Extra Space Storage : UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS - Form 8-K

Number of shares of EXR Parent common stock and Extra Space OP common units to be issued upon conversion of shares of LSI common stock and Life Storage OP common units at March 31, 2023⁽¹⁾

Multiplied by price of EXR Parent common stock on May 30, 2023⁽²⁾

Estimated fair value of shares of EXR Parent common stock and Extra Space OP common units to be issued

Estimated transaction costs⁽³⁾

Estimated aggregate consideration

LSI stockholders and Life Storage OP unitholders will receive 0.895 of a newly issued share of EXR Parent common stock or 0.895 of a new Extra Space OP common unit, respectively, for each share of LSI common stock or Life Storage OP common unit, respectively, that they own as of immediately prior to consummation of the Mergers. Shares related to the acceleration of unvested LSI equity awards under LSI's equity incentive plans that become fully vested at closing are included in the estimated shares to be issued.

The estimated purchase price is based on the closing price of EXR Parent common stock on May 30, 2023. Pursuant to accounting rules, the final purchase price will be based on the price of the EXR Parent common stock as of the closing date, and therefore, will be different from the amount shown above. Based on a sensitivity analysis, a change in the EXR Parent common stock price of 10% would result in an approximate $1.1 billion change in the estimated aggregate consideration.

For purposes of the Pro Forma Financial Statements, estimated transaction costs for the Mergers were included in the estimated aggregate consideration. These estimated transaction costs are expected to be approximately $161 million and include the direct costs incurred in acquiring the real estate assets. These costs will be capitalized by Extra Space.

Assets:

Real estate assets, net

Real estate assets-operating lease right-of-use assets

Investments in unconsolidated real estate entities

Investments in debt securities and notes receivable

Cash and cash equivalents

Other assets, net

Total assets

Liabilities, Noncontrolling Interests and Equity:

Debt

Revolving lines of credit

Operating lease liabilities

Cash distributions in unconsolidated real estate ventures

Accounts payable and accrued expenses

Other liabilities

Total liabilities

Commitments and contingencies

Noncontrolling Interests and Equity:

Stockholders' equity:

Common stock

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated deficit

Total stockholders' equity

Noncontrolling interests

Total noncontrolling interests and equity

Total liabilities, noncontrolling interests and equity

Revenues:

Property rental

Tenant reinsurance

Management fees and other income

Total revenues

Expenses:

Property operations

Tenant reinsurance

General and administrative

Depreciation and amortization

Total expenses

Gain on sale of non-real estate assets

Income from operations

Interest expense

Interest income

Income before equity in earnings and dividend income from unconsolidated real estate entities and income tax expense

Equity in earnings and dividend income from unconsolidated real estate entities

Income tax expense

Net income

Net income allocated to noncontrolling interests

Net income attributable to common stockholders

Earnings per common share

Basic

Diluted

Weighted average number of shares

Basic

Diluted

Revenues:

Property rental

Tenant reinsurance

Management fees and other income

Total revenues

Expenses:

Property operations

Tenant reinsurance

Transaction related costs

General and administrative

Depreciation and amortization

Total expenses

Gain on real estate transactions

Gain on sale of non-real estate assets

Income from operations

Interest expense

Interest income

Income before equity in earnings and dividend income from unconsolidated real estate entities and income tax expense

Equity in earnings and dividend income from unconsolidated real estate entities

Equity in earnings of unconsolidated real estate ventures-gain on sale of real estate assets

Income tax expense

Net income

Net income allocated to noncontrolling interests

Net income attributable to common stockholders

Earnings per common share

Basic

Diluted

Weighted average number of shares

Basic

Diluted

Investments in real estate properties, net

Investments in real estate - right of use assets

Investments in and advancements to unconsolidated entities

Cash and other assets, including intangible assets

Debt

Accounts payable, accrued expenses and other liabilities, including lease intangible liabilities

Noncontrolling interests

Total estimated purchase price, including transaction costs

In order to conform to the current EXR Parent presentation, we condensed and reclassified certain amounts presented in the historical financial statements of LSI, as follows:

Real estate assets, net, as presented includes LSI's historical balance of Investment in storage facilities, net. It has been further adjusted to include in-place customer leases, which has been historically classified within Other assets, as follows (in thousands):

Investment in storage facilities, net (historical)

Add: in-place customer leases

Real estate assets, net as presented

LSI's historical balance of Other assets has been adjusted to exclude in-place customer leases, as mentioned above, as well as to exclude lease ROU assets, which have been reported separately on the pro forma financials in line with EXR Parent's presentation. The balance has also been adjusted to include some historically separately presented items, including Accounts receivable, Receivable from unconsolidated joint ventures, Prepaid expenses, and Trade name. These changes are as follows (in thousands):

Other assets, net (historical)

Less: in-place customer leases

Less: Operating Lease ROU Assets, as presented

Add: Accounts receivable

Add: Receivable from unconsolidated joint ventures

Add: Prepaid expenses

Add: Trade name

Other assets, net as presented

LSI's historical presentation of Property operations and maintenance, presented as Property operations at EXR Parent, has been adjusted to include Real estate tax amounts which are presented separately on LSI's historical financials, as follows (in thousands):

Property operations and maintenance (historical)

Add: Real estate taxes

Property operations, as presented

LSI's historical financial statements do not present Income tax expense as a separate line item. Rather, these amounts have been historically grouped into General and administrative expenses and Gain on sale of non-real estate assets. As such, to comply with Extra Space's presentation of Income tax

expenses, the applicable income tax amounts included in both of these expense categories have been allocated to Income tax expense, as follows (in thousands):

General and administrative (historical)

Less: Income tax portion of G&A

General and administrative, as presented

Gain on sale of non-real estate assets (historical)

Add: Income tax portion of Gain on sale of non-real estate assets

Gain on sale of non-real estate assets, as presented

Income tax expense historically categorized as G&A

Income tax expense historically categorized as Gain on sale of non-real estate assets:

Income tax expense, as presented

LSI's real estate assets have been adjusted to their estimated fair value at March 31, 2023. We estimated the fair value of each property generally by applying a capitalization rate to the estimated net operating income and adding a portfolio premium to the property based on the relative fair value of the property in comparison to the total portfolio. We determined the capitalization rates that were appropriate by market, based on recent appraisals, transactions or other market data. The fair value of land is generally based on relevant market data, such as a comparison of the subject site to similar parcels that have recently been sold or are currently being offered on the market for sale. As part of the valuation, LSI's historical accumulated depreciation balance has been eliminated. The remainder of the adjustment can be attributed to capitalized transaction costs expected to be incurred, all of which have been allocated to Real estate assets, net.

Adjustments to LSI's historical balance of Real estate assets - operating lease right-of-use assets are as follows (in thousands):

Elimination of lease right-of-use assets

Recognition of value of acquired lease right-of-use assets⁽¹⁾

Total

This adjustment includes the fair value of LSI's lease right-of-use assets for ground and office space leases, in which LSI is the lessee, as well as the fair value measurement of all associated below-market ground leases as of March 31, 2023. We estimated the value of each lease by calculating the present value of the future minimum rental payments at March 31, 2023 using EXR Parent's weighted average incremental borrowing rate of 5.4%. The weighted average remaining lease term for these leases was approximately nine years at March 31, 2023.

LSI's Investments in unconsolidated real estate entities have been adjusted to their estimated fair value at March 31, 2023. The fair values for the investments were calculated using similar valuation methods as those used for consolidated real estate assets.

Adjustments to LSI's historical balance of other assets are as follows (in thousands):

Elimination of trade name intangible assets

Recognition of value of trade name intangible assets

Recognition of value of customer relationships relating to captive insurance

Recognition of value of management contracts intangible assets

Recognition of value of assembled workforce intangible assets

Total

LSI's debt balances have been adjusted to their estimated fair value at March 31, 2023. The fair value of Term Notes was estimated based on contractual future cash flows discounted using borrowing spreads and market interest rates that would have been available to us for the issuance of debt with similar terms and remaining maturities. This fair value adjustment also took into effect the elimination of associated debt issuance costs. The assumed mortgage notes have been kept at book value as they are anticipated to be paid down immediately following the merger.

Adjustments represent the elimination of historical LSI balances and the issuance of EXR Parent common stock and Extra Space OP common units in exchange for shares of LSI common stock and Life Storage OP common units, respectively, in the mergers.

We expect that the mergers will create significant corporate general and administrative as well as property operating cost savings. There can be no assurance that we will be successful in achieving these anticipated cost savings. Therefore, the Pro Forma Financial Statements included herein do not give effect to any synergies, potential cost reductions or other operating efficiencies that we expect to result from the mergers based on management's plans or intent after the mergers.

Depreciation and amortization expense is adjusted to remove $47.8 million and $192.9 million of LSI's historical depreciation and amortization expense and recognize $110.3 million and $441.0 million of depreciation and amortization expense for the three months ended March 31, 2023, and the year ended December 31, 2022, respectively. For purposes of this adjustment, we estimated the various components of the real estate acquired and used an estimated average useful life of 39 years for operating properties and an estimated weighted average remaining lease term associated with existing tenant relationships at March 31, 2023 that approximated 18 months.

We adjusted LSI's interest expense based on the fair value of debt. The adjustment to interest expense includes the removal of LSI's historical interest expense, including amortization of deferred financing costs and debt premiums and discounts, and calculation of interest expense based on the estimated fair value of acquired debt, net of amounts capitalized. The weighted average interest rate associated with the debt at fair value was 5.4% at March 31, 2023 (see note E).

We adjusted LSI's investments in unconsolidated entities to fair value. As a result, we adjusted the equity in earnings that LSI recognized from these entities to reflect the impact the amortization of these fair value adjustments would have had on earnings from these unconsolidated entities.

An adjustment was made to reflect the Life Storage OP unitholders' ownership percentage in all of the pro forma adjustments described above.

The unaudited pro forma adjustments to shares or units outstanding used in the calculation of basic earnings per share or unit attributable to common stockholders or unitholders and diluted earnings per share attributable to common stockholders or unitholders, after giving effect to the exchange ratios for the mergers, were as follows (in thousands):

EXR Parent

EXR Parent weighted average common shares outstanding - Basic

Shares issued to LSI stockholders - pro forma basis⁽¹⁾

Weighted average common shares outstanding - Basic

EXR Parent weighted average common shares outstanding - Diluted

Shares issued to LSI shareholders - pro forma basis⁽¹⁾

OP units issued to Life Storage OP unitholders - pro forma basis⁽¹⁾

Weighted average common shares outstanding - Diluted

The pro forma weighted average shares or units outstanding assumes the issuance of shares of EXR Parent common stock and Extra Space OP common units in connection with the mergers throughout all periods presented.