of growth of new supply is still left than the rate of growth of the populations in the U.S.

It is a great time to be in Storage..

Thank you..

Thank you, Neil..

Thank you. Our next question comes from Jonathan Hughes with Raymond James. You may begin. Jonathan Hughes, your line is open. Please check your mute button. Our next question is from Ryan Burke with Green Street Advisors. You may begin..

Thank you. Scott, you mention the more aggressive cap rate on the SmartStop portfolio, that’s the cap rate it certainly comes in below where you typically target your acquisitions on a 6% basis.

Can you talk us through your view on what that cap rate was on trailing NOI and SmartStop’s hands and what becomes year-one in your hand?.

Yes, so first of all I think it’s difficult to comment and what the trailing NOI is because there's some expense differences and how we operate the properties, there is also property tax assumptions that are made.

Going forward we can clearly comment on that, we're viewing this is kind of mid-fives cap rate year-one and growing from there as we bought it. I think the one thing that we always consider is worth. What happens is there seems to be a portfolio premium that’s applied to any portfolio that’s out there especially one of the size.

I think this is one of it. If not the largest or I just want to trade hands in some time. And we typically look at that as you end up paying 75 basis points premium to get a portfolio deal done..

Okay.

Can you talk a little bit about the tenant insurance penetration rate on the portfolio and how that compares to your same-store portfolio?.

Yes, so their tenant insurance penetration is lower than ours, significantly lower there closer to 50% penetration and their average rate per policy is a fair amount lower than ours also..

Okay.

So how long do you think it takes if your same-store balance sheet rate is in the 70% range say, how long does it take to get that out there?.

We think it will be one to two years to get it up to our penetration level just because we are not going to bother the existing customers, we're going to do it as these units churn..

Sure. Okay, thanks. And one quick one just on the balance sheet.

Can you update us on your thoughts on entering into an ATM program and how likely you are to do so and if so how you plan to use it moving forward?.

So an ATM is obviously always a board decision, it’s something that we are in discussions in today, it’s something that we’ve talked about in the past quite often. So it's very difficult to comment on their decision there..

Okay, thank you..

Thanks Ryan..

Thank you. [Operator Instructions] Our next question comes from Jeremy Metz with UBS. You may begin..

Hey guys, [indiscernible]. I don’t think you guys gave a July update yet so you finished the quarter with occupancy up about 240 basis points. So I was just wondering kind of where occupancy stand today verses last year and same with street rates and then just kind of bigger picture you had realize that growth I mean north of 6%.

So I guess can this continue at this high level or should we think about rate growth kind of selling back down to that 45% range here?.

Jeremy this is Spencer. For July we’re not giving specifics what I can tell you occupancy holding, rate for holding and we will have to see have the rest of the year place out, but things are good..

And just so where street rents and versus last year in 2Q?.

Kind of in the 7% to 8% up..

Okay and then I think Ross has a question..

Hi, guys I got two questions.

First is on Page 16 of your supplemental when you show in the quarter that rentals were down 1% and vacates were up 1.2%? How should we think about that information obviously differs quite dramatically from what your put up on the same-store revenue occupancy front, but it kind a shows you had more people move in out movement in and how should we think about that data relative to what’s on the income statement?.

Yes, I think there is a couple things to consider their as you need to look at the rentals we also need to look at the vacates - is vacates were you know depended on what your rentals versus vacates and the difference between them because certain time you know you have significantly more rentals than you have vacates.

What we focus on more than rentals and vacates we view that when we look at this we don't look at this just on a three month or six month period. We look at rentals and vacates and see how they compare the past six or seven years on average per property. And then we focus much more on the occupancy of the property..

Okay. On my second question is to you Spencer which is look at my comp spreadsheet here and I am looking at a $4 billion company the trades at a 6% cap rate? What’s your appetite for public M&A, it seems like your appetite for private M&A at five handle valuations is pretty high.

One look at some your smaller peers?.

Our appetite really has nothing to do with the public or private Ross. It has lot to do with, it doesn't make sense and is that the right thing for our shareholders. If you look at the public environment there's probably going to be step premium fixed to that kind of transaction and we are rational buyers..

Okay, appreciate that. Thank you..

Thank you..

Thank you. Our next question is a follow-up from Ki Bin Kim with SunTrust Robinson Humphrey. You may begin..

Yes, thank you. So let me, Spencer you definitely sound pretty bullish and you have the results to back it up and maybe a little premature. But we are past the halfway year-mark. So looking ahead and – for guidance, but just looking ahead maybe 18 months or so.

How should we think about some of your bullish comments that results and how that probably ties in to kind of forward growth rate for your company in terms of same-store organic growth? Because it does seem like towards the end of every year not just you, but all your company start to become little more conservative about the outlook..

So if we look forward I see things, Ki Bin is still being good. I don't know if we’re going to be operating in the stratosphere. But I can tell you with no new supply and our ascendancy on the Internet. I don't see anything that is disruptive borrowing a black swan event in the next 12 to 18 months.

I am bullish and this is an unprecedented market, in which we’re operating, and we’re going to take every advantage to maximize the result. My crystal ball is no better than anyone else. But I don't see anything that is likely to disrupt the operating environment in which we’re currently operating and I think - expect to see really strong results..

Okay. Thanks for that color.

And I mean that’s a comment, but I think half of the business actually report maintenance CapEx and just curious if you guys have any thoughts maybe included in that going forward just for comparability sake and I’m sure that gets to makes you look better anyway?.

Yes, it’s something we’ll look at it’s not anything we put out there yet. We have a pretty robust supplemental package, but it’s something we’ll consider..

All right. Thank you, guys..

Thanks, Ki Bin..

Thank you. Our next question is from Jonathan Hughes with Raymond James. You may begin..

Good morning guys. Sorry about the getting cut off earlier, but most of my question have been answered at this point, but I had one follow-up. So how aggressively do you plan to raise rates in the SmartStop portfolio you want close in 4Q.

I noticed that the rates are like 20% below [indiscernible] per square foot they don’t get there right at the back, but I am just curious that the trajectory is how quickly you’ll try to narrow that gap?.

Yes, we’ll focus mainly on occupancy in the first year, we will try to get their occupancy up to exactly where we are. The only thing I could caution you on as you can just look straight at 20% because they may or may not compete directly with our properties.

So we’ll aggressively move the occupancy and then from there we will aggressively move the rates to be inline with our existing stores were in the same markets..

Okay. That’s it from me, guys. Thanks..

Great, thank you. End of Q&A.

Thank you. I am currently showing no further questions at this time. I’d like to turn the call back over to Spencer Kirk for closing remarks..

Thank you everyone for your interest in Extra Space today. We look forward to next quarters call. Thank you..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day..