CubeSmart (CUBE) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the U-Store-It fourth quarter results conference call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Guy Gresham of The Ruth Group. Please go ahead, sir.

Thanks, operator. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call Stephanie Carrington at 646-536-7017 and she will fax or e-mail you a copy. A copy of the December 31, 2005 supplemental financial package was made available this morning on the Investor Relations section of the Company's Website at www.U-Store-It.com.

The Company's remarks today include certain forward-looking statements that are not historical and that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements, including without limitation, national and local economic, business real estate and other market conditions; the competitive environment in which the Company operates; the execution of the Company's business plan; financing risks; increases in interest rates and operating costs; the Company's ability to maintain its status as a REIT for federal income tax purposes; acquisition and development risks; changes in real estate and zoning laws regulations; risks related to natural disasters, potential environmental and other liabilities, and other factors affecting the real estate industry generally or the self-storage industry in particular.

The Company refers you to the documents filed by the Company from time to time with the Securities and Exchange Commission, specifically the section titled Business Risk Factors, and the Company's annual report on Form 10-K and its reports on Forms 10-Q and 8-K which discuss these and other risks and factors that could cause the Company's actual results to differ materially from forward-looking statements.

Now I would like to turn the call over to the Chairman and Chief Executive Officer of U-Store-It, Bob Amsdell.

Good morning and welcome to our fourth quarter 2005 earnings call. For full details of our financial results for the fourth quarter, I refer you to our press release issued this morning and our 10-K, which will be filed today. As we stated in prior conference calls, we continue to improve the amount of financial information which we provide in our quarterly earnings releases. Our supplemental package for this quarter will provide further details on our financial results as well as our acquisitions for both the year and the fourth quarter.

As I look back on the year, I'm very proud of what we are able to achieve. I have great pleasure in working with a truly talented group of individuals who are taking a good company and building an even greater one.

In October of '04, at our IPO, we were less than a $1 billion company and owned only 154 facilities. Over the past year and into 2006, we have more than doubled in size and are now a $2 billion plus company with 370 facilities and 23 million square feet. To achieve this dramatic growth, we have continued to successfully execute our targeted acquisition strategy. This last quarter was one of our best in terms of enhanced external growth as we made numerous quality acquisitions in our targeted markets. Along with this external growth, we also focused on our internal operations by growing revenues and controlling property operating expenses.

With this exciting growth quite frankly, we had difficulty projecting our general and administrative expenses. One of the main reasons for the increase of overhead was our rapid growth in 2005. Just to refresh everyone's memory, at our IPO, we stated that we would acquire 200 million of assets in 2005, projected to be about 50 facilities. The reality is that to date, we acquired three times that expectation. In 2005, we acquired approximately $550 million of assets comprised of approximately 150 facilities. So far in the first quarter of 2006, we have acquired an additional 200 million. Therefore, in order to sustain this tremendous acquisition growth in 2005, we had to grow our base of operations substantially more than we had laid out in early 2005 expectations.

By increasing our operating base, we now have the platform to be a 500 facility company. We currently have 370 wholly-owned facilities, and we feel that we can achieve our goal of 500 stores by the end of the year 2007. Our operating platform and balance sheet is now set up to do so. However, to reach this 500 facility mark, we will not compromise our acquisition strategy; rather, we will continue to acquire only facilities that meet our return requirements.

Because of the increase and G&A expense, we did not achieve our FFO target of $0.25 per share for the fourth quarter. Instead, we achieved FFO of $0.15 per share. The $0.10 per share difference, or 5.5 million, is all in our G&A expenses and particularly our year end bonuses and long-term compensation. The other items that make up the $0.10 relate to audit, legal, and professional fees, and our first year Sarbanes-Oxley costs.

Our tremendous growth in 2005 led to the increase of these costs. For instance, in order to successfully integrate the new acquisitions into our operating platform, we installed new systems and implemented new procedures which needed to be retested and reaudited. Such charges necessitated higher professional fees and ultimately increased our Sarbanes-Oxley-related expenses.

On the subject of incentives, the largest component of the increased G&A expense was the compensation awards to our senior management team and our headquarters staff. When we last updated you in November, the independent compensation committee of our Board had not met to assess our achievements in the year 2005. The committee, with the help of an outside consultant, met at year's end, and reviewed management's performance, the Company's performance as well as the compensation level of our peers in order to determine an appropriate and competitive compensation level for our staff.

Based on all that we achieved over the year, our Board decided to increase the bonuses for the headquarters staff and issue restrictive shares to retain our key personnel. In my opinion, I view the 2005 bonuses as a reward to individuals who have worked so hard and to achieve so much.

The bonuses determined by our compensation committee consisted of two components -- a cash bonus, and restricted shares. The aggregate cash bonuses were higher than we had initially budgeted in early 2005 when we envisioned a far less acquisition activity and a far smaller number of properties to be integrated into U-Store-It. Additionally, a portion of the restricted shares totaling 1.5 million, or approximately $0.03 per share, was required to be expensed in 2005 due to certain accounting rules insisted upon instead of vesting over the next five years. This resulted in a onetime increase in our compensation expense in 2005.

Going forward, our compensation committee will continue to set our compensation levels appropriately and in a way commensurate with the performance that we produce for our shareholders. As part of our year-end compensation review, our Board put in place a compensation plan for senior management that only rewards management if it achieves our goals.

When we look back on 2005, we realize that we underestimated the number of items in our G&A expense. In this quarter's supplemental, we outlined exactly what was spent on which -- on each item in 2005. In total, the G&A expenses were approximately 18.5 million, or roughly 5.5 million -- more than we estimated -- more than our estimate of 13 million -- at the beginning of 2005. For 2006, we are estimating total G&A expenses to be 17 million, or a reduction of 1.5 million. When you look at our G&A expense breakdown, Sarbanes-Oxley and its fees, legal fees, and professional fees totaled approximately 3.4 million in 2005. Our 2006 guidance for the same items is approximately 2.4 million.

Additionally, bonuses and restricted share awards were approximately 4.7 million for all of 2005, our 2006 guidance is 2.7 million. Again, total G&A guidance for the year 2006 will be 17 million, as compared to 18.5 million in 2005.

We realize that our underestimation of our G&A can be understood by many as a first-year company trying to overachieve; i.e., growing pains. We now are a second-year public company with considerably more experience and a much better appreciation for the process. Now no one, including ourselves, will understand further mishaps. I might add that we fully understand our responsibilities with respect to improving the accuracy of our guidance.

Now let me provide you with a brief update review of the fourth quarter. Our total revenues for the fourth quarter of 2005 increased to 43.3 million from 27.6 million, an increase 57% from the fourth quarter of 2004. Our net loss for the fourth quarter of 2005 was 2.7 million compared with a net loss of 31.9 million for the fourth quarter of 2004. Same-store revenues for our 153 same-store facilities increased by 3.2% and property and operating expenses decreased by 15% for the fourth quarter of 2005, resulting in same-store NOI growth of 16.6%. FFO per diluted share was $0.15 for the quarter. At December 31 of '05, we owned 339 facilities, compared to 201 facilities at December 31, 2004. In 2005, we acquired 146 facilities, consolidated four facilities and sold four facilities, bringing our total facility count to 339.

In the fourth quarter, we acquired 19 facilities totaling approximately 1.3 million square feet and costing approximately 114.3 million in aggregate. Subsequent to December 31, 2005, we have closed on the acquisition of 31 facilities for approximately 200 million, and have gone under contract on another 18 facilities for approximately 100 million.

Going forward, we remain very optimistic on the outlook for 2006 for both continued internal and external growth. Our internal growth expectations are supported by our healthy same-store results for 2005, with annual same-store revenue up 4.4% and NOI up 11%.

With the proceeds from the secondary equity offering, we hope to continue growing externally to attractive acquisitions that are currently in our pipeline, as well as those not yet identified.

I remain extremely confident of our future and very proud of what we achieved in 2005. Our prospects for 2006 are bright and we look forward to delivering to our shareholders another great year.

With that, I will turn the podium over to our President, Steve Osgood.

As Bob summarized, our total revenues for the fourth quarter of 2005 increased to $43.3 million from 27.6 million, or an increase of 57% from the fourth quarter of 2004. A majority of this increase is due to the acquisition of 46 facilities in the fourth quarter of 2004 and 146 facilities in 2005. On a full-year basis, total revenues increased to $148.1 million from 91.6 million, or an increase of 61.7% from the full year of 2004. Net loss for the fourth quarter of 2005 was $2.7 million compared to a net loss of 31.9 million for the fourth quarter of 2004. On a full-year basis, net income was $2.8 million compared to a net loss of 32.3 million for the full year 2004.

The increase in net income is due to the increase in income from a larger number of facilities owned in 2005. In addition, our 2004 results included a cost of acquiring our management company, $22.1 million; a charge for early extinguishment of debt, $70 million and a charge for deferred shares granted to executive officers, 2.4 million. Our FFO per share for the fourth quarter was $0.15.

Moving on to same-store results, as of December 31, 2005, our same-store portfolio consisted of 153 properties, essentially every asset that we took public. Operating results for these same-store facilities for the fourth quarter are as follows. Revenues increased by 3.2% and property and operating expenses decreased by 15%, equating to a same-store NOI growth of 16.6% for the quarter. Of the increase in same-store revenues, almost all was due to increased rents. The decrease in operating expenses was attributable to lower marketing and other operating expenses, partially offset by higher payroll expense. For the full year 2005, same-store revenues increased by 4.4% from the previous year, and property and operating expenses decreased by 6.2%, equating to a same-store NOI growth of 11%.

General and administrative expenses came in at 8.6 million for the quarter and 18.5 million for the full year 2005. I would like point you to a breakdown of our G&A, which is included on page 13 of our supplemental package. As you can see, our 2005 G&A came in higher than our initial guidance of 13 million. The majority of this discrepancy can be broken into two areas -- one, compensation and two, audit, legal and professional fees.

As you know, 2005 was our first full year operating as a public company, and therefore, our first year operating under Sarbanes-Oxley requirements. We are pleased to announce that we're fully compliant. During that time, we developed our systems and procedures to comply with those requirements. At the same time, we closed on nearly 550 million of acquisitions versus our initial forecast of $200 million, which required us to further expand our operating platform in our to smoothly integrate the acquisitions. The combination of these two factors led to higher-than-expected audit, legal and professional fees. However, we expect these items to decrease in 2006 as we become more efficient in our audits and public company requirements. An example is that we recently hired a General Counsel with the goal of building up our internal capabilities and consequently reducing ongoing outside legal expenses.

In terms of compensation, our payroll, bonuses and restricted share expense were higher than our initial guidance. As Bob mentioned, 2005 was a very successful year for us in terms of acquisitions and operations. In our first year as a public company, we executed a successful acquisition plan that helped us double in size. We have so far acquired three times the amount that we initially forecasted at our IPO. With these acquisitions, we expanded our footprint into several targeted markets where we were able to enter new markets with size and scale. Given that our pool of acquisitions in 2005 was so substantial, our operations team had to work intensively to integrate these acquisitions quickly and effectively into the U-Store-It brand and our system.

On the financial side, we continue to maintain our balance sheet carefully. Last fall, we were able to successfully execute a $400 million follow-on stock offering that was done at a price 27% higher than our IPO price. With this equity offering, we set up our year-end balance sheet with relatively low leverage to allow for the flexibility and capacity to fund our acquisition growth in 2006. At the very end of the year, our compensation committee reviewed our strong performance and decided to compensate the senior management team and 114 members of our headquarters staff with bonuses of restricted stock at an amount that was higher than initially budgeted.

Our compensation committee will continue evaluating our management team relative to company performance so that the interest of management and shareholders are alike. However, we expect that the total compensation will be lower at the end of 2006. On the other hand, we expect that the payroll expense will increase slightly in 2006 as we hire more staff to stay on pace with our rapidly growing platform.

As of December 31, 2005, the company had total debt outstanding of approximately $669 million. Our interest coverage ratio was 2.3 times for the year and our fixed charge coverage was 2.1 times. At year-end, we had no variable rate debt outstanding.

In order to reduce our financing cost and expand our capacity for funding future acquisitions, we recently refinanced our existing secured revolving credit facility with a new unsecured credit facility. Compared to our existing facility which was $150 million in size and expandable to $200 million, the new facility is larger at $250 million in size and expandable to $350 million with a three-year term that can be extended for an additional year. The interest rate is based on a leverage grid. At our current leverage, the rate is LIBOR plus 130 basis points compared to LIBOR plus 212.5 basis points under our prior facility, resulting in an 82.5 basis point reduction in rate. We believe that this refinancing is a reflection of the recognition by the debt markets of our credit quality and our track record as a public company.

In connection with the repayment of our existing facility, we will have to write of $1.2 million in loan procurement costs during the first quarter of 2006.

In summary, we believe that we're in great shape with respect to our balance sheet. As a result of our successful equity offering in the fourth quarter of 2005 when we increased or equity base by 46%, our leverage based on market capitalization at year-end was below 35%. Our outstanding debt is entirely fixed-rate, giving us no floating rate exposure. We put a new line of credit in place with lower cost and expanded capacity, almost all of it is available to us at this time.

Last but not least, we believe the fact that we own 100% of all of our facilities provides us with an additional layer of financial flexibility.

Now I would like to provide you with an update on the status of our acquisitions. During the fourth quarter, we completed the acquisition of 19 self-storage facilities totaling 1.3 million square feet for a total purchase price of $114.3 million. Subsequent to December 31, we have closed on the acquisitions of 31 facilities totaling 2.3 million square feet and costing approximately $200 million. To summarize, between September 30 and today, we acquired 50 facilities for a total consideration of approximately $314.3 million, which leads to our portfolio of 370 facilities.

With these acquisitions, we are increasing our market share in our existing markets of California with 21 properties, Texas 10, Arizona 5, Tennessee 5, Colorado 3, one each in Florida and in New Mexico. In addition, they represent our continued expansion into new markets such as Nevada and Virginia with two facilities each. As for acquisition pipeline at this time, we currently have under contract a total of 18 facilities totaling approximately 1.3 million square feet for approximately $100 million. These facilities are located in our existing markets. We hope to provide you with a further update on these acquisitions at our next earnings call.

I will now turn it over to Todd Amsdell, our Chief Operating Officer, who will comment on our operational results.

Thank you, Steve. Moving onto operating performance, I would like to point you to our supplemental package which lays out our rents, physical occupancy and economic occupancy for each of our five operating regions for our total and same-store portfolio.

When we look at our company today, we look at it as a sum of two parts -- our IPO portfolio of 154 properties and the 216 facilities that we acquired since our IPO. For our IPO portfolio, which is essentially represented by our same-store portfolio of 153 facilities, these are the facilities that we know best and have owned for a long time, in many cases more than six years. They have relatively high occupancy with an average of 84.7% for the fourth quarter of 2005, which is flat from the fourth quarter of 2004.

In short, while we continue to improve our operating efficiency at these assets to maximize their yields, we do not need to spend a disproportionate share of our time managing these properties. We're confident that our IPO portfolio will continue to grow.

Additionally, there are 216 facilities that we acquired since our IPO. As we've mentioned on our previous earnings calls, these facilities generally have lower occupancy and lower rents compared to our IPO portfolio. The addition of these facilities caused average occupancy for our total portfolio to decrease from 83.4% in the fourth quarter of 2004 to 81.6% in the fourth quarter of 2005. A majority of these facilities in our acquisition portfolio in our opinion were not operating at their fullest potential when we acquired them.

That said, as with every single acquisition we make, our focus is to find deals that not only meet our initial (indiscernible) requirements, but will also generate excellent returns over time. In this regard, we have spent a great deal of time working to increase the productivity of our acquired facilities through improved professional operating practices as well as selective redevelopments and improvements.

For the properties that we acquired since our IPO up to today, we've budgeted approximately 20.6 million for capital improvements for the acquired facilities. During 2005, we spent approximately 8.7 million of this amount. This money was spent in a wide range of items throughout the year ranging from rebranding facilities to U-Store-It to upgrading the management offices and building at retail sales areas, expanding the facilities, adding elevators and converting units to climate control.

As we continue with this work, particularly on our more recent acquisitions, we have begun to see the impact of our efforts within the respective markets. Our increased size and market presence within many of our markets have allowed us to capitalize on economies of scale, for example, significantly reducing our Yellow Page advertising costs in some areas.

As our ranking in many markets have climbed, customers in those markets have become more aware of the U-Store-It brand. However, while we believe that our capital improvements will eventually drive rents and occupancy at all of our acquisitions, we are only gradually seeing this impact across our acquisition facilities and we expect to see more of the results in 2006 when we will have owned many of these assets for over a year.

A case in point is the Metro portfolio. 2005 was a difficult year for the Metro portfolio, which experienced occupancy declines. We set aside 2.2 million for capital improvements on this portfolio. As of now, most of this money has been spent. The recent results have been more encouraging and reflect the early results of our efforts to improve these assets. In fact, their performance exceeded our expectations for the fourth quarter of 2005. In the coming year, we will work to maintain this momentum and translate it into further NOI and cash flow gains.

Looking at where we are today with our acquisitions, our largest market is now California, followed by Florida. In California, we have than doubled our portfolio to 58 facilities with 33 facilities acquired since our IPO. In particular, we put our efforts into building up our market share in certain markets such as San Bernardino where we recently acquired our largest competitor and where we believe our market share gives us a substantial competitive advantage.

We continue to expand our presence throughout Florida, our traditional stronghold, where we are the second-largest operator. We now own 52 facilities in Florida.

While we are especially excited by the growth prospects in these markets, we are also very optimistic about other markets in which we have made significant inroads during 2005, with several portfolio acquisitions in Texas and Arizona. We expect that our facilities in Florida, California, Texas and Arizona will continue to lead the rest of our portfolio in performance.

Now I'll turn the call back over to Steve, who will discuss our earnings guidance for 2006.

Thank you, Todd. I would like to move on to our 2006 guidance. For the full year of 2006, we currently expect to earn an FFO per share in the range of $1.30 to $1.40, which is the same range as we laid out in our third quarter earnings call. Our earnings guidance for full year 2006 is based on both internal growth from the year-end 2005 portfolio of 339 facilities and an additional 520 million of acquisitions in 2006.

I would now like to reiterate the assumptions we used last quarter, as well as highlight any changes we've made in our assumptions this quarter in order to get to that range.

For our 2006 guidance, we continue to use the following assumptions for our year-end 2005 portfolio -- a 2% increase in our rental rates, a 3.25 increase in the economic occupancy of our portfolio of properties that were owned at year-end 2005. By combining occupancy and rental increases, our revenues should grow by approximately 5.3%, a 3% increase in our property operating expenses over 2005 levels. The combined effect of the above will be an approximately 6.6% growth in NOI for that portfolio of properties. However, we have changed our G&A loan procurement amortization and acquisition assumptions. Based on 2005 results, we have increased our G&A production projection to $17 million from 14 million. The new line of credit that has been put in place will result in a non-cash charge of approximately $1.2 million in the first quarter of 2006.

In terms of acquisitions, we're seeing a slightly larger volume of opportunities and as we get further into 2006, we're more confident on the timing. Therefore, we have updated our 2006 acquisition assumptions as follows. In 2006, we expect to make 520 million of acquisitions, timed as follows. Number one, 200 million during the first quarter already completed, 120 million during the second quarter -- most of these facilities are already under contract -- and 100 million during each of the third and fourth quarters. These assumptions are assumed to be made at a blended cap rate of 7.6% and will be funded with cash as well as new draws on our revolving credit facility. You can expect that as with our last year, we will term on our acquisitions with long-term fixed-rate debt. In today's market, five-year fixed-rate mortgage financing would cost us about 5.5%.

These acquisitions are expected to generate approximately $0.23 to $0.27 of additional FFO for 2006. Because this reflects the FFO impact of these acquisitions done through the year, on a run rate basis the FFO accretion is higher, estimated to be in the range of 28 to $0.32 per share. Therefore, we expect that our run rate 2006 FFO, taking into account earnings from our year-end 2005 portfolio and the full year impact of the 2006 acquisitions, to be in the $1.35 to $1.45 per share range.

With that, I will turn the call back to Bob Amsdell.

Thank you, Steve, and thanks everyone for joining our call today. We now open the call to questions.

(OPERATOR INSTRUCTIONS). Alexander Goldfarb, Lehman Brothers.

Good morning, I'm filling in for [David Cody] and [David Harris], so forgive me. Go easy on me, if you will.

Then go easy on us.

I will. I know sometimes it's fun to go on these calls. Just wanted to talk about the $0.23 to $0.27 share accretion that you just mentioned. I think there was a number that then you mentioned afterwards about a run rate and I just wanted to make sure I had my numbers correct, that the 23 to 27 was the accretive benefit of the acquisition and get the number that you then mentioned after that.

Right, and then the full year run rate as if the acquisitions had taken place on day one would be $0.28 to $0.32 per share.

Okay, that's perfect. Switching then to the G&A, it sounds like in '05, there were some additional bonuses just because it was a good year and some targets were exceeded for certain criteria. And also, there were some setup costs on the initial Sarbanes-Oxley, et cetera, as being a public company for the first full year. Should we then take it that the budget that is now set is pretty firm? So assuming that the acquisitions go as planned, we should see the G&A remain in the guidelines that you've provided?

Yes. I would say that, particular to the compensation being the bonus [on] restricted share expense, the $17 million number that's in the guidance reflects a specific plan that was approved by the compensation committee, that if we hit the numbers in accordance with the range of $1.30 to $1.40, that the compensation of bonus and restricted shares would be in accordance with that projection and reflected in the $17 million number.

Okay. And is any part of this bonus expense, is it affected by the change in the share price?

No, it's basically based on performance of two guidelines. One is the actual FFO that we achieve next year, as well as the amount of acquisitions that we would achieve in 2006.

And have you provided what those FFO guidelines are?

We have not provided those guidelines. They are tranche. But I again can state that the $17 million projection of G&A for the year is -- and for the specific line items of the bonus and restricted share expense -- are [in accordance] with hitting the FFO of $1.30 to $1.40, as well as the acquisition targets of $500 million in 2006.

I can tell you also, Alexander, that they're heavily weighted towards FFO growth, 70%, and 30% towards internal growth through acquisitions.

The only reason I asked about the stock price is I know some companies' compensation plans were tied to changes in stock price, and that can sometimes surprise people. I just want to make sure it's not included in your compensation plan.

It's not included at the present time.

But generally, I thought those were more in line with outperformance plans, and this is really not an outperformance plan, it's more of a guideline for -- and it's a plan for (indiscernible) on an annual basis, versus some longer-term outperformance plan.

Okay. And then --.

The goal here was to be considerably more objective rather than being subjective. And I think we have accomplished that goal.

Okay -- no, it sounds like it. On the same-store performance, there was the decline in marketing expense. Is that -- is that something that we should plan trending forward, or part of that growth in expenses for this coming year include increases in marketing expense?

No, it's more of a timing issue.

How so?

Well, when we pay the bills, it's more of a reflection of when the bills come due. There will be some economy that we pick up as we acquire properties that work out of those adds, especially in areas that we go forward. So, yes, there's definitely economies in that, and we'll continue to expand in those savings. But going forward, it will depend on what markets we move into as to the proportion of savings that are out there.

Now I understand. That makes it clear.

The point is, Alexander, we are -- we're attempting to do infill locations. We like the markets that we're in. We'll essentially be infilling those locations and there are economies of scale. Our efforts are to get better market control and better market presence.

That makes sense. My final question is -- if there is any comment on the Sure Guard bid that's being discussed?

No comment.

I had to ask. Thank you very much, thank you for your time.

Jordan Sadler with Citigroup.

Good morning, I'm here with Jon Litt. Just going back to the guidance question, specifically on G&A, I'm looking at your supplemental and I appreciate the disclosure. It looks like you're expecting G&A to come down from this year to next year, and I can see the breakout, but specifically that bonuses will be down despite a continued pretty heady acquisition pace. Can you walk us through why that is?

Generally, as I explained before, Jordan, the bonus plan that was put in place by our comp committee right at year-end going forward in 2006 and out over time, is basically geared to performance of FFO and tied to FFO performance and acquisition performance. And so the numbers that are --

What was the 2005 bonus tied to then? Because you guys originally had guidance of $1.20 to $1.30, and even if you back out the guidance charge -- excuse me -- the G&A charge, you're doing $10 5, well below the new midpoint of the range, $0.20 below. So it wasn't tied to FFO at all?

I can't speak entirely for the compensation committee, but I can tell you it was based on two items. One would be solid performance, but more importantly I guess on rather spectacular growth. We exceeded our growth expectations threefold, and I'm sure that was a factor.

Yes, but why would -- the company can grow the amount of assets they have very easily and dilute shareholders. That is not a behavior that should be rewarded. A behavior that should be rewarded is doing it on an accretive basis. What we see here is one year after your IPO, you guys were obviously low on your G&A, coming out of the box. And then there was a bit of catch-up which we're trying to understand why it was as meaningful as it was given the FFO performance. Clearly, the share price, along with a lot of REIT shares, did quite well. Then as we look at '06, who is to say that come the fourth quarter of '06, we're not -- the Board is not going to say, hey, we have to pay these guys more money and the $1.30 to $1.40 is going to be missed by $0.10.

I think you hit the nail on the head in what the comp committee looked at, along with, again, the independent consultant that was brought in, is that the performance of the stock and the return to the shareholders in 2005 was an exceptional year, and that the stock went from 16 at the time of the IPO and was right around 21 at a time that the committee met.

I guess I would take issue with your statement that it's done very easily. It's not very easy to do accretive acquisitions and then to integrate them into a platform. It was really a makeover of the entire company. It was an extraordinary effort, I'm really proud of what we have done and I felt that those who participated should be rewarded.

I would also keep in mind, tying it back to FFO, at the time we went public in 2004, our FFO was in the mid $0.90 range per share, and we're looking 18 months later with most of the acquisitions in 2006 already accounted for to $1.30 to $1.40, and that the -- basically the performance of FFO was thought to be in line. And I can't speak for the comp committee, but again, they met with an independent consultant that we were tracking, in order to achieve the numbers that they thought we would need to hit. In addition, you have to take into account the fact that we had $400 million dilution in the fourth quarter with the secondary offering.

Right, but the question is -- what's going to happen in the fourth quarter of '06? Does the comp committee have the latitude to put in another $5 million bonus beyond what is already in the budget?

As I mentioned before, it's considerably less subjective, and we have a plan that has been implemented and which has been utilized in making these projections. We feel that those projections are in line with our expectations.

I thought it was interesting that part of the plan in terms of the bonuses -- it sounds like you're compensated on acquisition volume. But are you being measured by the performance of those acquisitions relative to underwritten expectations? And can you maybe us through how these assets have performed relative to your underwritten yields?

Let me speak to the first issue. Integrating that 216 assets into the platform which existed in October of '04 was a considerable effort. There's a lot more involved than just going out and buying things. Our process is one that is very time-consuming. I can tell you that there was a lot of midnight oil burned. This is a 7/24 operation and there was an extraordinary effort put in place, and not just in acquisitions, but updating of systems and integration of those assets. And these are accretive -- it was an accretive deal. Your second question related to performance, and Steve or Todd, do you want to speak to that?

Well, specifically, again, getting back maybe to your first question is the fact that the bonuses and the compensation are going to be tied, as Bob said, weighted to the FFO performance, and that is where the performance will be at the end of the day. The acquisition portion of it, which is 30% of the plan, is based on volume of acquisitions. But to the extent they are not accretive deals, the FFO is not going to be there, and the bonuses won't be achieved.

And if the bonuses are higher than we projected, I think you're going to be happy because it means that we'll have grossly exceeded our projections in FFO.

I had a question on your occupancy assumptions. I think most of your revenue growth coming from an acceleration of occupancies -- can you talk about why or how you expect to achieve that?

The occupancy assumptions going forward are actually that they won't grow by a major amount. We will the picking up -- on the same-store -- we will be picking up occupancy on the acquisitions facilities, we will the picking up economic occupancy. So in other words, we'll continue to push rents on the entire portfolio, we'll continue to dwindle down on the economic occupancy. And as we work with the properties that we have acquired, and introduce things like climate control, again, not only pushing rents, but that we feel will help us to drive that occupancy.

The driver of the occupancy is eliminating concessions?

Turning off discounts.

Todd Amsdell When you look at it, the same-store portfolio, and you look at the difference between almost a 5% occupancy difference between where the same-store portfolio is and the acquisition portfolio, we feel that over time, we will bring that occupancy up through best practices, through the implementation of things like the climate control, unit mix revisions and those types of things. And we also will be working with things like our call center, again, delivering best practices. So over time, especially in the markets that we're already in, we don't feel there is any reason that there should be any great disparity, certainly not a 5% disparity, between the same-store occupancy and the occupancy of the acquisitions we've picked up.

The question is -- why would that discrepancy exist then? What are you saying, they were undermanaged?

Absolutely. Look at what we have done with the properties that we have bought and just changing around rental offices and our marketing, the call center, the physical aspects of getting climate control and unit mix conversions, all the things that we can bring to our acquisition properties. Absolutely, I think we do a much better job than the companies where we picked these properties up from.

As my last one, I just wanted to go through -- you are expecting 6.6% NOI growth next year. I think -- I assume that is off of the in-place properties as of year-end?

That's correct, that 339 properties at year-end.

I assume the 150 -- there is two different components here. There's a same-store off of the 153, and then there's the balance of 200 or so. How does that break out -- can you give us --?

I really don't have the breakout, Jordan. That's not how we put the model together. We put -- basically looking at year-end that we have the 339 properties. Also, our same-store pool changed going forward. Next year, it will be 200 facilities versus 153. But I could give you a call back later. If you can give me a little bit of time, I should be able to get something for you.

That would be great. The only thing I would ask is just on the -- could you maybe give us a yield -- a current yield on the 900 or million or so of acquisitions you guys have made since the IPO? Do you have something like that or maybe at least on the Metro portfolio, somehow we can measure how you're doing on the non-same-store properties?

I would tell you that, with the exception of Metro, that the yield on the target was right around an 8% yield, and that the properties are trending at that 8%. As Todd mentioned, Metro has been a little bit disappointing. And at this point, looking at '05, that it has been trending at about 7.3 or so. But it is definitely trending up.

Another example though specifically is the Liberty portfolio, which we thought we were going to acquire at a nine cap has basically been tracking right at a nine cap. So other than Metro, I would tell you, we have been tracking at the 8. Metro, although we are seeing improvements specifically in the fourth quarter, I think it is market-driven; of the Chicago market specifically, not the particular properties has been disappointing.

Thanks.

Eric Rothman, Wachovia Securities.

(MULTIPLE SPEAKERS) on the yields that you're quoting. Are those -- when you're saying it's tracking towards an 8, does that mean you're on target to hit a stabilized 8, or that it is currently yielding an 8 on in-place?

It is basically heading right around an 8, Eric. The difference is that some of these properties we have owned for seven or eight months and have a much better feel for it, and most of the acquisitions were skewed to the fourth quarter and we have less data on them. If you think about the volume of transactions that have taken place since September 30, that is more of a fell and we're just really getting our hands around it, that it's tracking towards the 8. The older stuff -- for example, Liberty as I mentioned, which we have owned since April 1, is hitting the nine number.

So I guess I'm not quite clear. What you are saying is that, on what is in place now annualized, and taking into account seasonality, you would expect the assets that you've acquired to the at roughly an 8. But it's not, and so they are at a 7.5 today, and you expect to then grow them to an 8.

No, no. They are tracking right around an 8.

In terms of the Q4 acquisition, what was the approximate cap rate there?

That was right around 7.7, 7.6, 7.7. One of the things that brought that number down a little bit is that we had a portfolio in Southern California that we had originally expected to close in that first quarter of '06 and actually closed in the second week of December. That brought the entire quarter's cap rate down a little bit.

And you said for '06, you expect to acquire your 520 at a 7.6 cap rate, correct?

Yes, a blend of 7.6.

And of that 520 or 320 remaining, what portion is from Rising Tide?

At this point, I would tell you that the Rising Tide portion will be somewhere between $30 to $50 million. It would be expected to be more in Q3 or Q4. And that comes in at an 8 cap.

So that's $30 to $50 million helping blend in and up this 7.6 number?

Right.

In terms of the expenses, help us understand how it is that expenses were down again. I'm not entirely clear on that. And how temporary or permanent is that?

I would think that our run rate for expenses in '05 is a good number. As I said, we were projecting in '06 that they will go up by 3%. This really ties back to comments that we made at the time of the IPO that, as we prepared to take the company public, and more importantly, prepared the properties to take them public, that we incurred fairly high operating costs and that we thought that was a trend that was not going to continue. And so in fact, Q4 of '04 to Q4 of '03, operating expenses I believe were up on a same-store basis around 17%. And we had stated that was not going to be the case going forward. Some of it is just the comp that we had back to last year.

What type of items would have caused that Q4, or 2004 number, to be so much higher in preparation for launching?

We were going through, as you know, the IPO process. We wanted to be ready. We didn't want to just arrive, and so we were doing everything we could with looking at leases to branding and making sure that we were set and ready on all levels. So those expenses flow to the properties and thus ended up in our numbers. That's why they are more onetime. But we also put in new computers and additional signs as I mentioned. So we're reaping the benefits of that, but obviously, it had to be paid for it and that's when it came in.

Sure. So what type of same-store might you have generated if '04 had had a more normal level of expenses?

That is a tough question, but I would tell you that it would probably have been in the 8%, 8.5%, range. The number that we actually came in for the year was what we actually had projected a year ago in anticipation of the fact that we were going to have the savings on the expense side. So I have not gone through and done the math to actually figure it out. But just kind of the top of the head swag at it, it would be 8, 8.5.

In terms of the call center, I thought you had at one time, you were trying to determine whether or not you were going to keep the national call center. Have you made that determination?

We have not made that determination. We continue to work with the third-party call center and watch them and make sure that they are delivering best practices. So at this point, I would say the determination to stay with them is still one that we're going with and we haven't changed that to date.

Do you anticipate maybe shifting the rest of your volume there?

No, I don't anticipate adding storage at this point.

Lastly, with respect (indiscernible) back to the compensation issue, of the restricted share award of $3.2 million, as best I can tell, it looks like you expensed half of that in 2005. I guess why was half of it expensed?

Because 1.5 million of it was issued to the Chairman and a provision of the award was that it would vest on retirement, five years or on retirement. From an accounting standpoint, that was interpreted as meeting it could vest more immediately, and we were required to write it off in '04, or in '05, rather, fourth quarter.

And do you have any plans to retire within the next five years?

I don't know about five years. I'm 65 years old and I'm feeling pretty good at this point. I like what I'm doing. I might also point out that that -- that was not a cash transaction. We're talking about an accounting transaction. It certainly didn't affect our cash position in anyway, whatsoever.

When does the rest of that vest?

It vests over a five-year period.

So I should expect to see one-fifth of that amount next year and every year hereafter. So the amount that we see in the budget as --.

Well, less what has already been written off.

So, sure. 1.6 call it roughly has been written off, so you've got another 1.6, so I should divide 1.6 by 5, and that is the amount that will vest in '06 -- is that right?

Right, and that's reflected in the supplemental under the (multiple speakers).

So obviously, within this, of 1 million in expected restricted share expense, there is about another $0.5 million or more of restricted shares -- additional restricted shares that will be offered -- in December 2006?

Although I don't think the numbers quite works out to be that high. But we have hired as I mentioned before a General Counsel that will receive some restricted share expense and there was some leeway should we hire additional personnel that we want to give shares to.

How was the 2005 budget of call it 1.1 million (technical difficulty) how was that determined?

The restricted share expense that was out there before, because the other item that's running through there are actually options that were granted to the 70 or so management people as part of the IPO. And so that's just working through the model and the vesting of the expense that would reflect that. So there really weren't restricted shares themselves. It was more going through the Black-Scholes model where we expected the option expense to be.

Again, I know you have said you can't speak for the compensation committee, but I guess to the extent you could help us understand how it is that the bonus number was up five times budget, and the restricted share expense is up almost three times budget. Were they not aware of your budget?

I'm sure they were. This compensation committee is independent. These are sophisticated individuals. I'm very proud of the quality of our Board. They made the decision that it was the appropriate thing do in consultation with an expert and I believe their conclusions were correct.

Rick Murray, Raymond James.

A couple of quick questions. I'm sorry, I missed your assumptions as it pertains to the '06 guidance regarding occupancy.

Rick, we're looking that the economic occupancy will increase by 3.25% in '06. This is for the 339 properties that we had at year-end.

Did you mention the physical occupancy?

No, we do not break out the difference between what would be the burn-off of concessions with any pickup in physical occupancy. It all runs through that line item as economic.

I guess the other item related to the guidance I missed was your comments at the end of the call about $1.35 to $1.45 a share. What was that in reference to?

That is basically looking at a run rate, taking into account the increase -- the impact of the 2005 portfolio and then a full-year impact of the 2006 acquisitions, but as an annualized run rate.

Great. Really, the only question I had was just really on the occupancy line. I guess I'm just trying to figure out -- for the last few quarters, we have seen a deterioration in that trend. (technical difficulty). I was inquiring about the occupancy and if you had any insight as to why your occupancy seems to be trending a little bit away from some of your peers in that it has kind of been down the last few quarters. Any insight on that?

Absolutely. As we mentioned, the acquisitions have delivered to us a great opportunity, although it comes out as a lesser occupancy when compared against our same-store portfolio. Again, it's in that difference in physical occupancy that we feel we can make the greatest contribution to these stores and their performance. So in other words, as we introduce climate control, as we introduce best practices in our call center, our on-site teams, we will drive the occupancy at these stores up. And especially when you look at some markets that we moved into -- California, Arizona, New Mexico -- strengthening our markets and moving into very strong markets.

So we look at that again as great opportunity to bring these lower occupied stores up and to extract -- the 1% occupancy, for instance, is $0.03. So to extract that value and put it into the portfolio, which is one of the things that we feel we do best. We're leveraging our talents and certainly day one, it brings down our occupancy, but going forward we feel these will be the strong performers for us. It's going to take a little bit of time, but I think you'll see these stores are the ones that really drive the portfolio.

Steve, I wanted to touch on your comments with regard to the acquisition properties and the current yields on those. Where, when you guys underwrite say this group of properties that is currently yielding roughly 8%, where do you see those yields going over the life of the investment?

That's a good question. How long is a life? First off, we have been in the last 6 months have really focused on upgrading the quality of the portfolio and have focused, specifically in the California market, and think that is one of the two best markets along with Florida, and also been buying higher quality properties. The flip side of that is that we have been willing to step down and pay a little bit more at lower cap rates. Our evaluation when we're going through the process of acquiring properties is to basically do a five-year analysis and look at basically whether the deal in itself on any given property is going to be accretive over a calculation of our perceived cost of capital being a blend of debt and equity at any point in time. So that is really the hurdle that we're looking at. Trying to take this portfolio and say that it's an A cap today and where it's going to be -- three to five years ago, I haven't specifically done the calculation.

Thanks.

Obviously, there are many factors that need to be computed that we have no control over -- what's going to happen to inflation, what's going to happen to the economy. To look 24 months or 36 months ahead, I think is about all that we can safely do.

Ross Nussbaum, Banc of America Securities.

It's Christine McElroy here with Ross. What is your cash balance today following the Sure Save acquisition? And related to that, can you give us some sense for the level of interest and other income baked into your guidance for '06?

Okay. Basically, what the Sure Save acquisition was the first time we had finished using the proceeds from the secondary offering. In fact, had to put a $30 million bridge in place to close that transaction while we worked on completing the new line of credit. So we basically have cash on hand for working capital needs, but nothing beyond that.

Okay, so we should go back to more like the first quarter through third quarter numbers as a run rate?

Right.

And then with your current acquisitions guidance, are you planning on issuing any additional common equity this year?

We're not planning at this point in time, with the exception of some transaction that we're not aware of, on coming back to the common equity market.

So what leverage level are you comfortable with?

We have continuously said that we want to stay on an average somewhere in the 40 to 45 range, but we will definitely exceed that at a point in time depending on the markets and the acquisitions that maybe getting up to 50. Again, looking out over a longer period of time, that 40 to 45% range.

Did you mention the cap rate on the Sure Save acquisition?

I did not. Basically, our first quarter acquisitions and build into the forecast, and again because of the locations primarily being Southern California we were willing to pay up is that the 200 million of acquisitions came in at basically between 7.1 and 7.2.

I think Ross has a follow-up.

My question is on the guidance again. You mentioned the 3.25% increase in I think you said economic occupancy?

Correct.

What does that equate to in terms of a basis point increase in the portfolio occupancy? You're talking about how that translates into revenue growth, is that right?

Basically, if we pick up a point in occupancy, whether it be physical -- at the end of the economic burning off concessions -- you're looking at about 1.8 million, $0.03 a share.

But the 3.25% number you referenced, what is that going to equate to in terms of a gross occupancy pickup?

I'm not really following the question.

You mentioned you're looking for 5.3% same-store revenue growth from the 339 properties. Of that, 3.25% of the revenue growth is coming from occupancy. So your portfolio occupancy was 81.6% for those properties. Where do think that number -- what does equate to in terms of an occupancy number?

Again, we're not -- that is the physical occupancy, which we're not breaking out separately from the savings that we'll have from the concessions and burn off of discounts. We're looking -- the number I guess that would be more equitable is that the economic -- Todd, do you have that 72 -- the whole portfolio?

Yes, the whole portfolio is 71.3.

So we are at 71.3 for the whole portfolio. We're looking at that to get to 74 or 75 on the economic occupancy.

Okay.

Whether that comes from physical or from, again, the burning off of concessions, we don't break that piece out.

The other question is, that's not necessarily a same-store number as I would think about it because it's got a lot of the acquisition properties in there, which to your own admission were undermanaged. So part of the revenue pick up that you are expecting in 2006 obviously is attributable to that. What can we expect from the 153 true same-store properties?

As far as a pickup in physical occupancy?

In terms of just a same-store NOI growth number, because the 6.6% number you gave for NOI growth in my mind isn't really a same-store number because it's reflecting the lease-up of sort of undermanaged properties. So I'm trying to get a real handle on what the true intrinsic same-store NOI growth is.

Right. I would say that it would be between 5 and 5.5 on the same-store. We expect a larger pick up on the non same-store.

The last question I had is with respect to rebranding efforts and integration. How are those going in terms of your expectations in terms of timing and cost?

Sure. The rebranding effort is -- we look at it this way. If we have the opportunity like we did with the Liberty portfolio to rebrand immediately and take advantage of our already superior market presence, we do so and in that case we did. So day one, we rebranded the Liberty portfolio over to U-Store-It. There are instances, like in the Tucson market, where we picked up the national portfolio where we don't run in and rebrand because they had a number of marketing initiatives intact that we wanted to continue to work with. So billboards, Yellow Pages, marketing like that that the national name was working well and we rebranded and will continue to rebrand those stores as those Yellow Pages and billboards turn. So we have gone in and we have changed over and introduced best practices as soon as we can, day one in most cases. But the marketing efforts really are something we look at what the presence that the facility has in that marketplace and what our opportunity is to develop our name and whether we want to get that going day one or not. It can take over a year to get a facility completely rebranded and turned around into a U-Store-It self-storage center.

Paul Adornato, Harris Nesbitt.

Just a couple of quick follow-ups. You said the bonuses were awarded to 100-plus head office employees. I was wondering if you could give us a sense of the budget versus actual for a mid-level let's say employee number 50.

It would be somewhere probably around $1000.

Was the actual, and that would be above what the budget was?

Right.

Finally, just to -- once again on '06 compensation, you mentioned FFO and acquisitions as being the two metrics that the committee will focus on. Is that FFO per share or gross FFO?

FFO per share.

And acquisitions -- gross volume or somehow tied to performance of the acquisitions?

It's gross volume, but due to that reason is why it's a smaller percentage of the plan.

Michael Knott, Greenstreet Advisors.

Just going back to the Rising Tide, can you just comment on how these developments are faring relative to your expectations, and then how much you think might come through in '07?

I would say generally Michael that the properties have come online slower than we expected. There are two properties that are not yet even completed as far as construction. These are big properties, they're high profile properties and it has been more difficult to get them built than we expected.

You'll find information on page 18 of the supplemental on Rising Tide.

I see it, thanks. I was just curious how they were doing relative to your expectations and that commentary was helpful. Thanks.

That does conclude today's question and answer session. Mr. Amsdell, I will turn the conference back over to you for any further or closing comments.

Thank you. I would like to thank everyone for their interest in our company. We appreciate your attention and appreciate the cogent questions. Thank you all.

Thank you, and that does conclude today's conference call. Thank you all for joining us.