CubeSmart (CUBE) 2009 Q2 法說會逐字稿

Hello, and welcome to the U-Store-It second quarter 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions.) Please note this conference is being recorded.

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

Thanks. 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 -- risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company files with the SEC, specifically Form 8-K together with our earnings release filed with the Form 8-K in 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 measures can be found on the Company's Web site.

Good morning to everyone. Thanks for joining us. Our lineup today is we're going to start with Chris Marr, our President and Chief Investment Officer, as we have all the exciting news to talk about regarding recasting our term loan and our credit facility and our Heitman joint venture. Chris will be followed by Tim Martin, our Chief Financial Officer, and then I will come back and talk a little bit about fundamentals and as I see the sector where we are today, and then we'll go to Q&A. So we'll turn it over to Chris.

Okay, thanks, Dean. While I'm making a few opening remarks, I would like to point you to a slide deck we will be using as a part of the call today. For those of you who don't have it currently available at your fingertips, please go to our Web site, ustoreit.com, and then to the bottom of the page, select Investor Relations. Then when you're at the top of the Investor Relations page, select Financial Information, click on that. And then to the left on that page, the Financial Information page, you can select Financial Reports and then go to the first item, Investor Presentation. This information is also available for you as an 8-K filing that was made last night, if you want to refer to it in that fashion.

Well, my alter ego, optimistic Chris Marr, appeared for the first time on last quarter's call and he is back again today. While economic times continue to be difficult and capital markets remain challenging, we are very encouraged by what we see and feel in our marketplaces. The unsecured debt market for highly rated seasoned REIT issuers came back this week with a loud bang. Excellent executions have taken place over the last few days and that is a cause for optimism about the continued thawing of that marketplace.

Relationship lending at reasonable terms and conditions is slowly returning, as evidenced by the wonderful success we have had in obtaining a new credit facility. Banks have evaluated our sector, our Company, and our management team and have renewed and, in many cases, expanded their commitments to our Company.

There remains a market for dispositions of self-storage facilities. This is evidenced by our company being on track to sell $87 million of assets at cap rates that remain in the 8% range. The local and regional bank market remains open for new relationships, as evidenced by the buyers of our disposition properties being able to obtain financing and by our continuing ability to close loans with these great new partners. $54 million, we've closed thus far in the year and have another $43 million in the pipeline.

Direct investment in self-storage is reappearing. Our announced joint venture with Heitman and the announcement of a JV by another public company in our space is evidence of this market being open to solid companies.

The common equity market is available to the self-storage sector, as evidenced by the use of our At-the-Market program, as well as the use of a similar program reported earlier in the week by another company in our sector.

All of this activity, taken as a whole, gives us great cause for optimism. The work is difficult and challenging and pushing all of our announced transactions to closing will be significant effort, but we are confident in our team and our partners and we are up to the task to get it completed.

I'd now like to refer you to the slide deck that I pointed you to earlier in my remarks and we'll walk through that for you today, as it creates a significant amount of clarity around all of the great activity we announced last night.

Turning to page 3 gives you a summary of the year-to-date activity that the Company has achieved. Capital raised year to date through August 6th, $79 million, made up of closings on secured term loans that, if you look at the $51.4 million we had through June 30, plus the additional $2.3 million loan that closed last week, the average term of that debt, 6.1 years; the average loan to value of that debt, 64%; and the average coupon on that debt, 7%. This is all through regional and local banks who are interested in developing relationships and making loans on income-producing stable commercial real estate.

On the disposition side, the $11.7 million raised through June 30, and we closed on an additional asset last week, that total year to date -- we were able to execute those sales in the $65 to $70 per square foot range at cap rates in the 8% to 8.25% range.

Moving to page 4, the other things that we'll update you on today. July 14th, we kicked off a bank meeting here in Philadelphia and began the syndication on a new three year secured credit facility. We'll provide you with an update on the terms and status of that. We did, as we announced, enter into a definitive agreement on a $102 million joint venture. Proceeds to the Company of approximately $51 million will be used to pay down existing indebtedness. And as we said in the release, there is an opportunity to expand the venture with a contribution of up to 20 additional facilities, which have been identified at this date.

From the secured loans and asset disposition pipeline, we continue to have great success here. We have $43.4 million of term loans that are working their way towards closing, and $71.8 million of dispositions also working their way towards closing. And we continue to have a very healthy pipeline behind these transactions that are in earlier stages of the process.

Turning to page 5. This is the detail around the new secured credit facility that the Company is entering into. As we said in the release, at this point we have commitments for $420 million of capital. The syndication process will continue for the next two weeks and we continue to believe that we will circle around a $450 million facility when the process is complete. As we sit here today, we anticipate that being a $200 million secured term loan and a $250 million revolving credit facility.

The facility would have a three year term, assuming a November of this year closing. It would mature in November of '12. The Company's current unencumbered pool would be used to secure the facility. The proceeds first would be used to repay the existing term loan and credit facility revolver borrowings, repay the existing $46 million secured term loan, and then for general corporate purposes.

Obviously, the transaction is subject to completing all the due diligence on the assets, lender due diligence, et cetera. And, as we said, we would expect a closing in the fourth quarter.

From a covenant perspective, 67.5% leverage ratio in the first year, and that's using a 9 cap on NOI; 1.45 minimum fixed charge; the typical limitations on permitted investments, floating rate debt, tangible net worth, et cetera that you see in credit facilities; and from a pricing perspective, a LIBOR floor of 1.5 with a spread from 3.25 to 4 depending upon leverage levels. Day one, our expectation would be an all-in rate within this pricing at 5.5%.

Very pleased with the process in a very short period of time and we received wonderful support from not only Wells Fargo and Bank of America, but from all of the banks in our existing facility.

On page 6, a couple of details around the JV. Last night we entered into an agreement with an affiliate of Heitman. They are wrapping up a few items. The third-party due diligence is complete and we expect, with the wrapping up of a few ancillary documents, that we would close on this transaction this month.

As we mentioned, 22 of our existing unencumbered assets, approximately 1.6 million square feet, valued at $102 million. And that valuation was derived from 2008 actual net operating income. We will be the operating partner, continue the day-to-day operation of the properties, obviously, for a market rate management fee, and the proceeds of approximately $51 million will be used to repay existing indebtedness.

On page 7, the current transaction pipeline. The $46.4 million from asset sales, those are dispositions where earnest money from our buyers is hard, the conditions to closing have been satisfied, and we expect them to close no later than within the next 45 days.

The second pool of $25.4 million are under contract. Due diligence is currently being performed and, subject to that, expect closings in the fourth quarter. That $71.8 million of dispositions represents a per square foot price of $81.

The loans that are in due diligence, as an aside, we're currently batting 1,000 on loans that we have announced in this stage going to closing. And we feel confident that this $43.4 million will proceed in a similar fashion. They're very similar to those that we have closed already -- fixed-rate borrowings; 5- and 10-year terms, with a weighted average interest rate on this pool of 7%.

Page 8 will show you the debt maturity schedule as of June 30, and then pro forma for the new credit facility. Then, in conjunction with that new facility, we will retire the $46.4 million secured term loan. The YSI III debt that matures in November will be paid off utilizing, quite frankly, the current revolver. And then the proceeds from the dispositions, the joint ventures, and the other secured financings will serve to reduce existing borrowings under the revolving credit facility and to push our term out beyond 2014.

So we've made significant progress in paying down our revolver throughout this year being good stewards of capital and extending our mortgage maturities out beyond 2014.

As you look at page 9, this sources and uses takes us from the existing balance sheet, June 30, 2009 through June 30, 2012. On the left-hand side, it captures the existing sources -- the cash on hand, as of June 30; the asset that closed last week; the assets previously described under contract; the secured financings that closed last week and those that are in due diligence; the existing commitments on our $420 million on our new credit facility; our expectations of rounding that out at $450 million; proceeds from the joint venture; and expected retained cash flow for the balance of 2009.

That $643 million of sources matches up to our secured maturities in November of '09 and '10; the several smaller maturities we have in 2010 of $23.7 million; the repayment of the existing unsecured term loan; the repayment of the existing unsecured revolver; the repayment of the existing secured term loan; YSI II being paid off in January of '11; and then there are a few small 2011 secured maturities. And thus, end up with approximately $13 million of sources in excess of our maturities. And, again, on the source side of things, this does not reflect any cash flow in 2010, 2011, and 2012 produced internally; no additional sales beyond those that are under contract; no additional joint ventures, including no expansion of the Heitman JV; no additional secured debt beyond those that are described in the release; and no additional usage of the At-the-Market program for common equity.

So a great picture through June of '12. A significant amount of effort to get here, and certainly effort left to close, but we are very pleased with our ability to extend our maturity profile significantly out into the future.

Page 10, then, you've all seen this before in other presentations that we've made. This just recaps all of the markets that we have been speaking about having access to and utilizing and have demonstrated by our use of each one of these that we can, in fact, tap in.

On the refinancing side of the equation, we will continue to harvest our relationships with the regional banks on a property-by-property basis. As mentioned, we have transactions, not only in the flow, but we have a deep pipeline of deals that are in earlier stages behind those that we have announced.

On the life company side, we've closed one transaction and, clearly, the ability to articulate the move out of our credit facility to 2012 will be very helpful in this marketplace, as the life companies look at us as a potential borrower.

On the -- obviously, we've talked about refinancing existing debt.

And then on the other side, then, is the de-leveraging tools that we have at our disposal. The three that we've spoken about consistently. Asset sales -- we continue to have great success and a good track record of closing everything that we get under contract. On the common shares side, it remains an important part of our overall capital raising strategy. Obviously, during the quarter, we announced that we had issued 2.5 million shares, raising $10 million under our At-the-Market program. And then on the joint venture side, we've talked about this for a while here and are very pleased with our partnership with Heitman and believe that our ability to tap into direct investment in our product will continue to be strong as we move forward.

So, in summary, a significant amount of progress. A lot of work left to be done. Very pleased with where we are. And at this point I will turn the call over to Tim to talk about our operating results for the second quarter and our expectation for the balance of the year, including factoring in a significant amount of capital raise beyond what our prior expectations were. Tim?

Thanks, Chris, and thanks to everybody listening for joining us for this morning's call. We're certainly excited to announce and discuss the very significant progress we've made as a team on our capital raising initiatives. And I'd like to take a quick moment and express my appreciation for all of the efforts of our banking partners, our new joint venture partner, our professional service providers, and our U-Store-It team, who have all been working very hard over the last few months.

I'm going to take just a few minutes and provide an overview of our second quarter results and then provide some comments on our earnings guidance for the third quarter and balance of the year.

Last evening, we reported second quarter FFO per share of $0.21, which was a bit ahead of our guidance range of $0.19 to $0.20 per share. The primary driver of the outperformance relates to advertising expenses, which I will expand on in a moment.

Total revenues for the quarter were in line with our expectations. Same-store revenues were down 2.8% as compared to the second quarter of last year. Consistent with our first quarter results, rental revenue declines were partially offset by increases in other operating income, including tenant insurance income. Our tenant insurance penetration continues to be a major focus, as 90% of new renters purchased insurance during the quarter, bringing our overall tenant insurance penetration to 42% at quarter end.

Property level expenses on our same-store portfolio were up 6.4% over the second quarter of 2008. You may recall, during our first quarter call, we discussed our debut television advertising campaign that launched in April. This shift in marketing strategy to media advertising that's heavily weighted to the beginning of our prime rental season creates a difficult comparison year over year, as we had no similar expenditure last year.

We found our television advertising to be very effective in the vast majority of our targeted markets and we closely monitored the impact of each spot utilizing unique telephone numbers. We then optimized our spend to weight our spending to the markets and network affiliates that provided the greatest return.

Also of note during the quarter, we recognized approximately $500,000 of expense related to an unsuccessful appeal on certain prior year real estate taxes. So, although our reported property level operating expenses in total on our same-store portfolio were up 6.4% over prior year, our focus on controlling expenses continues to produce results. After stripping out marketing expense due to the lack of comparability, and the nonrecurring tax item, our same-store property expense declined year over year by 1.7%. With these same normalizing adjustments, our same-store net operating income decreased 3.3% compared to the prior year quarter.

We recognized gains totaling $2.1 million during the quarter related to the sale of two properties that had an aggregate sale price of $8.8 million, and we do not include gains in our calculation of FFO.

We closed on five secured loans that generated $51.4 million of proceeds. We raised $10 million through the sale of approximately 2.5 million common shares during the quarter, using our At-the-Market equity program. And the proceeds from these sales, secured loans, equity issuance, and cash generated from operations allowed us to repay $11 million of our existing secured term loan and $59 million of borrowings under our revolving credit facility. Our credit facility had $104 million outstanding at the end of the quarter, compared to $212 million at this time last year.

We remain comfortable in compliance with the covenants of our unsecured credit facility and expect to remain in compliance through the fourth quarter, when we expect to close on our new secured credit facility, which will replace and fund the repayment of the existing facility, as well as the $46.4 million outstanding under our existing secured term loan.

Switching gears now to guidance. We've introduced our third quarter 2009 FFO per share guidance range of $0.20 to $0.21, and we've adjusted our full year 2009 FFO per share guidance range to $0.84 to $0.89. Our guidance revision is driven, in part, by our expectation of increasing pressure on our same-store property performance as well as additional dilution from our capital raising efforts, as we're outpacing the assumptions in our previously issued guidance.

On operating performance, we now expect our full year same-store revenues to decline a bit more in the down 4% to down 2% range. We expect same-store expenses to grow less, now between 0.5% and 1.5%. This translates to our expectation that same-store net operating income will decline in the 4% to 6% range.

Our previous guidance contemplated dispositions and new financings ranging from $100 million to $150 million. Our current guidance contemplates our expectation of $200 million to $250 million of capital raised through asset sales, secured financings, our announced joint venture, and the equity we've issued through our At-the-Market program.

Additionally, our revised guidance contemplates our expectation of a fourth quarter closing on our new senior secured credit facility. Please refer to our earnings release, as there's additional detail provided there on our expectations related to each of these components of our capital raising efforts.

These past few months have certainly been challenging, but our efforts are translating into truly meaningful results. As always, thank for your interest in our Company, and at this time, Dean, I'll turn the call over to you.

Okay, thanks. If you don't mind, I'd like to go back to -- go back up to a macro level and let's talk some about how our product and this company, our company, is faring during this very difficult recessionary period that we find ourselves in.

There's been some discussion about self-storage, and I think I've started it way back when as to being recession resistant, and how do we -- do we lag or do we lead in and out of the economy such as the one we're in now, and I'd like to talk about that some.

If you go back and look at the public companies, and I've done this specifically with our company, and look at the results of last year, I think it paints a pretty clear picture, to me, that going into a recession we very much lagged the broad economic -- broad economy. If you look back, and I think everyone pretty well agrees at this point in time we went into a recession in December of 2007. If you look back at Q1, as a Company, we generated, on a same-store basis -- and I went back and studied 376 properties that we owned at Q1 '08, and we still own those same 376 properties today. And you look at the revenue per property, per square foot and on a unit-by-unit basis, we had normal seasonality in 2008 as it relates to those revenues growing. Our revenue per property grew from $92 million to almost $97 million last year. On a per square foot basis, it grew -- on a quarterly basis, it grew from $1.43 to $1.50. And on a per unit basis, it grew from $165 per unit, that's NOI, to $174 per unit. Those are -- that's normal seasonality, as far as I'm concerned. And so it appears to me that very clearly we lagged the market last year going into this economic downturn that we've been experiencing now for about 19 months.

The other thing that's interesting to note what has happened in the first two quarters of this year. We had -- I think we, along with the other public companies, suffered a fairly dramatic downturn in Q1- - January, February, March. And for most of us, even April was not a good month. And so Q1 dropped down, back on a per square foot basis to $1.41. And Q2 now has remained level at $1.41 per square foot for the quarter, again, on a same-store basis.

So I think it's -- I think you can draw from that conclusion that we lagged going in. I think you can also look at the $1.41 in Q2 '09 compared to the $1.43 in Q1 '08, or the $1.46 in Q2 '08, and say that maybe we are going to be able to build a stronger case for being recession resistant.

And I think the third conclusion that you can draw is that maybe we have reached bottom. I think most economists will say that the broad economy reached the bottom in March. I think many will tell you that as of this morning, as of the good jobs report, as of this morning, as of this quarter, we think it's quite possible that we're now out of the recession.

So what does that mean for us in the self-storage business? I think it's quite possible that we might become a leading indicator, if you will, coming out of the recession. And if I'm right on this, this is really the best of both worlds, where you lag three or four quarters going in and you're the first coming out. But let me give you some of my reasons for thinking this.

First of all, any of you, I'm sure, read Faith Popcorn's report 15 years ago or something, and she talked about small indulgences. And I think that's a little bit about what we are, especially for the discretionary customers. Many of those people have been storing now over the last few months, last two quarters in their garages, putting off the need -- putting off the event of going out and renting a storage unit. And I do think that some of those early dollars that these customers either have now and are fearful of spending or will be gaining back in their family household budgets in the near term, I do think have a possibility of coming our way.

But if you look at across the country as it relates to our product and our company, you really have to look market to market. We have some markets that clearly we're going to have a V-shaped recovery. And I think we're starting to see some of those markets right now. Three or four to name - the west coast of Florida from Tampa to Naples has experienced extremely good the last 60 days, along with Denver, Phoenix, and Tucson. I think it was just last quarter that I talked about being concerned about Denver, Phoenix, and Tucson, as those had deteriorated quite rapidly. In fact, I made trips out and looked at those markets very carefully. But all of those markets I just talked about had very good May, June, and Julys.

Those are some V-market recoveries. And then I think we have some that are more L-shaped. Those are the ones that have had a dramatic downturn in the first quarter of this year, and now I think we're going to start bumping along the bottom. I would put Southeast Florida in that group, as that market, Dade County and Broward, has suffered greatly in this downturn, perhaps the deepest of all of our markets, and then San Bernardino and Riverside, with Southeast Florida. Those are the L-shaped recoveries. And I do think even though we may not still yet be at the bottom in those two specific markets, I feel like I can see the bottom.

And then we have many markets that the plunging side of the V, if you will, really didn't plunge that far. And we are -- I don't think we will have so much of a V-shaped recovery in those markets because, again, they didn't plunge that far, but it will be something between a V and an L. And those markets are like Chicago, Texas, New Jersey, Washington, and Baltimore. Again, those markets held up fairly well and I think will be performing just fine going forward.

Again, in the Inland Empire and Southeast Florida are the only two markets that I don't think perhaps we've hit bottom yet. But, as I said, I think the worst is over and I do think we can see the bottom.

I think coming out of this, the consumer, of course, is going to have to lead us out of it. The government can only do so much. And with the jobs report we got this morning, I think that's possible. So I'm very encouraged, as we go forward, that more customers will be showing up at our storage facilities to rent units from us.

I'd like to talk a minute about the quality of our customer, because that's very, very personal to us here at our company. Even though we have fewer customers than we might like to have, we feel like the quality of our customer has improved dramatically over the last 12 months. During Q2, our discounts were down 39%. We had 30% of our customers showing up and we were able to get full price rentals from them. In other words, only 70% of our customers got some kind of discount, and of those who got discounts, they were down 39% over the same quarter last year.

The quality of our customer is better in that they're staying longer. On a year-over-year basis, we're up six days on length of stay. And they're paying their rent. Our bad debt is down 19% year over year on a quarterly basis. The people who are renting from us are staying longer, paying more on full price rentals, less discounting, and they are not going into auction status as much. Our auctions are down, over 100 auctions less this year than last year. And even those auctions that we're having, we're actually collecting more revenue when we actually have to sell the goods of someone. That's up 19% than last year.

So the quality of our customer has improved I think dramatically over the last year because we're not giving the first month free to everyone who walks through the door. So those people who have thoughts of only storing for 30 days will move on down the street and rent from someone else. That is -- that speaks to the quality. That speaks to long-term ability to raise rents to these people when the market does turn a little bit. And ultimately we will start to improve occupancy, but we will do that only by holding our rates as much as we can and keeping our discounts down in a better economy that we see, that we think we see, on the horizon.

With that, I will stop and I think we can go into questions and answers. And I'm sure we'll have plenty more answers for you. Let's go to Q&A. Operator?

Thank you. (Operator instructions.) Our first question comes from David Toti at Citi.

Hi, good morning. This is Mark Montana, and David Toti is here with me as well.

Just first going to the JV. It looks like the access that you contributed have an appraised value approximately 20% higher than those that you disposed of so far year to date. I understand that those that are in the works are a little bit higher than the ones you've disposed of so far, but I was wondering if you could just discuss some of the characteristics that resulted in higher appraised values of those contributed to the JV versus those that are being disposed of as well as those in your retained core portfolio.

The venture objective was to have a portfolio that effectively mirrors the overall REIT portfolio and had a nice balance where there were no significant concentrations of assets in any particular submarket and that the assets were spread throughout the United States where we operate in a very balanced way. So that was the objective, was to get something pulled together that mirrors our overall portfolio and did not have a lot of concentration in any particular submarket. The assets that we're selling, or have sold, have a similar characteristic. They are fairly dispersed. The states we mentioned where we have been selling. And it's just going to come down to the various NOIs on each of these properties and market values on a submarket-by-submarket basis.

Okay. So there's nothing in particular like occupancy or being greater in the ones you contributed to the JV versus those you're disposing of?

No. I would say, again, it's kind of asset by asset, but no -- nothing unusual there.

Okay. And then turning to the secured loan pipeline, the $43 million in the works on 20 properties, first, would it be fair to assume that loan-to-values on these loans are in the 50% to 55% range? And then secondly, what types of debt yields are you being required to achieve from the lenders that you're discussing with?

Well, on the LTV question, as I said in the other remarks, the loans that we have closed and the loans that we have in the pipeline average right around 65% LTV.

Okay. So that's in the pipeline as well then?

Yes.

Okay.

And that's on appraised value. And the appraisals on everything we've closed thus far have come in at or above what the expectation was when we entered into the commitment. So it continues to be in that range. They're five year and ten year deals. The ones that we have closed through June 30 were predominantly no recourse loans. The pipeline has recourse in many of the loans between -- right at 25%. That's kind of what we're seeing in the marketplace. As I said, five to ten year deals and the coupons tend to be around 7%.

And debt yields?

This is Tim. The terms of these don't typically include a debt yield; they do typically have a coverage covenant as part of the loan that ranges anywhere from 1.2 times to 1.5, 1.6 times.

Okay, great. And then finally, I know you talked about the covenants on the revolver that's under negotiation right now. You mentioned the current leverage ratio for this year at 67.5% limit and ongoing at 65%; FX charge at 1.45 times. We don't have a specific underlying calculation of those numbers. Could you just provide us with your current leverage ratio and fixed charge coverage that you're calculating on this basis?

Yes. On the basis of this, as we would pro forma entering into it, the ratio from a leverage perspective is right around 65%. And our coverages are in the 165-type range.

Okay, great. Thank you very much.

The next question comes from Todd Thomas at KeyBanc.

Good morning. It's Jordan Sadler here with Todd. Dean, you -- just sticking to the macro for a second, what do you think happens to NOI given sort of the recovery next year? If we lag going in, we come out, do we get positive NOI growth early next year?

I think year over year, Jordan, for certain you do. I think Q1, as a typical quarter, will be more challenging than the other three. But I think next year starts to look like, assuming we're not in a W recovery here, as a broad economy, I think the year starts to look more like a normal year. And of course the year-over-year comparisons will be pretty good. The challenge will be -- I mean it will all be on the revenue side because I think we are all -- have our expenses pretty well in line right now at a very proper level. So it will all be coming back on the revenue line. But next year looks -- should be a fairly normal year I think.

Okay. And then just on the -- I think you mentioned the cap rate on the sale, the one-off asset sales, but is there a cap rate on the joint venture, Chris?

Well, the properties were contributed on a formula based on the '08 actual NOI, less a management fee and a CapEx reserve. And that cap rate was in the same range as where we've been selling things, between 8.5 and 8.75.

And that's equivalent to the cap rates you calculate on the assets you sell, the same calculation?

It is.

Okay. And what's the aggregate? What do you think that's about 75 basis points G&A? The CapEx and G&A?

CapEx, we tend to use around $0.10 to $0.15 a square foot, and the management fee is a 6% of revenues market management fee.

Perfect. I think Todd has one.

Yes, hi. Just moving over operationally, how -- did you mention how July occupancy was tracking?

Well, yes, of course it's tracked -- it's over with. But we had a good July.

Right.

It was up on a seasonal basis. I mean, we really turn seasonal in May. April was the bottom, May became -- May was a very good month, June was an outstanding month, July was a good month. So it's -- we had our normal seasonal uptick.

Do you --

(Inaudible - multiple speakers.) Go ahead, Todd.

Oh, I was just going to say do you expect to continue gaining occupancy through the fall?

No. I think what happens from here is we go back to our seasonal declines. I mean, I don't think that we -- we certainly can't expect to gain occupancy in a year like this when in a typical good year you don't gain occupancy starting in August. We've got just over 1,000 students that rented with us this year and most of those will move out in August. And then you'll start trending down again, probably until next April again. That's just the seasonality of the business.

All right.

I think speaking to something that Jordan was alluding to there a minute ago is interesting. We still have strength with our existing customer base. We raised rents in Q2 by $595,000 to our existing customers. And that number doesn't mean too much, other than to make a comparison. In Q2 '08, our rate increase to existing customers was $610,000. So we basically had the same strength with existing customers in this economy after we had been in a recession for 14 months. Then, we had last year when we didn't know we were in a recession and everything was going pretty well. So I think we can continue to expect to get rate increases from our existing customers going forward.

We're starting to get some rate increases in selected markets now. We're starting to get some pricing power back. We have very little pushback from customers now. People coming in and complaining about rate increases that we're getting. We got a lot of that in the first quarter. That's just about died out completely. So pricing power is back for us. So I am very encouraged by the fundamentals as I see them today on a go-forward basis. But to your point, Todd, I'm encouraged that they will still only get back to normal seasonality.

Okay, thanks. That was good color. And then just lastly, how much room do you have under your controlled equity program and do you plan to use it in the second half of the year?

The shares that are remaining is about 7.5 million. And, as we said, we'll continue to look at the de-levering opportunities that we have. Obviously, that's one. Asset sales, expanding the venture, additional ventures, or other. So everything that we've proven access to we will continue to look at as an opportunity going forward.

Okay, thank you.

The next question comes from Jeff Donnelly at Wells Fargo.

Good morning, guys, and congratulations on all the work on the balance sheet. I guess the first question for Dean. To see activity pick up, just thinking forward 12 to 18 months, I mean whether that's higher occupancy or pricing power improving even further, do you think the economy needs to see more of a recovery in home purchasing and moving activity or is it just stabilization and consumer confidence and the jobs picture?

Well, I think both are going to be important. I think we've had some stabilization in jobs. What we -- the jobs report we got this morning, I mean we've been feeling that for 90 days now, that the people that are renting with us aren't so concerned about losing their job today. So that I think has somewhat stabilized. But as far as people moving, we still have a lot of dislocation out there in the market, as we've talked about. People have moved some in the last 90 days, for example, 120 days. But I do see that velocity picking up going forward for certain. So that will bring us more renters.

And another area that's going to bring us more renters will be the small entrepreneurs. We've lost many of them. The landscapers, just the small business folks, even the Pfizer sales reps, if you will. Thousands and thousands of pharmaceutical sales reps have lost their jobs in this downturn. That hiring will start again, I feel certain, fairly soon. And so we're going to get pick up not only from people moving around, as we've always had that, enjoyed that benefit, but also new business formations and rehiring of people who typically store with us.

That's helpful. And I guess for, Chris, as it relates to the Heitman JV, can you talk a little bit about the sorts of, I guess, unlevered or levered IRR targets that they are looking to achieve, I guess, maybe after fees?

Sure. The deal involves a contribution of unleveraged assets. So, again, we need to look at it in the context of we're not contributing below market debt as part of the transaction. It's just assets. And the assets will remain unlevered. The cash flows, on an annual basis, will go to our partner until a 9 IRR, and then to us, and then our 9, and then anything in excess of that 50/50. And then on a capital event, it's a 12 to our partner and everything above that is ours.

So they have a 9% sort of senior preferred return, if you will?

They do.

Okay. And I'm curious, you said before you're using 2008 NOIs as the starting point to your underwriting. Is that because Heitman views that as a, I guess it's a representative run rate for the forward 12-month NOI out of these assets? I guess why that? Why not sort of an actual forward projection?

Yes. When you think about the structure, as I described, it's a known number and we applied some values to that. But in the structure of this deal, that's a little bit less important than if it was a large promote-type structure.

And I'm curious, why the desire to mirror the broader YSI portfolio? Is that your requirement or Heitman's?

It was joint. And it gives both of us the ability to have a lot of flexibility throughout the life of the venture and not be particularly invested in any one submarket.

And then just a last question. You mentioned that the assets are unencumbered. Is it your intention to keep it that way or --?

Yes. It is the intention of the venture to remain unleveraged.

Okay, great. Thank you.

The next question comes from Russ -- Ross Nussbaum at UBS.

Hi, guys, good morning. Nice job on the balance sheet this past quarter. A couple of questions here. Of the 384 properties in the portfolio, I guess, at the end of the second quarter, how many will be unencumbered when all is said and done after you add to the collateral pool for the credit facility?

Well, I'm going to have to -- this is Chris. I'll take a first shot at that because it's not quite that simple. But at closing, if you assume the closing of the secured credit facility is in November of this year, at that point, I think it would be fair to say that the portfolio would be fully encumbered. And then as you roll forward, we would be using the proceeds or the capacity of the facility to pay down the CMBS pools, as we outlined, and unencumbering those assets, such that, I think to kind of take your question maybe all the way through its end, if you go out to 2012 and the ultimate maturity of the new facility, we would have assets securing the 450 in our pro forma new facility. And then we would have approximately $300 million, $325 million of unencumbered assets that could be used for additional financings.

Was that helpful?

Sort of. So let me -- I just want to make sure I understand. So, as the line is used to pay off CMBS maturities potentially, you don't have to pledge those assets to the line?

That's correct. If required, it's -- to pledge into the line to be able to keep the capacity, then we do. But if you build this up over time you reach a point where you don't need all of them.

Got it. So, based on, I think you said there was a 9%, give or take, cap rate being used to calculate the borrowing base on the revolver by the lenders?

That's correct.

So, basically, the question is, depending on what happens to the NOI, in order to access the full $250 million on the revolver, if for some freak reason NOI kept going down, you might have to pledge more collateral?

That's correct.

Got it.

Or not access the full capacity.

Okay. And as it stands, as of November, the collateral pool has been identified but you'll be fully encumbered at that point.

That's correct.

Okay. I just wanted to make sure I was clear on that. I believe there was a restriction in the press release you said on dividend payments in the new facility. What specifically is that?

Jeff, this is Tim. That restriction is the typical REIT restriction that limits our ability to pay out more than 95% of our FFO in the form of dividends to common shareholders.

Okay. So nothing more (inaudible) than that.

No.

And then I think, lastly, maybe for either -- for Dean or Chris. Dean, I know you don't like to talk about occupancy because it's all about cash flow, and I'm 100% with you on that basis. But as I think back over the 15 years or so I've been involved with the self-storage business, I can't remember the last time I saw a portfolio see a sequential decline from Q1 to Q2. And I know obviously that was offset as your realized rental rate showed positive growth, which is obviously a net positive. I'm just curious from an occupancy standpoint sequentially, as you set rental rates and set advertising and thought about the discounts you're offering, did the occupancy change from Q1 to Q2? Was that lighter than you thought it was going to end up being?

No, Ross. I think that it was just about on target. We've been right there together for those 15 years and we always have a nice bump with the seasonality in Q2. And, as I said, when I talked to you, when we talked to you guys last in early May, and I got a little criticism. I think the call was May 5th or something like that. I got a little criticism for not wanting to talk about the second quarter yet. But I'll tell you, I wasn't -- I didn't know what the second quarter was going to look like because I was, quite frankly, just a little bit concerned about if those customers were going to show up in May or not. And, of course, it's not the first week. They start showing up really in droves the second week in May. And of course April had been a very disappointing month for us.

And so the good news is they did show up, and they did show up in the numbers that we were more or less expecting for May, June, and we've had a good net positive month in July as well. So generally pleased, as I think everyone in the sector has been pleased with the results in Q2.

Thank you.

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

Hey, Chris, how do you think about the odds of completing the next round of the joint venture? And would it have similar terms as what you just outlined?

Yes. Hi, Michael. The terms would be the same and the assets have been identified and due diligence, third-party due diligence, has been performed. So I think it is possible that we could include an additional round of assets over the next 60 days or so. But, frankly, as I sit here today, I'd have to call it 50/50 and we didn't count on it in our sources and uses.

Okay, and then, Dean, can you just, I guess, remind us again your stance on the -- sort of similar to the last question from Ross about the occupancy. can you just, I guess, give us your pitch again for why you think the current levels of occupancy in your pricing strategy that that's the revenue maximizing level of occupancy given the current market conditions?

Well, sure, Michael, good morning. I was pleased to see our results compared to the other three public companies during Q2, with us only being down 2.8%. I think we led -- in fact, I know we led the sector. Our 30-day flips, if you will, people who move in and move out in the same month, within 30 days, are down 24% over last year. And keep in mind, last year at this time we were basically kind of giving first month free away to way too many people, as I think some of our competitors are now. So our 30-day flips are down 24% and people who move in and stay less than 60 days are down 14%. And our discounts are down 40% -- or correction, 39%. And so, I don't know, it seems like to me the kind of proof is in the numbers. I mean, I was pleased with that 2.8%.

Now the other side of it is what we intend to do when the market does turn around a little bit. We will be in there fighting for more and more occupancy. But it's a lot easier to gain good occupancy in a market that has turned up versus taking whatever walks through your door when the market is in a downturn. So I was pleased with our 2.8% down in revenues.

If you look at the SSDS report, I mean, year over year the small operators only reduced their rental rates by 4% -- 4.2%. We reduced ours by 5.5%. Some folks in the sector have reduced theirs much more dramatically than that. And, sure, you can buy occupancy. I mean people are out there doing it every day. But I don't know what that gets you at the end of the day.

Okay. And then -- thanks for that. And I guess looking out, conceptually maybe, once the recovery comes and conditions are improved and demand is better over the next couple of years, do you feel like that number will move up materially over the next few years? Or do you feel like your occupancy will continue to trail your peers but yet, as you pointed out, the revenue side may not be that much different? Do you all sort of get to the same place with different strategies, I guess is one other way of asking that question?

Yes, to answer your question. I mean, we did that back in our Storage USA days as well. I mean public storage in those days, as they are doing now, ran their occupancies in the 90%, 92% range in the summertime to maybe very high 80s in the wintertime. We typically ran ours about 5 points, 4 points lower and got better revenue growth. And I just think that when you run it at 92% you're going to be out of inventories at some properties at some point in time. So it's a philosophical thing. It's not about occupancy, it's about revenue as far as I'm concerned. So not too much has changedt here.

Okay. And then --

Michael, this is Chris. Just as a point of clarification for the discussion, so we're all on the same page, while the average occupancy in Q1 was higher than the average in Q2, which reflects the difficult April, the sequential move from March 31 of the year to June 30 of the year -- I think this was a prior question, but it was, in fact, a gain of physical occupancy from the point of March 31 to June 30. (Inaudible - multiple speakers.)

Okay. And then, I guess just mathematically, can you guys just help us reconcile the difference in the realized rent and the scheduled rent, 2Q '09 versus 2Q '08? Were you discounting more in 2Q '08? I'm trying to recall.

Yes (inaudible - multiple speakers.)

I was just comparing the $11.72 versus the $11.21 this quarter compared to last quarter.

Yes, absolutely, Michael. As I said, our discounts are down year over year 39%, and those are significant dollars.

And then my last question. Obviously, you've sold a number of properties on the lower end of your portfolio and now have contributed some [to] the joint venture that are sort of, I guess, middle of the pack in the aggregate in terms of the overall portfolio. Do you feel like there's more left to call in terms of quality? And then how do you balance that against, I guess, the scale issue that bigger can be better in this business?

As we round out this year, and the assets that we have in the pipeline for disposition, I think we've accomplished from an asset -- from a portfolio perspective, what we set out to do two years ago. The next phase involves kind of a longer process and a more complicated process to focus on assets that are in submarkets that we would like to exit but are encumbered and require us going through the hoops of removing that encumberance or transferring that encumberance as part of the sale. And I think that will be a focus as we get into the fall of this year and plan for next year on looking at just tweaking the portfolio in that way.

Thanks.

(Operator instructions.) Our next question comes from Paula Poskon at Robert W. Baird.

Thanks very much. Good afternoon. Could you give us an update on the progress of the sales center?

Sure, Paula. Good afternoon to you as well. The sales center, since you were here a couple of weeks ago, is clicking along nicely. It's performing very nicely. We're 90% staffed. We're taking a very large percentage of our calls now in the sales center. The new telephone system that we told you about then is basically installed and will be going live in a couple of weeks. The sales force is being adapted to our program now, as we speak, and will be live November 1. And our conversions of telephone calls to reservations continue to increase. Very pleased that we now have and control our own sales center right across the hall from my office.

Thanks, that's helpful. And how is the new national network progressing?

That's another good softball you're giving me there, Paula.

It's not intended to be a softball. I just wanted to know what the update was since we were there several weeks ago.

I think we're up to about 310 properties now and we have partners, very pleased with the results of the program so far that we've given them through this summer. We will be meeting many of those partners in two trade shows this fall, in September and October. And I'm very confident we'll be adding many more properties this fall. So that has taken off even faster than my greatest hopes. And so I'm very pleased with that.

Do you have a target number that you'd like to grow that to within, say, by year end or within the first year or -- ?

Well, I have an ultimate target that I think the footprint is pretty well complete at about 2,000 locations across the country. And today, with the 310 and our almost 400, we'll a little bit more than a third of the way there. I don't really have any goals for this fall -- I mean for this -- for year end. I'm looking forward to getting out to those trade shows and stirring up a little bit more interest. And as time goes on and the results are out there and the word of mouth is going to spread, I'm hoping within a couple of years we can have that footprint built out.

Thanks, Dean. And then just turning to the asset sales, can you give us a little color on what the bidding pool looks like these days?

Sure. It remains -- the entrepreneur, who either is looking to invest in a recession-resistant, income-producing real estate or the local operator, or regional operator, who owns facilities and would like to expand in their submarket.

Okay, thanks. And, Chris, assuming that you guys close on everything that you've laid out, in the timing and magnitude that you've laid out, what else will be necessary for the Company to end the year with a balance sheet the way you would like it to be?

I'm not sure that there would be anything necessary for us to do that. I think another way to look at that question is over time how do we think about leverage as a company. And as we sit in this marketplace and look out over time, leverage in that 40% to 50%, and to measure that percentage by putting a market cap rate on NOI, is what we think makes some sense, certainly in the environment in which we're in today. Another metric would be to look at debt to EBITDA. And I think over time to have that in the mid-6s I think makes some sense. We think makes some sense. So you want to move towards that, and all of this is -- that we've announced are certainly steps in that direction, but there would be wood left to chop.

Okay. And, Dean, just to -- not to dwell on this, but I just wondered if you have any other update on what had happened with the forced stock sale in late June, early July?

No, I don't have an update, Paula. For those of you on the call that, I'm sure you read the news release, it's some stock that I had pledged to a charity down in Memphis, Tennessee got sold without my knowledge. And so that's being worked on now, but I do not have an update.

Okay, thanks. That's all I have.

And the next question comes from Ross Nussbaum at UBS.

Hi, guys. Sorry for prolonging this. I just had a couple of quick follow-ups. What was the share price and the timing of the equity issuance in the second quarter?

Our utilization of our At-the-Market program started in May and continued through mid-June, and we exercised that program and were in the market most every day during that six-week period or so. And those shares averaged a sale price of just north of $4.00, at $4.05.

Okay. In terms of the term loan and the revolver, is it your intent to swap those to fixed?

It would be our intent, and even under the document I think there's a maximum --

35%.

-- of 35% floating rate debt. So we would be looking to do that.

So, when we think about the rate, I think you initially said 5.5%, but that would be floating. So if we're talking 6% here on the swaps, are we looking at 7.5%?

Ross, Tim. I got your name right that time. Apologies for earlier. The facility has a LIBOR floor of 1.5%. So, if you think about -- depending on what your LIBOR assumption is, is that effectively at LIBOR rates, where they trade at today, the facility, when we entered into, is kind of fixed because of that floor. So hedging strategies would contemplate trying to put a cap on LIBOR that would limit our exposure from our committed 1.5% to put a cap on it to limit the upside. So it is kind of 5.5% until LIBOR exceeds 1.5%.

So are you suggesting that the cap would be at LIBOR 1.5% or would the cap be higher?

I think our strategy between now and then would be to evaluate the cost benefit of a cap at 1.5% and for what term, as opposed to, perhaps, a cap a little bit north of that and take at least some moderate risk on LIBOR between 1.5% and a capped rate.

And are the lenders considering, in terms of the fixed versus floating definition, is it considered all floating, even with LIBOR, with the LIBOR floor at 1.50? How does that work? So, I guess, at day one, are you required to enter into any type of hedging?

Day one, we are -- the floor does not constitute fixed rate --

Got it.

-- from the covenant perspective, that's for sure. So, depending on our outstanding amount drawn on the facility at the time of closing, pending closing of the other transaction in the pipeline, we would indeed need to hedge whatever portion, at a minimum, we would need to hedge whatever portion to stay within that 35% of our total debt needs to be fixed, constraint within the covenants.

Got it. Okay. And then final question from me. Just in reference to a comment you made before on the Heitman JV in terms of calculating a cap rate as having a 6% of revenues management fee backed out. Just as a refresher to me, on your income statement does the operating expense line item have that kind of a management fee allocated in there or not?

Our current statement of operations, you will not see any management fee expense per se, as any management fee that we would charge properties that we wholly own would eliminate in consolidation. What you do see in property operating expenses, though, is effectively the actual costs that we incur to manage our portfolio, which would include our district managers, our divisional offices, and the like. So there's no management fee per se, but the administrative costs at the property level that would be covered by a management fee are included in our property operating expenses.

So there's -- it's a number between sort of, if I thought about it differently, zero and 6% of revenues is an allocated management expense that's sort of in there already?

That's correct.

Okay, great. Thanks, guys.

Thanks.

At this time, we show no further questions. I'd like to turn the conference back over to management for any closing remarks.

Okay. Thank you very much for your support. Thank you very much for your questions. Look forward to talking to you next quarter. Have a good day.

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