CubeSmart (CUBE) 2009 Q3 法說會逐字稿

Hello, welcome to the U-Store-It Trust third quarter 2009 earnings release conference call. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) I would now like to turn the call over to Dean Jernigan, CEO. Please go ahead.

Good morning, all. The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks and uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. Risks and factors that would cause our actual results to differ materially from forward-looking statements provided in documents filed with the SEC, specifically the 8-K together with earnings release 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 or reconciliation between GAAP and non-GAAP measures can be found on the Company's Web site.

Again, Good morning, to all. Thank you for joining us. We will start this morning, with Chris Marr, our President and Chief Investment Officer will give us the highlights from all the financings. He will turn it over to Tim Martin, our Chief Financial Officer. Then I will come back around with my comments as to what I think is going on in the market place out there as it relates to the fundamentals. Chris?

Thanks, Dean. It goes without saying that it is a lot more fun to be able to be on this call having succeeded in our recapitalization efforts and be able to recap accomplishing a strategy, as compared to year ago or even six months ago when we were outlining and expressing confidence in the execution. I will use the second quarter release as an anchor so that I can update you all on activities that have happened since that point in time, and I will go down through those in the following order.

First, on our credit facility, back in August, we talked about having had $420 million of commitments, with an expected closing date of a new, secured facility in the fourth quarter of 2009. The update on that transaction, as we had said back in August , we were going to continue the syndication efforts for another week or two. We did that. We were able to attract an additional $100 million of commitments. So, we stopped the syndication process, at $520 million of commitments, we have allocated the institutions down to a $450 million level. And we will be executing on a $200 million term loan, and a $250 million revolver.

The term loan will be outstanding at closing, effectively it will replace the existing $200 million term loan, the revolver have zero drawn at closing. Pricing in terms are unchanged from prior announcements. At this point in time, the loan documents are signed by the Company. They are signed by, I believe, the majority of the banks, and that process will be wrapped up here today. Then they will be held in escrow as the agents and the participants wrap up their property level due diligence. As you can imagine, it is certainly a lot of paper to move around on 150-plus assets in terms of survey and title, et cetera,. A full closing and funding of the term loan is expected in the next 30 days.

From the joint venture perspective, we had announced a deal with Heitman. That did close. Actually closed a week after our announcement of the pending transaction. We received $51 million in cash, for contributing 22 assets into that, 50-50 JV. The terms, the assets, et cetera, were all identical to what we announced, the date of our last earnings call. The equity offering that we did in August was a wonderful execution. We introduced the trade at 22 million shares, upsized the deal based on overwhelming demand, raised $161 million. We had a great order book, demand was four times over subscribed, and the book was well balanced between existing and new real estate, dedicated investors as well as bringing in new nondedicated folks.

From the smaller transactions, the property level secured financings, and the dispositions, again, using the second quarter, as an anchor, we had outlined a pipeline, of $115.2 million of secured asset level loans and dispositions, that we had expect to close in the third and into the fourth quarter. Closed through the date of this release through yesterday, was $139.2 million. So, the theme here, is that we have been batting a thousand-plus, in terms of announcing transactions, and then executing on those transactions, either at or in excess of, the levels that we had described. On the secured loan side, we had talked about $43.4 million in due diligence, maturities of 5 to 10 years and a weighted average rate of 7%. Through the date of this release, we have actually closed on $62 million in secured loans. On the asset disposition side, we had articulated two tranches, $46.4 million that we had under contract and $25.4 million that we had in due diligence for a total potential of $71.8 million. Through the date of this release, we have closed on $77.2 million in proceeds on dispositions.

For 2009, the dispositions and property level secured loans are largely complete. To recap the year, $113.4 million raised in individual property secured loans with an average loan-to-value of 64%, average term of 6.5 years, and an average coupon of 7%. On the disposition side, we have sold approximately $89 million of assets at an average per square foot of $76, and an average cap rate on trailing, NOI less a market management fee of 8.2. So as we think about activity between now and the end of the year, we expect the only significant closing will be the new term loan and revolver. We have a few small secured loans in the works that may evolve to a closing before December 31. We currently have cash on hand of approximately $104 million.

But with 2010 maturities of 108, we expect to meet those obligations with the cash we will have on hand at year-end. Allowing us to address our 2010 maturities without drawing on our revolver. With the liquidity and leverage issues put to bed, and the balance sheet in good shape, from an investment perspective we shift our focus and begin to spend our time strategizing about growth opportunities. Our thoughts will evolve and develop over the next few months, and we look forward to sharing those with you on our next conference call. At this point I would like to turn it over to our Chief Financial Officer, Tim

Thanks Chris. As always thanks to everyone for taking the time to listen to today's call and for your continued interest in U-Store-It Trust. I will provide a brief overview of third quarter results and provide a little color on our guidance for the fourth quarter. We reported third quarter FFO per share of $0.18 which slightly exceeded our guidance range of $0.16 to $0.17 per share but overall, third quarter results were very much in line with our expectations. Primary drivers of the outperformance of our guidance range were combination of slightly higher than forecasted revenues and lower than forecasted property level expenses. Same-store revenues declined 4.9% for the quarter and have declined 2.8% year-to-date, as compared to the similar prior-year periods.

Our year-to-date trend continued in the third quarter as the declines in rental revenue were mitigated by increases over prior year and tenant insurance income. Solid tenant insurance penetration continues as we provided insurance to 91% of new renters during the quarter which brings our overall tenant insurance penetration to 44% at quarter end. The 44% penetration at the end of the third quarter compares to 42% at the end of the second quarter of 2009 and compares to 33% at the same time last year.

Property level expenses on our same-store portfolio were down 6.4% compared to the third quarter of 2008, and are essentially flat at down 0.1% year-to-date. Drivers of the expense decline in the quarter were less repair maintenance expense, lower utility costs, and a host of savings across the board on areas like landscaping, supplies and postage that resulted from our focused efforts to control costs. Another driver of the expense decline resulted from our shift in marketing spend from yellow page advertising to television and double digit media. You may recall this shift in strategy and the related timing of our marketing spend was the main reason our same-store expenses had an increase of 6.4% during the second quarter. Now in the third quarter the timing of our media spend creates a $600,000 or approximately 39% drop in advertising expense, compared to last year.

All of the capital-raising activity that Chris walked through significantly strengthened our balance sheet and our liquidity position, and clearly had an impact on the third quarter results, the related financial statements as well as on our expectations for the balance of 2009. Utilizing the proceeds from our capital raising initiatives, during the quarter we repaid $46.4 million, of a secured term loan, we repaid $84.1 million in a CMBS loan. We repaid all amounts drawn on our existing revolving credit facility, and we built a cash position of $61 million as of quarter-end. As contemplated in our guidance, a portion of the debt we paid was subject to an interest rate swap. And as a result we took a noncash charge during a quarter of approximately $400,000, which is included in interest expense on our statement of operations.

Our joint venture with Heitman closed on October 13. For clarification, I will take a moment and describe if financial presentation related to the venture. The venture is consolidated in our financial statements. The assets and liabilities of the venture properties are presented 100% on our balance sheet, and our partners equity position in the venture is presented as noncontrolling interest in subsidiaries within equity. On the statement of operations, again, the revenues and expenses for the venture properties are presented at 100%, and our partner's share of the net income of the venture properties is presented as noncontrolling interest in subsidiaries. We have continued to present these properties in our same-store results. We recognize gains totaling $10.9 million during the quarter, related to the sale of 13 properties that had an aggregate sale price of $67.3 million. We do not include gains in our calculation of FFO. We remain comfortably in compliance with the covenants of our existing unsecured credit facility, as well as the covenants of our new credit facility that we anticipate closing in the fourth quarter.

Switching gears now to guidance, we've introduced our fourth quarter 2009 FFO per-share guidance rate of $0.12 to $0.13, and adjusted our full-year 2009 FFO per-share guidance range to $0.72 to $0.73. The details of the assumptions underlying our guidance, are presented in the earnings release, but in summary, our expectations for our core same-store property performance are unchanged at the midpoint. We narrowed our same store and ally guide from a range of negative 6% to negative 4% to range of negative 5.5% to negative 4.5%. On the capital raising front, both the timing of transaction closings, and the increase in the amount of both secured loans and property dispositions closed to date, in excess of the amounts we had anticipated in prior guidance, are the drivers of the revised 2009 full-year FFO guidance of $0.72 to $0.73. For secured loans, we have previously provided a range of $84 million to $104 million. And we have closed $113 million.

For property dispositions, we provided range of $61 million to $86 million, and we have closed on dispositions totaling $89 million. As always, thank you for your interest in our Company, and at this time, Dean, I will turn the call over to you.

Okay. Thanks, Tim. It is nice to be able to start talking about fundamentals again. Even though the fundamentals are not so terrific as it relates to the economy we find ourselves in today. It is still fun for someone like me to get back to the basics and talk about fundamentals of self- storage and how well our product type competes in an environment like this. You look at the Q3 results of all four of the public companies, in our sector now that have announced -- I think the numbers are quite good, relatively speaking to the other real estate product types. Low-to-mid single digits in revenue loss, NOI loss is quite good in my opinion, if you consider the fact that our -- we have been in a recession at least for 18 month, and if the guess is correct that we're out of the recession today, we were in the recession through the end of Q2. And we know that we -- the results that we all experienced last year, were very positive revenue gains and NOI gains. I think at the end of the day when the story is written, the self-storage sector will have positive grow and positive NOI growth all the way through those 18 months of recession. It is going to be quite a story to tell.

But looking forward, I think it is instructive to look at sequential periods vs. year-over-year periods. The year-over-year comparisons are helpful, but as we try to figure out exactly what is going on in our sector today, and what perhaps might happen in Q4 and next year, let's talk about sequential period comparisons. If you can help me, I will try to paint a picture for you. It is a couple of line graphs. You will take -- and let's talk about physical occupancy first. If you take January, as your starting point, in the industry, we always suffer a little bit of seasonal occupancy loss in the first three or four months of the year, but it is very gradual. Then when May rolls, along our rental season starts, and we have a big spike in physical occupancy in May. June continues although not as great, as May. And in July continues as well, not as great as June. And then, our seasonal decline starts, in August. It continues gradually through the end of the year. That's historically the way it has worked.

This past year, in the end of '08 and the beginning of '09, we experienced a seasonal occupancy decline, like I have really never seen in my 25 years in the business. As we -- instead of having a gradual decline in Q4, we had a fairly precipitous drop in physical occupancy, and that continued in the first quarter of '09. You may recall on this call, in early May, some of you were quizzing me about, well, what does May look like. And I was hesitant to talk about May because we had just been through a -- as I suggested, a very precipitous drop in physical occupancy, and it continued through April.

Which was totally unique to anything I had ever seen before, and I was very concerned about are our customers going to show up in this rental season that is beginning right now. And of course they did. We had seasonal peaks in the May-June-July period, that were typical. 150 basis points over that saddle that I described, in the -- in Q1. But, so they did show up. And we did have seasonal declines again, at the end of Q3, August and September, as you would expect.

Going into Q4, we are -- have been concerned about another perhaps precipitous drop that we experienced last year, that I am happy to say at this point in time, we don't see it coming. The October results, which I'm happy to talk about now, because they are in and they were good, and that has also continued in November. We actually gained a few square feet, in October, in occupancy. So that drop did not continue in October like it did last year. And it is very hopeful on our part, that what we saw in October and what we're seeing in November continues and if that's the case we will get back to a more normal, seasonal graph, as we will have very small drop in occupancy, for the balance of Q4, and on into Q1. And then we get back into our seasonal increase again in May. That's the physical occupancy side of it.

If you look at the income side, the revenue side, it is even more interesting. When we had the bad drop in physical occupancy, we experienced of course, a drop in revenue as well, and that continued through April. I think I said on the last call, I think we will look back and see that April was the bottom point in this cycle. It appears at this point in time that's going to be the case from a physical occupancy standpoint, and it looks like it is possible it could be the case from a revenue standpoint as well.

Going back to another line chart. You refer back to your -- maybe your first week in geometry as a kid, our teachers all talked about and taught us something we had never heard of before I guess, was a 90-degree angle. And right after that, they taught us about an angle that looked like 120 degrees. If you draw two lines with 120-degree angle that is what our revenue chart looks like for this year. We had the drops and we had the left side of that angle, came down, and -- in January through April. And it has been straight line level, since April, from a revenue standpoint.

So how is that happened? How have we managed to maintain that revenue at a constant level, since that drop in April? We know and we reported to you that we decrease rates about March 15 by 5.5%, Street rates. But also at the same time, we have been increasing rates to our existing customers. And we all know what a great business we're in that allows us to do that. And we have also gained that seasonal occupancy that I talked about in May, June, and July. But at the same time, in addition to the good insurance penetration that Tim talked about, we have been able to dramatically reduce our discounts, and a counterintuitive result, our writeoffs have decreased as well.

We have done a very good job of letting our customers know when they are late. Collecting their rent before they get too far behind, and the money they owe is is worth more than the goods they are storing with us. Our writeoffs have come down dramatically. Our discounts have come down dramatically. Our insurance has gone up quite well. We were able to pass loans for rate increases to existing customers. We did have good seasonal occupancy growth, and all of that offset by the decreased asking rates of 5.5%, has allowed us to maintain our revenue at a constant level since April. And that is sequential months.

We are not just talking about quarters here, we are talking about month-by-month. So now, how about going forward? Normally, Q4, will have that seasonal decline in occupancy. Normally you're able to hold your rates. You will lose some occupancy, but you will hold your rates, and you will continue to pass along rate increases to existing customers. By doing that, Q4 historically has been just down a very small amount compared to Q3, from an FFO standpoint. But, holding the rates, were important, and I am not sure we have been able to do that here before in the first three quarters of the year.

I did hear on one of the calls the other day, one of the companies reported they had actually increased rates by 3% to 4%. That is very encouraging. If we can start to get a little pricing power back, that will be an enormous help, in us holding our revenue for next year, but I'm not sensing that could be necessarily the case across the board. October, was a good month for us, as I mentioned, and we will see going forward. But I am hopeful that in next year's -- the dynamics sound something like this.

We have a large decrease in revenue already baked in because in case of this Company, we decreased rates to stay competitive 5.5% last March. I know other companies have had to do the same thing, and I think even to a greater extent. Our pass-along rate increases to existing customers are a little more sticky now. In fact, quite a bit more sticky now than they were back in the spring.

We are no longer getting requests from customers, on a broad scale basis, asking us not to raise their rates. That is good news. And hopeful next year we will have our seasonal occupancy, our seasonal folks coming back in May, June, and July, as we have historically. And I feel good that that will happen, since this year, was, I think, going to be a more difficult year than next, hopefully. Our year-over-year comps will be easier. So, I am cautiously optimistic going into next year. But, Chris and Tim will give more guidance on that on our next call with you.

The other thing we're doing which is -- and this is all four public companies, which is very helpful, is I think we're all gaining market share. The small facility, the small operator who has one or two or three or four facilities out there, has a website, that if they do have a Web site, it is probably buried on the third or fourth or fifth page on Google. And they are getting little to no results out of their website. But right now at this Company, we think that about 35% of our customers are coming through our website as a result of our website, are searching on our website, for a unit type in an area that works for them. So, as we go forward, and we will start to talk more about the growth opportunities next year, I think the small entrepreneur is feeling an enormous amount of stress, that perhaps the four public companies aren't at this point in time because of our marketing budgets and because of our website presence.

Last thing I want to talk about is our annual survey, our October survey, was just completed. This year it was a sampling of 3,740 new customers. And, there is some good news in it. The one question I was concerned about, is "What is your primary reason for needing storage?" And still yet, 51% of our customers were moving. And I was concerned that that number was going to be down this year, for just intuitive reasons. But that is not the case. The question I asked last year, which was unique, "Has the recent market decline caused you to downsize?" Last year was 32.2% said yes to that. This year it's only 20.3%. So a little bit less stress in the homeowner market as a result of the decline in the market.

The other question that was -- is not surprising, when you see it, but it is a change from previous answers, that is "What is your primary reason for choosing U-Store-It?" 37.5% this time said best value, 28% said location and 12% said helpful manager. If you recall from years past, that has flipped. Best value or pricing was number three, location was number one, and the manager was number two. That's not a surprise when you think about it, that we do have -- have had a lot of people looking for deals in the economy that we are in. With that, I will stop and, operator, I think we are ready to take some questions.

We will now begin the question-and-answer session. (Operator Instructions) We will pause momentarily to assemble our roster. Your first question comes from Christy McElroy with UBS.

Hey, good morning, guys. Dean, I know that you have caught a lost flack in the past for managing more for price versus some of your peers who manage for occupancy. I wonder if you're feeling sort of vindicated that aside from getting there in a different way, you're putting up the same revenue growth versus those peers. And as you get to the point where you can start to move occupancy higher, what sort of frictional occupancy level do you see managing to longer term, is it 90% is it 85%?

Hi, Christy, I'm not ready to claim victory yet. The first leg of it looks good in that we're holding our own, even at a decreased occupancy level, we're holding our own with revenue. The next leg will be the more important leg in my opinion, or at least equally important, and that is can we grow occupancy and can we grow our rates off of a higher rate than perhaps what some of our competitors have done with their rate? So we will see as we go forward. But, I am pleased to see that we have been able to compare very favorably to our competitors on the revenue line. As far as opportunity going forward on occupancy early on when we took over this portfolio, it was -- the question was asked about -- do you have structural vacancy. I have always suggested that we might have a little bit, and I think I have even mentioned at one point in time that we may have a few properties, especially out in San Bernardino area, that were just built too big for the market, 150,000 square feet. When I visited those properties that were 68% occupied, and I go in and I pat the managers on the back. And they are surprised. I tell them, you have got 100,000 square feet of storage rented at this facility. That is fantastic. So, we don't -- that last 50,000 may never come, and in fact, perhaps it's never actually been rented at some of those properties. So we may have 300,000, 400,000 square feet of vacancy that may never be rented, and we will call that structural vacancy.

The other side of it is, the markets the we're in, you have -- is there some concern about those markets, being able to fill up to 85% to 88%? And I think the answer to that is no. I'm not concerned about any of our markets on a go-forward basis being able to fill-up. Nor am I concerned, except for that little bit of structural vacancy I talked about and my concern about our specific facilities being able to fill up into those mid 80s. I am optimistic there, Christy, when the market comes back to us, that we are, first of all, going to start raising rents from a higher level, as you may have noted our realized rent actually went up, in Q3 '09 over Q3 '08. We have done our best to hold the line out there. The small entrepreneurs tend to follow the larger players. And when we take our rates down, they take theirs down even further. It becomes a spiraling effect. We have done our best to hold the line, and I am happy to hear some of the other guys are starting to raise rates now.

Do you see needing to push your occupancy further before you can really start becoming aggressive on rents? I guess the big question as we start to see a recovery, who puts up the higher revenue growth in the next couple of years? Is it the portfolio with the occupancy upside, or is it the portfolio with greater pricing power given 90% occupancy?

I think you try to do both. I think you try to push occupancy and push rates at the same time. That's somewhat counterintuitive as well. But, a lot of times, pushing rates just has to do with the courage to push rates. Over the years when we built storage facilities and we were in lease-up, I have always raised rates. Didn't really have anything to do with your physical occupancy. You may have only been 40% occupied if you were starting your second year lease-up, but the customer doesn't know that. The customer is coming in renting one unit from you. So, your physical occupancy is not that important, as it relates to rates, if you have the courage and you think the market will take it. What we will be doing going forward is hopefully accomplishing both. Increasing our occupancy and pushing rates at the same time.

Okay. And then just one further follow-up on the occupancy. Where does that incremental customer come from as you start to push occupancy? Is it new demand or is it taking market share that you spoke about earlier?

That really is a good question. Taking market share is there for us, and it is happening as we speak, and that is going to continue. The new customer, or let's say some of our old customers who have stored with us, when are they coming back to us. That is more unpredictable in my opinion. I'm hoping that we are going to start seeing some jobs growth in the first quarter this year. The number out this morning was not that encouraging, but not that bad as well with the adjustments. So I'm hoping next year first quarter we will see job growth. Consumer sentiment is coming back a little bit.

But where we have really lost a lot of space in this downturn, is really from the housing market. I mean, we know we're tied to housing because half our customers are moving. And so that we're directly tied to that. But where we also have customers are the sub contractors, and when you go into Florida, which I was been down there in the last month, out in Ohio, over this last week, and you talk about the housing market, we have lost so many of our customers, from people who are vendors to the housing market. So, we have those -- the Phoenix, the Las Vegas, the Florida -- we have those housing booms. Not only did we lose customers from people not moving in there any more and not moving around in the new housing, but we also lost those sub contractors.

I think that will be the first large group of customers that come back to us. Not so much, that we're going to have another housing boom, but they are only going to be out of work for so long. And they may be a sub contractor-- they were a subcontractor for housing, or maybe a sub contractor in another construction field going forward. But that one is less clear to me, Christy, than the first one, and we will continue to take market share going forward.

That's helpful, thank you.

The next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Hi, good morning,. I am along with Jordan Sadler as well. I was just wondering if you could talk about the decision that was made with Heitman to no longer pursue expanding the joint venture at all.

Sure, Todd. This is Chris. The option to expand, and then ultimately the decision not to do it, had a couple of components to it. On the Company's side, obviously, we had to look at overall sources at the time that we launched the equity offering, and made the prudent and hindsight correct decision, to upsize that transaction from its original $122 million to ultimately the $161 million that closed. And, take the risk off the table if, in fact, a co-investor was unable to be sourced for the deal. So, from a capital perspective, as we got to the September 30 deadline for expansion, or not. Quite frankly, we were indifferent, because we had no near-term use for the capital, and had succeeded in match funding through the upsized equity offering. On the other side, I think it shows that transactions are still very difficult to get completed. It is awful hard, and as a result, you look in the market place at joint ventures that are getting done, in our space or in any other. And I think you can point to ours, there was a retail deal I guess that was done, and it looks like something else may happen in that space as well. But there has been very few, that have actually gotten across the finish line. So at the end it was difficult to find a co-investor on their side, and on our side we were frankly indifferent as to whether or not those assets got contributed. So, I think it was win-win on both and, great relationship with them going forward. The deal has sort of hit the ground running, and we look forward to a long partnership with them.

Okay. And then, back over to occupancy, I know you didn't talk too much about 2010, but given the typical seasonal decline that we will now see most likely through the early spring, where do you think occupancy sort of bottoms out during this winter, or early in 2010?

I think we're become to normal curve, normal charts, normal times, as it relates to year-over-year comparisons, Todd.

Okay. Then I think Jordan has -- .

Yes, Dean, I was interested in your comments about courage to push rates. And maybe just if you could provide a little bit more perspective given sort of the switch in how your new customers are shopping. Will you have, I guess, the courage to push rate, given that people are now shopping based on value?

Yes, it is still a small percentage, Jordan. At 30-something percent that I mentioned, that shows us because of value, so there's still a lot of room. I think that the -- it is still such a small dollar amount. I don't think the customer showing up, is really discriminating between $105 and $100 for a 10 by 10. And I think that it factors, but I don't think that is a motivating compelling reason.

So, yes, I think all the public companies will have the courage to start getting rate back again. Getting pricing power back again. I think we need a little -- it's not so much about occupancy. We need a little better consumer sentiment, need a little bit better jobs growth, items such as that. And then I think we will all have the courage to go back to our pricing power, and lead the market again. I think the small entrepreneurs will come right along behind us as well.

I might have missed it, are you guys pushing rate anywhere to existing customers or new customers?

Well, you see the results of Q3. If you don't mind, for competitive reasons, I would rather not just layout our complete game plan for what we're doing in Q4, but you see our results in Q3.

From an existing customer perspective, we have continued -- I think you have heard the same message from all of the other public companies, to pass along rate increases to the existing customers, at percentage increases consistent with what we have seen over the last several years. And, again, somewhat counterintuitive like the AR situation, those customers are showing no change in their behavioral patterns in terms of being sensitive to that rate increase. And to Dean's point, largely because it is a fairly small dollar amount to them.

Okay. Thank you.

The next question comes from David Toti of Citi. Please go ahead.

Hi, it's Mark Montana here with David. Wondering if you could discuss the California market a little bit? Maybe what is driving some of the occupancy deviation versus the remainder of your portfolio and some of the initiatives it will take, or some factors it will take to get that back up to--in line with the rest.

Well, California really hasn't changed any since the three years -- plus years I have been involved in this portfolio. It is mainly San Bernardino. Most of the square footage is in the Inland Empire area. That is where our structural vacancy is. We have got a number of 150,000 square foot facilities out there. When those are 68% , 70% occupied, that is a terrific job, in my opinion. So, our California is very different from -- say or EXR in that we're in a different area. We have Sacramento, we have the Inland Empire area. We have a few in L.A. county and a few in San Diego county. But I don't expect as California comes back, that will come back, those will come back, but we really have only had about 5 points drop out there over last year, and that's consistent with the rest of the portfolios. So it is performing in a very similar fashion to the balance of the

Gotcha. So going forward as you expect a recovery to ensue a similar deviation in California versus the rest of the portfolio could likely be expected?

That's exactly right.

Okay. And then I guess you guys are getting more positive on your growth prospects. Wondering what your thoughts are on your strategy. I know you announced little in the way of growth probably from the Heitman JV. But whether your strategy is going to be future JVs, development, acquisitions, whether you're seeing any distressed opportunities? Haven't heard much about them, but just want to get your thoughts on what you're seeing and what your strategy is.

Great question. This is Chris. As I alluded to, that is what we're spending time thinking about. Making sure that the market place in general, understands that the balance sheet is in great shape, and we are interested in looking at the growth opportunities that are out there. And we're spending an awful lot of time looking and talking to all the constituents, lenders, owners, et cetera,. As you sit here today, and if you were to look back on transactions thus far this year, there just haven't been a lot of trades.

We have certainly been among the most active on the disposition side. And when you look at what's available in the market place today, there is yet to be a compelling situation. There is still a pretty big spread in bid ask, and lenders seem still willing to kick the can down the road. We anticipate that will evolve and change and become more positive as we move through next year on the buying end. But, we will have more insight into that as we get into our first call of next year.

Gotcha. So probably nothing in the pipeline over the next several months?

I would not anticipate any, no.

Great, thank you.

The next question comes from Ki Bin Kim of Macquarie. Please go ahead.

Thank you. (Inaudible) comments about the self-storage fundamentals, could you give just some numbers behind that, so maybe the trends in street rates you've seen in the past few months? And also how that plays out in relation to in place versus street?

I think you're talking about my comments. And I am really just looking in the rear-view mirror. I was not so much forecasting.

Yes. I'm not talking about the forecast. Looking back. How have your street rates trended in the past three, four months and has that -- what does the GAAP look like versus in place versus street today versus maybe three months ago?

The GAAP question, obviously, this is Chris, I will take that first. It is largely unchanged from several months ago, but we're run being 4%. The folks in place are about -- in the in place units are running about 4% higher, in terms of what they are paying than what we would be asking for that same unit from a customer coming in, off the street.

And how have street rates trended? So have they been incrementally increasing? I was wondering if you kind of just give more color on the trajectory?

What we have done--what we reported is 5.5% adjustment we made about March 15. We reported that through the first three quarters, and we are keeping all alternatives available to us as we get into this winter season now. But not ready to forecast where we're going in Q4, as it relates to street rates.

All right. And in terms of network program, could you just give an update on that? In terms of how many customers you have signed up, and the kind of economics you're getting out of that program?

Sure. We will soon be putting out a news release announcing our number 500 that has signed up. We blew right through that number. And we're -- I think we reported in our news release yesterday that we're at 547. But we do still want to stop for a moment and reflect on the number 500. And we still have a lot more in the queue. So people are seeing the value of this very easily. It is just a matter of getting in front of them and talking about it and trying to fit them into our footprint.

With 547 and our almost 400 stores, we're approaching a footprint now of 1,000 stores. I think when we get into a couple thousand stores in total, we should be able to be satisfy about 90% of the population of the United States, and that's when it really starts to work well for us from a national advertising standpoint. And also, on national leads through the internet. So, not ready yet to share the results as it relates to the financial side of it. But we will do that probably as we give guidance into 2010.

All right. Thank you.

The next question comes from Paul Adornato of BMO Capital. Please go ahead.

Thanks. Sorry if I missed that, but, can you roll us forward, and talk about performance in September? I'm sorry, October?

October? Sure, Paul. I was very concerned about October because last year, when we came out of our rental season, and the decline started in August, and September, normally, it will start to level off in October. And last year it didn't. So that was another one of those points. There were two key points in this whole debacle. It was this October and it was last May that I was focused on to see what the market was going to tell us. And fortunately, we had good news on both. Last May, the renters came back to us, and this October, we did start the leveling out of our decline if you will. Whereas last year it continued on a straight line down.

I appreciate the discussion on price sensitivity. Was wondering in association with that if you noticed a preference towards the smaller units? Are folks trying to economize by looking for smaller units? I realize that there is dynamic pricing,but are they coming in kind of inquiring about smaller unit sizes?

Yes is the simple answer. For the first time, probably in my career, we seem to be more full on smaller units than larger units. Almost always, your 10 by 20s, outdoors with the garage doors where you can drive up to, are in greatest demand because of the obvious reasons. But now, when I go to facilities, I am amazed to see smaller units on the second floor, that are fully leased. And it speaks to exactly what you're suggesting there, Paul.

Is there any thoughts to reconfiguring some space in order to create more of the smaller units?

We continuously do that. I am sure everyone does that. Yes. We -- the good news in that, of course, is you get a much higher rent per square foot on those smaller units. But yes that's a program that we continuously have running.

Okay, thank you.

(Operator Instructions) The next question comes from Michael Knott, of Green Street Advisers. Please go ahead.

Dean, I have a question for you on margin. Back in the Storage USA days, if some of my old data is right, you guys pretty routinely ran in the high 60s and sometimes above 70% on margin. Can you just contrast what your level of satisfaction with where your margin is now, and how do you feel about that low 60% number? Do you feel like it is going to bounce up a lot when occupancy rebounds? When you can push pricing power and occupancy, or do you feel like, there is a structural difference here, with this portfolio, or this platform, that is significantly lower on margin.

There is a little structural difference, Michael. And it has to do with the markets that we operate in and the kind of rent that we can hope to achieve in those markets.

Obviously if you take an extreme example, if you're in $15 markets, you got the same management team. You are paying basically the same kind of expenses, and so your margin is going to be so much better. In San Bernardino versus right there in your backyard, for comparison purposes, in Orange County, it is a big difference. It is probably $6 or $7 a square foot difference. All of that goes to margin. So I don't expect, with today's portfolio, that we will be able to get close to those high 60s, again. But clearly from 61.2 or whatever it was we reported this quarter, as we increase occupancy, and revenue, that number will go up. But I would be happy to see, us back up in that 65% range for margin.

Okay, that's helpful. And then, I guess leading from that question for both you and Chris, what is left to sell from the portfolio? Obviously liquidity position has been enhanced significantly, and so there is not necessarily a need from that perspective to sell, but do you feel like you want to continue pruning at the margin? How are you thinking about that part of your capital plan for 2010?

Yes, Michael, this is Chris. I think your term pruning at the margin is right on point. There are assets that were either encumbered, prior to the CNBS that was paid off this year, or are in some pools that will be paid off next year, that don't make strategic sense for us long-term. Either difficult to manage in kind of an out-of-the-way market or some tertiary locations. Those will be a focus of that pruning, but I think the pace and volume of what we have done over the past two years will slow pretty dramatically.

Okay, then my last question is I thought it was interesting that in the press release you noted the opportunity to evaluate external growth opportunities. Just curious, Dean or Chris, what you think that landscape will look like, compared to your pretty acquisitive days at Storage USA. What do you expect over the next couple years? Do you feel like there will be more transactions and values that you find interesting?

I think it is going to be a little bit different this time, Michael. In '94, '95, '96, '97, those years, the product did not suffer that much, in the S&L debacle. So there wasn't that much from an opportunity from lenders. I think we will see a little bit more of that this time than we did last time. But not a significant amount more.

What we also saw in those ninety years, was it was a first opportunity for people to monetize their equity, when Storage U.S.A. went public and then we had the two roll-ups and one more right after us. All of a sudden there was capital in the sector, which there had been no capital in the sector, since the S&Ls had gone out of business in the late 80s. It was the first opportunity for people to sell. That really is not the case this time. There has been continual capital in the sector if the bid ask- had come together.

But what is going to be the driving force this time, and totally unique from before, is how we find our customers. How we obtain -- capture our customers. And I keep talking being this, and this is going to be huge, and we are going to start to consolidate the sector for the first time ever, in that these small entrepreneurs are really struggling out there. And they are not going to be able to compete with the big marketing budgets that -$200,000 a month we're spending on Google right now, both in display and SEM. And the money we spend on SEO, they are not going to be able to do that. And so, unless they have got that great location, where 50%, 60%, 70% of their business comes from drive-by, they are really going to -- they are going to suffer. And so that's going to be the motivating reason, this time, tor us to consolidate the sector, and for companies like ours to grow, fairly dramatically.

So, just, if I could ask you one last question, as a follow-up, let's say in five years, what do you think the industry -- the public industry market share is compared to what is it, 10% or 12% today?

Yes, I mean, it is going to grow. And I talked about consolidation back in 1994, but it never happened because the small guys built more than the large guys bought. But we got two dynamics here. I think that they are going to work for consolidation. I think there is going to be far less construction going forward.

We don't need any more storage facilities built in this country, in my opinion. We have got 50,000, and we have got enough. We have got a vacancy in our sector that really is more than adequate. We need for the building to stop, and that is something that every chance I get to talk to people about, as I harp on. And so, very little is going to be built in the next five years, and I do think there is going to be a lot -- that bid-ask spread is going to come together. And it will not be long, in my opinion, that we are going to getting telephone calls from people asking us if we would like to buy their storage facility. I think that starts to happen, maybe toward the latter part of next year.

Thank you.

The next question comes from Paula Poskon of Robert W. Baird. Please go ahead.

Thank you very much. Tim, could you remind us what the unencumbered assets hole will look like once the all the secured financings and assets sales are completed by the end of the year?

There will be no unencumbered assets post closing of the new secured credit facility. All of the currently unencumbered assets will be contributed as collateral for that facility.

Thanks, appreciate that. And Chris, what has the progress been on the call center, since our visit in July?

Paula it's Dean. I will take that one. That has been significant as well. We have brought in a brand-new telephone system. I think we told you about then that we were going to. We put that in place in September. Our integration to sales force.com, has been completed as of November 1, was our date for that. And, we are taking many more calls than we were. We're taking all of our calls, as a matter of fact. Before when you were here, we still had an outsource call center. We're now taking all of our calls at our call center here in Wayne. We're very pleased with that result.

Dean, how much do you think the rising foreclosure rate and the changing nature of that with prime borrowers going into default and foreclosure because of job loss, is driving demand for storage?

Well, 20% of our customers tell us that they are moving because they are having to downsize because of the economy. So I think that is probably the answer.

Okay and then just a big-picture softball question for you. Could you quickly run through your major markets and just assign each one a report card letter grade based on your view of where fundamentals are now, and how you think that might change, by next summer's leasing cycle?

Well, we're in a lot of markets. Let me do it another way, if you don't mind. Let me tell you the markets I am concerned about. and then markets that I think we have great opportunity, and then kind of everything else falls in the middle. Will that be okay?

Yes, sure.

Okay. Atlanta continues to be a market along with Southeast part of Florida, that has been troublesome. And the reason is we have got a very fragile rental market. And in those areas, more suppliers come on board. And so, when you've got a new competitor, in years past, we've just sat by and let that competitor fill up. Now, we would rent some units, and we would lose a little bit of occupancy, but we would always hold our rates. And we would let that competitor fill up.

Well, this time around, because the market is so fragile, if there has been a new facility open up in the market, they price their facility substantially below the existing market. And again, because the market is to fragile, everyone else then has repriced below the new facility. And it's been a spiral downward. So, Palm Beach County, Broward, Dade County, we have had a fair amount of that. Atlanta we have had a fair amount of that. So those are markets that stand out as being troublesome still yet today. As I have said before, I think we see the bottom in Southeast Florida. I think we're off the bottom on the west side of Florida and also in Orlando and Jacksonville. So those -- that's kind of my quick take on Florida.

Now California, we have more or less talked about. We had a management problem that has been fixed in Sacramento, so now that is starting to perform in a proper manner. Then you go to markets like Las Vegas and Phoenix and Tucson, where you have had this housing bubble affect more people than some of the other markets. And, again, our sub contractors have dramatically affected us there as they have moved out. So, markets like that continue to be on my watch list. Even though, we're starting to see signs of recovery in Tucson, a little bit more than Phoenix.

But then when you look at the central part of the United States, and the northeast part of the United States, it is really quite positive going forward. In that you didn't have the housing bubble that really affected you that dramatically in states like Ohio, and Tennessee and North Carolina. And also, in New Jersey, we had good results in New Jersey.

And so, I am thinking that going into next year, we should see some pretty good results out of the central part of the United States, the northeast, and everything from Washington D.C. on up, and even the Carolinas. Continue to be concerned about the southeast part of the United States. Dallas has been a very good performer for us. Houston is -- it looks like it is down a little bit now, but that is as a result of Hurricane Ike coming through there a couple years ago. So the year-over-year comps are a little bit challenging. Austin, San Antonio should be fine. Our New Mexico properties and small markets should be fine. So is that helpful?

Yes, absolutely. I appreciate the color very much. Thanks. That's all I have.

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to Dean Jernigan, CEO, for any closing remarks.

Okay. Thanks for your interest. Look forward to seeing a lot of you at -- in Phoenix next week, and thanks for joining us today. Good bye.

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