CubeSmart (CUBE) 2008 Q3 法說會逐字稿

Hello, and welcome to U-Store-It's third quarter 2008 earnings call. 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, the conference is being recorded.

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

Good morning to all. Today's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risk factors that could cause our actual results to differ materially from these statements are provided in the documents the Company files with the SEC, specifically the 8-K--with our earnings release filed with the Form 8-K and the business risk factors section of the Company's annual report on Form 10-K. In addition, the Company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP can be found on the Company's website.

Again, good morning to all. I have with me this morning also Chris Marr and Tim Martin, who will be speaking. We will start with Chris, I believe, who will make some comments, followed by Tim. I'll come back around and wrap up our comments before we go into Q&A.

Chris?

Thanks, Dean. Thanks, everybody, for joining us this morning. An objective going into 2008 was to establish realistic expectations, communicate those expectations clearly, and then consistently meet or exceed our expectations. The third quarter was another very successful one for us on all accounts. We performed consistent with or in excess of our financial and operational expectations, and we performed very strongly compared to the industry as a whole.

Our same-store growth in rental income of 3.7% was driven by a 2.1% reduction in the dollar amount of discounts and a 2.6% reduction in the gap between in-place and asking rents, both as compared to the third quarter of last year.

And when we combine that with an increase of 1.6% in our asking rents, and our receivables remaining well below prior year levels, which resulted in lower credit write-offs than we had a year ago, we produced very strong top line results. Other property-level income, fees and ancillary sales increased 11.9% over the third quarter of last year, so our total same-store revenue increase was 4.3%.

On our second quarter earnings call, we outlined our expectations for the second half of the year of relatively flat to negative same-store expense growth as compared to the second half of '07. We have delivered on that expectation this quarter, with our same-store operating expenses up 0.9% over the third quarter of '07, with reductions in personnel, R&M and insurance.

As a result of strong revenue growth across the bulk of our same-store markets, combined with the impact of our focus on operating expenses, we produced a very powerful 6.5% increase in same-store net operating income. The result is a 130-basis point improvement in our same-store operating margin.

Our $0.26 per share of FFO exceeded the upper end of our $0.23 to $0.25 per share expectation, and represents 18.2% FFO per share growth over the adjusted FFO per share of $0.22 for the third quarter of '07. Our payout ratio of FFO of 70% permits us to meet all of our fixed charges and capital level--I'm sorry, and property level capital investments from cash flow.

Our previous annual guidance was a range of FFO per share of $0.93 to $0.97. We are raising the midpoint of our FFO guidance by $0.015 and guiding to the upper end of our previous range, introducing new full year guidance of $0.96 to $0.97 per share. And we are maintaining our full year revenue, expense and net operating growth income expectations on a same-store basis.

We continue to be very focused on leverage and liquidity. As Tim Martin will walk you through next, assuming a conservative scenario, we believe we have the capacity to address all of our maturities over the next 26 months.

We have always focused on being good stewards of our shareholders' capital. Twelve months ago, we outlined a plan that began with the right-sizing of the dividend, and continued with our disposition program and the use of 100% of the proceeds to delever. We did not start up a development program, and have not been active in the acquisition market this year. We have made steady progress in our JV discussions, and we continue to explore all capital raising alternatives.

As an update to our disposition program, year to date for the end of the third quarter, we closed on 16 dispositions for proceeds of approximately $45.1 million. These dispositions represent a 7.3 cap rate on trailing 12-month net operating income, and $53 per foot. At the end of the quarter, we had seven properties under contract for estimated proceeds of $21.1 million, and closing expected during the fourth quarter. These seven assets at those proceeds or sale price represented a 7.2 cap, $53 a foot.

Subsequent to the end of the quarter, we have closed on three of the sales, so cumulatively, as of this date, we have closed on 19 dispositions for proceeds of approximately $52.3 million, representing a cap rate on trailing and net operating income of 7.15. We expect to close on three additional dispositions before the end of the year for $9.8 million of proceeds. So, in total for 2008, we expect to generate $62.1 million of sales at a 7.27 cap rate, $53 a foot.

As an update to our JV process, we have made solid progress in documentation, property level due diligence, and in preparing all of the information that goes along with an application to a servicer to transfer existing YSI debt to a new venture entity. The extreme volatility in the capital markets has both the Company and our partner analyzing all aspects of our proposed deal on a daily basis.

Given these unusual times, progress is moving along at a very measured pace. We do not expect to be able to have a transaction finalized and closed in 2008. As we have cautioned on previous calls, this is an unusual period in the real estate capital markets, and we continue to work diligently towards the ultimate goal of creating the right transaction for our shareholders and our partner.

Moving on to operating results, our same-store increase in net rental income was attributable to a 1.7% quarter-over-quarter increase in street rents, and our rate increase is being passed along to existing tenants and lower write-offs. As I mentioned, discounts in whole dollars declined 2.1% compared to the third quarter of '07.

Benchmarking that against the SSDS third quarter national data, rent per square foot and occupied square foot in that report declined 3%, while our same-store portfolio improved 3.7%. Average asking rents declined in that report 1.3%, while our same-store portfolio increased 1.7%.

We're making great progress in our focus on improving our other income, and that focus translated this quarter to an 11.9% increase over the same-store pool results for the third quarter of '07.

One of our points of focus has been to increase the penetration rate on the sale of tenant insurance to new customers. Our penetration rate to new renters has increased from 34% in January of this year to 84% in September of this year.

Same-store operating expenses grew $191,000 in the third quarter of '08, 0.9%, in line with our expectations that the second half of the year would show flat to negative expense growth. Personnel costs are down due to better control over store-level hours in payroll and reductions in workers' compensation premiums.

R&M is down due to a significant amount of work that was done in the third quarter of '07. We've returned to more normalized levels of $0.15 per square foot. And other expenses, which consist of items such as credit card fees, landscaping, mileage reimbursement, uniform supplies, et cetera--these small property level expenditures are up $200,000 over the same period last year. Same-store NOI, as I mentioned, grew 6.5%.

From a sub-market perspective, looking on a square foot basis at our 10 largest sub markets, our same-store net operating income grew over the third quarter of '07 in every one of these markets. Same-store revenue grew in each of our top 10 markets, with the exception of West Palm Beach, which declined $71,000, or 2.5%.

Our best performing markets from a sub-market perspective and an overall perspective was the San Bernardino-Riverside area with a 3% gain in average physical occupancy, a 5.7% gain in revenue, and a 12.1% gain in net operating income over the third quarter of 2007.

Other particularly strong markets included Chicago, with a 3.8% increase in average physical occupancy and a 9.9% increase in net operating income, and Dallas, with a 2.5% increase in average physical occupancy and a 13.6% increase in NOI.

The 46 Florida same-store assets were down $106,000, or 1.1%, on total revenues comparing Q3 '08 to Q3 '07. Miami and Jacksonville both had positive same-store revenue growth at 7.3% and 5.7%, respectively.

The gap between physical and economic occupancy on the same-store pool improved 130 basis points from the third quarter of '07 to the third quarter of '08, again reflecting the reduction in write-offs and reduction in non-standard rents as we passed along rent increases to existing tenants.

G&A continues to run in line with our full-year guidance. We're increasing the midpoint of our full-year guidance from $0.95 to $0.965 and guiding to the upper end of our full-year range, introducing revised guidance at $0.96 to $0.97 per share. And we are affirming our underlying assumptions laid out in our second quarter release.

Our fourth quarter FFO per share we are forecasting in the range of $0.23 to $0.24, factoring in approximately $0.01 of dilution from our asset sales as well as the normal seasonality of the business. As I mentioned earlier, we are focused on improving our liquidity, continue to focus on disposing on non-core assets, and our guidance reflects asset sales at $62 million for the year.

In summary, a very good quarter. We're making excellent progress in all of our initiatives, and we're optimistic about the opportunities we see for the fourth quarter and into 2009.

At this point, I'd like to turn it over to Tim Martin, who will provide an analysis of our balance sheet.

Thanks, Chris, and good morning, everyone. I'm going to take just a few minutes and review some key pieces of information to consider when looking at our upcoming debt maturities through 2010. Then, I'll provide a roadmap as to how Management is looking at liquidity over the next two years.

We have a credit facility that consists of a $200 million unsecured term loan and a $250 million revolving line of credit. We had $182.7 million outstanding on the revolver as of September 30th. Additionally, we have a $57.4 million secured term loan. Each of these loans has a stated maturity of November 2009. At the Company's option for a 15-basis point extension fee, each of the loans can be extended by one year, bringing the loan maturities to November 2010.

The only condition we must meet to extend the loans is that we continue to be in compliance with the loan covenants. For reference, we've provided our financial covenant calculations as of September 30th as part of our October 24th investor presentation, which was posted on our website and filed in a Form 8-K. These financial covenants govern both the unsecured credit facility and our secured term loan.

From our most conservative perspective, here's how we look at 2009. Assuming we close on the property dispositions under contract as of September 30th of approximately $21 million, of which $7.2 million has closed through today, and we generate $4 million of expected free cash flow during 2009, we can repay the $87.2 million of secured mortgage maturities coming due in 2009 by utilizing availability under our revolver.

So, while we anticipate working diligently throughout 2009 to delever our balance sheet and maturities to the extent possible, we believe we are positioned to satisfy all of our 2009 obligations without any access to capital markets.

We intend to continue our property disposition program and pursue joint venture relationships, and expect to be able to generate proceeds ranging from $50 million to $100 million in each of 2009 and 2010.

Assuming the midpoint of that range, or $75 million of proceeds in each of 2009 and 2010, we will have adequate capacity to repay the $91.7 million of secured mortgage maturities coming due in May and July 2010.

Which brings us to the latter half of 2010, when, under these assumptions, we would have approximately $450 million of maturities to address, including the secured and unsecured term loans and approximately $193 million under the revolver on a pro forma basis.

To this point, the only assumption I've made for external sources of capital are $21 million of sales under contract as of September 30th, $75 million of sales during 2009, and $75 million of sales during 2010.

For illustration, I'm assuming a fair way to broadly look at the asset value of our portfolio is to apply the methodology used in our bank covenants. The covenants value our assets by applying an 8 cap to annualized trailing six month NOI after deducting a 5% management fee and a $0.15 per square foot capital reserve.

So, with our pro forma assumptions of asset sales and JC--JV proceeds funding the secured maturities through 2009 and mid 2010, we would have unencumbered assets worth approximately $939 million to address the remaining $450 million of maturities.

We currently expect that a combination of secured and unsecured debt will be available to fund these maturities, as even with the conservative 50% loan to value, our unencumbered properties would support more than the $450 million coming due.

While current equity valuations aren't extremely attractive, we expect to have access to that source of capital over the next two years to supplement our deleveraging efforts.

Before turning the call over to Dean, I'll wrap up with this. While we have work to do over the next 18 months to execute our business plan, it's important to focus on the fact that we have no impending need for external capital until May 2010 to address our maturities. We believe we can successfully execute our property disposition program within the ranges provided and that debt financing will be available between now and November of 2010 on a secured or unsecured basis of terms no worse than 50% loan to value.

With that, I'll turn the call over to Dean.

Okay, thanks, Tim. Thanks for that roadmap. I would like to go back to Chris's comments primarily and address those, because I'm sure the first question out of the box today would have been, should have been, could have been from someone, "Good quarter. How did you do it?" And quite frankly, I asked that same question two weeks ago, and I've been spending a lot of my personal time researching that. And I've come up with some very interesting answers for you.

Point one, you look at Q3 '08 over Q2 '08. I'm looking for trends, and so most of my comparisons, I'm looking within the calendar year of '08. I am looking for something that tells me why are we performing when the rest of the world is struggling. We all turn the TV on in the morning, and CNBC is telling us how things are coming down around us. And when we turn our screen off in the evening, all the red numbers on our screen following our stock prices indicate that CNBC was probably right that morning.

So, what is going on at U-Store-It that allowed us to put up the numbers that we were able to put up during this quarter? And back to point one -- Q3 '08 over Q2 '08, our average occupancy increased 150 basis points, so we gained occupancy during this year.

Point number two, realized rent. If you look year over year for realized rent, we're up 3.6%. If you look at revenue per available square foot, we're up 4.3%. So, we're getting occupancy, and we're also able to raise rents, raise rents to existing customers and raise our street rates at a modest amount. So, we're getting occupancy and increasing rents.

So, then I said to myself, "Well, okay, are we giving away too much in the way of concessions and discounts?" So, I did a study of that, and we have consistently throughout 2008 been giving discounts on a monthly basis to between 22,000 and 23,000 customers. And at Q3 '07, those customers were receiving, on average, $80.51 in a discount from us, and that has trended down nicely throughout all of '08 to October of '08, where that average came down--it's come down to $62.30 per discount. So, again, occupancy's up, the rate increase--rate's up, discount's down.

So, then I said, "Well, are we collecting this rent?" It's one thing to rent the units, but how are the receivables? And I can tell you that over--and this study I did was July through October, and our consistent--our receivables over 30 days have consistently been running at 2.5%--in the range of 2.4% to 2.6%, right on the average of 2.5%. So, we are collecting the rent, we are pushing rates, we're giving fewer discounts and fewer concessions, and our average occupancy, up Q3 over Q2 of '08, is up 150 basis points.

So, the next question is, "Really, those are the numbers--you know, how are we doing this? What's causing this performance?" And I think--as I think I mentioned last quarter, I do think we're outperforming the market a little bit. If you look at Ray Wilson's quarterly report, his SSDS survey, it clearly would indicate we're outperforming the smaller entrepreneurs around the country.

But, we had another interesting survey that was completed this past month, our annual October survey. And as I've told you in previous quarters, I had a hunch that the housing market turmoil was actually a benefit to us, and--but I couldn't quantify it, and now I have it quantified. We did a sampling of--around the country at four--the sampling is forty--4,600 people, and these are people who rented from us during the month of October, and they rented at the same stores that we've surveyed over the last three years, to keep our numbers consistent.

The numbers--and I'll highlight a few of them here--are interesting. 50% of our renters during the month of October at these stores tell us that they are--they've previously used self-storage. 49.4% said that they have never used self-storage. So, this is consistent with my history of doing this for--now for about 14 years. About half of our customers are first time users.

Also consistent is 50.4% of our respondents this time said that they are using self-storage because they are moving. That's been consistent over the years. It's always been in that 50% to 55% range. We asked a question this year that we've never asked before, and the specific question was. has the recent housing market decline caused you to downsize? We had 2,664 people say no; 458 people didn't answer; 1,485 people said yes, or 32.30--or 32.2%.

That's very, very interesting to me, because I would guess--and this is only a guess because we've never really asked the question before, but I would guess that, in years past, had you asked the question, you would virtually have no one say that they were renting from you because they were downsizing, or less than 1%, some very immaterial number.

So, clearly we are benefiting, unfortunately, from the housing dislocation for people moving back home, moving in with roommates, downsizing from houses to apartments. And it's interesting in that we get that same customer when people are moving up the property ladder. But they were typically staying with us for a rather short period of time because their house isn't ready, there's some problem where they need temporary storage, and our guess is that it looks more like a 90-day customer.

This time, with people moving down the property ladder, it's clear to me that they're probably going to stay longer. Unfortunately, with the economy the way it is and with the prospects of the economy on into '09, I would suspect that these people who are storing with us their prized possessions, if you will--if you're moving from a house to an apartment, you have your furniture, and you don't expect to be in that apartment forever. You do expect to move back to that house.

And of course, we all know that used furniture is probably no more than $0.10 on the dollar if you tried to sell it. So, these people are storing their possessions with us, and I think they are going to be staying longer as they're moving--as they've moved down the property ladder.

So, all of that sounds good, but I always like to talk about the bad as well. You know, where is the concern going forward? I've always said for years now that I thought our sector is recession resistant for a short downturn, a short period of time. And normally I've said two to three quarters down in the GDP. And who knows where we are today? But I think most people are guessing we're probably at least one quarter down.

And I would say if we have a prolonged period of a recessionary time--times, all bets are kind of off from my perspective, as, in the 25 years that I've been in the business, we've never had more than two quarters down. But, if we do have only two or three quarters down, I think we're going to compete just fine going forward.

But, if you look at the markets around the country--and we've all focused on Florida in the last couple of years. As we--we don't have to go back through it, but as we filled up with the hurricanes down there and those people started moving out, what happened is Florida turned into an out-migration state from historically being a strong in-migration state. Historically, about almost 60% of all moves in and out of Florida were in-migration moves. That dropped to about 46%, 47% of in-migrations in the year before last. And this past year, we're at about 50-50.

So we have suffered from out-migration in Florida, and we're also suffering from lower expectations, because we've always been accustomed to Florida being a strong in-migration state. And unfortunately, we've continued to build storage facilities. We, speaking as the sector, the self-storage sector, has continued to build storage facilities in Florida, more based on the trends of previous years, when Florida was a strong in-migration state. So, we have--I think all of us have struggled in Florida.

But, I'm happy to say now that it looks like those days are maybe behind us. And I do that with a fair amount of caution, but in looking at EXR's numbers, they've now had two quarters where they've had occupancies that--where they've gained occupancy in Florida. And we now have had our first quarter. In Q3, we were 0.6 of a basis point--I mean, 0.6 of a percentage point, on a same-store basis, up over Q2.

If we look at it market by market, which I've done in the last few days, we're good in Jacksonville. Coming down the East Coast, West Palm's been a challenge, but that's been primarily for two reasons. One is there's been a little bit of over-building in West Palm, but also we've had kind of a spiraling downturn in rate there as people have tried to counteract their occupancy with rate. We've tried not to do that. We've tried to hold our rates there, and we've gained from that now. So, West Palm is performing on a satisfactory note for us.

Miami continues to be fairly resistant--or resilient for us, and so we're having good gains there. So, it's really only--and Orlando is fine. We've had gains in Orlando. So, it's really the corridor for--from Tampa to Naples that we continue to be--to struggle some. But, we do have the right people in place in Florida now, and I'm convinced that even that Naples to Tampa corridor will come along for us.

So, what can go wrong? We've talked about the economy. I've always been concerned about supply. I'm always concerned about supply. And here at U-Store-It, we do a quarterly supply search just for this call, and we look at our 40 markets around the country that we operate in, and our folks are trained and required to know, of course, what is happening in their markets. And so we pulled together this data for you. And it appears that in the third quarter, we could only find 10 storage facilities around the market--around the country that opened during the third quarter. That would probably be about 600,000 square feet. My guess is it's--that's only about 0.3 of one percentage point in supply growth.

We had one--I'll just read them off quickly. One in Cleveland. One in Chicago. One in the Massachusetts, just north of Boston area. One in Denver. One in Southern California, near Murrieta. One in the Washington DC area, up toward Baltimore, actually. One in West Palm. One in Orlando. And two in Naples. So, that's kind of an update on supply. And it is--and intuitively, we know this has got to be the case, no one's building storage facilities out there to any great extent today.

So, with that, I will just kind of wrap up by saying that we're pleased. We're cautiously optimistic on the future. We're working hard on expenses. I'm getting very, very involved on the operations side of the house now with Stephen Nichols and our four divisional vice presidents. We're budget--in the budgeting process right now, and we are looking forward to controlling expenses in 2009. We're looking forward to still being able to pass along some rate increases, at least to our existing customers. We're optimistic that we don't lose occupancy. We will--Chris will, at the appropriate time, provide you with more guidance for '09, but, again, I'm cautiously optimistic.

And with that, Amy, we--I'll stop, and we'll start taking some questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Christy McElroy at Banc of America.

Hi, good morning, guys. I know you don't have to deal with the credit line or the term loan until late 2010, but have you considered doing--you know, preliminarily doing a debt raise using a portion of our unencumbered pool to pay down your line? And do you have the option of paying off the term loan early just to term out your debt a little bit better?

Hey, Christy. It's Chris. How are you this morning? We--to answer your second question first, we have the ability to repay either term loan, the $57 million term loan, which is a bank-led term loan, or the $200 million term loan, early. The only difference between those two instruments and the revolving credit facility is, once we pay them down, we cannot reborrow.

Under the--in the market, we--we're--as I said in my comments, when I said we're exploring everything, we are exploring everything, and have been for the last several months, in terms of what's available out there to be realistic for the next month and a half.

Now, the life companies who have been doing balance sheet deals with term at, on a relative basis, the most attractive rates that are really out there other than what's available within the bank term market, they're not doing anything new for the balance of this year. So, as we get into January and they start to focus on their '09 book, that's an avenue that we absolutely will explore.

Okay. And then, just, you know, looking at your unencumbered pool, assuming that you have $800 million of assets in that pool--but, according to one of your covenants, as you outlined in your October presentation, which was great, by the way. Thank you for that. The pool needs to be greater than $400 million. Does this mean that, at 50% LTVs, you'd be able to generate roughly $200 million from that pool to pay down debt, or am I looking at that the wrong way?

No, I don't think you're looking at that right. The unencumbered pool, the unsecured indebtedness cannot be more than 65% of that pool. The--I'm not sure where the $400 million came from, but the $815 million that was in our presentation, in terms of unencumbered asset value as defined, the leverage can't be more than 65%.

Okay. I'm just looking at page eight. It says, "Minimum unencumbered property pool value." You have the value at $815 million, and then there's a note that says it must be greater than $400 million.

That's correct.

Okay. So, that means that you need to have a balance of $400 million. So, you can't use more than $415 million of that pool to generate excess proceeds for--to pay down debt.

That's correct.

Okay. Great. And then, just lastly, with regard to the line of credit and the unsecured term loan, I'm assuming that you--you know, you plan to extend both, assuming you haven't found another option before, you know, Q--before next year. Would then--would you then have to book the 15 basis point fee--extension fee in Q4 '09?

Well, it would be amortized over the one-year extension, so that 15 basis point fee would be amortized one-twelfth per month between November of '09 and November of '10.

Yeah, technically--.

Okay.

Technically, it would be amortized ratably from the time we exercised the extension through maturity.

When can you exercise the extension?

We could exercise it now if we chose to.

Okay. Thank you.

You're welcome.

Our next question comes from Jordan Sadler at Keybanc Capital Markets.

Thanks. Good morning, guys. I'm here with Todd Thomas, as well. I just was trying to get a sense of what happened to your occupancy sequentially versus what you would ordinarily expect to happen. And it looks although--as though it was essentially flat. Is that accurate across the whole portfolio?

Yes, essentially flat. We were even on the average, and we were down, you know, from 81.9 to 81.7 at the last day of the month.

Okay. And ordinarily this time of year, Dean, what would you expect to happen? Would--isn't the third quarter usually a little bit seasonally better? And I'm just trying to gain a sense of what you think's happening sort of sequentially and maybe real time, as we even head into October, what's happening in the portfolio with tenants, how tenants are responding.

Well, now, actually your seasonality trend is down for Q3 over Q2. July will be a slight movement in the month. August is a big move out month, especially if you have many students, and September is a move out month. So, generally you start trending down after July, and your move outs--your net move outs in August and September will be greater than the move ins you have in July.

Okay. And so, what did you guys see in October?

Yes, so if you want me to answer the question regarding Q3, it performed--we performed better than historically, from a seasonality standpoint, in Q3 than I expected us to or would have expected us to.

Okay.

As far as trends on into October, we see nothing more than normal seasonality trends.

Okay. So--and you started to talk about move ins versus move outs. The pace is--the exchange is pretty much the same and you're concessioning less, you said?

We're concessioning less, exactly. We are--we're doing some things that are interesting with our discounting. The first month free that we've all been kind of pushed into over the last few years we're trying to get away from. We're testing other calls to action, if you will.

The problem--one of the problems with the first month free is we find about 12.5% of those people move out in the first 30 days and never pay you anything. And so, we're testing some others, and one that's more interesting is half off the first three months, which looks like a little bit more of a discount than the first month free, but you--but that assumes that the person is going to stay for three months. Half off the first three months is actually working quite nicely for us. And--.

When did that start?

We tested it back in September, and we put that into place in many places around the country in October. But, again, we're trying to find a way to keep from giving away so much free rent. It's--you know, you've heard me talk about it before. It's just ridiculous how much free rent this sector gives away, and we're doing our best to bring that down. And as I read off the discount numbers going from Q3 '07 last year--from over $80 down to $62 for the month of October, we're encouraged as to the progress.

What--how come you guys changed it? And I mean, that's--is that the same discount, or is that--?

Well, we have--.

It's a little bit more, right?

We have different kinds of discounting, but your concession discount has historically been--.

That's a one and a half months rather than one month, though, right?

Well, that's my point. You're assuming with the first month--yeah, it is one and a half months over a three-month period. But, if you give away the first month free, 12.5% of your people move out in the first month and don't pay you anything. You get another 15% who move out the next month. You're--we're finding you're better off to offer a concession to keep people there longer--.

Okay.

--than just giving them the free month free--the free month upfront and then moving out within the first two months. It's probably too technical to get into on this call, but --.

No, no, no, I understand--I mean, it makes sense to me. I mean, it's just another way of sort of managing tenant behavior.

We're trying to extend stays and bring down discounts, but you're exactly right--and get away from just giving it to them when they walk in the front door. Half of them have never used storage before. Many of them aren't even expecting it.

Understood. And then, on the occupancies on the stuff that was sold during and after the quarter, Chris, do you have that?

They were, you know, right in line with the same-store average, so the difference in occupancy driven by that is not impacting the overall same-store pool.

And we actually did that. It was 0.10 of one percentage point impact, so it's the same, Jordan.

It was $53 a foot, right, that stuff?

That's right.

I think Todd had one.

Yeah, I just wanted to--back to the concessions real quick. You know, I understand sort of these new programs you just started in September, but--they're down year over year, but can you talk about the trend in the concessioning sort of on a quarter-over-quarter basis and how that trended through the third quarter and into October, and I guess maybe even, like, the need to decide on this new program in September?

Yes, it's a lot of detail, but I'll just read off some quick numbers for you, if you'd like, and I'll give you July through October. In July, 43.6% of our people were selecting first month free or getting first month free. That's over 11,000 customers. That trended down to 10,000 in August, 7,000 in September, down to 5,305 in October, and down to 21%. And so, with the other discount that we're giving, which we think is a better value for us, not for the customer, we're--we are getting longer stays, so we're trending down dramatically on giving away the first month free.

Okay. All right, thanks. I'll requeue back in. Thank you.

Okay, thanks.

Our next question comes from Michael Bilerman at Citi.

Good morning, guys. It's David Toti here with Michael.

Good morning.

Just along those lines of the longer stay, are you--in the context of people staying because of the housing turmoil and the change in discounting, are you actually seeing a material change in your length of stay--you know, the 12 to 13 months for the residential customer and the longer stay for the business customer?

Not yet, David. We're still in that 11 to 12 month range as far as average stay, but it's really just kind of happening as we speak. If you think about it, if 32% of your people who are moving are renting from you because they're downsizing, you know they're going to stay longer.

And as far as our discounting is concerned, that will push our average length of stay up just a little bit because we don't have that 12.5% flip in the first month, as we call it. So--but it's too early to see any kind of change really, but we'll focus on that and give it to you as we go forward in the quarters.

Okay. And then, just moving over to some of the debt issues in the balance sheet, what kind of rates are you seeing on some of the debt options that you're exploring for next year?

It's--and this is Chris. If you think about a life-company-type debt at 55%, 60% loan to values, you're seeing coupons in the 6 to 6.5 range, generally amortizing. If you're looking in the bank market for our type of credit profile, arguably a notch below a BBB-minus kind of profile, we are seeing LIBOR plus 300 type spreads with upfronts of 25 basis points a year.

Okay. And then, along the same lines, will the cap rate used in valuation in the terms in the covenants be renegotiated when you exercise the extensions?

No, the covenants stay exactly the same.

Okay, great. And then, just moving along to the operational side, what's your projection--I know you're not giving out '09 guidance yet, but what's your projection for repair and maintenance spending going forward? Do you expect that it's going to stay at lower levels given the big push you made last year?

Yes, I think lower than the big push of last year, along--back along more historical lines, which would be in that $0.15 a foot range.

Okay, great. Thank you.

The next question comes from Jeff Donnelly at Wachovia Securities.

Good morning, guys. Thank you very much for laying out the roadmap. That was very helpful. You know, I'm curious, though. It sounds as though much of your deleveraging plan is based upon asset sales. What sort of pricing are you anticipating on assets in the plan that you had outlined to come up with those proceeds? And how does that compare today to the pricing that you're seeing in the market?

Hey, Jeff, it's Chris. Great question. As we looked--and you can go back and look at commentary we made going into this year. We laid out a fairly broad range because of the different types and markets of assets that we're selling of a 7 to 8 cap on trailing NOI. And really, we've been at the lower end of that, as I described in my comments, and we'll come in at the lower end of that for everything that will close this year.

We're selling unencumbered assets, so the proceeds to us generally, you know, absent the costs that we incur on the brokerage side, are in line with our sales price. So, you know, we're going to get $62 million in that low 7 cap range. And so, as we go into '08--'09, rather, our expectation would be that we would continue to see that 7% to 8% cap rating on--trailing on what we'll be focused on disposing of in 2009. I guess exactly we were at a 7.27 for 2008, and I think that 7 to 8 range, again, depending upon the asset and the sub-market, continues to hold.

You don't--you know, we haven't experienced really movement at all in our expectations asset by asset as we look at the beginning of the year versus where we've been able to close deals throughout the year. The thing that has evolved throughout the year is the time period is clearly elongated, and the depth is clearly much more shallow than it was at least heading into the beginning of the year.

I, frankly, wasn't able to keep track of all the figures in the plan that you had laid out, but what was the aggregate volume of asset sales that you are projecting in 2009 and 2010? And were all of those anticipated to be unencumbered asset sales, or were some of those encumbered assets?

The roadmap that we laid out assumed a range of dispositions of $50 million to $100 million in each year of 2009 and 2010. So, for illustration purposes, we chose the midpoint of that range at $75 million. We also chose, in that roadmap or that pro forma that I walked through, to assume that all of those assets were unencumbered, because that is the most stressful to the roadmap. So, if you assume that some portion of those $75 million were encumbered, that would actually give us a little bit more of an unencumbered property value by the time we got to the end of 2010.

And so, what is your most restrictive covenant today?

Our most restrictive covenant is the--is a combination of the consolidated leverage ratio, which we put in our October 24th investor presentation at 57.8%. That has a limit of 65%. If you stress that on the debt side, that would mean that to get up to the 65%, we could incur approximately $123 million of debt without benefit of it adding anything to the asset value. So, we could add a--we could incur $123 million worth of debt to do--I don't know what we would do, other than buy assets, but that's the stress on the top part of that ratio.

On the bottom part, the asset valuation that I walked through, which is in the covenants, is based on an 8 cap on trailing six month NOI. The denominator of that leverage ratio would have to reduce by approximately $189 million, which translates into an annual reduction in NOI of about $15.1 million. So, our NOIs would have to go down $15.1 million to push us up against that covenant, all other things being equal.

That's helpful. One last question. It's in there as an 8 cap. How are lenders underwriting today in the marketplace, if you were to go out and go and seek leverage there? Are they using 8 caps? Are they using more or less of that?

Again, having had conversations that--obviously, no need to be in the market with this specific transaction, I can just tell you from discussion, so I don't have a term sheet. But, from discussions, things are generally staying in that 8 cap.

That's great. Thank you.

The next question comes from Paul Adornato at BMO Capital Markets.

Hi, good morning. I was wondering if you could talk about what you believe to be a long-term goal for your operating margin. You know, you said that you experienced a nice increase this quarter.

Hey, Paul. It's Chris. As you--you know, as you know, having focused on this product for quite a long time, between adjusting revenues to where ultimately they can get to and then continuing to have good top line growth, and having your expenses as well where they need to be on a property-by-property basis, to be able to get those margins up closer to that 65% range for this portfolio in the markets that we're in is ultimately a long-term objective.

And what do you think is a reasonable expectation for 2009 as it relates to margin?

Yeah, I think we'll provide all of that rather than do it piecemeal. You know, we'll get that as part of, obviously, our overall '09 outlook.

Okay. And--.

Hey, Paul. This is Dean.

Yes.

That is a big focus of mine. You're really hitting on a hot button of mine there. When you do compare across the landscape, though, you have to be careful and make sure we've all got the same expenses in at the property level versus at the G&A level. But I am very focused on expenses at the property level. And as Chris said, we do have a goal in mind, and we will be bringing those margins in line.

Okay. And just to clarify, do you include non-rental revenue sources in your margin calc?

Yes. When we look at margins, it's total revenues at the property, everything that's delivered at the property, so it includes locks and boxes et cetera.

Okay. And with respect to your property sales, could you characterize the buyers of your properties? Were they entrepreneurs, pre-public entities, institutions?

Soup to nuts -- more of the first two, not so much the last one you mentioned. It has generally been folks, primarily entrepreneurs, who have had positive experiences in the storage sector and who have relationships with financial institutions, whether they be national or regional, who continue to have healthy balance sheets and are willing to lend at that 50% to 55%, some cases 60%, loan to value.

They're good to work with because they know what they're doing. They understand the property type. They underwrite to levels that are comfortable and we can understand, so we can have good communication with them. And they have generally been able to deliver on the debt. They have the equity, whether it be friends and family or other sources. But, it's been a pretty broad group, although we have had repeat transactions with two or three of our buyers.

Okay, thank you.

The next question comes from Chris Pike at Merrill Lynch.

Good morning, everybody. I guess I'll start with Dean. I guess--based on your comments and your expectations for the storage sector in general, I guess you're expecting if we have a shorter duration of a recession, things should be relatively okay, right? But, I know back in 2001, you were one of the operators in business at that point, at SUSA, and you posted negative year-over-year revenue comps. So, is it possible for the sector in general to post some flat or even negative comp as you see things going forward?

Well, good morning, Chris. Let me go back to 2001 for a minute. And it's my position that 2001--the two quarters that we had down in 2001 did not drive by itself the one or two quarters of negative--I believe it was only one quarter of negative NOI growth in the sector. I think that was driven by the 9/11 event, because we were operating Storage USA at the time. And as I've mentioned on this call before, I think that the--we had--we dropped 1,000 net rentals that first month, October 2001, after 9/11. And that was what I call our discretionary customer. Everyone realized at that point in time we were at war with somebody, didn't know who. Everybody started to reevaluate their household budgets, started canceling their Disney trips, Carnival Cruise line trips, and so that's the customer we lost immediately, and it trended down from there.

I go back to the two quarters we had down in 1991. We had another aberration, in my opinion, then, and that is we had so much overbuilding as a result of the S&L debacle. And so, we were fighting massive overbuilding in 1991, and then we had come upon--we had the 9/11 event in 2001. This time -- and we are doing quite a bit of research on this this time, real time research, to document how this product is doing through this presumed recessionary period.

And so, I'm not expecting--I'll get around to answering your question now. I'm not expecting any kind of sector negative NOI rates during '08--during '09, excuse me, if we--and I realize that we had one of the public companies actually report a quarter with negative NOI this quarter. But if we all do our job and do it well, we should be able to get through two or three quarters of a downturn and come out just fine on the other side without any kind of negative NOI growth rates.

No, and I understand that. And I don't think anyone, nor do I, ever question your abilities, especially given your experience. It just seems that we are on--in rather unprecedented times from an economic and capital markets backdrop. And similar to what happened in 9/11 and the terrorist attacks, I don't anybody quite was prepared and will be prepared for even some of the situations that you guys outlined earlier in your call. But thanks for that.

I guess on a similar note, do you guys--in any way, shape or form, can you provide us how you guys think about the effective change in earnings for a given change in either same-store revenue, physical occupancy or NOI? In other words, for every 100-basis point increase and decrease, or decrease in physical occupancy, do you see a commensurate change in your same-store revenue?

Well, I think I understand the question, Chris--this is Chris. But it's got so many different components to it, I'm not quite sure how to go about answering it that simplistically. Because you can have a decline in physical occupancy seasonally or year over year, and as long as you still have the ability to increase rents to your existing tenants, increase street rents, you can still maintain receivables. You can still produce a positive net operating income growth--or, I'm sorry, a positive revenue growth.

And then, when you trickle that down to net operating income, obviously, I think all the public companies have demonstrated this quarter the ability to very quickly control certain expenditures and, over time, maintain very modest to low growth in others, which obviously has an impact on NOI, so--.

No, and I understand that, Chris. I -- just knowing from, like, other sectors, these things hold other things equal. For every 100 basis points in occupancy or rental rate change, there may be a commensurate change in NOI, and that--.

Well, I think one way to play with it would be to take the 23.6 million square feet we have in the same-store pool--you know, play with the average occupancy and then use the realized rent per square foot and drop that, assuming everything else is equal And I think that gives you a proxy for what the change would be to the revenue line, assuming all your other components stay the same.

Okay. You guys talked about pushing rates on both new and renewals, especially on the renewal side. How do you guys think about that right now? When do you look to push rates, and by how much do you? I know some of your other public brethren have different approaches in doing that. I'm just wondering how you guys think about it.

Well, we have historically, since we improved the systems and began the establishment of our revenue management function, through today, looked at customers who have been with us for six months, and they get a rate increase at that six month mark. And then thereafter on an annual basis, the rate increase varies tenant by tenant, property by property. But I think it's fair to say, through today, we've been in a range of 6% to 8% to those tenants. And we track very, very carefully, tenant by tenant, in our systems the duration of stay following the receipt of that rate increase letter, and we do not see any change in the length of stay for folks who are getting a rate increase versus length of stays across the portfolio.

And I don't know if this question may hold water here, but on the same note there, is there some type of mark-to-market, if you will? So, if you've just looked at all the folks that you're pushing rate on, is there some type of statistic that you can say, "Well, even though we've pushed rate by 5% relative to asking rate, they're still 2% below rack"?

Yes, that's where we would look at, you know, what we would call non-standard rents, which is the difference between your asking and your street rate. Again, as you're moving street rates on a regular basis, that number obviously changes, because you're changing both parts of the equation. But, for the quarter--for the third quarter, on the same-store pool, that difference was 2.4%.

Meaning, 2--meaning, 2.4% below street or 2.4% above?

Below.

But, you're right, Chris. Maybe times at--you know, per customer at a selected location, many, many times we will have existing customers paying higher than rack rate.

Chris Pike Okay.

Just to follow up one other thing, I think where you were going with your question, you can pass along rate increases--regardless of how little or how large, you can pass along rate increases too often, because it's my theory you wake them up.

If you want to pass along a 6% rate increase, my theory is you don't do it in 2%, 3% increments, because you have to send them a letter, and it's a decision they have to make. "Oh, it's only 3%. I'm not moving out because of that, but do I really need that storage?" And so, I think our practice is really quite good. And they know they're going to get a rate increase after six months staying with us, but then a year rate increase is reasonable, and we don't wake too many people up.

Well, the only reason I'm pushing this point is, you know, I guess with your portfolio, I think that's a positive. I can just tell you, from personal experience, when I pulled out of my storage unit, I found I was paying, wow, you know, a hell of a lot higher than what the street rates were when I went in. So, I guess given where we are in the economic cycle, and given where you guys are in rebuilding your rental rate growth, I just wanted to better understand where it is.

And I guess, finally, are there any one-time charges impacting G&A or somewhere else on the P&L in Q4 that may not have been highlighted on the call?

No. The G&A run rate that we are articulated in our guidance--obviously, you can back into a fourth quarter expectation from our full year range, and we don't expect to have anything that will alter that range, obviously.

We did have--everyone had hurricanes and tornadoes during the quarter, and I don't think we highlighted that, but we did have deductibles associated with that, but--if that's helpful.

No, I guess I--.

But, that's not in G&A. That actually hit the property operating--.

Well, I'm just trying to get--I mean, no severance or departures, because I guess that will impact the '09 G&A run rate is what I'm getting at.

Yes, and--or able to be absorbed within our $23 million to $24 million annual number.

Yes. Okay.

Hey, Chris, it's Tim. Just to double back on the--Chris suggested a methodology to answer your question on what a 1% change in same-store occupancy would be. If you actually do the math that he suggested, by taking 23,569,000 square feet of same-store space, 1% occupancy drop times the $10.87 realized rent per square foot and compare that versus an annualized same-store revenue number, it would represent a 1.1% decrease in same-store revenues, obviously all other things being equal.

Okay, great. That's very helpful. Thanks a lot.

You're welcome.

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

Hey, guys. Just a quick question on--maybe if you can just give us some color on what you're selling--what types of assets you're selling, and how you're going to think about what you sell in '09 and '10. Is it similar in quality and price point compared to what you have been selling? And just if you can put a little color behind recent sales and--because the price per foot seems relatively low, even though the cap rate is low as well, but can you just help us better understand the quality of what you've been selling compared to what you still have in your portfolio?

Yes, Michael, thanks for that question. We have focused in this year on assets primarily in that belt between the Gulf Coast of Florida across through to Baton Rouge, Louisiana. And they are smaller assets, albeit occupied, within the realm of the same-store pool that are in those smaller markets, and that I think translates into the $53 per square foot range.

As we look out into 2009, there are still some opportunities in that part of the country to sell a few encumbered assets in those markets, which will allow us to, from a manger--managerial perspective, exit some of those smaller markets entirely, speaking about, you know, parts of Alabama, Mississippi, et cetera.

And then, we are currently going through the process of finalizing the '09 list, but it will in--it will be a focus on, again, markets where we look at, from a long-term perspective, the growth that we can get out of those markets versus where ultimately we may be able to deploy capital more effectively, will be a focus on smaller pools of assets versus each one being sold as a individual asset. But it's, again, trying to cull that bottom 25% of our portfolio from a quality perspective.

Bottom line, Michael, is the assets that we sell in 2009 will be better than the ones we sell in 2008, and the ones we sell in 2010 will be better than the ones in 2009.

And I know you probably can't comment too much on the pending joint venture, but what would be a reasonable price per foot to be implied by that transaction, you know, ball park compared to the $50-foot type numbers for what you've been selling outright?

Yes, I think you're in the range of, call it, $65 to $75 a foot.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Lindsey Yau at Robert W. Baird.

Hi, just to expand on some of the trends you've been seeing, you mentioned the 32% demand from the people that have downsized due to the market. Have you seen any trends emerging with the small business or commercial tenants?

We have not yet. And quite frankly, I haven't gone out looking for it. We're--it appears to me at this point in time we're getting about the same kind of usage from our small commercial customers as we're--as we've gotten in the past.

Okay. I'm sorry, what was the average length of stay for the commercial tenants?

Well, historically it's been a little over two years--26 months, and about six to seven months for the residential customer.

Okay. And you gave an update on the tenant insurance penetration. Are there any indications that that might change going forward as, you know, people's budgets become more constrained and they choose to opt out or opt in for the service?

No, it's just a sale. I mean, it's just how well we sell it. I mean, the numbers Chris gave are quite impressive to me. We're up to 84%, 85% of all of our customers coming in we're now selling insurance, and all that's developed over this year. Most of that--50% of that's developed over this year. So, we're--we think we will do just fine going forward with our insurance program.

Okay. And then, finally, just have you seen any changes in the use of credit cards or the auto pay system?

We have emphasized auto pay. Going forward, we will start to try to emphasize maybe some direct debits to get away from the credit card charges. But, no, we really haven't seen--I mean, it's gone up some, but we've really been emphasizing it.

And you haven't been impacted by anybody, you know, hitting their credit limit or anything when they're on this credit card system?

Nothing extraordinary.

Okay. Great. Thank you.

Is that it, Amy?

Yes. At this time, we show no further questions. Would you like to make any closing remarks?

Sure. Thanks for your attention, and thanks for your interest in our Company. We look forward to talking to you--some of you at NARI, some of you next quarter. Good day.

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