CubeSmart (CUBE) 2007 Q4 法說會逐字稿

Hello, and welcome to the U-Store-It trust fourth quarter 2007 earnings release. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded.

Now I would like to turn the conference over to Dean Jernigan. Mr. Jernigan, please go ahead.

Thank you very much. The company's remarks will include certain forward-looking statements regarding earnings and strategies that involve risks, uncertainties that may cause actual results to differ materially from these forward-looking statements, the risk factors that could cause actual results to differ materially from forward-looking statements are provided in the documents the company files with the SEC specifically the form 8-K filed yesterday together with our earnings release filed with Form 8-K in the business risk factor section of the company's annual report on Form 10-K. In addition, the company's remarks include reference to non-GAAP measures, reconciliation between GAAP and non-GAAP can be found on the company's website at U-Store-It.com.

Good morning to you all. Thanks for joining us. Chris and I will make the presentation today and I will start out. I want to talk about the sector, and I will leave the company comments regarding the quarter and the year up to Chris. But I am reminded by a little story I want to start out with in 1994 when we were first taking Storage U.S.A. out public we were out doing our initial road show and we had this investment banker who was squiring us around stand up and say we've got a great company here for you today, we were making a presentation to about five portfolio managers. We've got a great company for you here today with a great story, some young portfolio manager spoke up and said, sir, if you don't mind, just give us the facts and we will make that determination. So I am going to ask Chris today to just give you the facts on the quarter. I am biting my tongue to keep from telling what you a great quarter I think we had. We'll give you the facts and let you make that determination.

But what I want to talk about is the sector because because I think we had a remarkable quarter in the self-storage sector. I think we have a sector that is showing its resilience to a number of different factors that perhaps could be influencing other real-estate sectors out there, but not the self-storage sector. I've spoken a number of times about the fact that we are a solution for our customers, not an indulgence. So if you look at the quarter, the quarters that we all saw that the real-estate sky was falling in, the subprime implosion, explosion, all the house foreclosures, all the bad events that you read about in the newspapers and watch on CNBC every day, how could we possibly have a decent sector experience with self-storage in Q4. But in looking at ourselves and our friends in the sector, Extra Space, Public Storage, and Sovereign, I just want to point out a few things, which are just remarkable to me. If you look at revenue growth we all experienced positive revenue growth from 2%, 3%, 3.5% for Sovereign, 5.5% for us, NOI growth almost 4% for EXR, 5% for PSA, 5.7 for Sovereign and 7.2 for us. Remarkable numbers, in my opinion. And so how can this be?

I'm ready to add another significant life-changing event that in the past we really haven't had on our list of events that could perhaps be helpful to self-storage, but there's certainly, we've determined, no negative correlation. We've always known that life-changing events like marriage, divorce, death, all of that brings business to the storage sector. But now I'm ready to add home foreclosures as an additional life-changing event that brings us business. We looked at, during the quarter, within the last 30 days, actually, the top markets in the country that have been experiencing the highest foreclosures. And, of course, the poster child, unfortunately, for them, as they seem to be a poster child for almost all negative comments like this, is Detroit. And if you look at Detroit was ranked number one in the U.S. last year in foreclosures. In fact, it was ranked number one in 2006 as well. But last year, if you use the self-storage data service that Ray Wilson provides to our sector every quarter, if you take Ray's sampling, and it is a very broad sampling, I think over 4,000 facilities around the country, the Detroit market experienced over 10% -- 10.13% year-over-year growth in rental rates. And experienced 8% year over year growth in physical occupancy.

That was Detroit, and that was ranked number one. Stockton, California, was ranked number two, and I skipped that one because we don't have a presence there. Go to Las Vegas, which is ranked number three in foreclosure rates in 2007. Las Vegas experienced a 5.88% growth in rental rates and a 3% year-over-year growth in occupancy. Next on the list is Riverside, San Bernardino, the Inland Empire area, ranked number four. It, according to Ray Wilson's report, was flat year-over-year in rental rates and down 4% in physical occupancy. Our own experience in Inland Empire is very similar. We were down only 1% in physical occupancy.

So last what I'd like to comment on, and we tend to beat this one up on a regular basis as well, Cleveland. It's ranked number six. I left out number five, which is Sacramento, because we don't have a strong presence there either, but in Cleveland we do. Cleveland is ranked number six, and you look at year-over-year rental rate growth, plus 7.59%, and plus 1% in physical occupancy growth. To me, that's -- that is fairly remarkable in showing that we have no negative correlation to home foreclosures to our self-storage sector. We've always said that intuitively we didn't feel like home foreclosures were negatively affecting us, but those are some hard facts and figures, and if you want to refer to the website of Ray Wilson, I believe it it's ssdata.net. I think will you find all this data on his website. And it's conclusive evidence, in my opinion that there's no negative correlation between home foreclosures and demand for our product. I'm not ready to say there's a positive correlation yet, because I don't think we have enough time under observation, and I think we will do a study at the appropriate time to look back and sea if we can make a positive correlation but I think that's quite possible.

The other potential head wind that's often talked about out there is construction starts. Growth in supply and self-storage sector. You've heard me talk about this previously as well, and that is that we've had two organizations, the Self-Storage Association and also the Self-Storage Almanac that have been building their databases over the years, and they each have their databases up in the 45 to 50,000 storage facilities around the country. And the almanac in particular said in 2007, in their report that came out in January 2007, that they discovered 2000 more facilities in their search for that book versus the previous year. And so a lot of people leapt to the conclusion that while there were 2,000 construction starts and new properties built when, in fact, that wasn't the case. It's just that when I met with those folks who put that together, they were just building a database, and they just found 2,000 more facilities so in this year's report they came out in this January, they put a note in that they're building their data base, and those numbers are not to be used to determine year-over-year new starts.

So the SSA is doing something similar, and so the only method that we have, and the only organization out there that is actually measuring these starts, of course, is the FW Dodge company who has been doing it since 1985. So intuitively people are saying, oh, they're not coming up with them all. And I think that's quite possible that they're not finding everything. They do this with reporters in cities around the country, and so certainly some of the smaller markets are not finding them, but I think in the top 50 markets they're probably finding most of them because in the top 50 markets you would expect the developers to have to apply for building permits, and that to show up on a public record. So we decided to do a back check of the FW Dodge reports for the last two years in 10 markets. We selected randomly Atlanta, Charlotte, Cleveland, Denver, Indianapolis, Jacksonville, Phoenix, San Bernardino, Tampa, and Washington, D.C.

And in years 2006 and 2007, in total, 83 building permits were pulled to build self-storage in those markets. When we did our back check, we went to each of those addresses, we used Google Earth, we talked to managers in the surrounding areas where these properties either were built or were intended to be built, and we are fairly certain that 42 actually got built, out of the 83 building permits, and of the 83 building permits, 13 of those building were used for expansions. 28 building permits were not used at all. So I am of the opinion at this point, and we've got a lot of work to do here, but I've challenged the SSA to do the work. They're forming a special committee now, our trade industry to do exactly this, but it's my intuition at this point in time that supply is very much under control, I'm not saying Dodge underreports, but I don't think they necessarily miss that many out there.

I think the report is fairly consistent with what is actually happening. We will do more study, more back checks, but I would like for all of you to hear from me in that I do not think we have a head wind at all as it relates to growth in supply. So those are the two big aspects regarding the sector that I think are possibly impacting our rental rate growth, our NOI growth rates, and our physical occupancy growth rates. So speaking to the sector again, I think it's almost like a horse race, if you will, if you take the Kentucky Derby, if you ask people a week after the Kentucky Derby would won the Kentucky Derby, almost everyone remembers the horse, hardly anyone remembers the jockey. And I look at our sector, the public companies in our sector as jockeys. We do a good job from time to time of steering through traffic and getting to the rail from time to time, but just getting to the race, just getting to the Kentucky Derby, you will do well. Being in the race, you will do well.

So Public Storage, Extra Space, Sovereign, our company, we're all in the race together. All of us get to the rail from time to time, but at the end of the day, we must give credit to the sector. This is a very forgiving sector. Even when we make big mistakes, the sector does well, the product does well, and I am just pleased to be in the self-storage business at this point in time. We look forward to the race in 2008.

With that I will turn it over to Chris, and he will give you specifics about the performance of our company.

Okay, thanks, Dean. Without a doubt Q4 was a wonderfully positive quarter for us on all fronts. Yet I can't help but to say don't doubt that we recognize that we remain actively engaged in the turnaround process. We have work to do in 2008 to grow occupancy, control expenses, and shore up our balance sheet, but we are very pleased to be able to roll up our sleeves and dive into that work from a strong platform built over the last two quarters of 2007. I would also first like to recognize Tim Martin and Ben Carr, all of the accounting and finance team and Wayne for their strong efforts in assisting the company in achieving a clean 404 opinion on our internal control structure for the year ended December 31, '07. Those of you who were shareholders or analysts following the company through 2006 and into early 2007 can feel great comfort that the team that we built during '07 has created a strong internal control environment, and that the issues uncovered as we transition to the new team have been addressed and corrected.

Our balance sheet at year end is in very good shape from a maturity profile and from a match between our sources of capital and our known uses. We have a $1.028 billion of debt at year end representing debt to gross asset ratio of 52.5%. Of our total debt, 38% or 419 million, is unsecured. We have approximately $396 million of debt that floats its spreads to LIBOR, of which 40 million is subject to an interest rate cap. An additional $75 million of floating rate debt is subject to swaps that fixes the rate until November 2009. Our $555 million of fixed rate debt has an average rate of 5.4%. We only have one 2008 maturity, a $2.4 million mortgage maturing in December of this year.

In November of 2009, we have an $87 million CMBS pool that matures. Hat a fixed interest rate of 5.09%. We have one-year extensions at the company's option on our credit facility and term lone that can extend their maturities to November 2010. The credit markets are in very difficult shape. I, and I'm sure as everyone on the call does, read many prognostications that the dislocation may last another 12 to 18 months. We plan to monitor our opportunities to refinance over the next 20 months and be prepared to access the refinancing market or utilize our extension option when conditions present themselves.

The right-sizing of our dividend to $0.18 per share resulted in a fourth quarter 2007 FFO payout ratio of approximately 86%. This will allow us to retain cash instead of borrowing to pay the dividend. We utilized a significant amount of our dry powder in acquisition of assets in September '07. Fortunately we are forecasting covering our dividend and capital investment in 2008 from cash flow. In connection with our previously disclosed -- discussed, rather, strategy of disposing of noncore assets, we currently have 12 properties under contract, an additional 10 properties under advanced contract negotiations.

These assets under contract are in due diligence periods and there can be no assurance that the sales will ultimately close. However, we are very encouraged by the process and the level of buyer interest. Based on the current status, the assets under contract would close primarily during the second quarter and generate proceeds to the company of approximately $35 million. Should the assets under advanced contract negotiations actually come to contract, we would expect them to close during the third quarter, generating proceeds of approximately $37 million. That's assets are noncore for us, and we are seeing cap rates on this sale in line with our previously articulated expectations. If all of the assets we currently have under contract or you should advanced negotiations close, we will sell them at an average cap rate of 7.3 on trailing net operating income. We anticipate balancing the use of proceeds between reducing leverage and executing under our share repurchase authorization.

Moving on to our operating results, we generated a 7.1% increase in same-store rental income from a 200-basis-point increase in average occupancy, an $800,000 reduction in write-offs, a 70-basis-point increase in street rates, and the impact of systematic rate increases to existing tenants. We gave back some of that rent growth as our other property-related income declined about $475,000 from the fourth quarter of '06. This is primarily related to a discount program we had in place in the month of October of '07 that waved the admin fee on new rentals. Overall a 5.5% increase in same-store revenue for Q4 '07 as compared to Q4 '06. Revenue per occupied square foot grew 4.5% on the same-store pool, and this compares to information you can see in the self-storage data services reports of a national average of 4%, fourth quarter of '07, over fourth quarter of '06.

Same-store operating expenses grew 3.2% in the fourth quarter of '07, increases in personnel costs primarily reflect improved benefit plans designed to make us an employer of choice, particularly at the store level. Advertising is down as we eliminated legacy programs to advertise in multiple small yellow page directories in many markets and focused our spending on the Internet and other more direct marketing programs. Parent maintenance expense is up reflecting our catching up on deferred maintenance items and investing in assets to drive occupancy. And the other expense variances largely reflect timing differences on the occurrence of expenditures and increased Visa and MasterCard fees as we have focused on increasing the number of tenants using credit cards to pay their rent to keep our receivables down and increased expense of offering free truck rental as an additional incentive to new tenants. All of that results in same-store net operating growth for the quarter of 7.2% over the fourth quarter of 2006.

The gap between physical and economic occupancy on the same store pool improved 240 basis points from Q4 '06 to Q4 '07. This reflect the reduction in write-offs, the reduction in nonstandard rents as we passed along rent increases to existing tenants, offset by an increase in promotional discounting primarily a continuation of the first month free program. G&A at $5.2 million, in line with where we have been running all year in that 5 to $5.5 million per quarter range, interest expense in line with our expectations, resulting in FFO per share of $0.21 at the high end of our range, driven by the strong core performance of our assets. We are affirming the 2008 full year guidance and the underlying assumptions we introduced in the December release. Looking forward into the first quarter guidance, our same-store pool for 2008 increases by 60 locations to 389 facilities. Our G&A should run right around that $5.5 million level, and our same-store assumptions on revenue are generally consistent with full-year expectations.

Our January and February rental activity has been in line with our forecast. Our first quarter expense growth forecast is higher than our full year as we expect to have higher repair, maintenance and marketing costs in Q1 '08 versus Q1 '07, driven by our goal of having the properties and their marketing efforts at their peak going into the rental season. From a market perspective, looking by state at our ten largest same-store margins, their performance matched the overall same store results. New Jersey was our biggest challenge, where we had a 40 basis point gain in physical occupancy but a 0.7% decline in same-store revenue. Rental income there was actually up 1%. We have cleaned up the accounts receivable so well that our fee revenue fell.

We have had two stores in New Jersey impacted by competition. We are adding climate controlled spaces to these assets and believe we will be more competitive in 2000 eight. We generated a 1% revenue gain in Florida, 1.7% in Connecticut on a 250 basis point gain in occupancy, 3.7% revenue gain in California with an 80 basis point gain in occupancy and our best performing markets were in Texas with 9% revenue growth and 160 basis point growth in occupancy, Ohio with 7.9% revenue growth and a 300 basis point increase in occupancy, and Illinois with a 7.7% revenue growth and a 650-basis point increase in occupancy. We closed on one acquisition in the first quarter, a property in the Adams Morgan area of Washington, D.C.

The property is a 2002 conversion to self-storage containing 597 units, and 63,000 net rentable square fee. We purchased it at a seven cap and the property is currently 83.3% physically occupied and we believe has up side in both physical occupancy and rent increases and this is a market that we really like going forward. That's a recap for all of you of the quarter from an operating perspective as we experienced it. And at this point in time, we would like to turn the call over for questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Christeen Kim at Deutsche Bank.

Good morning. Last quarter you guys were looking for something along the lines of 1 to 2% in NOI growth in the core portfolio, and you guys came in at 7. That's a pretty big variance. I'm trying to understand what the biggest differences were versus your expectations a few months ago.

Good question. The differences really were across the board. I think when I just rattled off those markets, well, let me step back. First of all, coming off of the third quarter, I think it's fair to say, again, going into the first quarter, we're taking a very cautious approach to how we introduce guidance to begin with. Secondly, on the top line, I would say everything that we included as a risk we had in our guidance and all of those risks, none of those risks, I guess, rather, came to light, and everything that did happen happened as positive as we could have expected it. The rental activity continued in a very positive way. The clean up of accounts receivables is officially complete, and we experienced a wonderful reduction in write-offs at the property levels. The burn-off of the discounts, the length of stays grew a little bit longer than we had forecast, and on the operating expense side, we certainly kind of threw the kitchen sink into the guidance, and while we continued to invest in the assets in the parent maintenance expense and a few other areas generally expenses came in as good as we could have hoped. I think it's a balance of quite frankly nothing bad happened against a very cautious outlook.

So is it safe to say you're taking that sort of same cautious stance on 2008 guidance then?

Well, I think at this stage the game, as I tried to say, or did say early on, one quarter does not a complete process make. We've got a lot of work that we have to do. We're very comfortable with the guidance on the first quarter, and we affirmed the guidance for the year, and I think for safety sake, that's where we are from commenting on that today.

Okay. My last question is, could you just comment on where occupancy has been trending following the end of the quarter and how sticky some of your new occupancy is?

Sure. As we move into the seasonally slow period of December and January, occupancies, net rentals are negative, as you would expect them to be, but they are in line with our expectations, and February particularly the last 15 days of February, has been surprisingly strong.

Great. Thanks.

Our next question comes from Paul Adornato of BMO Capital Markets.

Last year you had pretty significant turnover at the store level. Wondering if you could comment on the level of turnover now.

Sure, Paul. Good morning. We -- that is one of my hot buttons right now, as a matter of fact. We still experienced more turnover in '07 than what is acceptable to me. We had about 35% turnover in our general managers in '07. I would like to bring that down another 15 percentage points. I would like to get a five-year stay on average out of our general managers, and we are just initiating a new process right now for screening. We have a program that we are developing using testing to screen potential applicants, and so as I said, it's a fairly lengthy process that we're initiating, and I won't bother to give you all the details but it's down substantially from last year, Paul, but we still have some work to do.

At the store level, how is the productivity of the store level folks? What kind of training do you provide there?

Well, we have, I think, a very good training program, and again, no need to take everyone's time with all the details but we certainly have what we had at Storage U.S.A. putting in place with the bronze, silver and gold level training. It's an LMS program, which is done on-line. We have our trainers out in the field. We have a training department in Bowie, Maryland. So we're very pleased, and I know one of our peers put out a certain number of hours that they have -- that they done training in '07. Training is a very, very important part of our focus in '07 and '08 because we were turning over so much of our sales people, and it's a major focus for us going forward. But we feel good about our training programs we have in place.

And switching to bad debt, was down significantly. Are you at a level that you think is a sustainable level of bad debt at this point?

Yeah, Paul this is Chris. As we moved into -- really into October, and as we see it now moving forward in '08, the issues surrounding our receivables and write-offs is a closed one, and behind us, and we are running extraordinarily efficiently at this point at the store level.

And just historically, given your experience in the industry, what happens to receivables during times of economic stress?

Yeah, again, you don't normally across the board see a big change there in terms of the overall levels of receivables. As I mentioned, we've put in a lot of different programs, not only monitoring, but also from an efficiency perspective in taking the auction action that you can at each store as quickly as possible which helps keep down the levels of bad debt as well as encouraging the customers both through the rental action as well as through various promotions to utilize credit cards, particularly to allow us to be able to hit their credit card every month on a go-forward basis.

The seasonal thing, we have that, just as everyone else does, where after the holiday season, they spike up just a little bit, but I have to report they immediately came right back down in February. So we're very, very pleased with our focus that we put into place in '07 on receivables.

Okay. Thank you.

Our next question comes from Michael Knott from Green Street Advisors.

I'm trying to reconcile your fourth quarter guidance with what you actually reported. I'm trying to understand why the actual result wasn't much higher than the top end of the range given that the same store NOI growth was much higher than you expected.

Yeah, Michael, I think it's fair to say that as we try to reconcile that same-store pool to the overall pool, and the performance, we ended up exceeding our same-store guidance. We ended up from a conservative basis, giving back in a couple other areas. It's hard from an art perspective to do 19, 21 in the same store and kind of have everything jive perfectly. I think we were fairly conservative in the same-store guidance that we put out. We ended up doing much better there overall we ended up coming in $0.02 above the low end of our range. Other than describing it as an art, I'm not sure I have an analytical reconciliation for you.

Okay. Dean, can you help me understand why you guys would buy a property at this point instead of buying back stock?

Yeah, that's an art also, Michael. We have about 850 employees out in the field and recruiting every day better folks to come to work with us. And we have to keep in front of them the opportunity this company is going to grow and we're not going to be just focused on reducing expenses and increasing our existing occupancy. We had an opportunity come along, and you've heard me speak in the past about Washington, D.C. closely behind Manhattan as being the best market in the country, in my opinion, for self-storage. We had an opportunity that came along that we couldn't refuse, so granted, a good use of the funds, the $13 million, would have been to buy back stock as well, would not have made much of an impact, I don't think. I will tell you, just buying that one asset made a tremendous impact to our esprit de corps for our people in the field, it's in the market we want to be in, we want to grow more in that market, and they now understand that this company is going to grow going forward.

Was that deal not marketed? What made it -- was there something more appealing than other marketed transactions?

They did not hire a self storage broker. It was just a commercial broker in the Washington, D.C. area. We got in very early, and I don't believe it was looked at by -- it it had very limited marketing done on it. So I don't think anybody else in our sector, public companies, saw it.

Chris, can you just reiterate for me what you said about the properties that you have in different stages of negotiation for sale and then what you intend to do with those proceeds? I thought I heard you mention something about share buyback. Can you just reiterate the key points again?

Sure. We have 12 properties under contract. They are in due diligence, so there's no certainty that they will ultimately move to closing. Assuming that they do, and stay on track, they would close primarily during the second quarter, generating proceeds of about $35 million. We have an additional 10 that are under advanced stages of contract discussion, assuming they come to contract and then ultimately assuming they close, they would be primarily third quarter and generate proceeds of about $37 million, and we've said all along we would anticipate balancing the use of proceeds between reducing leverage and executing under our share repurchase authorization.

And what's the level of lender interest in these sales? We've heard other companies and other product types express difficulties in trying to sell properties because of lenders backing out. What's the scenario here?

Yeah, these, again, if you think about the buyers, we're actually finding a good level of interest from buyers who are low leverage type individual buyers, who to some extent have been shut out of the market over the last few years because they couldn't compete with the higher leveraged guys. And so we don't have financing contingencies associated here, at least on many of these, and it is -- it's a buyer who is anticipating putting a significant amount of equity into these assets, and running them either themselves or with a small management company they may have, or buyers who have purchased other assets in these markets and have a relationship with a management company, and they are generally, on the financing side looking for that 50% loan to value, and they're giving us the feedback that they're comfortable with the fact that they can close and then ultimately finance them at that level in this -- even in this market we're in today.

My last question, and I'll hop out, the 7.3 cap rate you mentioned, is that combining both of those two pools of sales?

Yeah, that would be for everything, assuming they close.

Then are all 22 properties in the same-store pool?

All 22 of these properties -- I'm sorry, all but one is in the same-store pool.

and what's the rough value per foot approximately?

While he's looking for that, Michael, notice we sold two business parks during the quarter also, and those were at a 5.5 cap rate on trailing numbers, so we felt that we had very good execution on those two sales.

These are about $65 a foot properties.

Thank you.

Our next question comes from Chris PIke at Merrill Lynch.

Good morning, Dean and Chris. First, let's go to Chris. With respect to the leverage profile, you said you're willing to term out and extend or you have the ability to term out and extend your line. How much would that cost you on the margin, to push it out?

We would just pay a fee of 15 basis points, an extension fee for one year.

So it's no margin up in the spread?

No. I think it is very fair to say that had we -- if you had to go out and replace that line today, it certainly would be at -- an additional spread to where we are today.

How much do you think that would be?

Boy, I'll give you a big range. 25 to 45 basis points.

Okay. You didn't talk about any joint venture activity, perhaps to help provide liquidity into the balance sheet. What are your thoughts there?

We've been spending some time on that concept of committing some existing assets into a venture and exploring that market. I'm sure, as you know, it's a bit of a bouncy time right now for folks to look at things. It is something that we have on the radar screen, and we'll see how that progresses here in '08.

Okay. And I guess lastly, for Dean, or you, I guess it's widely thought that this dislocation in the market, and given where some highly levered buyers had acquired assets, stemming back over the last 18 to 24 months, that there could be a situation where a good number of assets come back on. In your conversation with brokers and industry folks, have you guys speculated as to directionally how much product could possibly come back onto the market over the next 12 to 18 months?

I think, Chris, this is Chris, as you kind of look at the various private owners out there, the bulk of the product is owned by folks who, if they're fortunate, had put five, seven-year mortgages on their assets in the last two or three years, and are clipping coupons and enjoying very good cash flow and are very happy with their investment, and to the extent that some of those owners take properties out to the market, they're doing so with a price that they have in mind, and if they can't achieve that, are perfectly happy continuing to own the asset. So we've not really seen a distress situation, or any distress situations at this point. I think to the extent that there were owners out there who had acquired properties over the last two years with very high levels of leverage and little to no equity, I think we have to see how that plays out and again, I can't imagine that if that were to all sort of play out negatively for them that we're talking about more than 25 to 75 assets, if I had to guess that could end up coming on the market.

I guess you know where I'm going with respect to one large levered operator who was really assembling a huge portfolio of assets, and I've got to think that that company acquired more than 25 assets over the last 24 months.

Yeah, I don't have an in-depth knowledge of that situation and what may or may not be going on there.

Okay, thanks a lot, guys.

Our next question comes from David Toti at Lehman Brothers.

Quick question on -- you're sort of, in terms of the portfolio, in a contraction mode. What's your sense of the platform's capacity for expansion when and if you sort of turn around and reverse your strategy?

I think we're in great shape, David. We have -- I think we have capacity in certain markets especially at the district manager level. Our DVPs certainly have capacity to take on more asset management. The structure and the training department, as Dean talked about, marketing, facility services, et cetera, is there. So the platform is there to absorb additional properties. Again, a lot of it would depend upon the specific submarkets that those assets may be in as to whether or not we would need to add at the DM level. But all the improvements we've made from a systems perspective in the back office and the control environment, on the IT side, I think we would be able to absorb additional properties with minimal frictional costs.

What kind of scale are we talking an point terms of percentage? Is there any way to quantify that?

Yeah, I think we could pull in 10 to 20% more assets without an appreciable increase in cost.

my next question is have you guys seen any changes in the last couple months in customer behavior or expectations in terms of discounting?

No, I think the -- I think the first month move-in for free, or $1, or whatever that discount may be, continues to be very pervasive, and I would assume on the customer behavior, somewhat expected, but the length of stay of those customers, aus would expect, aren't any different from those customers who would have paid full price for the first month. If you have a need for the product, you have a need for the product, and if you have a need for a set period of time, that need doesn't change just because the first month is free. I think it certainly helps at the margin attract somebody who may have been thinking about using the product on a discretionary basis and just hadn't gotten there yet.

What has happened over the years, David is that the length of stay for our commercial customers are on average broadening the length of stay for our overall tenant base. We're up to 350-day after, something like that now, and as we have more and more commercial customers who know how to use our product and stay long term that just keeps extending. So I'm very pleased with the length of stay that we're seeing.

Great. Just along those lines, have you made any changes internally in terms of the level of data that you're collecting on the customers? I know you were putting in some new systems. I'm just wondering if you're seeing any results from that data collection or you're sifting through that.

That's been extremely helpful for us, as we've now had a history of activity since October of '06 when we got on the current system. So we are now able to track to the lowest level of detail someone who got a promotion when they moved in, and exactly how long did that customer stay. We're able to track patterns in rental and vacate activity. We're able to really on a very granular level, see the impact of different levels of promotions and how they -- how they impact demand. We're able to look at rental rates on a unit by unit basis against occupancy, and be able to make much more sophisticated judgments on increasing rents. We're able to look at tenant rate increases that are passed along to the existing tenants, and see what happens to that specific tenant after the rate increase let hear been received, to make sure that that is sticking. So all in all, each month that goes by, the use of the data becomes greater and greater.

Great. Thank you.

Our next question comes from Paula Poskon from Robert W. Baird.

Thank you. I have a small picture and big picture question four. Small pictures on page 8 of the supplement, same-store data, what was the cause of the rise in other expenses? Can you just give us a little characterization of what's in that category and why it was up so much?

Sure. That category has, boy, 30 things in it, ranging from the Visa and MasterCard fees, office supplies, sale items, legal costs associated with auctions and everything else associated with the auction process, free truck rental would be an expense in there, to the extent we offer that to the tenant for moving in. A lot of that, as I said in my earlier comments, has to do with some of those specific items. There's an awful lot of timing in there in terms of just when things were incurred, supplies purchased in November, December of this year that may have been purchased in John or February of the prior year. And I think in general, I'm sure you can appreciate, back to my points on internal controls and processes earlier on, as we moved through '07, the efficiency has increased dramatically each month that we go by. So some of it it is just also an absolute level of systemization.

Staffing, technology, et cetera, in 2008, on which strategic imperative are you most focused? What's priority one?

Well, this is Dean. I have two hot butt top, I call them this year, and I've already addressed one as turnover, and we're addressing turnover by screening. And that is a big challenge for us to get our absolute best employees in place and properly trained. The second one, well, we have other systems that we're putting in. I've talked to some last quarter about collections. We're going to an automated collections program. We have -- we're testing out a kiosk at one of our facilities right now to better support our managers on site when the office is closed after hours but still be able to rent units. But my other hot button is ancillary income this year. We right now only have a penetration rate of, all total, about 23% on our insurance program. That can go up dramatically. And so with our insurance program and also our ancillary sales program we're rolling out new procedures to have focus on enhancing our other income category for the year. So I'm excited about that. But those two programs, and as you see, the heavy lifting was done last year. We're starting to be able to focus on things now at the margin.

Thank you very much.

The next question comes from Eric Rothman at [Ferdinand Securities. ]

Good morning. Do you still use auction rate securities as a cash management tool?

Great question, Eric. We do not. The company prior to this group arriving had reinvested some of the proceeds from the secondary offering into ARS and those were liquidated in January of 2007 -- I'm sorry, January 2006 at par, and we've not had any exposure to ARS since January of '06.

Thank you very much.

Our next question comes from Michael Knott at Green Street Advisors.

Hey, guys, two questions for you. Dean, as you guys get the ship going in the right direction now, can you comment on prior prognostications that you always felt you could get the physical occupancy up to the mid to high 80s? Is that something you still strive for? What's your current thinking on that part of the business?

Well, I think what I've always said, Michael, is our expectation is to be able to compete with our peer group. We have no structural vacancy, in my opinion, in our portfolio. Average occupancy for all stores at -- for the fourth quarter was 82%. DXR is at 84.7. Sovereign is at 82.2, and PSA is out there at 88.6. So we're making progress.

Okay. And then, Chris, question for you on page 8. Looks like there's new disclosure there at the bottom, indirect property overhead. Can you just help us understand what that is and whether that's attributable to both the same-store and the nonsame-store pool?

Yes that is new. We're trying to be helpful based on questions that we got at the end of the third quarter, so the $6.435 million is the direct NOI from the nonsame-store group, and the indirect property overhead would be the costs that we incur to manage all 409 properties. So it's applicable to both pools.

So those expenses are not expensible at the property level but they're not also at G&A?

That's correct.

Thanks.

(OPERATOR INSTRUCTIONS). Our next question comes from Craig Melcher at Citi.

When looking at your '08 revenue guidance of 4.5 to 5.5% how much of that sat distributable to declining in bad debt?

I'll kind of give you the whole picture, and let me just use the midpoint of 5, if I may. Of that 5%, about a percent and a half would be street rate increases, about 2.5% would be occupancy, about 1% would be reduced levels of write-offs, and basically tenant rent increases and in anticipation that our -- kind of our other income relatively flat net out.

Also in the '08 guide tans LIBOR rate in your initial guidance was quite a bit higher than where it is today. Did that make -- would you look at revisiting your '08 guidance, or are there other items that may be offsetting that, that are making you hold the range?

We would look at revisiting that going forward if things continue to stay at the level at which they are.

Thank you.

Our next question comes from Paul Adornato of BMO Capital Markets.

Could you comment on the performance of the Florida properties compared to the rest of the portfolio?

Yeah, I think, again, I'll refer you back from a macro perspective to some work that Ray Wilson had done that indicated that had the impact of the hurricane not been there, Florida as a whole would be performing today in line with historical results. For our portfolio particularly as I had said, when talking about the markets, we had a -- we had a 1% gain revenue in the same-store pool there -- I'm sorry, 1% revenue, that's right, in the fourth quarter from a same-store perspective. We have pockets in Florida with good gains in physical occupancy. We have other pockets that are a little bit more challenging, so I think in general Florida seems to have stabilized. You're starting to see some migration back into the state, which will be helpful, and we have been able through, again, a combination of everything we talked about, primarily through the discounting, through passing along increases to the existing tenants and the lower levels of bad debt, more than pushing street rate, been able to generate some positive revenue gains there.

Okay. Thanks.

Is I'll just kind of comment on the migration patterns just for a second. Florida historically has had migration trends, patterns up around 60%, all interstate moves in and out of Florida. 60% have been move-ins, 40% move-outs, then when Katrina came along that flipped to down around 47% were move-ins, 53% move-outs. That's when everyone was thinking, wow, everyone is leaving Florida and no one is moving in. But United just reported recently their migration trends for 2007, and Florida has nosed ahead again 50.14% of all shipments in and out of Florida were inbound shipments, which is very good for the state of Florida. So we feel like Florida is stabilized. Any more questions?

It seems that we have no further questions at this time.

Okay. Well, I'll sign off by thanking you again for your interest in our company. We look forward to talking to you at the end of next quarter if not not before. Thanks again. Good day.

That does conclude today's conference. Thank you for attending. You may now disconnect.