Maximizing Revenue

Even with historically average demand, we achieved another year of strong performance. In contrast to the marketplace, we continued to increase rates to our existing customers – an ongoing core strategy that grew our revenues without increasing move-outs. We also gained occupancy. In fact, as the economy began to recover and vacate levels went down, we increased our occupancy to 87.8% as of December 31, 2011 – an all-time high for the Company at year-end.

At Extra Space Storage, our goal is not to maximize price or occupancy alone; instead, we strike a careful balance between the two metrics that allows us to maximize revenues. Our differentiated revenue and occupancy model is backed by our sophisticated, real-time revenue management system. Working together, they deliver top-line growth by optimizing rental rates while reducing discounts. At the same time we diligently keep our operating costs in check, from office expenses to utilities and payroll. The combination generates industry-leading net operating income for our shareholders.

Leveraging Technology

Our cutting-edge platform drives results. With our revenue management system, we can respond quickly to changes in rental supply and demand and set rates accordingly. Our growth strategy is powered by an array of web-based tools in revenue management, online marketing and information technology. No one else in our industry has this platform, and it gives us a unique advantage to expand revenues, lower costs and capture market share.

Our innovative strategy brings together advanced technologies to improve our operational efficiency. We have integrated our point-of-sale system with a host of tools overseeing customer relationship management, sales, our in-house call center, financial reporting, analytics, facilities management and more. Altogether, we have consolidated 30 disparate systems and processes that we once had in house and moved them to a cloud-based environment.

Everything is connected in real time, giving us highly detailed customer intelligence. We can track customers from the second they hit our website to the day they move out, and every touch point in between. Just as important, our call center representatives and site managers have one place to go for up-to-the-minute dashboards and easy reporting, so they can rent the perfect unit on the spot. Our whole system creates a customer-focused experience that is second to none.

Increasing our scale

When we manage a property, we reflag it under the Extra Space Storage brand. We place our high-caliber employees behind the counter, put our proven revenue management system to work and use our website and call center to drive traffic to the store – all to maximize the customer experience and improve operational results.

In return, we earn a management fee and gain an off-market acquisition pipeline when owners are ready to sell. Perhaps most importantly, our third-party management program gives us greater scale. Having more properties under management grows our base, across which we can allocate expenses, and adds to our marketing strength in our core markets and on the web.

At Extra Space Storage, we have excelled at online marketing – a key draw for owners joining our third-party management program. In a consolidating industry, smaller operators simply don't have the resources to compete, particularly on the Internet. Our national marketing program gives them significantly higher search rankings with more efficient and profitable paid and organic search results.

Winning customers online

In 2011, we reallocated a large portion of our marketing budget from Yellow Pages to online initiatives. Online marketing is the most efficient way to attract and convert customers. By deemphasizing Yellow Page advertising, we have moved our marketing spend to more cost-effective Internet advertising. Our remaining Yellow Page relationships have begun a transition to a pay-per-call model, with costs in line with our online cost per acquisition.

Approximately 65% of our customers touch the Internet at some point in the sales cycle. To reach them, we bid on an average of nine million search terms a day. In response to online advertising inflation, last year we expanded our paid search team and refined our strategies to get the most out of every dollar we spend. Today we have assembled one of the best interactive marketing organizations in the industry.

To strengthen our capabilities, we hired two individuals with advanced degrees in mathematics who are developing a pricing algorithm to enhance our revenue management platform. We continue to look at ways to refine our strategy, so we can target the customers who are most likely to convert, stay with us longer and be more likely to accept rate increases. In turn, we expect to increase our lifetime customer value over time.

Keeping our eye to the future, we have invested in social media platforms, promoting our properties and brand on Twitter and securing over 19,000 "likes" on Facebook. We also launched a new mobile version of our website so customers can easily research and rent a unit straight from their smartphones.

Our marketing strategy is designed to offer the highest return on investment at the lowest cost per customer acquisition – for our third-party owners, joint venture partners and shareholders alike.

In a competitive market, we pride ourselves on being a disciplined buyer. We took a methodical approach, buying in the right markets at the right time, adding value to our portfolio over time. Our high-quality, well-located properties give us the best demographics in the self-storage sector, with the greatest concentration in the top 20 metropolitan areas among our peers.

We took advantage of our strong balance sheet and financial flexibility to capture acquisition opportunities on favorable terms – in some cases assuming debt from motivated sellers. We also leveraged our relationships to strike the best deal.

In fact, beyond two larger portfolios we acquired in the Midwest and California, 75% of our remaining 21 acquisitions came from our joint venture or ManagementPlus program. This gave us two advantages: first, we knew the properties inside and out, and second, we were able to purchase the properties without having them widely marketed.

Overall, we executed a careful investment strategy designed to grow our business and deliver long-term returns.

Optimizing our balance sheet

We took advantage of the positive interest rate environment to lock in the interest rate on $83 million of our trust preferred securities, at 4.99% for seven years. We also carefully analyzed our variable rate debt and short-term maturities and fixed certain interest rates or refinanced loans.

With bank competition high, we approached a number of financial institutions about the early repayment of loans so that we could refinance them at lower rates. We succeeded in modifying $337.7 million in loans in 2011 without having to refinance them. In the process, we reduced the interest rates on these loans – previously between 3.8% and 7.2% – to a range of 2.3% to 4.8%.

Our effective loan modification program allowed us to reduce or eliminate floors on certain loans, release cash collateral, extend maturity dates and increase loan amounts and credit limits– all without adding any additional costs or corporate covenants.

Maintaining appropriate leverage

We believe self storage supports higher debt levels than other property types, because of its access to robust financing options, resilient operating performance and the viability of equity financing. This is particularly true of Extra Space Storage, due to our geographically diverse portfolio with an even more diversified customer base in the top metropolitan areas.

Over the past three years Extra Space Storage has been layering its maturities and naturally delevering its balance sheet, reaching what we believe is an appropriate debt level. Our strong operational performance and appropriately positioned balance sheet also enabled us to pay a consistent dividend of $0.14 per quarter throughout the year, for an annualized dividend of $0.56 per share.

With properly leveraged properties, we are positioned to generate a higher return for our shareholders over time.