Jeff Norman - Director, IR Spencer Kirk - CEO Scott Stubbs - EVP and CFO.

Todd Thomas - KeyBanc Capital Markets David Toti - BB&T Capital Markets Jeremy Metz - UBS George Hoglund - Jefferies Smedes Rose - Citigroup Ki Bin Kim - SunTrust Robinson Humphrey Jenna Gallagher - Bank of America/Merrill Lynch Landon Park - Morgan Stanley Jonathan Hughes - Raymond James Ryan Burke - Green Street Advisors Wes Golladay - RBC Capital Markets Steve Sakwa - Evercore ISI.

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

I would now like to introduce your host for today's program Mr. Jeff Norman, Director of Investor Relations. Please go ahead..

Thank you, Jonathan. Welcome to Extra Space Storage’s fourth quarter and year end 2015 conference call. In addition to our press release, we have furnished unaudited supplemental financial information on our Web site.

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, Wednesday, February 24, 2016.

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. 2015 was a record breaking year. We executed at a high level and produced outstanding results despite difficult comps. For the fourth quarter same-store revenue growth was 9.3%, NOI growth was 11.9%, year-end occupancy was 92.9% and FFO as adjusted grew 29%, this marks 21 consecutive quarters of double digit increases.

We delivered these exceptional same store operating results while expanding our physical real estate and digital real estate footprint by 24%. In 2015, we added 259 stores to our platform and our year end EXR branded store count was 1,347.

For the year we closed on 1.8 billion in acquisitions, seller expectations are high and we expect pricing to remain competitive in 2016. However, we're finding accretive acquisitions including off market transactions and we're off to a solid start in 2016. I’d now like to turn this time over to Scott..

Thanks, Spence. Last night, we reported FFO as adjusted of $0.87 per share meeting the high end of our guidance. Including costs associated with acquisitions and non-cash interest, FFO was $0.38 per share for the quarter. This was below our Q4 guidance due to additional transaction related costs.

We paid 16 million in SmartStop transactional cost, 8 million for SmartStop’s investment bankers and 8 million severance expenses. These costs were expenses on our books rather than on SmartStop’s in essence we paid SmartStop’s transactional costs with SmartStop’s working capital.

These costs were included in our original purchase price estimates and had no effect on the transaction on a net-net basis. For the year, FFO as adjusted was $3.13 per share meeting the high end of our guidance. Including acquisition and non-cash interest cost FFO was $2.58 per share.

Our same-store revenue growth was driven by higher rates to new and existing customers, increased occupancy and lower discounts. Our top performing markets were California, Colorado and Florida. Our worse performing markets still grew at 4% to 5% and out platform continues to maximize results.

We had a busy quarter on the acquisition front, adding 131 stores to 1.4 billion. The majority of these stores were part of the SmartStop acquisition which are performing in line with our underwriting expectations. Last night, we provided guidance and annual assumptions for 2016.

Our new same-store pool increased by 61 properties for a total of 564, we expect the change in the same-store pool to positively impact our revenue growth by approximately 50 basis points. For 2016, our acquisition guidance of 600 million refers only to our wholly-owned stores. The impact of our JV acquisitions is captured in our equity and earnings.

Our full year FFO as adjusted is estimated to be $3.65 to $3.73 per share. 2016 FFO guidance is $3.57 to $3.65 per share. This guidance includes $0.05 of dilution from our 2015 and 2016 certificate of occupancy acquisitions. Our guidance also includes 2015 acquisitions that as anticipated will require time to be brought up to our performance standards.

Once they're performing at our portfolio average, they should produce an additional $0.10 per share. I'll now turn the time back to Spencer for some closing remarks..

Thanks Scott. We expect 2016 to look much like 2015. Demand is steady, new supply while present, is still muted and our advantage on the Internet continues to grow. However in 2015, increases in occupancy and reductions in discounts contributed approximately 300 basis points to revenue.

This year we expect occupancy gains of approximately 100 basis points and little to no additional benefit from discount reductions. I congratulate our team on the significant growth and the strong performance in 2015. It has resulted in Extra Space been included in the S&P 500.

We're pleased to be recognized as a top tier REIT and a member of this fine group of companies. Now let’s turn the time back to Jeff to start the Q&A session..

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. If time allows, we will address follow-on questions once everyone has had an opportunity to ask their initial questions. With that, we will turn it over to Jonathon to start our Q&A..

Certainly. [Operator Instructions] Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your question please..

Just first question on occupancy, there was a much more muted seasonality impact at the end of the year, only a 30 basis point decrease from the average occupancy in the fourth quarter. I am assuming that was a pretty conscious effort.

But what levers did you pull on to keep occupancy at 92.9% at the end of the year?.

So, we continue to advertise out there. So I think the one of the things we made a conscious effort of is we spent some pay per click dollars as well as maximizing our SEO spend. We continue to try to make sure that we maintain occupancy in the slow season so we're ready to push rates as we move into the busy season..

Are you able to share your occupancy through today and where that was year-over-year perhaps?.

We're not giving exact numbers, it hasn't changed significantly..

Okay. And just a follow-up then on Houston, with regard to occupancy there, it actually fell rather sharply. It was higher year-over-year last quarter, but was lower this quarter by 120 basis points and it is now one of the few markets in the portfolio where occupancy is lower.

What is your read on Houston and are you operating in Houston any differently than you operate in any of your other markets?.

Yes, so Houston is overall Todd, 2% of our total portfolio. This is the beauty of a broadly diversified and geographically dispersed portfolio. And yes there is softness in Houston.

And we have not done anything differently, operationally on our interactive marketing efforts or our revenue management specifically to try and address something that is just part of the economic softness in that part of the country. So, we're going to continue to do everything we can without being operational in our behaviour.

We've got a platform, we've got a system and we are letting the system run based on the laws of supply and demand..

Thank you. Our next question comes from the line of David Toti from BB&T Capital Markets..

I just have two questions on rent growth. And Spencer, I think you mentioned a revenue forecast for the year. You are assuming little discount burn-off and about 100 basis points of occupancy.

Can you share what your rent assumptions are embedded within that revenue forecast?.

So, if you look at our revenue forecast David, the majority of that is actually going to come from rate, you're going to get about 100 basis points from occupancy and the rest is all rate, so we think that we'll continue to be able to push rates in the mid to high single digits and hopefully we continue to see strength through the summer months here..

And then a follow-up to -- a follow-up to that question, in assets where you have occupancy in the mid-90s or higher, and you have some limited inventory, what is a typical rent strategy in those types of assets? Do you push rent to dislocate tenants to create more inventory what -- how do you guys approach that situation?.

We push rate as hard as we think is prudent for the market and for the data that we have for a particular property and the unit size codes that are in demand.

Part of the beauty of our platform is that data is probably our single most valuable asset and if you look at 800,000 plus units that we have information on, we're going to push rate as hard as we can.

Obviously, we don't want to dislodge customers but where we have existing customer rate increases being benefited by lofty street rates, yes, we can get pretty aggressive both with new customers walking in the door as well as the existing customer and our system is going to be try to optimize the revenue for any particular size code..

Thank you. Our next question comes from the line of Jeremy Metz from USB. Your question please..

Hi guys I am on with Ross here.

I was just wondering if you could talk about what you're budgeting for SmartStop in 2016 in terms of the revenue growth and how that breaks down between occupancy and rents?.

Yes, so we're hoping to have their occupancy be at similar rates to what we have in our occupancy by the end of the rental season or by the end of the summer. You're going to do that first by making sure the rates relatively low. But overall for an annual growth rate, it's high single digits..

Okay. And then just on one of the potential JVs you mentioned in the press release it looks like all those assets are developments in New York you would buy at CO. So I am just wondering if you can walk us through your thinking there and thoughts on current supply already underway in the market.

And then in terms of the JV, is your partner the actual developer or just the financial partner?.

So, it's actually just a financial partner, it's an institutional partner, so it's one we're excited do more business with to do -- have more investment with.

We like the New York City market, New York City the boroughs have low per square foot penetration as far as your square feet per population and we're excited to have additional product in a market that has great demographics and high rent per square foot..

And is there a chance you could increase your -- yes?.

It's Spencer, if I could just put a vital color on JVs, number one JVs help us with the dilution part of the equation on earnings, number two, it increases our return and in answer of part two of your question, new supply generally throughout the country I think that's the question you're getting at, it's still muted.

And my own personal number is total number of properties delivered new assets in the United States in 2016, 600..

Thank you. Our next question comes from the line of George Hoglund from Jefferies. Your question please..

Yes, I was wondering if you could just, one, comment on expenses in Chicago that were up pretty significantly..

It is property tax reassessments, for Illinois is very aggressive on an annual basis and some of those we'll appeal..

Okay.

And then when you think about the guidance range in terms of what is most likely to push you towards the higher end of the guidance range or could even -- what would be the outlier that would push you above the range? What factors do you think are most likely?.

I’d give you two items, one would be of property taxes coming lower than we are originally budgeting, we're budgeting them close to 6% I think it was 5.8 for our budget on same-stores this year. And then second of all, if rates hold better than expected through the summer months..

And then I guess just one more.

In terms of -- you talked about occupancy, you had mentioned it earlier, that it was about the same or unchanged wasthat versus the year end or is that on year-over-year basis?.

Versus year-end..

Thank you. Our next question comes from the line of Smedes Rose from Citigroup. Your question please..

You mentioned that some of the acquisitions made in 2015 can drive an additional $0.10 to make it up to your company wide portfolio metrics.

Can you talk about maybe some of the dilution I guess that is embedded in your guidance for this year from the 2014 or so CofO properties coming online?.

So the dilution is actually primarily from the ’15 and ’16 acquisitions and you've got about $0.05 in those properties. So from a growth perspective you got $0.05 from CofO and another $0.10 from properties that we've purchased considering them to be value-add opportunities..

Okay.

And then could you just remind us when you were calculating your adjusted FFO, how do you treat the convertible notes in terms of...?.

The non-cash portion we take out as an adjustment and then the other adjustment is the transaction cost for acquisitions. So, those are really our only two adjustments..

Thank you. Our next question comes from the line of Ki Bin Kim from SunTrust. Your question, please..

Could you just give a quick update on where your street rates were this quarter or in January, whichever one you prefer, year-over-year? And in terms of tying that into your same-store revenue guidance, it sounds like 600 basis points comes from rate.

Is that pretty equivalent to street rate growth? So to get to 600 basis points of revenue growth from rate does that equal 6% street rate growth for next -- for this year?.

Yes, a couple of things, just of note here, first of all, they're high single-digits year-over-year. December versus last December but again that could depend on what you did last December with your rates. So, we would caution people always to look at it on average.

So, we can continue to raise rates but then the other thing that's important is what is our actually achieved rate because everyone doesn't comment and pay street rate, you have some Internet specials things like that.

So, you also need to book at what our achieved rate is versus our street rates but overall, they continue to grow and again as I mentioned earlier majority of our growth this year is going to come from our rate increases..

Okay. And I think the high-single-digit year-over-year increase in street rates in December is -- it sounds mostly noticeably better than last December year over year.

If this holds up as we get into summer leasing season, is it reasonable to expect that year-over-year increase in street rates to be more than that 8%-ish number that you posted last summer?.

You know what Ki Bin, it all depends on how our busy season transpires, we're walking into our prime season with a record occupancy and we're going to push rates as hard as we can but certainly not out of the realm of possibility but I think we're pretty mature to offer any kind of prognostication as to what's going to happen, give us another 90 or 100 days and let us kind of see how things are starting to transpire and I think we can add some color, it is too early..

Thank you. Our next question comes from the line of Jenna Gallagher from Bank of America/Merrill Lynch. Your question, please..

Can you provide some detail on where the stores you bought year to date and the acquisitions you are targeting in ’16 are located? Whether you are trying to increase scale in the SmartStop markets or just generally for the portfolio wide?.

I would tell you, they are more in our core markets, we're not necessarily trying to add in some of the one off markets where SmartStop is I think that we're buying them wherever we can buy them and make it the best pricing possible..

The one thing that I'd add to this and I said this many times, we're not going to get to 3,000 properties by being in Los Angeles and New York, we're going to have a broad national platform and as we talked about some of these markets that are experiencing a little softness, we also have markets that are performing at levels that are unprecedented and geographically diversified portfolio is best and I think a rational strategy of say look, we can't predict winners and losers over the long haul, virtually every market will cycle that I'm aware of, we want to be probably diversified and geographically dispersed so that we can capitalize on what this self storage business has to offer and that is best-in-class performance amongst any real estate class..

And then just kind of your thoughts on funding the acquisitions and any guidance for dispositions this year?.

Yes, first of all the funding of our acquisitions included in our share count and in our equity estimates we have about $225 million to fund the $600 million in acquisition, so 225 million of equity or OP unit issuance..

And any dispositions?.

And then in terms of dispositions we continue to look at the bottom part of our portfolio, right now we're looking at $25 million or less in dispositions that are -- we have a few properties listed right now but it's a small portion..

Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Sir your question, please..

Hi, guys, this is Landon on for Vikram. Just wanted to touch on Chicago, I know it has been sort of one of the weaker markets this year for you guys. And we have heard from some private operators that there is quite a few pockets of supply cropping up there.

Is that sort of impacting that market or on the revenue side what do you think is driving the weakness?.

There is new supply Landon, there are pockets of development around the county, you start to think about parts of Texas, parts of Florida, Chicago obviously, yes there is some development going on and it's going to have an impact but overall if you look at the entire country, 600 of assets plus or minus coming online this year is barely keeping up with the population increase of this country in terms of new supply that needs to be added, so back to my earlier comment being in a bunch of markets with an operating platform that optimizes performance is our strategy and if one market is up another might be down and Chicago right is feeling softness and we are okay with it, it's not what we want, but it's not causing us to have a good night's rest, we're able to just rest well with that portfolio that's producing outstanding results..

So, is the weakness there -- you think it is largely attributable to new supply?.

I would tell you a portion of it is new supply, a portion of it is the overall health of the economy there. And I think there is new supply and in our markets we've seen probably outsized supply growth..

Okay.

And just more broadly on supply, how quickly do you think that that supply could ramp over the next few years with fairly quick build times in the industry?.

[Technical Difficulty] and the credit requirements to obtain a loan are tight, entitlements are still very-very difficult to get generally around the country and although there will be initial supply I still maintain it slightly to be muted and I don't expect a hockey stick for the aforementioned reasons.

So I think the operating environment continues to look favourable for the next couple of years. And as we progress down the road, we get better clarity and we'll speak to it..

And then just one last one on the reinsurance income, how much of the increase year-over-year is going to come from higher penetration at SmartStop? And how do you see the penetration of that portfolio sort of trending over the next few years?.

I would tell you it's going to come -- part of it's going to come from the increase in that but the overall our penetration is low to mid 70s and it's going to be tough to push it much more than that. So you are going to continue to add to our tenant insurance income through acquisition and through addition of management properties primarily..

And just remind me, what was SmartStop at when you close the deal?.

I think their penetration wasn't that different, I think it was a little bit more in the rate and kind of what the dollar amounts they were insuring..

Thank you. Our next question comes from the line of Jonathan Hughes from Raymond James. Your question please..

Just to touch on Landon's question. I was hoping you could kind of give some similar commentary on maybe the same-store revenue growth in your DC portfolio.

Is that being impacted by new supply at all or maybe weaker job growth?.

We have not seen outsized growth in new supply in DC, but I think that probably has to do more with the overall health there, it was also one of the markets that held up better during the downturns than some of the others, so if you look at a 10-year average or a 5-year average I am not sure it's that different than some of the other markets..

And then turning to the SEO deals that were added to the pipeline, are most of these projects with developers you have had prior relationships with or are they new entrants to the storage development market?.

Some of them we have had relationships with in the past and I would say none of them are new entrants to self storage. They're all experienced self storage developers..

And then what are the yields on those deals versus stabilized cap rates?.

So, obviously when you get into a CofO deal Jonathan, your yield is zero and so what we do is look at the market, and we like to generally see about 150 basis points spread between that new opportunity and what a fully stabilized asset would be trading in that market. So it depends, depends on the market..

And then that 150, I mean has that compressed significantly over the past six months or is it pretty much stable?.

It's pretty stable over the last six months..

Thank you. Our next question comes from the line of Ryan Burk from Green Street Advisors. Your question please..

Net rents on the properties that you will roll into the same-store pool this year, about 20% below the average for the 2015 same-store pool, just curious if you expect to fully close that gap, obviously not in 2016 much but over time?.

So you're saying that properties that are moving from the non-same-store to the same-store in ’16 what will we do? I think a portion of that is not just at the price below but also it's a function of what markets they are in.

I mean from our perspective we're looking at more what the lift has changed between the 2 same-store pools, so in my earlier comment I mentioned it was going to add 50 basis points.

Part of that is coming from the properties that are below market rents in certain markets but you can't only just look at that because some of them maybe in a different market with a lower per square foot rent..

Acquisition volume has been strong across the sector it has been very strong for you so far this year.

Is there any evidence that the smaller private operators are starting to become more willing sellers? And what is your general outlook for portfolios that may be coming to market?.

So I think as there has been some cap rate compression over the last few years Ryan I think yes, there are a number of folks out there that are saying -- I don't know that it's going to get any better than it is today, I’d probably ought to take a look at selling this single asset or this portfolio, we're obviously out in the market looking at everything that is out there, I can't tell you that there's any next big SmartStop hanging out there in the wings for us to go to capture in 2016, what I can tell you, is we're going to participate in the open market and do so in a disciplined fashion and we're also going to be going after all of the off market stuff because we have got a wonderful relationship with hundreds of operators.

Who at this point may decide or elect to sell and let's see how the next 10 months play out. So, we think open market and off market, we're off to a good start and we expect to have a decent year in 2016 but I can predict another home run hit like a SmartStop in 2016 because, there isn't anything right now on the table..

Thank you. Our next question comes from the line of Wes Golladay from RBC Capital Markets. Your question, please..

First off congrats on the S&P 500 add.

Looking at SmartStop, what is your forecast for expense growth for that portfolio this year?.

So, in terms of expense growth, we actually didn't model it at all in terms of what they had in their expenses at versus ours, we actually just modelled it entirely based on what our expense structure is, so we took what our payroll structure is, we took the pro forma property tax adjustments all of that so, I couldn't even comment on what the growth would be in expenses..

And then looking at the 600 facilities coming online in 2016, how much of that is competitive for your portfolio? And do you see any markets where supply will meaningfully overwhelm demand?.

I think a portion of those are obviously competitive to us. I would tell you that, I don't see a single market where it's going to overwhelm demand I think you're seeing more construction in Texas and in Florida in Chicago, some of the markets where it's typically and historically a little bit easier to build and get things entitled..

Thank you. [Operator Instructions] Our next question is a follow-up from the line of George Hoglund from Jefferies. Your question, please..

Just one additional question, on the past few months have you seen any change in appetite from JV partners in terms of how much they want to buy or have you seen new JV partners looking to enter into the space?.

I would say, George that for the last two years there's been a fair amount of interest from various would be participants wanting to get into self storage I think, self storage has proven itself as a excellent investment and whether it's private equity or institutional investors, there is a lot of demand, there's lot of inquiry to trend put it into the last 90 days or last six months I think would not be fair I will just say that we are frequently getting calls, as I'm sure the other major operators are saying, hi, I'd like to participate with you can we do something together.

And I don't think that that's going to change because storage is a really good asset class. So, nothing out of the ordinary in the last quarter or two quarters, I'd just say there's been a constant level of inquiries and interest expressed over the last couple of years..

And then just on cap rates on acquisitions, what are you seeing on stabilized properties for some of the stuff you have been doing year to-date?.

We'll typically stabilize a property mid 6s but that's not necessarily a forward-looking year one cap, sometimes we will take some opportunities to buy a property that maybe has lower occupancy or is in the lease up phase, so I would tell you cap rates are all over and it's going to be market by market.

In the secondary markets, you might get something in the 7s but if you want to buy something in New York City, you're not going to buy in the set 6s even..

Thank you. Our next question comes from the line of Todd Thomas from Key Bank Capital Markets. Your question, please. .

So in the past you have said that you would tolerate about 3% FFO dilution from CofO and development deals. In 2016 sounds like you are expecting about $0.15 overall, so $0.05 I think, Scott, you said from CofO deals and $0.10 from development and lease up deals.

So that is a little over 4% at the midpoint of guidance and you are taking up your exposure to CofO deals.

Has your tolerance to for FFO dilution changed at all or is there anything in terms of risk that you are willing to tolerate more at this point?.

I'm not sure it's changed at all Todd if you look at our 2015 acquisitions, obviously that is heavily weighted towards one large acquisition and so we viewed that as an opportunity and so we were willing to take a risk on more of a one-time thing there..

Okay. And then just lastly, taxes associated with the REITs, TRS, the assumption there is about $17 million for the year, so about $0.13 per share.

In the past there have been various initiatives to drive that back down, any thoughts about reducing that expense? And assuming that the TRS' tax expense does continue to grow does it cause you to think differently about how you operate the portfolio or run the business in any way?.

I'd tell you, we continue to look for opportunities to save taxes in the TRS, we've done solar we have looked at making sure that the TRS is paying its fair share in terms of acquisition costs from making sure that they reimburse the REIT for access to these customers.

So I would tell you our strategy is going to be to continue to be aggressive, but I think there are benefits from having a TRS and having insurance captive, so we'll continue to look for opportunities and ways to maximize our return..

Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI Group. Your question please..

Spencer, I was just wondering as we are getting sort of deeper into the economic cycle here, and you guys are doing more CofO deals, how do you just sort of think about the risk of the lease up on the developments? And are you guys sort of changing your underwriting at all or getting more conservative as you kind of analyze these different projects around the country?.

I would say Steve that is we're thinking about CofO deals philosophically first of all we have to recognize that historically or compared to the historical lease up time we're running about 1.5 the time that it takes to show up a property.

Now, there are always outliers on that, but for us whether you're looking at the economic cycle as being steady or even decelerating, what I can tell you is that the life changing events that caused people to use storage, happened in good economies and bad economies and we're not underwriting anything differently on lease up in 2016 or even 2017 then what we would say we're doing better than we have historically done and the Internet is the game changer that's allowing us to drive more traffic at the proper price point to our properties and we were able to go forward and we're going to continually refine that process so that we maximize performance.

And maximizing performance is, fill it up as fast as you can in an economic fashion to optimize revenue..

So, not to put words in your mouth, but if you knew a recession was coming you really wouldn't do much differently?.

That is correct. We never actually changed our underwriting to be more aggressive when things were leasing up faster..

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Spencer Kirk, CEO..

We appreciate your interest in Extra Space today and we look forward to the next quarter’s call. Thank you..

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day..