CubeSmart (CUBE) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the U-Store-It Trust second quarter 2006 earnings results conference call. Just a reminder, today's call is being recorded.

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 those historical results, or any results express or implied by such forward-looking statements. The Company refers you to the documents filed 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 that discuss these and other risks and factors that could cause the Company's actual results to differ materially from forward-looking statements.

In addition, the Company's remarks today include reference to non-GAAP measures. A reconciliation between GAAP measures and non-GAAP measures can be found on the Company's website, at www.U-Store-It.com.

With us today from U-Store-It is the President and Chief Executive Officer, Mr. Dean Jernigan, and the Chief Financial Officer, Mr. Christopher Marr. At this time I would like to turn the call over to Mr. Dean Jernigan. Please go ahead, sir.

Thank you very much. Good morning to all; thanks for joining us for our second-quarter call. This is my second call here at U-Store-It; very happy to be with you today, and I will talk for a few minutes about the second quarter as I saw it and what the future looks like -- what it looks like for us, and then I'll turn it over to Chris and he'll get more into the numbers.

Basically, I'm just sitting here looking at a list of those of you who are on the call, and it appears that probably 75% of you Chris and I have met with since Chris joining us, and most of you we met with at the NAREIT investor conference in June in New York. So not too much has changed since then, actually. Our story is still the same. The timing is still the same, and I'll go over both of those. We've made a lot of changes here at U-Store-It in the personnel area. We have made all the hard decisions we think that we need to make on the personnel side. Some of that is reflected in third-quarter projections as far as termination, paying allowances is concerned.

But also, what I'm happy to report today is that we do have our senior management team together. In fact, they're all in the room with me today. Going around the room, besides Chris Marr is Kathleen Weigand, our General Counsel, Executive Vice President and General Counsel; Todd Amsdell, who we'll talk more about as far as what we're exploring in the way of development -- we're very excited about the possibilities there; Stephen Nichols, who has just recently joined us as Senior Vice President of Operations. Stephen and I, along with Chris, go back to 1995 together, when Stephen joined Storage USA and was a very important part of the management team at that Company.

So, we have our senior management team together. I'm not going to go back to -- too much to the nautical terms as I used in the first-quarter call, but we very definitely trimmed our sales to a point during the last 90 days. We have our senior management team together, and we will continue to add a few people, I'm sure, as we go forward below the senior management team. Those of you that I spoke with during the last 90 days, I've asked a little bit of patience from you, and asking you to tell -- to understand that we will have our complete team together between now and the end of the year. And as far as our numbers are concerned, we should be up, performing along with the rest of the market, along with our peer group; we should be performing along those lines by this time next year.

So, we are excited about the wind that's still at our back. We have very good performance from our peers in the sector during the second quarter. And again, congratulations to all of those folks, because those are very good numbers that have been put up. And also, in reading a great quarterly report that we now receive, an industry report from Mr. Ray Wilson, we are, I think, for the first time, have a good handle on not only the public companies but the rest of the market across the country, at least the top 50 markets across the country, where Mr. Wilson surveys about 35 to 40% of the storage fertilities in those markets. And that gives us good indication that we have a strong wind to our back. In fact, I think in his report this month, it was indicated that the occupancy grew 200 basis points, 2 percentage points, second quarter '06 over first quarter '06, which was an all-time record since he had been keeping those records. So the wind is strong at our back, and we have our sail up and we have a trend -- we have it trimmed, and we are now starting to enjoy -- will soon start to enjoy the benefits of it.

We ask your patience. Again, as I've told you, this is bringing a new team in. The way it was being done before was not necessarily wrong, but from my experience at Storage USA, we had a Storage USA way of approaching managing storage facilities around the country, and we're bringing those policies and procedures into place as we speak.

We're very pleased with the integration of our new software program from CenterShift, which Chris will speak more about, but that's going nicely. And we have -- what we have to look forward to is a third quarter which should provide no surprises to us. We will continue to manage our assets, trying to increase our economic occupancies or our revenue per available square foot, to bring those up to our industry-level industry standards. And by doing that, that should measurably increase our FFO on a go-forward basis.

So we're very excited about the future. No surprises during the quarter from a performance standpoint. Chris will speak to a couple of accounting surprises we had, but no surprises from a personnel standpoint, from an operational standpoint, and we think we are in good shape going forward into this third and fourth quarter.

With that I'll turn it over to Chris and let him make his comments; then we'll come back for questions after Chris.

Thanks, Dean. As Dean said, I will address in more detail the second-quarter results, our third-quarter outlook, and the financing of the business going forward.

We view the second quarter as a foundation to build on as we move the business plan forward. On a normalized basis, our $0.27 per share of FFO reflects the beginnings of the implementation of our focus on people, systems and accountability -- a focus we believe will translate into tighter expense controls, improved occupancy and rental rates, leading to improved topline growth and continued improvements in our credibility of the Company as we improve our forecasting techniques.

In the second quarter, as you can imagine, a significant amount of time and energy was focused on laying this foundation; made a thorough review of personnel and initiated a fair number of changes; we evaluated our accounting policies and our disclosure; and have made great strides in improving quality in both areas.

We converted approximately 24 of our facilities to our CenterShift software program at June 30th, and as of today we have converted a total of 184 stores, and expect to have all the sites converted by August 31st.

In summary, we are moving as fast as is prudently possible, and fortunately we continue to do so in a wonderful market for our product.

We did recognize, as we disclosed in the release, a non-cash adjustment, lowering rental revenue by $1 million during the quarter. This adjustment will have no impact on earnings going forward.

As we went through the evaluation and conversion I described above, we have identified a clerical error in our manual bookkeeping process. This mistake had been consistently made historically and essentially resulted in three months of revenue being recorded in each quarter. But the first month will be slightly understated as it left some of the revenue behind in the prior quarter, and the third month would reflect a borrowing of some of that revenue from the next quarter. The adjustment this quarter represents the cumulative effect of correcting our P&L and retained earnings and positioning ourselves to start at July 1 with this item behind us.

The portion of this adjustment impact in the same-store pool was approximately $750,000. Prior to that adjustment, the core same-store results reflected revenue growth of 4.3% over '05, achieved entirely on rate, as the average occupancy levels at 82.4% remained largely consistent with '05 levels.

Expenses increased 928,000, reflecting a total of approximately 300,000, or roughly 5%, increases in taxes and personnel, increases in electric rates driven up by utility costs of approximately 74,000, the timing of advertising and repair and maintenance expenditures resulting in an increase of about 246,000, and then a bunch of various smaller items spread across the roughly 200 properties totaling around 200,000.

We did renew our property insurance on May 1 and we experienced a similar significant increase in the renewal premium as the peer group. Our premiums increased by approximately 37%, and the impact in the same-store pool is to increase our insurance expense by 33.5% over the second quarter of '05.

Probably more importantly as we looked at things, sequentially over Q1, our actual results in the same-store pool had physical occupancy increasing about 180 basis points to 83.1%, and our operating expenses increased an immaterial $77,000 from Q1 to Q2, both very encouraging signs.

The nine properties we closed on during the quarter were acquired at an average cap rate of right at 7.5%. And assuming completion of the remaining assets in the pipeline, we will acquire 62 facilities for consideration of approximately $369 million in 2006.

On the financing front, we have 88 million out at quarter-end on our credit facility, leaving us with 162 million of capacity under the current constitution of the line, all of which is available to us under the existing covenant package. That 88 million also represents our floating rate exposure, which is approximately 11% of our total debt outstanding.

We have roughly 80 million of cash used for the closing subsequent to Q2 in the pipeline, so pro forma we would have about 168 million out in the line at year-end. We have the option to increase the facility to 350 million. So at year-end, if we do not exercise that option, we would have about 82 million of capacity; if we exercise it, obviously, we would have about 182 million in capacity. Pro forma for all the closings, our leverage would be roughly 42% on a market cap basis.

We have approximately 103 million at an average interest rate just shy of 8% coming due in late November. We continue to believe that an unsecured model is appropriate for this sector and our business plan; therefore, we are currently exploring the bank unsecured term loan market to fund the mortgage maturities and reduce a portion of the outstandings under the facility. We would evaluate market conditions and potentially swap a portion of the floating-rate exposure to fixed, and we'll have an update for you and more specifics on our third-quarter earnings call.

From an earnings outlook perspective, we've stated during our investor meetings and calls that this year will be one of continuous improvement in both our disclosure and forecasting. And at this stage of the process we are very comfortable providing guidance for the third quarter. The guidance is appropriately conservative, given where we are in the process of converting our systems and developing our modeling and forecasting capabilities.

As we state in the release, we do anticipate a charge in the third quarter of 2.6 to 2.8 million, as the implementation of our business plan creates changes in personnel and systems. Approximately 1.5 million reflects a cash charge for severance computed in accordance with previously in place employment contracts for employees who have been terminated. In addition there is a non-cash severance charge for those same employees of approximately 500,000 to reflect the accelerated vesting of certain equity awards in accordance with their contracts.

We anticipate the non-cash write-off of the undepreciated cost of the existing property level system being replaced by CenterShift to be approximately 300,000 during the quarter. Prior to the charge, we anticipate FFO per share for the third quarter to be $0.24 to $0.26. This reflects an additional $0.01 of G&A in the third quarter as compared to the second, given the timing of professional fees and executive hires. We're also incorporating the additional property insurance costs. Upside to the midpoint of the range would reflect continued expense controls at the property level and a continuation in revenue improvement derived both from occupancy gains and our focus on targeted rate increases.

In summary, a very positive quarter that we believe has created an excellent foundation for us to build on going forward. At this point we would be glad to turn it over for questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

It's Craig Melcher here with Jon. Chris, I just wanted to first go back to your guidance. What are your expectations in terms of sequential revenues or occupancy for the third quarter?

In that guidance range, in terms of how we expect to see same-store results, as we said, over the prior quarter to start off with, we're in that range that we identified in the release, 4.25 to 5.25. The topline sequentially Q2 to Q3, we're in effect expecting in that guidance range that the month of June essentially is able to repeat itself in July and August, and we may see a slight seasonal trail-off in September. So as I said, upside to that would be continued improvements from the month of June into July, and then into Augusta on both the same-store as well as the overall pool, either between occupancy gains or our focus on pushing rent.

In terms of the gap between the economic and physical occupancy in the portfolio, 70% versus 82%, where do you think you can get that spread toward by year end?

Year-end is not really a focus for us right now; we're really talking about decreasing that spread between now and the end of next rental season -- basically the end of July. So effectively, this time next year, we are expecting a marked increase in our revenue per available square foot, or our economic occupancy as you call it. Our revenue per available square foot right now is $8.93, and our street rate is $12.35.

And for those of you who don't quite understand the subtleties of storage, the difference in those two rates is vacancy and discounts. Vacancy you're going to have. We are expecting by this time next year some vacancy. We are expecting to be up with our peers in the high 80s. And the rest are discounts rolling off. Today I think public storage has a revenue per available square foot of about 83.5%. So if we can get to the high 80s, I would expect us to be in the low 80s from an economic standpoint.

I said that was revenue per available square foot; that's actually their economic occupancy. The revenue per available square foot is $11.10 versus their street rate of $13.30, which represents about an 83.5% economic occupancy. And that's about where -- perhaps just a shade below that -- they're at 92% physical. We're at 88, 89% physical. I think we should be more like 82% economic.

Can you talk about your marketing plans or the advertising plans in the quarter? At least for the same-store portfolio, the expenses were up pretty big year-over-year. Is there anything specific there, or is this the new marketing plan being implemented?

No TV. Nothing new. We're still -- the demand drivers are still very positive for us out there. We don't feel like there's really any need for any kind of new marketing programs. I think it is more of a comparison year-over-year. The '05 expense number -- the '06 expense number looks right. Not saying '05 looks wrong, it's just that it's a tough year-over-year comparison. If you look at quarter-over-quarter, first quarter to second quarter '06, very much in line. If you look at our margins on a same-store basis we're almost 65% margin. That's a good number. So we feel like our expenses are coming into line for us.

Chris Pike, Merrill Lynch.

A couple questions relating to personnel and strategy, I guess. First off, Dean indicated that senior management is in place. I know one of your competitors just lost one of their acquisition heads. Are you folks looking to fill that position there going forward, or do you have all the pieces in place at this point to take down that portion of the business?

As far as acquisitions going forward, our plan is to outsource that role and use a great brokerage base that has developed around the country that focuses entirely on self-storage. We have our internal investment committee that will handle the internal function there, so we are not looking for an acquisitions officer at this time.

With respect to the hiring of Stephen, I know you talked about additional implementation going forward. Could you guys just give us an idea of not necessarily what was wrong with the old model, but I guess maybe Stephen, if you talk to us about one thing that when you walked through the door and you saw what the folks in the field were doing, and maybe what your immediate response was and say -- hey, this is one thing I know we can implement rather quickly that we could perhaps garner some immediate upside.

Let me answer that. To be fair to Stephen, he's really only been here a couple of weeks. And it is a when-you-walk-in-the-door question, but I've been analyzing it now for a little over 90 days, and it is just really a little bit of a different focus on a model where by -- U-Store-It before my arrival was more of a centralized model. I like to push responsibilities down and out into the field, give more empowerment to -- all the way down to our manager levels, and ask our DMs and RMs to take on a little bit more responsibility and flatten out the org chart, if you will. So it's -- again, it's just a little bit of a different approach, but it's one that Stephen and I are comfortable with. And that is our direction on a go-forward basis.

Should we expect -- what's the best way to talk about this -- significant -- I don't want to say turnover, but new people just coming from the top down, or should we expect more folks with the SUSA-type hat, so to speak, being brought into the organization to run it in a way in which you folks are used to running assets?

Yes; I think it's fair to say the latter, but it will be more fill-in and more through attrition, if you will. So we're not really expecting any kind of big upheaval as far as our folks in the field.

My final topic here in terms of development. Maybe -- you indicated Todd is there. Maybe if you could just vet out and talk a little bit more about your development strategy going forward, given that you didn't really speak on it in your prepared comment. That would be great.

All we're really doing at this point in time is exploring first of all the viability in doing development on a go-forward basis. I guess we all (indiscernible) recognize the fact with increasing rates and increasing occupancies, that will normally bring about a development cycle. I think it's clear for most to see that we are entering a development cycle. So what Todd and I are doing together right now is exploring the best method to take advantage of a development cycle.

Basically, there are kind of two directions out there, and I know our competitors are doing it different ways. But one would be where you build everything and own everything in-house, on your own balance sheet; the other one is a joint venture program. And we're exploring all opportunities, and we'll be able to give you more description and clarification and direction on that at the next call.

When you were at SUSA, being that this is a new space to me in many regards, what was the most appropriate way in which you did it back at SUSA?

We actually did it both ways back at Storage USA. And I'll tell you, for that period of time, we were far more successful with the joint venture direction versus the other.

David Toti, Lehman Brothers.

I have one follow-up question related to the prior discussion. In the model that's more decentralized and flatter, can you talk about your overall strategy relative to pricing and specials, in terms of driving occupancy and topline growth?

Yes. And this is again kind of the way I am comfortable in doing it; we will determine here in this office at our level what we think is appropriate macro-pricing, if you will, and then we'll turn that number over to Stephen and his people in the field to figure out how to get there. As we all know, markets and submarkets differ wildly across the country, and as far as the ability to push rates and push occupancy levels.

So we will -- we're getting ready to go into the budgeting process, so I can just take that as an example. Senior management will, with appropriate input from all kinds of sources, determine what we would like to see in the way of achieved rate increases for '07. And then we'll give that number, as I said, to Stephen and let them figure out on a submarket and market basis how to get there.

Great. Sort of shifting over, can you talk a little bit about the current acquisitions environment? Is there a smaller pipeline? Has there been any movement in cap rates in the last quarter?

I think the pipeline, as far as you'd call pipeline the number of facilities available across the country, is probably greater than I've ever known it to be. But we're getting into that period where seller expectations and buyer expectations -- there is a void, a divergence, a chasm being created there. And so, if you think the cap rates could be inching up a little bit, which I personally do, of those $2.5 billion worth of assets out there that somebody thinks they want to sell, I doubt the number is anywhere close to that as far as what could possibly trade over these next 12 months at competitive cap rates. Does that answer your question?

Actually, could you provide like sort of a cap rate range that you've seen in recent deals that you've looked at?

I think -- depending upon where you are in the country, I think you're still going to have the lower cap rates on the higher-quality assets in California. And if you try to normalize everything on a stabilized basis, I think you're seeing things go off from the very high 6's to 7.5, kind of in that range.

Lastly, can you also talk a little bit about what's going on in Chicago at this point in terms of management personnel and actual metrics that you've seen?

A couple weekends ago I was over in the Chicago market and saw a number of our facilities there, and I'll tell you, I'm very pleased with our asset quality over there. I think the chain that we bought over there was a good chain, the properties are well-located, and I am personally disappointed in our results right now in the Chicago market.

When I look at Mr. Wilson's report, it appears that Chicago is one of the best-performing markets across the country from an occupancy standpoint and rent increase standpoint. So that's something that we will be coming to grips with soon. I can't tell you what the answer might be, but I do know we've been missing a DM over there in that market -- actually perhaps two DM's in the market. So I think it is personnel-related, to answer your question.

Ross Nussbaum, Banc of America Securities.

It's Christy McElroy here with Ross. You provided G&A guidance of 4.7 to 4.9 million for Q3. What's causing that to increase from the Q2 level? And as you look out over the next four quarters, how do you see that line trending?

The difference from Q2 to Q3, you're going to have really a couple of factors. One is simply the timing of the addition of personnel here, particularly at the executive level. Q2 had about two months, I guess, of Dean, one month of myself, zero months of Stephen. So you're going to see a full third quarter of all of us in that number, and that will be somewhat offset by some of the overall reductions in staff here at the corporate office that have taken place over the last couple of months.

You also just have some timing issues as it relates to professional fees and costs being incurred as the hours are being -- as the hours are being incurred on the audit and internal audit and other things along those lines.

So I think that's the expectation, that we'll be 3 to 400,000-or so up Q2 to Q3. I think the guidance right now as we sit here that was provided for Q3, I think, gives you a reasonable starting point for our run rate. But again, as we're putting things together here, we are hesitant to try to go out too far in front of you there in terms of trying to provide any expectation for Q4 or next year, as there are still some moving pieces that we're putting in place here.

Just following up on the reduction in corporate staff, was Tedd Towsley's dismissal related at all to the accounting errors you found and corrected, and how confident are you that you won't find additional errors?

To answer the first question, it was not. And the answer to the second question -- as we sit here today and get ready to file our 10-Q, everything that we are aware of is, obviously, reflected in the numbers and in the results. And certainly our hope and expectation would be that we've captured everything, working closely with our outside auditors and internal audit team here and the outsource team, to make sure that we have articulated everything in this release. And again, as I sit here today, wishing that I had the I Dream of Genie gene in my body to look forward, I think we've captured everything that we're aware of.

Would you care to comment on the dividend, given the visibility that you have now versus three months ago? What would your recommendation to the Board be in November as far as maintaining or a potential cut?

Don't have that formulated at this point. As we look at -- again, as we look at the budgeting process and being able to have much keener visibility into the 2007 FFO, and our continued expectation that ongoing CapEx requirements will be in that $0.20 per square foot range, I think we'll have a better idea of when we can grow out of the shortfall. At this point I don't think we are in any different position than we were 45 days ago, which is we'd like to get better visibility and see that we can in fact grow out of the shortfall before we make any recommendations to the Board.

I believe Ross has a question.

Just a question on the occupancy line, and that is -- it would seem to me that concessions in the industry have backed off somewhat over the last 12 months. Industry occupancy is up. Do you have a competitive opportunity here to walk in with some big concessions and promotions, drive the occupancy higher, and basically sort of offer a discounted rent in the short-term, which should drive additional traffic to you versus where your competitors are pricing right now?

I think so, Ross. The concessions do appear to be declining, maybe down as much as 15% across the country. I misspoke a few minutes ago when I said that occupancy was up 2 percentage points over first quarter; that's actually seasonal 2 percentage points up over Q2 of '05, which is very dramatic. So when you have occupancies with dramatic increases and discounts rolling off from your competitors, obviously, that puts you in a position that your discounts are going to be much more effective.

So I think you will see us coming up to the same level as our peer group just by natural discounts and marketing programs that we have in the marketplace. Assuming we don't have some horrific event in the country, in the world for that matter, that could destabilize the buying and spending habits of our consumers, we should be fine this time next year.

I guess the follow-up to that is, a number of us watched Public Storage a few years back after they had made a strategic change on pricing that didn't work out; they were able to ramp up occupancy. If I recall correctly, it was like 7, 800 bips in one year, just basically from advertising like crazy and offering concessions. Is that a number that seems achievable for you guys? We've seen it done in the industry just a couple of years ago. Is that sort of a benchmark we should all be thinking about as a possibility?

I think that's certainly possible, but I would caution you that our style over the years has been a little bit different from Public Storage in that they tend to like to operate at full -- with quotation marks around it -- in the low '90s, whereas I'd like to kind of operate in the high 80s to right at 90. But even at that number, your 700 bips would be achievable.

Eric Rothman, Wachovia.

I was curious, with respect to the acquisitions in the pipeline you mentioned -- for '06 I think the total would be 62 properties, $369 million -- does any of that include Rising Tide?

It does not. To the extent that either we are able to or we choose to exercise the option and acquire in some or all of those Rising Tide facilities, that would be in -- incrementally in addition to those numbers that we've laid out.

Has any of that Rising Tide portfolio triggered the option yet?

They have three of them, I believe, we have bought in from the regional pool. The remaining 14 have not at this point.

Do you anticipate that if they were to trigger the option, you would buy them in?

We're looking at a couple different structures as it relates to that. Obviously, one is exercising the option and acquiring the asset at the option price. The second alternative is looking at that portfolio as potentially either a discrete or a portion of a development venture concept, where we could contribute or acquire in those assets into a venture that would use them as sort of prestabilized but constructed assets to balance out some of the other development that may take place within that venture.

Of these 62, does this include the properties that are going to be acquired from the Jernigan group?

Those have already closed, and they are included in the 10 facilities that closed subsequent to year -- to quarter-end.

With respect to the charges, the severance charges and such, what might we -- I guess, do we expect that there will be any more in the fourth quarter or beyond, or do you anticipate that this is kind of the full amount of what you'll see as restructuring charges?

Our goal when we talked to you and others earlier in June was to capture everything and offer it up on a prospective basis when we released second-quarter earnings. And as we sit here today, we believe we have met that goal. So we would not anticipate anything materially additional into the fourth quarter.

Lastly, with respect to those maturities, what sort of a rate do you think you can get on a bank loan?

Inside the facility -- so the facility is LIBOR plus 130 today -- I think you can do 5 to 15 basis points tighter than that.

[Duane Kennemore], Clover Partners.

Congratulations on the good quarter. I had a quick question. Could I get you to discuss how your new acquisition integration procedures have changed from previous management's? I know that's a big component of making these work well relatively quickly, and you had some very definite ideas on best practices in that regard. Could I get you to talk about that a bit?

Sure. Three points. One is that the number of acquisitions that we're closing on, of course, is -- the pace is much slower, let's put it that way. So that certainly gives us the opportunity to do a better job of integrating assets when the pace is much slower than it was, say, 12 months ago.

Second thing is, you start off with a good integration, of course, with the underwriting and buying the asset. And we think with our senior management team in place and our investment committee in place and the underwriting that we're looking at, with Stephen sitting on the investment committee with us, and with the operations group on the front end buying into the numbers, if you will, that certainly makes for a better integration. Because no one is pointing fingers; we're all on the same team, same side of the table.

And then the last -- third point, last aspect, is just the integration itself. Again, slower pace helps a lot; making sure you've got the right managers in place before you take over the property; making sure you have your arms around the dates for the Yellow Pages and the signage changes and things such as that. And I'd say the one constant element that is helping us most is just the slower pace. We did this back in 1996, I think, at Storage USA, but basically what U-Store-It went through last year. And it is very, very difficult to integrate the number of assets in a single period of time as U-Store-It did, as we did back at Storage USA. So I'm glad we're through with that, and we're doing a good job at this point in time, I think, with integration.

Is it because of the, I guess, just the manpower required and the different details associated with -- I guess I really don't understand what all is involved in integrating a new property.

It's basically manpower. If you're -- and it's all numbers. So the slower pace just makes it so much easier and we're able to cover all the details in a much more methodical manner. That's all it is.

(OPERATOR INSTRUCTIONS). Ralph Block, Focus Financial.

Congratulations on getting your team together again, Dean.

I'm very happy about that, Ralph.

Just a question on housing turnover. What's been your experience in terms of the amount of housing turnover being a driver for demand of storage space? And are you at all concerned about some people now talking about kind of a hard landing as opposed to a soft landing in the housing market impacting demand for space?

You and I have been through a couple of these, right? My experience has been that a softening housing market does not necessarily tie to a downturn in self-storage occupancies or rental rates.

On the other side of it -- so you don't have as many people moving. You've got people staying in housing units that are smaller. As they grow with their families or collections of things, they need more storage space. So, it is a demand driver to a point. But when you have housing starts down, you do have an offsetting positive factor.

As far as the hard landing is concerned, I guess we go back to '91, '92 before we've had a hard landing, if you will, or at least a two-quarter recession -- has not been a material impact on our industry either. What impacts us most as far as demand drivers are concerned I would say is more corporate profitability, which I think we're all still pretty pleased with. Those demand drivers built into corporate profitability is moving people around, adding sales reps, adding additional space for those sales reps and other uses within the corporate world.

The economy does affect discretionary spending, so I think our consumer that is a discretionary spender or store, if you will, is in the 10 to 15% range for us. So when we have an event that will cause the consumer to stop their discretionary spending, that does impact us some. That would normally be people concerned about their jobs. And with basically full employment, I don't see a problem there.

Our other demand drivers of course don't change, and that's people dying, people getting divorces, other calamities, if you will, like hurricanes in Florida and floods in El Paso. So, kind of a long-winded answer, but I don't see an event out there right now that causes [me pause] as it relates to our demand drivers.

I appreciate -- that was very helpful. One other related question, Dean. Is there any change in the prospects for getting additional business from companies?

Oh, sure. That's as much an awareness item as anything. As we mature as a sector, self-storage, the business establishments out there are waking up every day on how to use our product to either eliminate their need to take that extra 1200 square foot bay that's coming open next to them, take their storage out of the back room, expand their 1200 square foot bay to all retail display space, and put their storage down the street in our storage facility, if you will. That goes all the way to the pharmaceutical sales reps that in good times such as we are enjoying right now, basically all of them have the opportunity to take their samples and their point-of-sale materials out of their apartments and houses and take them to a storage unit which is paid for by the company. So from an awareness standpoint, we've seen this business usage grow dramatically over the 20 years I've been in the business, and it will continue to grow.

I think just another slight point on that is if you look in Europe right now, where storage is a fairly new product type over there, it's the businesses who have found how to use storage first over there, versus the retail consumer. So, I think, whereas we think maybe 30 to 35% of our consumer base is a business customer, in the UK, for example, it's 65% the business customer. And I see as we go forward our number increasing.

Ben Lentz, LaSalle Investment Management.

Can you guys speak to the current return on your 2005 acquisitions and compare that to the return on your 2004 acquisitions, including the IPO properties?

Sure. The trailing 12 months, if you look at it that way, for the 2005 acquisitions, are yielding about a little bit shy of 7%. And the 2004 weighted average would be right around 7.25.

The acquisitions that you acquired in 2006, they're about 7.5? Am I right?

The most recent ones are running at about that rate, yes.

Did you see a difference in sequential revenue growth between the 2005 acquisitions and the IPO and 2004 acquisition properties?

I think, certainly, from just a pure occupancy perspective, there were acquisitions in '05 and earlier in '06 that have a great upside opportunity in terms of leasing up those facilities. So from that perspective, I think, that pool has a little bit more upside, given that the other pool has got a little bit higher physical occupancy.

Normally it's much more market, sub-market driven than vacancy.

I guess I was trying to get to -- in this quarter, did you see that the '05 acquisitions had a different growth rate than the rest of the portfolio sequentially in revenues?

No. I think sequentially this quarter, you saw generally across the board Q1 to Q2 increases both in occupancy month-to-month, as well as the ability to focus on pushing rent.

And then you mentioned that the June sequential revenue growth would be much like July and August, or July and August would be much like June. But I missed -- what was the June sequential growth compared to the rest of the quarter?

You know what? We didn't give that number, and I quite frankly don't have it here in front of me. But, clearly, from an occupancy perspective, as we went from month-end to month-end on the same-store pool, you would have gone from 81.3 at the end of -- at the end of March to 81.6 to 82.3 to 83.1. So you saw nice growth from an occupancy perspective in that pool.

So we can assume that June was stronger than the rest of the (multiple speakers)

Absolutely. And as we said, in our guidance we assume that that June number kind of continues into July and August.

Are there any other -- are there any previous acquisition properties that don't fit into the portfolio at this point?

Yes. We've identified actually 34 properties as of this moment that we plan to sell, roughly in the 90 to $100 million range. We expect to get out of those and redeploy those dollars.

Are they concentrated geographically?

No, they're spread across the country. Nothing concentrated really.

Okay. Is there a timeframe we should expect those to go in? Are they going to go relatively quickly, or is that a period of a year and a half?

I don't think it's a year and a half, but let me give you my guess on it. We will start to market those assets during this quarter. I would think six, nine months out we should have most of them sold.

I guess the next question would be how do you envision the growth of the Company? I was really going to focus that on sort of development versus acquisition. Do you think development is kind of replacing an acquisition pipeline? But I guess I could also ask now, do you think that the Company is going to grow going forward, or do you think you're basically over the next year just going to replace those dispositions?

No. We still expect incremental growth, one step back, two steps forward. Certainly, we're exploring the development opportunity as we know, as we've moved from cycle to cycle in the real estate world. You need to have development capabilities. Of course, that's how I started my career 35 years ago, as a developer. So we will -- Todd and I are exploring that carefully as we speak. So, I do expect us to have an answer for you on that in the next 60 days or so.

And then we will still do compelling acquisitions. It's a product that -- we'll always be -- you'll always be able to make some acquisitions out there. And then there will be -- our internal growth is the third leg of that stool. And that, of course, is one that's very exciting to me.

But when we look at the 90 to $100 million of dispositions, should we think of the acquisition program as just replacing that capital for the next six to nine months, or do you think you'll have net acquisitions that are positive above that?

I'm not sure we're making any forecasts yet -- not ready to make any forecasts yet on the acquisition pipeline on a go-forward basis for the Company. What I've said is we absolutely will continue to make compelling acquisitions. I think it depends a lot upon the marketplace out there. If sellers are getting to a point, maybe they're getting a little bit squeezed on their floating-rate debt with their friendly banker, or they've got the properties up and operating at a point where they don't think they could do much more with them and they're willing to sell, perhaps, on a compelling basis to us, we could do some good acquisitions. There's a little bit yet to be determined.

Rick Murray, Raymond James.

I was curious if you had any guidance as far as your expectations for expense growth, similar to the way you provided your expectations for revenue growth in the same-store portfolio for the third quarter.

I think the better way for us to look at it as we're running from Q2 to Q3 is that for the overall pool and, I think, also on a same-store basis, the growth from Q1 to Q2, I think, is fairly indicative of how we see Q2 rolling into Q3. So given that the '05 comparison -- the '05 Q3 number was down over Q4, I think we'll still see pretty good expense growth on a same-store pool, 06 Q3 over '05 Q3. But I think on a sequential basis, expenses are a keen focus of ours, and I think the results from Q1 to Q2 are indicative of that.

The other question I had was, of the acquisitions that you completed during the quarter and those that you are expecting to complete over the next -- call it six months, what portion of those were previously contracted or entered into letter of intent by the previous management team?

The ones that closed during the quarter or subsequent to the quarter were previously under contract. And those that are remaining to be closed as we move through the balance of the year -- I believe five of those are newly put under contract, and the balance are ones that were already under contract.

Were you able to an go back to any of those deals and renegotiate terms if necessary?

That was not necessary.

Alan Calderon, European Investors Inc.

Going back to some of Ben Lentz's questions on the financing of the Company going forward, it sounds like you've got the 103 million of notes expiring in November, and your plan is to issue probably a higher amount to pay down some of your floating rate debt also.

I think what we're looking at right now, as I said, is the term loan market in terms of being able to put some unsecured debt with decent maturity. And whether that's two years, three years, four years, we're looking at it on the books. That term loan market in general would be a floating rate market. As I said, we'd look to swap some of that back to fixed based on market conditions at the time, and in general, where we kind of capture our comfort level with the fixed to floating ratio. And that will give us the flexibility then to more fully explore whether we can in fact grow out of the overall levels of secured debt that we have and go down a path towards investigating a rating.

And I guess looking forward, in a net acquisition situation, what leverage level would you be comfortable with before considering going back to the common equity market?

You've got a couple different pieces to that question. Right now, on a pro forma basis, as I said, if you look at -- to market cap leverage levels in the 43, 44% range with all of these acquisitions closing certainly is a range in which we're comfortable. As Dean said, there's a good pool of assets that we're exploring on the disposition side. And certainly in the near-term, those can either be redeployed, that capital, into development, into acquisitions, or to pay down some of the debt. So as we look at our business plan right now going forward, the need to utilize the common equity market to fund the business plan, we don't see that need as we look out right now.

Another couple of questions. The expenses on implementing tend to shift. Are those being expensed or capitalized?

The costs of the implementation are being expensed. They're very de minimis, because, as you know, it's a browser-based system. So the cost really is already embedded in the portfolio. As the property manager and the regional manager need to be on-site, they're generally able to be on-site, obviously, anyway. So, no incremental cost there. And then you're simply pointing your browser to CenterShift and you're up and running. So the cost side of it is fairly immaterial. What is being capitalized then is the, I believe, roughly $3500 per property license fee for the software itself.

And then on the maintenance CapEx, did you say $0.20 a square foot annually?

Yes.

Rolling forward second quarter to third quarter, you had $0.27, pretty much a clean FFO, in the second quarter; guidance is $0.24 to $0.26 in the third quarter. I think you said about $0.01 of G&A and higher property insurance. Is that a proper way of (multiple speakers)

Yes. And I think as I said, I think the upside to that then is on the revenue line.

Right. And then finally, you guys mentioned kind of a [rev path] and an in-place number -- could you please repeat those numbers?

Rev path was $8.93, and then the growth potential or the street rate per square foot, $12.35.

(OPERATOR INSTRUCTIONS). Gentlemen, having no other questions in queue, I will turn it back to you for closing remarks.

Thank you very much. If anybody's listening, thanks for joining us and we'll talk to you next quarter. Bye.

Thanks for your participation. This does conclude the conference and you may disconnect at this time.