CubeSmart (CUBE) 2008 Q2 法說會逐字稿

Hello and welcome to the U-Store-It Trust second quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS)

Now, I would like to turn the conference over to Chief Executive Officer Mr. Dean Jernigan.

Good morning to all. It's again my pleasure to read this cautionary statement for you.

The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risk, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors have caused our actual results to differ materially from forward-looking statements provided in documents the Company files with the SEC, specifically the 8K, along with our earnings release in the business risk factor section of the Company's annual report. In addition, the Company's remarks include reference to non-GAAP measures for reconciliation between GAAP and non-GAAP that can be found on the Company's website.

Okay, good morning again. Chris is going to start off this morning with a few comments and then I will make my comments and we'll open it up for Q&A. Go ahead, Chris.

Okay, thanks, Dean. Thanks to everybody for joining the call today. Second quarter was a good for U-Store-It Trust, both compared to our internal goals and expectations as well as compared to the self storage industry. We remain very encouraged with consumer demand. Our rentals were up over the second quarter of last year on a same-store basis and new supply remains firmly in check.

We have read reports of folks discussing a disappointing June. Obviously, we're not sure of what the basis of the comparison is, but we wanted to make sure that, as we assumed, everyone realizes that there were five Saturdays in May of 2008 and the month ended on a Saturday, which is very positive for our business, as compared to four Saturdays in May of last year.

June of this year only had four Saturdays and the month ended on a Monday, as compared to June of 2007, when there were five Saturdays, including the last day of the month. So, if you take the quarter as a whole, to factor out the monthly differences in the number of Saturdays, we increased our rentals for the quarter 2.2% over the second quarter of last year. May and June were very positive for us and that momentum continued into July, with a 55 basis point increase in same-store occupancy, sequentially.

Our same-store growth in rental income for the quarter of 5.6% was driven by a 50 basis point increase in average physical occupancy, the positive impacts of our technology in the revenue management area, passing along rate increases to existing tenants and increasing street rents in markets, such as Austin, Chicago, Houston and Nashville where we have experienced strong gains in physical occupancy. And all of that, combined with our receivables remaining well below prior year levels, which result in lower credit write-offs than we had a year ago allowed us to put up the strong 5.6% same-store rental income growth.

Our discounts continued to be higher than we would like them to be, as we must meet the market to remain competitive. Our FFO per share for the quarter was impacted by a penny a share from the write-off of some third party due diligence costs related to a transaction we were working on. As I'm sure you can all appreciate, when we entered into negotiations, we exchanged mutual confidentiality agreements and so we are not able to comment with any more specificity. So, obviously, we will not be taking questions on this during the call.

Our $0.25 per share of FFO, excluding this charge, was at the mid-point of our $0.24 to $0.26 per share expectation. Our payout ratio of FFO at 75% thus far in 2008 permits us to meet our property level capital investments without additional borrowing. We are maintaining our full-year FFO guidance of $0.93 to $0.97 per share and we are maintaining our full-year net operating growth expectation of 4.5% to 5.5% on a same-store basis. We are very fortunate to have no debt maturities of note in 2008 and we've been using asset sales to reduce the balance on our credit facility.

You'll note, on the balance sheet, we have an 11% improvement in our liquidity. Our cash, restricted cash and availability on our credit facility shows an 11% improvement over where we ended 2007.

At the end of the second quarter, we've reduced our floating rate exposure to 17% of our total debt, down from 33% at the end of the first quarter. Our interest coverage is now at 2.6 times and our debt to gross assets ratio is at 52.4% at quarter end.

As an update to our disposition program, we have closed on the sale of six assets in Florida, New York and Louisiana and a business park in New Jersey, thus far in 2008, for proceeds of approximately $17.1 million. The self storage sales represent a 6.81 cap on trailing 12-month NOI; another frame or reference, $49.00 per foot. We currently have 14 properties under contract for estimated proceeds of $40 million and closing expected during the third and fourth quarters; those on a trailing NOI basis 6.98 cap, $53.00 a foot. All of the eight properties under contract at the end of the first quarter have either closed or remained under contract with closings pending.

The financing market is difficult and while the markets that we've explored have not proven to be deep, we are encouraged by our execution. We currently have, in total, between asset sales closed and those under contract, approximately $57 million of proceeds.

As we discussed on our first quarter call, we continue our efforts to raise institutional capital through a joint venture program. We are pleased with our progress and if our discussions continue as positively as they have thus far, we believe we have a strong possibility of closing on a venture during the fourth quarter of this year. There are details to iron out and due diligence is in very early stages so specifics will be forthcoming during our third quarter conference call. The concept remains consistent; our contributions of assets in existing CMBS debt. Clearly, we remain in an unusual period in the real estate capital markets and there is always risk between the stage we are currently at and the closing.

Moving along to our operating results, again, we generated a 5.6% increase in same-store rental income; 27% of that gained through occupancy, 29% through street rate increases and the balance spread among rent increases to existing tenants, lower write-offs, offset by slightly higher discounting.

The same-store data services national average shows rental rates down, by comparison, 2% and physical occupancy down 1% over their survey of the same properties in the second quarter of '07. We're making great progress on our focus on improving our other income. We have increased by 85% our tenant insurance penetration rate to new renters from our January, 2008 results to our June, 2008 results.

However, the other side of our very low AR and write-offs are lower late charges being assessed to our customers, which is the primary cause of the 5% decline in other property income on a quarter-over-quarter basis.

Revenue per occupied square foot grew 5% on the same-store pool. This compares to the same-store data service national average of negative 4.5% in comparing the second quarter of '08 to the same quarter of '07. Same-store operating expense growth of 9% in the second quarter of '08 was in line with our expectations and our budgets. During our comments in the first quarter earnings call, we discussed our plan to significantly ramp up marketing in the second quarter and that our same-store expense growth would reflect that investment. We also spoke to many of you at NAREIT and discussed the fact that we were determined to have our advertising investments in the Internet and in focused direct marketing in certain markets completed in advance of the prime rental season. We completed that objective and believe we bore fruit as our results illustrate.

Same-store NOI for the quarter was up 2.3% over the same quarter of last year. Moving to more of a market look, same-store revenue grew in all of our same-store markets with the exception of Fort Lauderdale, West Palm Beach, Tampa and Naples, Florida. In those four markets, we saw a 4.5% decline in our same-store revenue growth. Florida, as a whole, was down 2.4% as we had positive results in Jacksonville and Miami. Removing the Florida assets from the same-store pool results in our growth moving from 4.8% to 6.4% and our NOI growth moving from 2.3% to 4.7%.

We have made changes to four of our five district managers in Florida, with the changes being made last fall and early this spring. We have seen positive revenue and occupancy growth trends from April through July of this year, with occupancy up 150 basis pints and revenue up 1.3% from April to July. We believe our changes are having their desired effect and Florida has stabilized and is showing signs of beginning to move in a positive direction for the balance of the year.

Our best performing states were Texas with 9.5% revenue and 8.9% NOI growth; Ohio, with 9.1% revenue and 12.1% NOI growth and Illinois, with 10.3% in revenue and 9.4% growth in NOI. And Illinois was also the leader in occupancy gains with a 540 basis point improvement over last year.

The gap between physical and economic occupancy in the same-store pool improved 310 basis points from Q2 '07 to Q2 '08. This reflects the reduction in write-offs, the reduction in non-standard rents as we passed along rate increases to existing tenants, offset by an increase in promotional discounting.

G&A adjusted for the one-time item was $5.8 million, in line with our previously issued guidance for the run rate for the full year. We are affirming our full-year 2008 guidance of $0.93 to $0.97, as well as affirming our NOI growth of 4.5% to 5.5%. We have tweaked down our full-year same-store average occupancy revenue and also reduced our expense expectations. These adjustments on revenue and occupancy reflect our actual results through June, particularly in Florida, which impacted our, obviously, our occupancy and revenue growth expectations for the balance of the year.

Our focus on operating expenses continues to bear fruit and our second half of the year will show relatively flat to negative expense growth over the second half of 2007. Our third quarter FFO per share, we are forecasting in the range of $0.23 to $0.25 and it continues to be appropriately cautious and conservative. As I mentioned earlier, we are focused on improving our liquidity and we continue our focus on disposing of non-core assets and our guidance reflects asset sales for the year at $60 million to $65 million.

In summary, a good quarter; we're making good progress on all of our initiatives. We're working extremely focused and are excited about the opportunities we see for the balance of the year. Dean, I'll turn it back over to you.

Okay, thanks. I'd like to take a little time today and discuss, in somewhat more detail than I normally get into, some of our results. I've seen the reports; that means reports from all three other public companies now and I've heard two conference calls. And at least two of the companies have different perspectives than us. I haven't heard PSA's call yet but our perspective is very different from the other two calls. And so, I'd like to run through all of our markets where we have 500,000 square feet or more in storage facilities and give you our year-over-year revenue gains.

Now, we break this out by state in the material that we file. But we manage, by market, actually, and we have about 40 markets around the country that we have storage facilities in. In the ones that we have 500,000 or more, let me run through them.

Houston, year-over-year, up 13.3% in revenue; Chicago, up 10%; Sacramento, 9.5%; Atlanta +9.1%; Maryland-DC, the capitol area of the country, 9.0%; Denver, 8.5%; Indianapolis, +8.2%; all these are pluses, of course.

Phoenix, 8.1%, Cleveland, 7.8%, Dallas, 7.0%; North Carolina, which includes Greensborough, Raleigh, Charlotte, Fayetteville, 6.3%; Memphis, 4.4%, Connecticut, 4.3%, New Jersey, 3.3%.

Now, we get to the losers. San Bernardino, +2.5%, not negative but still +2.5%; southern California, +1.8%; Tucson, +1.6%; Orland, +.3%.

Now the real losers; Fort Lauderdale, -2.9%; West Palm Beach, -3.3% and Tampa, -6.2%.

Now what does all of this say to me? I'll tell you; if you strike a line under New Jersey and look at the properties, look at the markets below that, starting with San Bernardino through Southern Cal, Tucson, Orlando, Fort Lauderdale, West Palm Beach and Tampa, our fault; not the market. Our fault, management issues. We made many, many changes in those markets, both at the DM level, district manager level and at the property level, with our general managers and managers. And we really didn't have all the right people in the right places prior to this rental season.

So, we're not blaming anything on the market right now. Is Florida, in more of a malaise now than before 2005, before the hurricanes hit? Yes, for sure. The migration patterns have changed. It's still a balanced state. People aren't moving out more rapidly than they're moving in, but we don't have the great in-migration in Florida back yet that we had prior to 2005.

But still yet, we should be able to do much better than what we did in Q2 at our Florida districts and our Florida markets. And, we're already seeing, as Chris said, a turnaround. We think we have bottomed out there and we are looking forward to greater opportunities in the Florida market.

So we've suffered for two or three quarters there. And the question is why we suffered. I mentioned, kind of, what we, somewhat, why we suffered but the word that comes to mind is narcolepsy. It's an unusual affliction and the definition is an extreme tendency to fall asleep whenever in relaxed surroundings. And I really think that's what Katrina and the sister hurricanes did in 2005 to us down there. It filled everything up. Virtually all of Florida was full; people raising rents 15%, 20%, 25%. And it lulled us into a sense of false security, I think.

When those people started moving out, it uncovered what was underneath and that is, perhaps, management teams that had grown to accept something less than perfect. They weren't as energized as before. I think another old term is fat, dumb and happy.

So, I look at us; I look at our management team that came in here in the summer of 2006. And we have not suffered from that unusual affliction. We have focus; we have extreme focus at this Company, based on results. And so, does that mean in this quarter we maybe outperformed the rest of the market a little bit? Perhaps. But, you know what? I think we really should. We get paid to outperform as a public company and I think we should outperform.

So, as Chris said, the SSDS reports, Q2 average occupancy down 1%; we were up 50 bips. Their report had asking rents down, 2%; we were up 1%. Pretty good, in my opinion, still not quite good enough. Pleased but not satisfied, I guess you could say.

So, I'd like to go back and discuss one point that Chris made also. And that is, because we really had some great confusion in this quarter, I think we actually had some people writing on what a miserable June the industry suffered. But I will tell you, at U-Store-It, we have great technology. And we budget on a daily basis, meaning that we know when a month has five Saturdays and we budget accordingly.

So, words I've heard to describe June, dreadful, awful, and pathetic; none of those were appropriate. One company reported rentals down 10% in June; caught them by surprise. They said they were pleased with July but suspect June was weak because people moving had declined as the downturn occurred throughout the country. In other words, they were down 10% across the whole country; well, of course they were. They were one less Saturday to rent units, and that, of course, was a big, big swing day.

So, they described June as a blip on the screen. It was a blip on the screen but we can't manage these assets and manage these companies and manage these properties on a month-by-month basis and budget accordingly. We must manage on a day-by-day basis.

But we were pleased with June. June came in right on budget for us. We were pleased with May; we were not carried away with May because it did what we expected it to do, with the five Saturdays. So, again, the quarter was a good quarter and we were pleased as it came in, basically on budget for us.

I've also seen somebody writing that maybe storage is not a great defensive business. And I still contend that it is. Again, rentals up, year-over-year; occupancy up for us, year-over-year; revenue up, year-over-year. The picture looks pretty clear to me. I don't agree with the concept that YSI is collecting low hanging fruit. This team was in place a year ago. We were renting a lot of units a year ago. And is there still some low hanging fruit out there? Maybe just a little bit, but not much. This management team has been doing a great job for far more than a year now. And so our year-over-year comparisons, I think, are fair.

The other comment I've heard that I would like to speak to is the fear that we are a consumer discretionary purchase. I admit that we have a few such customers but they are very few, less than 10%. They go out and buy their Harley Davidson motorcycle and rent a storage unit from us to put it in. That business is gone for the time being but that is well less than 10%, in my opinion. We have people that are using us because they need us.

I would encourage whomever wants to go with me on my next road trip, to listen to these people, meet these customers and listen to why they're storing with us. We're providing a product and service for these people in transition. They're in transition. That is our business; that is the bulk of our business.

So, I think, as Lyle Lovett has sang the song, "I've been everywhere man." That's been me, the last 12 months. I've seen almost all of our properties now, across the country. I am very pleased with what I've seen, the money that we've invested in our properties, that we have upgraded our properties to the point that we compare with any, as far as I'm concerned, now.

But another thing I do, when I'm out seeing our people and seeing our properties is I'm always looking around for new supply because that is the one thing that can cause us more grief than we'd care to think about. Now, I'm happy to say, again here today, that we have virtually no new supply taking place out there, across this country, in self storage.

We are starting to do a survey, a quarterly survey, through all of our district managers for them to --- of course, they're supposed to keep up with their markets. They're supposed to keep up with any kind of new supply coming on, and, believe you me, they do. Because, if it's going to impact them, they want to know about it so they can tell us maybe why a property's not performing as it should because of a new competitor.

This last quarter, we could only find five new storage facilities that opened around the country. One in Cleveland, of all places; one in Chicago; a small one in Denver, 275 units; one down in the Biloxi area on the Gulf Coast and one in Fredericksburg, Virginia. That is a trickle, a very, very small growth in supply; almost nothing. It feels like 1993, '94 and '95 to me, when we were coming out of the S&L debacle. Nothing had been built; the financial markets had collapsed and, of course, we have something that's similar today. And plus today, we have steel prices that are growing to an unacceptable level.

And so, where are we going forward; no new supply. I think we are outperforming some and I hope this Company will outperform more. We do have our house in order and we are focused. We are focused on growing our net operating income and growing our FFO. For us to reduce expectations on occupancy means nothing to me. I am only concerned about us increasing our NOI and, consequently, our FFO. And as you see, we kept our expectations and our guidance on both consistent with previous guidance.

So, as Chris said, it was a good quarter. I think I'm looking forward to the rest of the year as being a good year. With that, we will start with questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Mr. David Toti of Citi.

Hey guys, it's David here with Michael. How are you?

Good, David; how are you?

Good, thanks. A couple of questions for you on --- just starting with customers, can you talk a little bit about the tolerance of new customers to your existing prices? Are you seeing sort of more pushback from the new customers, or more pushback from the existing customers?

David, we're not really seeing a pushback on either side. Again, from the revenue management perspective, where you're pushing street rents, for us at least, it's in those markets where we're seeing strong demand, occupancies are up, and as a result, we have few units of that type available. And in those markets, we are pushing street rents. We try to avoid reducing street rents whenever possible because, once you go backwards, it's awfully hard to climb back up that hill again.

From a passing long rate increases to the existing customers, our data, and we track every single customer who gets a rate increase letter and then what happens to them over the days and months they're out until the ultimately leave the portfolio; and our data would indicate that the rate increases being passed along actually seem to be having, humorously, a positive impact on the length of stay.

So, on a percentage basis, the tenants who are getting rate increase letters have been progressively staying longer than they were when we first got here and began the program of passing along monthly rate increases. So, we have not seen a change there at all.

In fact, when you look at length of stays, for example the 180 day category, we've actually seen a sequential drop of about 105 basis points, in terms of amount of people who are moving out after 180 days now than they were a year ago this quarter.

Great and then, just moving over to corporate, are you guys pretty comfortable with where you, in terms of staffing and internal systems at this point?

Yes. We are fully staffed. We have a great team and, both from a systems perspective and a staffing perspective, are completely where we'd like to be. Now, obviously, on systems, it's never ending. So, systems create an awful lot of data for us. Data creates an awful lot of demand for analysis and interpretations. So, I still believe, from a data mining perspective, we've got an awful lot we can do, which will benefit us in many, many ways. But the core foundation is there and we push out an awful lot of data on a daily basis to help the folks run the business.

Okay and then, forgive me if I missed this but did you address your strategy around your '09 maturities?

The '09 maturities we did not. So the '09 maturities, we've got two buckets. One is the, and a substantial one, is the term loans and the unsecured credit facility. They have a one year extension option, assuming that we continue to be in good covenant condition as we are, with a 15 basis point fee. So, arguably, if the markets continue where they are, that would be the strategy, is to push that to November of 2010.

YSI 3 is one of the CMBS pools. It matures in November of 2009 and we are looking at a variety of options on that one right now but haven't settled on any specific strategy.

Okay and then lastly, could you just talk a little bit about the acquisition environment, relative to are you seeing increasing or decreasing volume? Are you seeing changes in the sort of average prices? Are you seeing any distressed sellers in the market? Color would be great.

I think there continues to be a spread on the bid/asked, between what people are interested in selling for and what buyers are interested in paying, which, as a result, has not created an awful lot of transaction volume. That's why we're awfully pleased with our ability to execute where we have.

You've obviously seen the transaction in the JV that Sovereign did as a good data point, really, for our portfolio. I'm not sure there's been much else moving around. And you just don't see that distress yet.

To your other point, for the most part, folks refinanced in the last few years with relatively long-term, low cost interest only debt. They're cash flowing and happy. We do believe at some point, if the markets continue to be seized up as they are today, some of that opportunity will present itself. But I doubt that's an '08 event.

Great; thank you for all the detail.

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

Hi, good morning. Just a follow up on customer retention; what actually is the absolute level of customer retention after 90 and 180 days?

We tend to lose, if you're a new customer and you came in today and rented a unit, your move out, between 120 and 180 days, would be about 6.8% of the customers who would come in today and rent. And then that drops to about 4.2% for the folks after 180 days.

Okay, great. And, what has been the nature of the discounts that you've been offering, especially in this last quarter? Has it been a month's free rent? Have you offered more than a month in some cases?

We generally do the month free. Now, that gets stopped at unit types above 90% occupancy and/or if we only have two or three of a particular unit type available, we don't offer that discount. But generally, we offer it below that. And we have experimented with 50% off the first three months. And we're also looking at some other programs, designed to attempt, as we've been fighting this battle for over a year now, to move away from that first month free being offered on the front end and try to find a way to create a longer length of stay in order to get that discount. But, obviously, we're fighting that battle against the other public players who are being more aggressive on the discounting. But the overall philosophy hasn't really changed.

And do you notice a difference in retention among those that you offer the free month up front, versus the 50% off for three months?

Again, I think we've been fairly new on the 50% off for three months so I don't have as much data as I would, as I told you before, on the trend there.

And finally, just on advertising, you said, you, obviously, spent a lot this quarter. Did you turn it off completely in the second quarter? Or do you now -.

No. We didn't turn it off at all. So, the advertising will continue. I think part of the 75% really relates to the fact that we did not turn it on in the second quarter of '07. So, sequentially, we're continuing to use our investment, particularly on the Internet, to drive customers and that's something we can track. So, it's a highly valuable tool for us and there's some ground we can gain on some of the other folks in that area.

And can you comment on July activity?

Yes, July was nice. We were, as I said, we're up 55 basis points, sequentially. We saw good customer rental activity and we continue to be optimistic on the first eight days of August.

And then, just one more; how has bad debt been in the quarter?

Yes, that problem is gone. It's 40% reduction in Q2, same-store, over Q2 of last year. Receivables, over 31 days, are below 2.5% and again, I think, hammering back on Dean's comments, nothing here has been easy since we got here, which means every day, folks are focusing in on blocking and tackling I think accounts receivable is one of those areas where that focus has created a best-in-class performance.

Okay; thank you.

Our next question comes from Mr. Jordan Sadler of KeyBanc Capital markets.

Good morning; I'm on here with Todd Thomas as well. Just wanted to touch base on sort of the revisions and I know this is maybe a little nitpicky but on the same-store revenue and expense revisions, I'm just curious to get a little bit more detail on what was driving those changes?

Sure. The drop on revenue and occupancy really relates to where we ended at June 30, particularly in Florida and how that's going to translate into the last half of the year.

As Dean said, we believe Florida has stabilized and things are starting to move in a positive direction. But we have what we have for the first six months. So, that's really the driver to tweaking the top line.

The bottom, the expenses, we've had some programs in place since the end of lasts year on taking cost out of the system. We've had a keen focus on how we can reduce operating expenses and control them where they can't be reduced. And it is bearing fruit. So, we have some aggressive internal objectives, which we are starting to, and have been, delivering on. As a result, I think the expenses will remain very much in control for the balance of the year.

To be fair, the expenses last year, in the second half of the year, were also fairly high. So, when we talk about flat to negative expense growth on a same-store basis, over the prior period, the sequential changes in operating expenses are not nearly going to show that magnitude. The change over the prior year will, in fact, be flat to negative for the second half of the year.

But, well, will your sequential expenses come down? Is anything particularly seasonal, Q2 to Q3?

Not a lot of seasonality, but from, say, a property insurance perspective, our renewal was at the end of May so we'll see lower insurance costs in the second half than we did in the first half. Repair and maintenance, we are working through the back end of all of the deferred maintenance we wanted to get accomplished. We'll see that move sequentially slightly lower.

Your utilities tend to peak in July and then August, to some extent, with the costs for the climate control units and then that comes down. Last year, that was offset by really high snow removal, in the fourth quarter in particular. We'll see how that weather plays out this year.

And advertising, what's going to happen sequentially?

I think it'll be relatively consistent with second quarter.

Okay, so that would probably be up a little bit from last year?

It will; not nearly to the magnitude you saw in the second quarter because we had the folks in place as we went into the third and we began ramping up, especially on the Internet and direct advertising in Q3 and Q4 of last year.

Okay and then, the joint venture activity you're talking about here a little bit, what's the sort of order of magnitude? And then, which CMBS chunks would probably ...?

Yes; we're not identifying the specific pools at this point. I think, in terms of order of magnitude, total deal size, we're thinking somewhere between --- I'll give you a big range; somewhere between $180 million and $250 million.

Okay and, the likelihood of this, at this point, relative to where you were at NAREIT? It's increased, or...?

Yes, it's increased, relative to where we were at NAREIT.

And, what're you seeing on the cap rate front?

I don't think there's been a whole lot of movement. We're not at a point to disclose that level of specificity. As I said, we will be by the time we get to the third quarter call, assuming things continue to move. But I think there's been general knowledge about where market cap rates are. And, obviously, for a venture seeded with existing assets, you're going to have a slightly higher cap rate, because the owners, or the buyer rather, is not buying 100% of the asset. They're only buying a portion.

Okay and my last one was more of a housekeeping one. And I think you've mentioned some of these details but went over them quickly. On the insurance income penetration, is that showing up in other property related income?

It is.

Okay and so that sort of helped --- and it was higher than it was in the same-store pool last year, right? So there was some....

No, no. Our other property operating income actually declined. If you're talking about it in total, 5% or...-

Right.

...or about $200,000.

Right; so I'm asking, I guess I'm curious what the full offset was.

We may have had insurance income because that penetration, really, has been building each month. So, the insurance income in Q2 of this year, over Q2 of last year, was up, I'm going to guess to say around between $75,000 and $100,000.

Okay and the bad debt, bad debt shows up in net rental income?

That's correct.

Okay. And that was down by how much, year-over-year?

That was down by around, on the same-store pool, by around $800,000.

The other offset, Jordan, is late fee income because we're doing such a good job of collecting our rent, our late fees are coming down.

Okay, that's helpful. Thanks guys.

Our next question comes from Christine McElroy of Banc of America.

Hi, good morning, guys. Given your slightly lower occupancy forecast, you talked at NAREIT in June about the likelihood of kind of getting back up to your peer average occupancy levels of around 88% by mid-2009, what kind of likelihood would you put on that target today and how you're thinking about occupancy over the next year?

Hi, Christine. We've got two things working for us. We're gaining occupancy and they're losing occupancy. So, we have a good chance to get back to the peer group --- little humor there; next summer, I think.

Seriously, we are more driven, as you've always heard me say, towards the NOI line and the occupancy. The occupancy is a factor but we're also decreasing discounts at every opportunity. As you know, I talk about that all the time. And we are interested in gaining income at the margins, with the insurance. We've talked about penetration. We're now focused on our sales of locks and packaging and boxes, trying to increase that by about $10.00 per customer.

And so, we are very comfortable that we're going to do well on our NOI, FFO growths, kind of what I call the bottom line. But that physical occupancy, I just tell you, in years past, we ran our company at the 86%, 88% range. If we get there next year, I think that's great. But if we don't, we're still going to show, I think, outstanding NOI growth because we're doing all these other things.

But I'll get around to answering your question. I think we will be close enough to our peer group by this time next year and it will not be a question of yours.

Okay and then, just kind of, you mentioned earlier about some of the improvements you've made in the technology, with regard to your revenue management. Can you just provide a little bit of additional color on that?

It's really nothing more than what really our other competitors have. I think we just looked at April, May a little bit closer than, perhaps, some of them did. But, our technology and Chris, you can comment if you'd like, but we're using technology in all kinds of different directions nowadays, not only revenue management but accounting and in other areas. Chris?

I think where we're seeing a real benefit is just the passing of time. So, as we have data and, again, we installed most of this in October of 2006; so as we're seeing time pass, which gives us more data, which gives us better points to analyze, I think we're able to do more with it. And it's helping us on a variety of fronts.

At the margin, as Dean said, there are a few things we're doing just because everything's new, which I would say are, by the result of them being new improvements over what we would've had had we carried forward technology from the past. But I don't think we're particularly doing anything to Dean's point that's completely different than everybody else.

And then, just kind of going back to your pushing of [in place] rents, can you discuss kind of at what point, in their stay and how often, you're raising rents on your existing customers? And kind of, you know, by how much are you pushing them?

Sure; if you're an existing customer of ours, generally, you will get a letter in your fifth month, which will inform you of what your rate increase will be, beginning the next month. So, effectively, at your six month anniversary and then every 12 months thereafter. And that's a range, depending upon the location, of between 5% and 7%.

And then, just lastly, going back to the unsecured debt coming due in 2009, you mentioned covenants. Can you kind of elaborate on that, what type of covenants are in place? What would potentially restrict you from exercising the extension?

Sure. Our basic covenants are leverage coverage covenants in the amount of floating rate we can have. The typical kind of bank line covenants, all of which we are significantly under the covenant limit. And I can't imagine that, given the fact that NOIs keep improving, that the covenants will have any issue on our ability to extend at all.

That's helpful; thanks so much, guys.

Our next question comes from Christeen Kim of Deutsche Bank.

Hey good morning. Could you maybe give a little more color on Florida? You indicated that you're seeing some positive signs there. Could you just maybe elaborate on what sort of positive signs there may be?

Well, Chris has some numbers that he'll share with you. But I'll tell you that what we've done is we have five districts in Florida, five district managers. Over the last 11 months, we've switched out four district managers. When you change a district manager, almost always you will change a fair amount of your general managers and managers at those facilities. And so, we've had a wholesale change in management, if you will, in our Florida markets in four of the five districts since last year.

We think we leveled out in Q2. And Chris will give some numbers in a minute on July and even into August, perhaps, as to the fact that we feel good that we have leveled out and we're bouncing off the bottom to better results in Florida. Chris?

Sure. If you just go from April to June and then, again, it gets more positive into July but April to June a 90 basis point increase in physical occupancy. Revenue grew over 1%. So, it's a sign that the focus is there and we're starting to move in a positive direction, versus the slide that we saw in Q4 and Q1.

Well, do you want to speak to July just a little bit?

Sure. In July, the trend continued in a similar manner. We had growth in both our occupancy as well as in our revenue. In terms of specific gains, we were able to grow, as I said, 50 basis points in physical occupancy and about 60 basis points in revenue.

I'd like to also comment that, as a sector, I think we were really causing ourselves a lot of harm in Florida. There are markets in Florida, West Palm Beach is one of them that -- really not U-Store-It but, as a sector, the rents have come down dramatically. As we all have these revenue management programs, I think they can get out of hand if you don't watch them very carefully. And rents have been reduced dramatically, in that market, by some of our competitors.

It will take years, at 4%. 5% and 6% rate increases per year, it will take years to get back to where rates are today where they have been before the rates were reduced. And so, I think we are shooting ourselves in the foot, in some markets. We're holding the line on rates. And, for example, in West Palm Beach, we've got 10 by 10s, 10 by 15s that are $30.00, $40.00, $50.00, $60.00 more than some of our competitors.

And so that's where I get back to making the comment is, we're not managing to the occupancy line. We're managing to the revenue line and to the net operating income line.

Okay. With your rates in West Palm being $30.00 to $60.00 more than your competitors, are you seeing any increase in move outs, or anything of that nature?

See, West Palm's included in those markets he's talking about. So, we are holding our own and actually gaining some. I mean, costs, rent, if you will, has always been third on the list of our customers. The location or convenience is number one; the manager, how pleased they are with our managers, number two and cost is number three. And where we've gotten to as a sector, self storage as a sector, is we've pushed costs up to a much higher profile with our customers than it's ever been before.

With all the signs out front that say free first month, $1.00 move in specials, rent slashed, manager special, all this nonsense that we have [on -- all our] signs now, to try to attract a few people off the street. And it is very few, because nobody turns in the driveway seeing a sign that they get a first month free, unless they really need self storage.

So, we're causing the focus on price to be much, much more dramatic than it's ever been in the past. And so, my thought is you can't reduce rates $30.00, $40.00 and $50.00 because, again, it'll take you years to get back to that point. And so, when we have a 10 by 10; looking at a list here now, our Dixie Highway property, at $159.00 and one of our competitors has that same unit at $89.00, we'll just wait for them to rent those units out, and hold ours at $159.00. They'll rent up the few at $89.00 they want to rent up and then they'll come back to the $159.00 range and it will all be fine.

So, that causes us some occupancy loss to our competitors. But in the long run, we will be better off for it, I assure you.

Okay and just quickly, on the concession front, can you quantify how much more you're using concessions as vis-à-vis last year?

Chris, do you want to take that one?

Sure. The dollar magnitude of concessions...-

Dropped, they just dropped. Yes.

I don't know who that was. Somebody said it dropped, though.

Okay. We have gotten an e-mail that there's some kind of issue on the web cast and we are looking into it; we apologize.

The discounts, if you look at it as a percentage of our gap between economic and physical occupancy, discounts of that gap represent about $4.5 million or 64%. That number is up from where we were last year, primarily as a result -- if you recall, last year we did not begin to offer these first month free or dollar move in type specials until the mid-point of June of 2007. So, if you look at it just from a dollar perspective, where that number was last year, it was running about $3.8 million.

Okay, that's helpful. Thank you.

Our next question comes from Derek Bauer from Merrill Lynch.

Good morning; it's Chris.

Hey, Chris.

How're you doing Dean?

Hey Chris, great; thanks.

So I guess, Dean, just from your comments here, it sounds to me that despite -- I guess, we're just arguably still a fragmented sector, within commercial real estate, and a commoditized sector. That market share is not the first thing that you guys -- it's not the first tool you're going to pull out of the box, in the sense of driving revenue. It's more along the lines of not effective [rent] growth.

That's true. I will argue a little bit about us being a commodity. I don't think we're close to being a commodity yet. I think the Internet, perhaps, is going to take us there. But we still have, you know, 50% of our customers showing up daily that have never used storage before. So, their expectations are minimal in a lot of respects. They expect the market to set the price. They expect us to be close, as far as pricing is concerned. So they do expect us to price kind of like a commodity.

But, in fact, we don't necessarily have to price like a commodity because many of these customers don't go to any place else. They come to us and we're able, with our good sales people in the office, to sell them at a rate higher than somebody down the street.

So, from a fragmentation standpoint, yes, we're a fragmented sector but, that's good. We'll have consolidation opportunities going forward and I do think this sector has an opportunity to consolidate as we go forward because of the reliance on the Internet, going forward, versus the yellow pages. And only the larger companies with the largest advertising budgets can spend the dollars on clicks that are going to be able to compete for that first page on Google.

And so, I think the small entrepreneurs, especially those who own storage facilities around the corner and off the main street, are going to suffer. And I think they will tend to sell quicker in the future.

So, those are some of my thoughts, Chris.

But, I guess, from a commodity perspective, you know, I have toured some of your facilities. I've toured some of your competitors and it just seems whenever I see a YSI sign, I look, maybe a quarter mile or a half mile down the road or even maybe across the street and I see an EXR sign or I see a PSA sign. So, I guess, in that sense, you're close to your peers and in that sense, is it arguably more commodity like, from a pricing perspective?

Well, you would think so. But I just gave you some prices on West Palm that would suggest that we're not commoditized down there because the competitor's right around the corner from us and it's one of those you just named. And so, if we let ourselves, we will become commoditized. But I am trying to stay away from that because I think we do have a value add with our managers. We certainly have value adds at some of our locations, compared to some of our competitors. So, we're probably moving toward that in some years in the future but we're not there today.

Okay. And so, just to be clear, let's say, you know, relative to your views from, let's say, 90 days ago, with respect to occupancy and revenue growth and the like, the downside in the guidance is not a function of a more cautious look to the second half and beyond. But it's just more of a function of continued weakness in Florida.

It's not even continued weakness, Chris. It's us not getting the job done. It's our fault; we didn't have the right people in the right positions in Florida eight months ago, a year ago, 18 months ago, to hit this rental season and enjoy what we should've gotten out of this rental season. I'm not blaming it on the market; sure, it's not the greatest market but it is an adequate market and we performed much poorer than what we should have.

Just take Jacksonville, for example. I told you we have five DMs down there. That's the one market where the DM's been there for almost two years now. And Jacksonville has performed admirably during this period of time. Q2, I think their revenue was up 4%. And they have had new supply, actually, in Jacksonville So, we always tried -- a lot of people; not me, but a lot of people try to blame things on the market. It's normally not the market with this sector; it's the people. And in our case, it was the people. And that's my fault.

Okay and I think you'd commented that since replacing those folks, things have improved. I guess, looking sequentially on a rent per occupied square foot basis in the same-store pool, things softened from Q1 to Q2. And you've explained somewhat why. I'm just wondering, have the, you know, one month in, given your reporting system, how has rent per occupied square foot trended across the portfolio?

Chris, you're going to see, again, you've got a couple of different components here when you look at the gap between physical and economic. But if you just look specifically at the rent per occupied square foot, where we have gained the occupancy, particularly in May and June, ...-

I guess I'm thinking, really, from June into July.

It's going to get better, just as it got worse from March to April and April to May because of the discounting. So, you're in this vicious cycle as being described, where we rent units in May and June, to a significant amount of people who do not pay until June and July.

And we have people move out in May and June who take their $12.22 rent with them. So, the move down somewhat reflects the aggressive discounting on an awful lot of your tenants moving in during the quarter. As they stay and as the velocity declines due to the seasonality of the business, your rent per occupied square foot goes up.

Okay. Let me ask other questions. The bad debt in the sector, why do you think it's so low? Do you think it's because you have a better credit customer (inaudible) storage?

No, absolutely not. In fact, our competitors tell us that we're in worse neighborhoods than them and we should have ...-

Industry in general, yes.

No, it's focus, Chris; it's total focus. It's just that, I put the hammer down in March of last year at a meeting with all our DVBs and I knew where we should be. And, I said guys, we're going to get there. And the only reason we're not there is because we're not doing the job. We were too lazy; we were letting people get too far in arrears and, in fact, they would be going over the cliff. The rent that they owed us was worth more than the stuff they had stored. So, they would just let it go to foreclosure, let it go to auction. It's focus; that's all it is, management focus.

Okay and then, I guess, just a last question here, Dean, maybe for you, given your experience here. Why do you think the SSDS data was so different from your results in the quarter? Is, I guess, back to the fragmentation and commoditization point, is that working in your benefit? Where you're offering something different?

Yes, I think...-

I'm trying to understand why a larger set of national survey data would be so in one direction, whereas, you know, the position from you guys is that that is not what's happening across your portfolio. Is it your portfolio? Or, could the national trends be like that because of the, you know, the higher concentration of non-professionally managed facilities?

I think Ray Wilson's survey data is conclusive on, I mean, it's a lot of storage facilities, as you know, spread all over the country. You're going to continue to see this, I think. In fact, you may even see this widen.

As I said earlier, we have a very large budget for the Internet. And now we're getting --- EXR reported 26% of their business now is coming through the Internet. And ours is growing. We're not at that level yet. But as we go more into the Internet replacing the yellow pages, the small entrepreneurs, and that's who Ray Wilson surveys, they're going to have a tough time competing with those of us who bid for clicks every day with Google and Yahoo and MSN.com. And as we replace the yellow pages, our business through the Internet is going to get on up into the 40% to 50% range. We're going to out compete those people. They're going to really be hurting, as I said, especially the ones that don't have the greatest location where they're getting 40% to 50% of their business from drive by.

So, I think we will out compete, going forward, Ray Wilson's survey and we should.

I will listen; thanks a lot I know you guys have been working really hard. Congratulations on a good quarter.

Thanks, Chris.

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

Hey guys, just a quick question on the JV situation. Can you just comment on sort of the appetite for these capital sources for sort of properties that you would contribute to a joint venture, versus, say, the Hightman-Sovereign deal where they're going to go out and buy new properties? Is that at all a consideration?

Hey Michael, it's Chris. I think, obviously, there's a little bit more complication, which makes the marketing and process longer when you are trying to seed something and then grow it, than when you are essentially establishing a black box, that or a box, that would be the parameters upon which you would acquire or develop.

Obviously, at Storage USA, I'm sure you remember, we had stand alone joint ventures with certain partners where we seeded them with existing assets and we had an acquisition venture and a development venture where we went out and [spec-ed] product. The pace of getting something done on just creating that box and moving forward is a little bit faster, just given the fact that you're basically just committing to do something assuming you can find the product, than when you're seeding with existing properties.

But, I think, the expectations are not different, in terms of the returns, assuming that people aren't looking for something kind of off the map, in terms of a value-add acquisition, for example, where they're trying to go in and do some kind of turnaround.

Which reminds us...-?

Was that responsive?

Excuse me?

Was that responsive? I'm trying to make sure I understood the question.

Yes, no, that was helpful. And then just to follow upon that, can you just remind us of what was shaping your thinking, in terms of whether to seek a joint venture that was seeded with existing properties? Or, sort of going out and buying new properties and just sort of refresh us on what you expect to do with the proceeds of a joint venture, where you are seeding it and reaping some proceeds?

Sure. We were really looking for three things; one was an institutional partner who we could grow the business with. Two, we were looking to improve the balance sheet by being able to take a significant percentage of some secured debt off of our books and get proceeds from such a transaction that we could use to reduce our short-term debt, thereby overall having a bit of a de-levering. And an improvement in the secured, versus unsecured balance in our portfolio.

And then lastly, we were hoping to find somebody who could grow with us, using that as a foundation, using those seed assets as a foundation to look for redevelopment, development and/or acquisition opportunities in one transaction.

There's one other side of that too, Michael and that is that bid/asked spread is still way too wide, in my opinion, to effectively go out. They did the Henry deal, Sovereign did and those are nice properties and I'm sure that's a good deal. But it's tough to be out there today buying assets.

As I've said all along, these assets are performing admirably for the owners and so they're not compelled to sell. And unless they've got bullet wounds or unless we get a new capital gains rate that shakes some stuff out of a tree, it's a tough time to be out there trying to buy. So we weren't too excited about going in that direction.

Okay and then, Chris, maybe I didn't hear you mention share buybacks as a possibility.

Yes, that is a possibility. As we've always said, it's that balance between a desire to establish liquidity and improve the liquidity, improve the leverage and also allocate capital. And there are certainly prices at which, internally, we would look at a share buyback as something that would make sense.

And then, Dean or Chris, lastly, you stressed that your business is focused on serving people in transition. We've seen stories recently that suggest that the number of people moving has declined significantly, of course. And also that the people are just staying in place more often than not. So, has the makeup of the people in transition changed? Can you just maybe elaborate on what transition means during economic downturns, as opposed to more positive times?

Yes. The transition we're experiencing right now and again, I've spoke to a number of these people recently in all my travels is that, they're still downsizing. I mean, you know, home foreclosures were up in the second quarter dramatically, still yet, over last year at all time highs. And people are still transitioning down.

Unfortunately for them, but fortunate for us, that's good for us. And so they're storing their stuff with us. The moves that people tend to measure are the easiest ones. And those are the interstate moves that United and Bekins and others put published reports on. The intra-city moves, if you will, versus moving up from the house into the apartment, from the apartment back home, those are much more difficult to measure.

But the answer is no, we're not seeing a discernible difference at this point in time, people being in transition this year, versus last year. But we were doing our survey in October and that is one of our specific questions we're drilling down this year, to get more clarity on.

Thanks.

I'm sorry. For everybody on the call, we did re-establish the connection on the web cast and we will insure that, on the replay that the couple of minutes where we lost it is repaired and you'll have the full call available for you.

(OPERATOR INSTRUCTIONS)

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

Thank you; good afternoon. What portion of your tenant base is on in some sort of automatic payment system, either through a credit card or automatic debit from their checking account?

It's growing; I can tell you that. It's growing dramatically because it's a focus of ours and that's something else that cuts your late fees down. But, in our opinion, it's worth it because of keeping the customer happy and us not having to chase after these people to collect their rent. But Chris, do you have that number in front of you?

Paula, if you have a second question, I'll see if I can get you an actual percentage while we're on the phone.

Oh sure, that would be great. Mostly, I was just looking for a ballpark. And, to a related question, among that pool, are you seeing any kind of bounce backs where they're over their credit limit or there's not enough funds in the checking account or phenomena like that?

You know, we don't really focus too much on --- I mean, our measuring stick is that bad debt number. And it's amazing to us that we are below 2.5% for over 30. And our benchmark is 3%. I mean, it's acceptable for any one facility or any one district or division to be as high as 3%, over 30. And an additional 7% for under 30. And we're far below those numbers.

And so, you look at our charts and the only blip on our chart from a downward move, total downward move since last year, is the one that we get every year around the holiday season as people tend to go a little bit longer in paying you then. But I am certain, at our 2.5% and below, we are best-in-class there. So, to me, that is the ultimate measuring stick as to if people can afford to pay or if they're paying you or not. And they are paying us; no question about it.

Great thanks. Yes?

We have 42,600 auto pays in the portfolio, at the moment. That's up about 16% from where it would have been a year ago and that's against a tenant base of roughly around 200,000.

That's very helpful; thanks. And then, just to follow up on one of the earlier questions, I too think I missed the metrics that you gave around insurance penetration. I wrote down here 85% and I'm assuming that's of new tenants? I'm not sure I got that correctly.

No; you didn't. That would be fabulous when we get to that point. We showed an 85% improvement from where we were at the beginning of the year in new tenant penetration to where we are now.

At the end of July, we were just a little bit shy of 70% of every tenant that walks in has successfully been offered and sold tenant insurance.

And are you attempting at all to push existing tenants onto that program?

Absolutely.

Yes. That is a focus. You know, that's like found money. Anytime somebody comes in to pay their rent, we try to sell them insurance and we do have many properties now that are selling more than 100% of our new customers. We've had one property I visited just recently; they were at 140% because they were doing exactly what you're suggesting. So, our goal is 80% today. We're approaching it for initial penetration and our goal for total penetration is 50%. And we'll get there next year.

Our folks are really doing the job here. And this is focus as well; we are very pleased with this result.

Okay and then, lastly, could you review for me again; I think I missed this; your disposition outlook for the full year and how that relates to your guidance being reaffirmed?

Yes. We are looking at closing and having proceeds between $60 million and $65 million based on everything that we know at this point. And that is a component of our guidance.

Great and I'm sorry; I do have one last question. On the advertising spend levels, particularly around the Internet, how do you measure the effectiveness of that spend? And, what kinds of information are you learning about your tenant traffic, that is, you know, more enlightening than you used to have?

The measurement there is pretty easy because we have, obviously, the ability through, example Google, to track what we spend during the day, where we are in terms of position in the search engine and then what ultimately happens to that customer. Because the customer then is able to go through our website and either make a reservation, in which case we ask them to put down a $25.00 deposit and/or contact the call center or the store.

If the contact the call center or the store, their data is then captured and we track them all the way through. So the beauty of that form of marketing is that we're able to fairly specifically follow through the person from the point that they connect with us all the way through their ultimate resolution.

Thanks very much.

(OPERATOR INSTRUCTIONS)

We show no further questions at this time. I want to turn the conference back over to Mr. Dean Jernigan for any closing remarks.

Okay. Thank you very much. As you can tell by our excitement in this call, we're very pleased with the quarter. We look forward to the next two quarters at least being equally pleasing for us. We appreciate your support and look forward to talking to you soon. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.