CubeSmart (CUBE) 2010 Q2 法說會逐字稿

Good day. Welcome to the U-Store-It second quarter 2010 earnings release conference call and webcast. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions.

I would like to turn the conference over to Mr. Dean Jernigan. Mr. Jernigan, the floor is yours, sir.

Thank you very much. This morning we will have certain remarks that will include certain forward-looking statements regarding earnings and strategy, that involve risks and uncertainties and other factors that may cause the actually results to differ from material from these forward-looking statements. Risks and factors that would cause our actual results to differ materially from forward-looking statements are provided in documents that the Company files with the Securities and Exchange Commission, specifically Form 8-K, together with our release filed Form 8-K, the business risk factors section of the Company's Annual Report on Form 10-K. In addition, the Company's remarks include reference to non-GAAP measures, a reconciliation between GAAP and non-GAAP can be found on the Company's website.

Good morning again to you all. I am going to start off this morning and talk a little bit about fundamentals. At the end of last year, and probably on the first quarter call as well, I talked about being able to see the light at the end of the tunnel, I thought. I am happy to report today that we are in fact through that tunnel, and I am even happier to report that we determined that light to be daylight indeed. By no means do we have clear skies ahead of us, but I really don't see any buildups or thunderstorms that would disrupt our recovery. Not only our Company, but I am speaking for the whole sector when I say that. We should be able to push through, punch through anything that develops out there on the horizon. But basically daylight indeed. We are very happy about that.

Before the call, we also talked about going positive by the end of 2010 on year-over-year revenue. Even with the lackluster recovery, we thought we could accomplish that. And we are also happy to report that we didn't have to wait until Christmas. It came in June. We had very modest year-over-year revenue gain in June. And it has continued in July. We should be able to build for the balance of the year.

These revenue gains for us, and other companies in our sector, are being driven by occupancy primarily, and some pricing to existing customers, but essentially no pricing to new customers. In looking at occupancy, I hear all of the calls, of course, and a lot of commentary, and read all of the reports, and it seems like everyone tends to talk about occupancy as it relates to people moving into the units. But that is only half the equation. We really need to focus on people moving out as wellto see the entire picture.

Clearly our society has become less mobile in the last couple of years, and in fact I saw a report the other day that said only 1.6% of our population moved in 2009. And that was the smallest percentage since World War II. So fewer people moving gives us fewer move-ins, but also fewer move-outs. To be frank, 2010 over 2009, the comp was very easy, if you look at net rentals.

That is what I think it is appropriate to look at, net rentals. We had a massive gain in 2010 over 2009 in net rentals, that is taking your move-ins minus your move-outs, but I am happy to focus on 2008 as well. We had a 3.5% increase in 2010 in net rentals over 2008, and I think most of us consider 2008 as a peak year. So that is some good news. Net rentals,that is what drives occupancy. And I think we need to focus more on that going forward, rather than just move-ins. So I know you are thinking, well that is good, but how can this be?

So I thought we would talk about three of the challenges that I have talked about in the past, and then I will talk about kind of the silver linings in those dark clouds, if you will. We have clearly had, as I mentioned, less mobility, fewer people moving. I just talked about that. But with that, we get a longer length of stay. I know I have heard some of our other friends talk about they don't see their length of stay getting longer, but it seems to me by simple logic, you have got fewer people moving in, but your occupancy is going up. It is going to give you fewer people moving out and a longer length of stay.

So less mobility has a good and bad side to it. And right now the fewer move-outs is giving us those occupancy gains and longer length of stay. I think that is something that is going to be with us for quite some time. I don't see our society getting back to its mobile ways as it is been in the past, but clearly there is a silver lining in that cloud for us.

Another dark cloud that is out there for us is housing, generally construction. Our lost contractors, if you will. But this morning, I am going to go out a little bit on a limb, and talk about something that I thought I was, I hadn't read about it, but I now find out that Barron's had a piece on it the other day, but I think the housing market is actually going to roar back. I think we have got a big comeback coming in the housing market, it is just going to be in a different form. I think it is going to be in the multifamily area, not single-family.

We know that single-family ownership topped out at a little above 69%, as a result of our politicians down in Washington thinking that everyone in America should own a home, and giving very compelling financing to go along with that, our homeownership went up about 4 percentage points over our historical average of 65%. With about 120 million households, we are seeing a dramatic shift now from that 69% back down at least to 65% I think. And I think it will even go further, through 65%, maybe down to 63% before it bottoms out. I think I recently also saw that 69% has already come back down to 67% and change. So if it does get down into that 65% back to historical levels, or 63% even through that, that is somewhere between 5 million and 7 million households that will shift from single-family to multifamily. I think that is terrific for the multifamily guys. I think it is also terrific for us self-storage guys.

The typical renter moves every three years, versus a homeowner who only moves once every 10 years. We are right about that, more people moving is on the horizon. They are going to be moving into smaller quarters, and the construction workers, many of them, will be out building apartment complexes versus houses. So I think that it is a win/win/win for us on all accounts.

The last dark cloud that I have been talking about for a number of quarters now has been our discretionary customer, and I even see a little silver lining there as well. I am sure all of you have noticed that our savings rate has popped back up to about 6.2%. That is actually quite high by American standards as we all know. That tells me that the people who are employed, that 90% number out there, they have repaired their personal balance sheets to a great degree, and they have started to save. So I think that is good news, probably not for this year, but maybe for 2011, that we actually might have our discretionary customer coming back to us.

So to wrap up, in the past I have talked about it in kind of a joking way, an L-shaped recovery. Obviously when you look at an L, that is not much of a recovery, but now I am starting to see a recovery in the self-storage sector that maybe looks more like a checkmark. Perhaps that checkmark will have a long tail to it, but at least it is moving in the right direction.

With that I will pause, turn it over to Tim Martin, our Chief Financial Officer for some comments. Tim?

Thanks, Dean. As always, thanks to everyone joining us for today's call, and for your continued interest in support of U-Store-It Trust.

Our second quarter results reflect a solid operating quarter. Our reported $0.11 of FFO per share was at the high end of our guidance range, and in line with Consensus expectations. Quarterly results from our core portfolio came in a bit better than planned, picking up on Dean's comments that despite recessionary pressures our occupancy gains through the spring and summer rental season have returned to normal levels. Occupancy gains continue to be influenced by lower move-ins relative to pre recession levels that are more than offset by lower than normal tenant move-out activity.

Our customer base continues to demonstrate that it is very much needs based, as on average our customers are in fact staying with us longer than they used to. Our ability to achieve higher levels of revenue from ancillary sources continued during the quarter, and for the fifth consecutive quarter we told tenant insurance to over 90% of new renters. Our overall tenant insurance penetration has increased to 49% at the end of the quarter, compared to 40% a year ago.

Operating expenses were in line with our expectations. Property taxes are down year-over-year as a result of our continuous process of evaluating the assessed value of our properties, and appealing those values where we see opportunities. Utility costs are down year-over-year as a result of better utility usage programs we have put into place. Lighting upgrades that are much more energy efficiency, and notably lower electricity costs per kilowatt-hour in certain markets in Florida.

During our first quarter call we discussed the transaction to acquire the third-party management contracts from United Stor-All. That transaction closed on April 28th and the integration of the contracts into our operating platform has been smooth, and is a very exciting opportunity for us to leverage our people and our systems. From a financial statement perspective the transaction was accounted for as a business combination, and accordingly consistent with the GAAP treatment of expensing upfront costs associated with acquiring properties, we recognized the upfront acquisition related costs of approximately $300,000 during the second quarter.

Also during the quarter, we continued to utilize our available cash to repay mortgage debt as it matures. We repaid $15.5 million of loans during the second quarter, and have repaid $98.8 million of maturing loans year-to-date. Since June 30, 2009, we have decreased our outstanding debt by over 29%, from $994 million to $666 million as of June 30, 2010.

We have cash available to satisfy our remaining 2010 debt maturity, and have no amounts borrowed under our $250 million revolving credit facility. While we have very manageable debt levels, debt maturity levels in 2010 and 2011, we do remain very focused on our late 2012 maturities. We continuously evaluate our long-term capital strategy, and look at various markets with the broad objectives of growing our platform on a leveraged neutral basis or better, and to extend out our debt maturity profile.

Our general and administrative expense for the quarter was impacted by approximately $600,000 related to amended employment agreements for Dean and myself, as we disclosed in an 8-K back in early July. And as we discussed during last quarter's call, we incurred additional G&A costs related to the integration and startup of the third-party management business.

Switching gears to guidance, we have introduced third quarter FFO per share guidance of $0.12 to $0.13, and moved up the low end of our annual guidance to a range of $0.46 to $0.51. As detailed in our earnings release the positive results we had during the spring and summer leasing season have provided additional earnings visibility, and we have adjusted our same store revenue expectations upward. Implicit in that guidance is our expectation for positive same store revenue growth for the balance of the year.

We also lowered or improved our expected annual same-store expense growth guidance. Implicit in this guidance is an expectation for expense growth during the second half of the year, which is impacted in part by the timing of our marketing spend this year compared to last year. Chris will spend some time in a moment discussing external growth opportunities, but from an earnings guidance perspective, we have not included any impact of acquisitions for the balance of the year.

Overall the second quarter was a good one that showed signs of steady improvement in our financial results, and continued stabilization in our operating fundamentals. We are positioned to continue to capitalize on our internal growth opportunities in the coming quarters, and at the same time we are focused on evaluating external growth opportunities, and continue to expect consolidation in the sector over the coming years.

At this point I will pause and turn the call over to our President and Chief Investment Officer, Chris Marr.

Thanks, Tim. Following up on that theme we are very pleased with our successful external growth initiatives thus far in the year, and are very enthusiastic about the prospects to continue that growth over the balance of this year and through 2011 and beyond. We focused our efforts over the last eight months on being creative and identifying ways to develop lines of business that would internally generate investment opportunities.

As Tim had said all of the people, processes, and state-of-the-art technology we have implemented here over the last few years, established a solid foundation upon which we will seamlessly lay our external growth. We identified the third-party management business as one that would allow us to very accretively leverage that platform, and we have gone from no properties under management at this time last year, to currently managing 119 properties for 24 different owners containing 7.9 million square feet.

These relationships create our own opportunities. As the manager of the asset, we have the best knowledge of the facility and its value. We have the direct relationship with the owners and are providing them with quality service. In addition, given our history in the business, many of the owners of self-storage facilities have a connection to Dean, Carol, or myself from past business relationships. That may be that they were franchisees or JV partners with us at Storage USA, or we have purchased or sold assets to them over the last 15 to 20 years.

As a result, when the time comes for an owner to decide they would like to sell their facility, we are the best position to acquire that asset. We have also leveraged off of relationships with financial institutions that we have developed over our years in the business, and have demonstrated that we can be very creative in assisting them in maximizing the value for their portfolio, in a way that is also economically beneficial to our Company. In addition to having created an internal pipeline of opportunities in markets that we find attractive, we are seeing increased deal flow coming from the broker network. The well-respected self-storage investment brokers have done a great job in educating sellers as to the current status of the investment market.

So let's put some numbers to the deal flow. We have reviewed opportunities to acquire 282 self-storage facilities so far this year. 41% of these opportunities have come to us directly, either through our management program, from lenders, or relationships with the owners, whether that be the typical self-storage entrepreneur or institutional investors. The balance of the deals we have seen have been marketed deals.

Keeping with the themes outlined on the first quarter call, 25% of the deals we see are stabilized assets with stable ownership, who have made a decision to sell for estate planning, tax reasons, or other traditional reasons having nothing to do with duress. About 42% of the deals are for sale due to some form of mild distress. These are typically seller distress. They have other investment that have gone bad, they have an urgent need for capital, they may have debt coming due on the self-storage asset or elsewhere in their portfolio, and they recognize they cannot replicate the high loan to values of the past.

27% of the deals are fully distressed, where the seller is either a lender, or the sale is being dictated or controlled by the lender. Most often the facility was over leveraged, and under managed. The remaining 6% are those recently developed assets that in many cases should probably not have been built, and the owner/lender is trying to salvage something. Typically we see these in Florida, Arizona and parts of California.

As we noted in our release, we closed on an acquisition in Texas for $6 million in an all-cash deal, and we have transactions in various stages of due diligence totaling an additional $33 million. Our pipeline continues to fill. As of today, we are in various stages of negotiation/underwriting on an additional $100 million of opportunities, and we can clearly see the potential for more deals behind that. To be clear, there are no guarantees that all of these deals will fall our way, and those that do may be late 2010 closings, and more likely 2011 closings. That being said, we are extremely enthused by the deal flow, we are seeing, and even more enthused by the markets in which we are seeing opportunities to accretively grow our portfolio.

With that, we will pause in the prepared remarks. Operator, we can open it up for questions.

Yes, sir. We will now begin the question and answer session. (Operator Instructions). The first question we have comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hi. Good morning. I am on with Jordan Sadler as well. Can you talk about your expected sources and uses of capital over the next 12 to 18 months, I guess particularly given the acquisition activity that you are seeing today?

Sure, Todd. This is Chris. I will start, then I will turn it over to Tim to pile on. When we think about acquisition sources specifically, we have been very clear and consistent that we view our external growth program, as one that would fund in a leveraged neutral manner or better. And we continue to evaluate all of our opportunities with that view.

So on our acquisition that we did close in Texas, for example, we took advantage of our at the market equity program to raise about $5.4 million to fund the majority of the cash needed for that transaction, the balance of $600,000 came from cash on hand. So that deal was one we were able to do on an FFO accretive basis and reduce leverage.

As we go forward, we continue to evaluate these opportunities as a way to grow the portfolio in an overall accretive manner, improve the quality of the overall portfolio, but also do so in a way that chips away at leverage over time. So, Tim, from there do you want to talk about the overall sources and uses?

Yes. From an overall perspective, sources and uses, we have very little, as I mentioned in my prepared remarks, we have very little in the way of maturities for the balance of 2010 and into 2011. So we remain focused on our late 2012 maturities. As Chris mentioned, we have consistently signaled that a leveraged neutral or better basis growth strategy is our strategy. From an ATM program perspective, Chris mentioned that we were active. We had originally established a continuous equity program that had authorized 10 million shares. To date through usage in 2009, and some usage that Chris mentioned through 2010, we have just under 6.9 million of those shares remaining authorized.

Okay. Just looking, then, I guess ahead, the January 2011 maturity, any thoughts on being able to refinance that with new CMBS debt, since the markets have improved there at all?

Yes. One of our longer-term objectives that I mentioned is to look at a variety of different available capital sources. Our objective is always that having more options is better than having fewer options. To keep the optionality of having an unsecured balance sheet, an investment grade rated type balance sheet, we are mindful of the levels of secured debt that we have. So as we think about that maturity and the timing of it, our expectation is to use cash on hand and our line of credit in the short term, to address that maturity and explore capital alternatives that include unsecured issuances that would really require us to be mindful of the levels of secured debt that we have on our balance sheet.

Okay. And then just lastly, Chris, on the acquisition, do you have a cap rate on that deal?

Yes. I would hate to be specific on one single transaction. I would love to be able to answer that question by saying that sellers out there are happy to get a 10 cap for assets, and that is where deals are getting done, but that is not the case. If you look at all the deals we are evaluating on a cap rate basis, as opposed to a price per-square-foot basis, deals are generally getting done in the 7.25 to 8 cap range. That is on in place occupancy and revenues, sowe are not paying for the upside that is generated through our management and scale. But that is a good range, I think, across the $40 million or so that we have in process.

Okay, great. Thanks.

The next question we have comes from Eric Wolff with Citi.

Hi. It is Mark [Montanen] here with Eric and Michael. I just wondered on the management properties, did the income from the United Stor-All start generating income in full in April? And then on the managed properties picked up in early July, I was wondering if the economics were similar to those acquired through United Stor-All in April?

Eric, it is Tim. The USM transaction, the beginnings of us managing those facilities, that transaction closed in April, late April. April 28th to be specific. We started to receive management fee income only for two of the three months during the second quarter. The nature of the additional third-party management contracts is similar, in that we manage them for a fee that generally a market fee for third-party market businesses is in 5% to 6% of gross revenues.

How should we think about the property management fee income for the year, and the sort of appropriate run rate now that the business has got some, a little bit of scale?

I think the amount that we have disclosed for the quarter is obviously two months worth of 85 of the 119 properties. So I think using that as a basis for modeling management fee income more broadly is a good indication.

Maybe going back to G&A for a second, the $6.8 million, that excluded the $300,000 acquisition related costs that you had separately on the income statement. You said, was there $600,000 of costs related to the amendment of the employment agreement?

Yes. Specifically in the second quarter, included in our G&A number. Really two things that were notable during the quarter. The one was $625,000 of payments associated with the amended employment contracts that we filed in the 8-K back in early July. Then there are really two components of costs that impacted us related to the USM transaction. One component of the cost is included in G&A, and that is related to the integration costs of that, United Stor-All had a back office function in suburban Baltimore. And as we took over the management of that, we had a transition period where we had staff there, and we were building up our staff and transitioning here.

So included in our G&A during the quarter were approximately $200,000 to $250,000 of what we call integration costs, which were effectively transitioning that staffing and back office functionality. The other $300,000 of USM costs that we talked about are on their own line of the income statement. Those represent up-front transactional costs, similar to what you would have in any acquisition, and would include things like professional fees, legal fees, and the like. So there are really two places on the income statement that the transaction impacted us. One in G&A, and one not.

And I guess going forward, it looks like, at least in the guidance for the back half of the year, it is about a $6.2 million average, so that you are not really seeing this going away is the employment contract costs?

No. Than the increase in the G&A guidance is $1 million on the low end and the high-end, is largely driven by amounts that we incurred during the second quarter. So the second half of the year continues to be in line with what our previous guidance would have implied.

I guess why was there costs of $600,000 for the employment agreement?

Yes. If you go back to our proxy statement that we filed back in May, our Board and Compensation Committee stated in the proxy that they had a recognition that Best Practices for Executive Compensation have evolved. And they made a commitment in the proxy statement that as existing employment agreements came up for renewal, that their intent was not to renew those employment agreements under their current terms when they came up for renewal.

So when during the quarter, Dean's contract and my contract, were amended, specifically to address what were viewed as not the best of pay practices, which were modifications to the change of control provision that include how change of control is defined. They include the payments that would be received upon a change of control, among other things. So an inducement from the Board and the Compensation Committee to have those contracts amended, came with a signing bonus to each of us. And that is the amount that we are referring to.

I guess maybe just last question, but overall G&A at these levels relative to the peer set still seemed elevated, and I just wonder whether there is anything else, Dean, that you can sort of take out of the business, or you think that there is room for savings, because the G&A load still seems high relative to the asset base and the NOI levels of the Company?I mean PSA is running at $34 million at a much, much bigger asset base.

Hi. This is Dean. Clearly this Company has been built with a management team that is prepared to take this Company to the next level in the form of growth. If we were going to stack arms today and march forward with the assets that we have, the quality of this management team, the strength of this management team would not be necessary.

If you look back at the growth rate and the experience that Storage USA enjoyed in 1994, from the day we went public, to when we sold the Company in 2002, as Chris as the CFO and me as the CEO, we experienced tremendous growth during that period of time, returned to our shareholders over 17% on a compound annual growth rate during those years. We anticipate similar growth at this Company as we go forward. This management team is inspired. This management team is ready to take this Company to the next level. We are prepared to do so.

Okay. So you really think that the G&A base sort of stays flat as you acquire, expand the management business, and do that?

In fact, you may have noticed that we have just added Bob Blatz as Senior Vice President of Operations. He is in that number going forward. We have our entire management team in place to grow this Company dramatically. As we go forward, you will see G&A coming down in a similar fashion as a percentage of revenues.

Okay. Thank you.

The next question we have comes from the location of Michael Knott with Green Street Advisors.

Chris, can you just comment on the IRRs that you are underwriting on an unlevered basis when you look at these deals, what kind of growth are you assuming over a hold period in terms of evaluating the returns that you may expect to get versus your cost of capital?

Yes, I would be glad to do thatMichael. If you do that kind of across the board on the assets that are kind of in the contract stage, or the one that we closed, and for specificity, if you tack 50 to 75 basis points on the back end as the reversionary cap rate, we are seeing unlevered IRRs deal specific really that range, from say 11% to 12%, up to 16% and 17%. So it shows you that there is a mix in there of those more stabilized assets in very, very high quality markets, and those that are in those high quality markets, but are not quite stabilized yet, and we believe we can add a lot of value, either on the occupancy side, or the rate side, or both. On a blend, you are in that, call it 12% to 13% range.

So you think 12% to 13% unlevered IRRs?

That is right.

Okay. Okay. And then I guess moving on, can you just give a little color behind the operating expense decline? In particular, the percentage change on the R&M line stood out to me? Can you just give color on why that is declining so much?

Yes. The personal change on, it is Tim, Michael. Good morning. The percentage change on the repairs and maintenance looks high, but if you look at the dollar amounts, it is $100,000 or so. And very difficult to predict precise levels of repair and maintenance, but in fact, our preventative maintenance programs and our investment in the portfolio to bring it up to standard back in 2007, has resulted in our ability to keep our properties working great and looking great, and we get the benefit at times of having lower levels of repair and maintenance expense.

Thanks for that. And then, Dean, you guys are, from a physical occupancy standpoint, kind of in the mid-70s, high-70s at the end of the period. I think you have talked more recently about being able to increase that fairly significantly over a period of a few years. Do you still feel like you can get up to that level, and is that something that we should hold you guys accountable to?

Absolutely. In fact, I feel even better about it today, Michael. You remember me talking about a trough to peak range, happy to get 275 to 300 basis points during the rental season. And we in fact this year got 383. So we will give some back over the winter, but we are going to be starting next spring much higher than we started this spring. So hold us accountable. We will get the occupancy back up to competitive levels for this Company.

Thanks, guys.

(Operator Instructions). The next question we have comes from the location of Paula Poskon with Robert W. Baird.

Thank you very much. Good morning, everyone. I apologize if I missed this in your prepared remarks. Are you currently marketing any assets for sale? What are your thoughts on continuing dispositions?

Hey, Paula. This is Chris. After cleaning up things in 2008 and 2009, and being very, very active on that front, as we entered the year we said we would just be opportunistic, that we may do a few transactions here or there, but that was not a big focus. We have one property at the moment under contract for sale that is in due diligence, and that has been the extent of our activity thus far this year.

So the increasing robustness of the transaction market isn't enticing you to think about putting more assets up?

Well, as I said, we took care of that in where we were interested in tuning up the portfolio in 2008 and 2009. Got great execution on those assets. We told at a blended low 8% cap rate over that two-year period. And at this point satisfied with where the overall portfolio is. And as I said, we will be opportunistic as we find some pockets where it makes some sense.

Okay. Any further thoughts about rebranding the third-party assets?

No. We continue to believe that as that evolves, and again, we've gone from zero to 119 very rapidly here, and it has only been over the last three months that we have been in this business in a big way. So as that evolves, and the comfort level with our process evolves, and we continue to deliver on our what we promised, we think that will evolve naturally as well, and the owners of those assets will see the benefits in doing that.

Okay. And then just finally, given where your guidance has trended throughout the year, any further thoughts on the dividend?

Paula, our Board meets and evaluates the dividend on a quarterly basis, and thoughts haven't evolved much from what we said in the past, which are we still have a great use of the retained capital. And that is to partially fund the external growth opportunities that Chris alluded to, and also to continue to be mindful of our debt maturities and our leverage levels. So our Board does evaluate that quarterly, and will do so again very specifically in our strategic planning meeting later in the year.

That is all I have. Thank you very much.

Thank you.

The next question we have comes from the location of Ki Kim with Macquarie.

Thanks. It looks like you acquired 25 properties from Wells Fargo, and we heard that those properties might be going on the market, relatively shortly, like in a couple of months. What kind of fees are you getting, and what will happen when you eventually sell it?

Hey, Ki. This is Chris. We entered into that relationship in a very creative way, mindful of the fact that it needed to be a win for the owner of those assets, and it needed to be a win for us and our shareholders. So not to take the Coca-Cola approach, but that recipe on how we are going to make that work, I think is indicative of how we think about things in general. We come at things in a very creative way.

So rather than have that secret sauce out there, and the ingredients for, all we have a traditional property management fee, as Tim has said, and then we have other fees and opportunities to make sure that our interests and the banks are aligned, and we are all moving positively in the same direction. That being said, we are in managing those assets. And as I said in my remarks, best prepared to know their value. And obviously we wouldn't have entered into the transaction if we didn't believe that we would like to own some or all of them as the case permits. So that will play out over the balance of this year. I am highly confident it will play out in a positive way for all the parties involved.

And did you know that fully going into the contract?

Oh, absolutely. This has been a very collaborative relationship, and I think it will be one not only to bear fruit in the near term, but I think as a result, we have had many, many other financial institutions approach us, to figure out what can be done to help them. The larger banks have departments who deal with assets that haven't performed on a regular basis. The interesting thing about self-storage is that it is unique. It is not one of the common food groups that they are used to dealing with, and I think we have established ourselves as an entity that can be very helpful to those professionals within the bank, to help add self-storage expertise to their expertise in managing distress.

And it looks like a large portfolio. If you did pursue an acquisition, would the preferred route be getting a partner?

Again, I think that will evolve. Our belief has always been that to the extent that the asset and the related financing and the ability to do so on a leverage neutral basis or better works for us, then we would like to own the assets 100% and have them on our balance sheet. To the extent that financing those in a partnership with some institutional capital produces the best returns for our shareholders over time, that is certainly a strategy we've used before, and we will use again in the future.

So would it be safe to kind of assume that equity capital via JV is preferred versus doing a secondary?

No, I wouldn't imply out of that one direction or the other. I think as I said, it really depends upon the nature of the asset, and the opportunity to achieve our overall objectives over time.

And could you just give us a little description of what you would consider the quality of the asset as compared to your own, or what other benchmark?

Sure. The assets are good assets, many of which are in attractive markets, but they certainly run the gamut across the portfolio. So it is a nice portfolio.

What is the average age?

Off the top of my head, I do not know that.

Okay. This is the last question. I don't know if you already talked about this. But what percentage of your customers received rent increase letters this quarter, and how does that compare to the first quarter?

This is Dean. If you don't mind, we would rather not provide that level of detail. As I have told everyone in the past, we pass along rate increases every day to customers, and we have been consistently passing along rate increases all the way through this tunnel that we have been in for the last two years. We can be a little more aggressive today than we have been in the past, but let's don't break it down on a quarterly basis.

Alright. I won't press you on it, but maybe if I could ask it in a slightly different way, do you guys prefer to send out rent increase letters more so in the summer, than just throughout the year?

I will say it again, we send out rate increase letters every day. We don't stop in the wintertime. We don't send out more in the summertime. We send out rate increases, we are on an anniversary date for our customers. So we have leases rolling every day of the year. And when appropriate, as I have described in the past, after five months, we send out a rate increase letter, and they get a rate increase after six months.

Okay.

We do another one after a year past that. And we send them out every day. There has been no pause through this tunnel with rate increase letters.

Alright. Thank you, guys.

The next question we have is a follow-up from the location of Todd Thomas with KeyBanc Capital Markets.

Good morning.

It is Jordan Sadler here with Todd. I just didn't hear this fully addressed. I think there was a mention of the recent hire of Robert Blatz. If you could shed a little bit more light on the reason for the hire?Seems like a pretty senior operating level person. Was there a departure that I might have missed, and/or is this a reflection of maybe performance, not in terms of the operating level not coming up to where you would like it to, and maybe just investing a little bit more?

Hi, Jordan. This is Dean. You are getting personal there with me, since I have been running operations now for the last 18 months. But no, Stephen Nichols was our SVP of Operations--

I hope you are not disappointed.

Stephen Nichols left our Company in the fourth quarter of 2008, and I think maybe I talked about this on one of the calls, when I may have used a metaphor like two people in the cockpit, and I needed to have control of the yolk while we were in those very difficult teams. Stephen left the Company and I took over operations, as I did marketing in the fourth quarter of 2008. Ran marketing and operations for all of 2009. Then we brought in Steve Hartman in January of this year as a Senior Vice President of Marketing. So he took marketing off my hands.

I have continued to run operations. And that means that the division vice presidents report to me. The director of operations reports to me. Revenue management reports to me. And a few other people report to me. So I have had all of those additional responsibilities for over 18 months now. It has been our plan all along to bring another Senior Vice President of Operations back on board. And we went through a lengthy search, and Bob Blatz came out as a terrific opportunity for us, and I am happy to report that he will be here in about another 30 days. So I hope it is not relative to my performance as having that additional hat on as Senior Vice President of Operations, but it is really bringing that last piece in, and let me go back to my full-time day job at the Company.

Does that mean there will be more golf in your future?

No. That is not my day job. I enjoy my job. I haven't played golf in a lot of years now. We have got plenty to do.

Now that you have sort of done a lot of the heavy lifting and marketing and operations, and have gotten these--?

Well, it is going to be probably a six-month transition, is what I envision, Jordan, with Bob. That is what it was with Steve Hartman. And Steve is flying solo in Marketing now, but it is a very collaborative senior management group here. There is not a day that goes by that all of us aren't together for something it seems like.

I think it is about a six-month transition. And after that I think Chris Marr and I will be back together again in a big way from a business development standpoint. I like to think that all of the relationships that I have enjoyed over the 26 years in the business I am going to take advantage of. So my plan is to get out, beat the bushes, stir up business from an acquisition standpoint, and also a third-party management standpoint. So I look forward to working with Chris and his team on business development as my additional responsibility, but we have got probably another six months to go on the transition.

Okay. Is an element of this a succession plan? I mean --

Well, succession at the Company is my employment, if you happened to notice, runs for another 3.5 years. I will still be very young, just for the record, at the end of that employment agreement, but I do plan on exiting the Company at that point in time. As with any Boards, our Board is very sensitive to the fact that they would like to have as many candidates as possible, internal candidates, to replace me. So that is not the primary reason. The primary reason is to fill the Senior Vice President of Operations job that had been unfilled for over 18 months, but clearly Bob Blatz is a very capable person, and has been very successful as a Chief Operating Officer of another REIT in the past.

Okay. Thank you for the color.

The next question we have comes from the location of Christy McElroy with UBS.

Hi, guys. It is Ross Nussbaum here with Christy. Dean, I missed the early part of the call, but I am just curious with respect to the new employment agreements, why were they done now? What prompted the Board and management to do this in late June?

It just seemed like an appropriate time. I mean, I was entering my last year of my agreement. And I think if you ask them, they would say that they wanted me to stay around a little bit longer, and didn't want to wait until the last minute. It was the appropriate time for Tim as well. And Chris runs through next year. I am sure we will be dealing with his at the appropriate time, probably Q1. I think it is probably more related to just the timing of our contracts.

And the change in some of the provisions, I understand the extension of the contract, but why did everybody feel as though those provisions needed to be changed? Was there anything that happened in the past or the recent present that prompted everyone to revisit that?

No. It is just the world is evolving as it relates to pay practices, especially for senior execs in public companies, as we all know. So it is really keeping up with the best practices out there. I am confident that when you read our proxy next year, we will have absolutely the best practices as known at the moment for a public company, and that was the intent of the Board.

Did the Compensation Committee on the Board consult with an independent outside compensation firm in conjunction with these changes?

Certainly. The Comp Committee at this Company, since I have been here, has always had an outside consultant supporting them.

Thank you.

The next question we have is a follow-up from the location of Michael Knott with Green Street Advisors.

Dean, just to follow up on your comment about going to the bushes, and then sort of combined with Ben's earlier comment about $100 million of opportunities, with more behind that. What would be, if you could dream big, what would be your expectations for how much acquisition volume you could do in maybe 2011 or 2012? Would it be kind of on par with the old Storage USA days?

I am not going to let you put me in a corner and put a number on that, Michael, but you can hold me accountable to growth. We are going to grow this Company substantially. The opportunity you have let me talk about is there. I consider 2010 to look a whole a lot like 1994 and 1995. In those years we had a lot of transactions. This time we are going to have consolidation with those transactions, because there is not going to be a lot of development, hardly any development on the other side of that. So we will have consolidation. All ofthe larger companies are going to get larger. Both from an operational standpoint and an ownership standpoint.

And as you have also heard me talk about, the way we find our customer today has changed dramatically in the last two or three years, and it is all internet based now. Fully about 50% of our customers are shopping online with us before they either rent online with us through our website, or call our sales center, or stop into one of our stores. The smaller player can just not get on the first page of Google, much less toward the top. The largest players will have a terrific advantage. I think you will see some studies coming out soon, that will indicate that the larger companies are in fact taking substantial market share from the smaller players. When that starts to become more apparent, we will have more sellers. And as long as the capital windows remain open, I think you are going to see a very dramatic growth in our sector, not only for our Company, but probably for the other public companies as well.

Okay. Thanks.

Appearing that we have no further questions at this time, we will go ahead and conclude the question and answer session. At this time I would like to turn the conference back over to management for any closing remarks.

Okay. Thank you very much for your interest. Look forward to, I am trying to think if we talk to anyone before next quarter. I don't think so. We'll talk to you on the next quarterly call. Thanks a lot. Have a good day.

We thank you gentlemen for your time. This conference is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you and take care.