Culture of Performance

CEO Letter

CEO Letter

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Dear Fellow Shareholders,

Welcome to Extra Space Storage’s 2016 annual report. I am excited for this opportunity to share with you the culture of performance that made us the highest returning public REIT over the last decade. We’ve built this culture with an emphasis on consistently delivering a great product to our customers, providing an enriching workplace for our fellow team members, and striving to execute on our strategy to enhance shareholder value over the long term. This framework can be seen in three facets of our company.

First, our Company values. These values—integrity, excellence, innovation, teamwork and passion—are our guiding principles and influence all of our actions and decisions. We believe strongly that the success we have had is, and the future success we strive to achieve will be, a direct result of living these values.

Second, we have a well-developed, focused and proven business strategy. Certainly, we will continue to evolve and adapt to different market conditions and market opportunities. However, we are not veering off the course that has made us so successful in the past. We will continue to be a storage "pure-play" with a focus on maximizing shareholder returns through consistent, disciplined FFO growth by focusing on operations, technology, accretive growth and a prudent balance sheet.

The third element of our success is our people. Our management team has an average tenure of 14 years and possesses a wealth of public company experience. We continue to work together as a team to lead the industry and to strengthen our management depth throughout the organization.

Through our culture, we continue to drive outstanding performance from the assets that are under the EXR brand. In fact, Extra Space Storage is still the best-performing storage REIT and among the best performing REITs regardless of asset class.

2016 Results

Our industry-leading operating platform and culture of performance enabled us to deliver excellent results in 2016. Funds from operations (FFO) per share - as adjusted (FFOA) grew 23.0% year-over-year, reflecting solid operating performance, accretive acquisitions, profitable joint ventures, and third-party management and an optimized balance sheet. This combination contributed to Extra Space Storage being added to the S&P 500 in 2016.

Same-store revenues increased by 6.9% over 2015 while same-store expense growth was just 1.1%. This combination grew same-store net operating income (NOI) by 9.2%. Same-store occupancy remains near all-time highs. FFO as adjusted per diluted share grew 23.0%, to $3.85. Accordingly, we raised our quarterly common stock dividend to $0.78 per share, or $3.12 on an annualized basis, an increase of 32%.

Key Activities

At the end of 2016, we had 1,427 stores in 38 states, a 12% year-over-year increase in our wholly-owned store count, and a 6% increase in our total store count. This total includes 17 newly constructed purpose-built stores at completion. We acquired 108 properties in 55 markets with a total investment of $1.1 billion. All but 10 of these acquisitions were off-market transactions.

Through redevelopment, we also created 8,500 new units at existing stores by undertaking expansion projects or by reconfiguring the existing unit mix. And our industry-leading third-party management platform grew by 63 stores, resulting in 591 stores managed on behalf of joint venture relationships or third-party owners at year end.

To further diversify our balance sheet, we completed a $1.15 billion senior unsecured credit facility. This reduced our reliance on traditional bank lending and provided the Company with another source of capital. Our goal is to have an appropriately levered balance sheet with financial flexibility to ensure we have multiple sources of capital available to support our operations and finance our growth.

Looking Ahead

We believe that combining consistent, experienced leadership with a consistent, proven strategy will enable us to create long-term value for our shareholders and a great experience for our customers.

It’s all possible because of the people at Extra Space Storage. We have the industry’s best team, which magnifies the contributions of its individual members. Our team is fully committed to excellence in everything we do and focuses on executing our strategy in accordance with our values. For that, I thank each and every member.

I’d also like to recognize our shareholders. Your support is essential to our success, and we continue to work hard to earn your confidence and trust.

Our journey has been a very rewarding one. I have every reason to believe that will continue. I look forward to communicating our progress with you in the months and years ahead.

Joseph D. Margolis Signature

Joseph D. Margolis
Chief Executive Officer

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Platform

Our multifaceted strategy reflects a company culture that’s focused on performance.

Our performance is driven by our industry-leading operating platform, our successful acquisition program, our robust third-party management and JV platform, and an experienced, tenured management team that clearly understands that prudently increasing shareholder value is our number one priority. These are the qualities that enabled Extra Space Storage to be added to the S&P 500 in 2016.

A technology edge

We have developed an advanced technology platform that sets Extra Space Storage apart while maximizing operating efficiencies. About 8 in 10 customers interact with us online before completing a transaction. As a result, we put significant emphasis on our online strategy and are constantly optimizing and testing online with the goal of creating a more personalized experience for our customers.

Website
Statistics

  • Total Views: Over 36 million
  • Total Visits: 9.7 million
  • Unique Visitors: 5.8 million

Our advanced use of technology has earned us a spot on Google’s advisory committee. We have worked closely with Google on a number of projects, and they have published several case studies about us—including our ability to deliver hyper-localized ads while operating at an enterprise level, and our use of Google’s ad customizers to create timely and accurate ads.

Our commitment to technology includes internet marketing, data science, revenue management and an in-house call center—with nearly 130 employees dedicated to these functions.

Driving mobile traffic

We were a first mover in mobile internet marketing, and it continues to be an important element of our customer acquisition strategy. Our initiatives helped separate us from the pack, and we continue to make enhancements to drive mobile traffic to our stores. This is how potential customers are searching for a storage solution, and we want to make sure Extra Space Storage is as prominent on mobile platforms as possible. The growth rate of unique visitors to our mobile site is 29%—and growing.

Using technology to leverage our size and scale

Our size and scale give us a significant data advantage over the typical smaller, less sophisticated operators in this fragmented industry. For example, our sheer number of customers and transactions gives us an enormous amount of information that helps us understand customer behavior and test various optimization strategies. Such tests allow us to evaluate the impact of changes to pricing, promotions and advertising within test groups before implementing such changes portfolio wide. Thus, business decisions are supported by data, rather than conventional wisdom.

Internet
Marketing

We bid over 8 million keywords daily

Operations designed around our customers’ needs

Storage is a need-based product. The need for storage is typically triggered by life events or life changes, such as moving, remodeling, the death of a loved one, and kids going to or coming from college.

These events can be stressful, so we train our managers to help customers navigate their transitions by finding them the perfect storage solution. We’ve developed and refined our own sales process to provide a pain-free, customer-centric retail experience—and close the sale.

What’s more, Extra Space Storage locations are safe, secure and clean, and customers can expect a consistent experience with Extra Space Storage from Hawaii to Ohio to Puerto Rico

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Portfolio

We have developed and implemented a balanced strategy that makes Extra Space Storage fully equipped for continued growth.

Our investments in platforms, processes and people—combined with our culture of performance—prepare us for changing market conditions.

As the second largest storage REIT, our size is a powerful differentiator in the fragmented self-storage industry. It allows us to enjoy economies of scale in areas such as marketing, technology and revenue management that smaller storage companies can’t match.

Our geographically diversified portfolio is another advantage. It enables us to offset individual market downturns with positive results from stores in stronger areas.

These advantages translate directly into strong occupancy rates, higher revenue and increased net operating income (NOI). We ended 2016 with 1,427 stores in 38 states, a 12% year-over-year increase in our wholly-owned store count, and a 6% increase in our total store count.

The growth of our portfolio through accretive acquisitions, new joint ventures and the expansion of our third-party management program were key contributors to our success in 2016.

Acquisitions

In 2016, we acquired 108 properties in 55 markets.

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Joint Ventures

Producing an outsized return on dollars invested.

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The Benefits of Joint Ventures and Third-Party Management

  • They increase our number of locations, national presence and our brand—with minimal capital investment.
  • They give us operational economies of scale
  • They allow us to collect management fees and tenant insurance at all JV and managed stores, both of which are significant income streams.
  • They provide additional data, which we can use to enhance the sophistication of our revenue management system, internet marketing and other aspects of our operations.
  • They increase our visibility on the internet by providing us with more locations.
  • They make excellent acquisition candidates because of the operational knowledge of the properties we gain while running them. In addition, most of these acquisitions never make it to the open market and are done without a broker—offering advantages for both us and our partners.
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3rd-Party Management

The largest third-party management program in the country.

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The Benefits of Joint Ventures and Third-Party Management

  • They increase our number of locations, national presence and our brand—with minimal capital investment.
  • They give us operational economies of scale
  • They allow us to collect management fees and tenant insurance at all JV and managed stores, both of which are significant income streams.
  • They provide additional data, which we can use to enhance the sophistication of our revenue management system, internet marketing and other aspects of our operations.
  • They increase our visibility on the internet by providing us with more locations.
  • They make excellent acquisition candidates because of the operational knowledge of the properties we gain while running them. In addition, most of these acquisitions never make it to the open market and are done without a broker—offering advantages for both us and our partners.
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Redevelopment

In 2016, we created 8,500 new units at existing stores.

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Sustainability

Our ongoing efforts to improve the sustainability of our operations include installing solar panels, retrofitting properties with high-efficiency lighting systems, and replacing fixtures with energy-saving bulbs. To date, we have performed lighting retrofits at 305 Extra Space Storage stores in 27 states—the equivalent in CO2 savings of removing 6,505 cars from the roads, based on U.S. Environmental Protection Agency metrics. We have also completed solar installations at 187 locations in 10 states—saving enough energy to power 7,494 homes for a year— and added charging stations for electric cars at select facilities.

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People

Our outstanding growth over the years has been driven by a great team, and having the right people in place is a top priority. We make a concerted effort to attract and retain the most talented people in all areas of the company.

Our culture of performance is one of teamwork, innovation and empowerment. In fact, one of our six company goals is: Make Extra Space Storage a great place to work.

We provide our employees with all the support they need to succeed. The result: 88.5% of our employees say Extra Space Storage is a great place to work and 80% of our employees report that they would refer a friend or family member to work at Extra Space Storage. Our Glassdoor rating is 4.0, and our executive team has an average tenure of approximately 15 years.

Our Values

We seek people who share our company values, and we believe the strongest teams are united around common goals. Our five values are as powerful as they are simple. They serve as a compass in our strategy, our hiring, our partnerships and our operations.

Our Values

  • Integrity
  • Excellence
  • Innovation
  • Teamwork
  • Passion

Serving our communities

We work to make our facilities good neighbors in the communities where they’re located. Every facility we buy, build or manage brings security, attractive landscaping and professional property management to its community. We view each Extra Space Storage facility as being as much a part of the community as our on-site managers, employees and customers, and we encourage our more than 3,300 employees throughout the country to be involved in their local communities.

We get involved in other ways, too. For example, at our 2016 National Sales Meeting, our employees partnered with Operation Gratitude to make care kits that were sent overseas to U.S. service men and women. We also made battalion buddies (stuffed animals) to be presented to the children of service men and women on base as the children’s parents are deployed. These projects, as well as participation in other service activities, are examples of how we strive to be active participants in our communities.

We’re also planning a day of service in 2017, that will give employees a paid day off to volunteer in their community.

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Performance

Comparison of 5 Year Cumulative Total Return*

Among Extra Space Storage Inc., the S&P 500 Index, and the FTSE NAREIT Equity REITs Index

Line Graph Comparison of 5 Year Cumulative Total Return *$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright 2017 Standard & Poor’s, a division of S&P Global. All rights reserved

Financial Results

In 2016, funds from operations (FFO) per share as adjusted (FFOA) grew 23.0% year-over-year. This growth reflects not only solid operating performance, but also accretive acquisitions, joint ventures, third-party management and an optimized balance sheet. Our 26 consecutive quarters of double-digit FFO per share growth is not only the best among our storage peers, but among the best performing REITs in the country. We have produced consistent growth year in and year out because we have a need-based product that performs well in strong and weak economies, and has proven to be recession resilient.

We are achieving this exceptional growth without accepting incremental risk or deviating from our core strategy. Same-store performance was solid, and continues to be among the best in any REIT sector. In 2016, same store revenues increased 6.9%, while NOI grew 9.2%.

In 2016, we completed a $1.15 billion senior unsecured credit facility, further diversifying our balance sheet and providing another source of capital. Our goal is to have an appropriately levered balance sheet with financial flexibility to ensure we have multiple sources of capital available to support our operations and finance our growth.

Growth Strategy

Our strategy for continued growth is built around four key principles:

  • Operational excellence: Enhancing value of existing and newly acquired self-storage facilities, through best-in-class customer acquisition, revenue management and customer service platforms.
  • Disciplined growth: Consistent growth of our geographically-diverse portfolio through accretive and prudent acquisitions, mutually-beneficial joint-venture partnerships, and third-party management services.
  • Solid balance sheet: An appropriately leveraged balance sheet, consisting of diversified capital sources to provide access to the cheapest sources of funds.
  • Strong partnerships: Creating growth opportunities through joint-venture and third-party management relationships. Our partnerships provide capital, additional income streams, leveraged returns, future acquisition opportunities and additional data to help us optimize our customer acquisition strategies.
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