CubeSmart (CUBE) 2010 Q4 法說會逐字稿

Welcome to the U-Store-It 2010 fourth-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Dean Jernigan. Please go ahead.

Good morning. The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties, and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company files with the SEC, specifically the 8-K together with our earnings release filed with the 8-K, and the business risk factors section of the Company's annual report on the form 10-K.

In addition, the Company's remarks include reference to non-GAAP measures. The reconciliation between GAAP and non-GAAP measures can be found on the Company's website.

Good morning, again, to everyone. Thanks for joining us. Our batting order this morning will start with Tim Martin, our CFO, leading off, and Chris Marr, our President and Chief Investment Officer, is going to follow Tim to talk about our investment activity over the last quarter and perhaps the last year. And then I'll come back in for a few comments, and then we'll go to Q&A.

Tim?

Thanks, Dean, and thanks to everyone joining us for today's call, for your continued interest and support of U-Store-It Trust. 2010 was a very productive and successful year for our Company, as we executed our business plan on four important fronts. First, we delivered solid financial results from our core portfolio. I'll go over some of the highlights in a few minutes, but from a big-picture perspective, our same-store results for the quarter and full year are reflective of a very resilient self-storage product, combined with the competitive advantages we have in attracting customers with our well-trained on-site managers, our revenue management team, our sales center, and our marketing team and their focus on customer capture initiatives with the Internet and digital media.

Our second big 2010 initiative was to leverage our operating platform, and expand our third-party property management business. Over the past four years, we've built a state-of-the-art operating platform with scalable systems, and a motivated team of talented people. Seamlessly adding over 100 facilities to our platform during the year was a testament to our people and systems, and reinforces our belief that we have built a platform that is efficient and scalable to support significant future growth.

The third item of note for 2010 was the continuation of our efforts to constantly improve the overall quality of our portfolio through our capital recycling efforts. We reduced exposure to markets we believe have lower long-term growth prospects, while investing in core markets that have high barriers to entry, and strong population and household income demographics that we believe will result in sustained NOI growth and higher achieved rental rates that drive improved operating margins. Chris will provide some additional color during his remarks.

And fourth on our list of 2010 accomplishments is the significant process made to continue to strengthen our balance sheet, improve our financial flexibility, and gain access to additional sources of capital. During the year, we reduced our outstanding debt by 20%, and have reduced our debt by 39% over the past two years. We also migrated during the year from a fully secured balance sheet, to ending the year with 61% of our portfolio value unencumbered.

Circling back to our reported results for the quarter, we reported fourth-quarter and full-year FFO per share results at the high end of our guidance ranges, $0.15 for the quarter and $0.51 for the year. Our fourth quarter same-store revenue growth of 3.2% continued our growth trend throughout the second half of the year, and resulted in full year same-store revenue growth of 0.3%. Our fourth-quarter same-store revenue growth was driven by a combination of increasing our realized annual rent per square foot by 1%, to $11.14, as well as increasing our year-end occupancy levels by 120 basis points.

Same-store expense growth of 1.8% for the quarter was significantly impacted by a very difficult prior-year comp in property taxes. In the fourth quarter of last year, we had several successful tax appeals come in that made that quarter's tax expense lower than a typical quarter. Same-store property expenses, exclusive of property taxes, declined 3.3%.

Overall, a very clean quarter. The only other item to point out is that we did expense and include in our FFO results $294,000 in acquisition-related costs for the quarter, and $759,000 or $0.01 of FFO per share of these costs for the full year. During the fourth quarter, we increased our quarterly dividend to $0.07 per share, representing 180% increase over the prior quarterly run rate. The increase reflects our confidence in operating fundamentals, and is a return to a more traditional dividend policy.

On the balance sheet, we closed on the acquisition and disposition activity as outlined in our release. We also repaid, during the quarter, an $80 million CMBS loan that was scheduled to mature in January 2011, leaving us effectively with no remaining maturities in 2011. We ended the year with $43 million drawn on our revolving credit facility, providing us with $207 million of available borrowing capacity.

Switching to our 2011 earnings guidance, in our release last evening we provided our initial 2011 FFO guidance of $0.56 to $0.62 per share, which at the midpoint represents a healthy 16% increase over our $0.51 FFO per share in 2010. We also introduced FFO guidance for the first quarter of $0.13 to $0.14 per share. Our release details some of the underlying assumptions that support our guidance range.

We expect to continue into 2011 the progress we made in 2010, on both property acquisitions and dispositions, and believe we are well positioned to take advantage of attractive opportunities when we identify them. However, our earnings guidance range does not include any impact from these activities, including the impact of acquisition costs due to the uncertainty around the volume and timing of attractive transactions. Our intent is to update our guidance throughout the year as we identify specific opportunities. We expect to continue to finance our growth in a manner that is consistent with our objective of having an investment-grade balance sheet profile.

Thanks again for your time this morning, and at this point, I'll turn the call over to Chris for his remarks.

Okay, thanks, Tim. We had a very productive 2010 and continuing the strategy of divesting of assets in slower growth, lower barrier to entry markets, and reinvesting in our long-term core markets. We sold 16 properties, primarily in California's Inland Empire, for proceeds of $38 million, and cycled that capital into our 12 acquisitions in our core markets.

The strategy of entering into the third-party management platform to leverage our operating platform and marketing investments, as well as creating an internal pipeline of acquisition properties, proved successful as we experienced enhanced FFO from the revenue stream, and seven of the 12 acquisitions closed in 2010 were managed properties. The acquisition and disposition volume was back end of the year weighted, as we closed on the majority of our transactions in November and December.

We have a solid pipeline of opportunities that we are evaluating, and if we continue our 2010 success rate into 2011, we would expect our 2011 acquisition timing to be more evenly spread throughout the late second quarter and balance of the year. We have previously disclosed in presentations and 8-K filings our objective of acquiring $75 million to $125 million in our core markets, and based on the deals the team is underwriting, are confident in that range. In January of this year, we closed on an acquisition that we had under contract at the end of last year, located in Fairfax Station, Virginia, for approximately $14 million. We're also continuing to prudently reduce exposure in non-core markets through our disposition efforts, and as we have previously disclosed, are targeting our efforts to sell $30 million to $50 million of assets in 2011.

Our third-party management program continues its strong momentum from 2010 into 2011. We are targeting to grow the number of assets we manage by 20% in 2011 over the year-end 2010 figure. Our very good operational results on our same-store portfolio last year, and our strong expectations for our revenue and NOI growth this year, are proving to be a very effective tool in attracting owners of self-storage assets, as well as smaller property managers to our program.

Cap rates on acquisitions in the markets we focus on continue to be in that 7% to 8% range, and underwriting by the more sophisticated players continues to be fairly consistent throughout the buyer pool. The deals are still being won on relationships and flexibility in terms, not primarily on price. In summary, we expect to continue on our strategy of growing our portfolio through acquisitions and third-party management, and continuing to improve the quality of our cash flows by investing in our core markets and selling assets in our lower growth markets. As Tim said, we will use our external growth as a component of the continued improvement in the quality of our balance sheet by financing this growth on a leverage-neutral or better basis.

With that overview on the investment climate, I will turn the call over to Dean.

Okay, thanks. Normally I like to take a few minutes here and talk about the future, but today I can't resist just talking about the past just for a moment. I think the sector deserves some significant recognition for the past two years, 2009, 2010. I go back to 1994 and 1995 when we were out doing a substantial number of one-on-one investor presentations with an IPO and following equity offerings, when we started talking about our sector being a recession-resistant business. And I remember in those days I got a lot of quizzical looks, some push-back. I never really had the opportunity to back those words up with facts until now, I don't think.

When you look at 2010, I think we have the facts to substantiate that distinctive recognition that our sector deserves by saying that we are a recession-resistant business. If you look at 2010, and you look at the three companies who have reported so far, all three have reported positive revenue growth and positive NOI growth over the previous year. And I'm sure Public Storage will come through with a good report this afternoon as well, to make it four-for-four.

If you look at 2009, right in the middle of the great recession, all four companies reported revenue down in the 3% and 3.5% range, and NOI only down about 5%. I think that is significant, outstanding results for a sector, for four public companies in a sector, in some of the worst trying times our country has ever seen in the great recession. And I really think that our sector deserves that recognition as being recession-resistant business. I'm excited to continue to pound that drum.

Now with that said, let's look forward because I don't think we're clearly out of the woods yet. If you look at the economy as we know it today, and we have a lot of hope in some of the numbers that are out there today as it relates to where we think our economy is going, I tend to be more negative than positive. The GDP revision this morning was just another example of numbers that do keep coming down the pike that suggest to us that our economy is in a very trying time, trying to pull out of this recession that we have experienced.

We look at what's going on in the Middle East with the fall of the autocratic leaders, and I think there will be more. I think that does put a lot of pressure on the price of oil, and I think that can cause us some problems going forward. I'd like to think back to my younger days of being an airplane pilot for the US Army, and a helicopter pilot, but specifically as an airplane pilot. We were taught that you had to be very careful on your airspeed and your angle of attack, because if you aren't careful, you can put your airplane into a spin, into a stall, which can result into a spin.

And I think that's where our economy is today. I think our angle of attack is, although it is upward elevated, it is elevated, our speed is such that we are in a situation where we could go back into a stall. When you're in an airplane, and you have that angle of attack and you have that slow air speed, many things can cause you to stall out. I think that's where our economy is today.

You have to keep the airplane trimmed, meaning you have to keep the tail behind the nose. And you have to be using good piloting skills, and it helps to have some altitude. And unfortunately, I think our spending habits that we have right now, our budget issues at the state capitals across the country and in Washington, tell us that our airplane is not trimmed too well. I don't think we have that much altitude when you look at our $14 trillion debt as a country.

And as far as good piloting skills, I'm sure we all have our opinion on our leaders down in Washington, but I'm very concerned that we don't have the good piloting skills right now to pull us out of a recession, a double dip, if in fact something puts us there. And very often when you're in a critical stage of flying an airplane close to a stall, there are a lot of things that can put you there. And many times it's just unstable air. And unstable air can be represented by the price of oil today. And if we see $150 again, $145 again, and some people are even suggesting we could see $200 for a barrel of oil, I think that really does put us back into a double-dip situation as far as the economy is concerned.

So I'm concerned, not for 2011 though. I feel good about our numbers for 2011, our guidance that we put out last night . I think 2011 will be just fine. I'm more concerned about 2012 and beyond.

The good news is, in the style I started my few words of wisdom here today, if you can call it wisdom, is that we are in a recession-resistant business in self-storage. And so I do think our sector deserves special recognition in difficult times like this. I do appreciate those of you listening today who are shareholders because we will get through this, even if we do have another two or three quarters down. I think our sector will plow right through it without any disturbance. As I said, I think I've said before, we could have two quarters down in 2011, and we would still meet the guidance that we have put out. So I feel good about our sector in the short term. I'm more concerned about it in the long-term, but we will see as the economy continues to improve.

With that, I will stop, and Amy, we'll take some questions.

Thank you. (Operator Instructions) Todd Thomas at KeyBanc Capital Markets.

Hello, good morning. I'm on with Jordan Sadler. I was just wondering, first, if you could give us an update on January and February, perhaps provide some color on occupancy, and move-ins and move-outs.

Good morning, Todd and Jordan, happy to. January and February are right where we expected them to be. We're actually a little better than budget in both months, very flat. January and February, you would normally expect to be turning down just a little bit. That is exactly where we are. We're turning down, it's really more flat than down though. Move-ins are level with last year. Move-outs are up about 1.5%, but we have, of course, anticipated that from a seasonality standpoint. We are feeling good as we start the year as it relates to move-ins, move-outs, and also revenue.

Okay, that's helpful. And then, thinking about the $30 million to $50 million of dispositions, can you provide some color on where we might expect to see those sales take place? Are you still looking to prune the Inland Empire, and what other markets are you looking to reduce exposure at?

Hello, Todd, it's Chris. No, not so much in the Inland Empire. We had some CMBS maturities that Tim referred to that freed up some assets that we owned, that had previously been encumbered, where we would find ourselves with one or two assets in a market. And we were really just waiting for that debt to mature so we could sell those assets unencumbered.

So you'll see some activity in those markets where we don't have much of a presence there; some of those in the Gulf Coast, is a good example. We had assets in southern New Mexico that were also encumbered throughout the year that are now unencumbered. And those are on the list. And then there are a few Midwest markets where we, similarly to our feelings about the Inland Empire last year, were just a bit overexposed for those markets. And we'll look to do transactions, somewhat akin to what we did last year in the Inland Empire, where we would not exit as we would where we might be selling one or two assets in a market to just get out; this would be more of a trimming in those type of markets.

Okay, and then, just following up on the sales, though, in the Inland Empire, or California, which is still about 15% of the portfolio, should we expect to see that portion of your portfolio perform disproportionately better in 2011 now, in addition-by-subtraction sort of way?

No, I think you'll see the portfolio will perform just fine in 2011, what we own there. What we would like to do over time is increase our exposure in the more coastal markets -- Orange County, LA County, the San Francisco Bay Area, parts of San Diego are a focus. We just have really not seen any transaction activity or opportunities there. The portfolio inland still has some positive growth attributes to it, and we will reap those benefits as the markets continue to get a little bit better over time.

And it's Jordan here. I just had a follow-up for Dean. I appreciate the insights, and view of the world. So a big picture one, how are you positioning U-Store-It to coincide with a bit more sober view of the world and our prospects?

I think, Jordan, we're fine on a balance sheet standpoint. I'm not expecting another great recession to come right along behind the first one, and so from a balance sheet standpoint I think we've proven that our coverages are fine, our debt leverage is fine. We are going to be, to specifically answer your question, we are going to be much more proactive in going after our customers. This business has been one where, you build it and they will come, has been the mentality for the 25 years I've been in, prior to these last couple of years. And so it's all about market share. It's all about taking market share. We are developing programs that we will just not sit back and wait. We're going after our customers, and our plan is to take market share.

I think the difficulty with that answer is the smaller players will continue to suffer, I believe, and they will only have price to compete with, and so I think that could put some pressure on pricing. Even with that said, I think we will start to use some pricing strength that I think the public companies have this spring. I do expect to see us starting to push pricing to our new customers come this spring, but I do think there could be a little risk there. But we are becoming much more proactive in going after our customers.

Okay, thank you.

David Toti at FBR Capital Markets.

Good morning, guys.

Good morning.

Couple of quick questions. Did you highlight your occupancy assumptions for 2011?

David, it's Tim. We did not. As is our practice, we do not provide any guidance on forward occupancy levels.

Okay. I guess then, just along those lines, maybe on the rent side, is it possible to characterize where your street rates are today, relative to in-place? I know you have to take a very general stroke there, but I'm curious in terms of the spread, and what we can expect going forward?

Yes, we can be pretty specific. We are all passing along rate increases to our existing customers in a fairly aggressive manner. And in order for your street rates to stay ahead of those in-place rates, you have to be doing something similar on your street rates. Our street rates right now are actually just a little bit in advance of our in-place rents; that flipped in Q4, and I look forward to that continuing.

Historically, that spread should be about 4 percentage points. From my experience, street rates are higher than existing. I think with pricing power coming back this spring, I do think that we'll push our street rates on up maybe to that level. But we will still continue to pass along aggressive rate increases to our existing customers.

As the street rates advance, you see further pricing power on your in-place tenants, or is there a threat to that because of the higher vacancy level?

No, I don't think it relates to vacancy level on your in-place customers. I think that relates to courage and testing, and knowing what you're doing when you're passing along rate increases. I think the only relevance to your in-place customer on pricing is to what your street rates are. You have two situations that can develop. One, if you get your in-place customers paying much more than your new customers, your in-place customers will come in and complain; and you have to be responsive to that. So that's a good reason to keep your street rates in advance of your in-place customers.

But you're also always out testing. If you have your street rates 3% or 4% or 5% higher than your in-place rents, and you're getting those, that gives you the courage sometimes to pass along rate increases to your existing customers, to bring them up to your street-rate levels. Pricing power comes about the spring, I think, mainly because of Public Storage and EXR both announcing that they're more or less at their occupancy levels. I heard Ron on a panel in January say that -- Ron Havner at Public Storage -- say that for all intents and purposes they're full because of the churn of 8% or 9% of their tenant base on a monthly basis. They feel like at 91%, they're full. So, in order for them to move their revenue needle, they have to pass along increases. They have to push rates. And I feel certain that's going to happen this spring.

Great. And if I could just sneak one more question in. In the context of your expense forecasts, increased spending on advertising, perhaps, and more aggressively going after customers, do you still see opportunity for margin improvement in that context?

Your last point is a good one, as far as marketing expense, going after new customers. I think our margin in Q4 is about 62.5%, 62.4%, something along those lines. I think we need more customers before you're going see a lot of improvement. Revenue growth, if we are able to use some pricing power this spring, you'll see a little bit of margin improvement from that, meaning the top line is growing.

But as I've suggested in the past, we have some inventory that some of our competitors don't have now, and we're going to rent that inventory. And call it stealing a little occupancy or what, we will spend some dollars to accomplish that. I'm not looking for us to improve that margin much from the expense side of it, but on the revenue side of it we will have some positive revenue growth, which will help out.

David, this is Chris. Two follow-ons. One, on your question on in-place rents versus asking rents, just as another point of color, early in '10 when we were underwriting transactions on the acquisition side, it was more common than not that the in-place tenants were paying more than the asking rent at that particular store. And from an underwriting perspective, we were effectively rolling down rent to market, and doing our underwriting on the revenue side based on those lower rents. I would say in the last three or four months, it's been quite the opposite. It's been rarer that we've seen a transaction that we've been underwriting where that operator's in-place tenants were paying more than what the asking rent was for their street rates. So, things have definitely moved in a different direction over the course of 2010 and into 2011 on that front.

On the margin front, to echo Dean's comments, it's definitely coming from the revenue side. I think we've squeezed out as much as we can on the operating expense side, but it's also going to come from the changes in the portfolio. When you look at the 12 acquisitions we did in 2010, the one we did in early '11, you're looking at markets that support $22 to $26, $27 rents, and because we don't discriminate between our employees in that market and our employees in a $10 market in terms of things like health insurance, et cetera, those costs are the same for us. We do see much better margins as a result in those higher-rent markets. So an exit from the Inland Empire and skinnying down there, and Fayetteville, North Carolinas of the world, and entering the burroughs, Boston and Washington, DC, will in itself over time have a very positive impact on our margin profile.

Great. Thank you for the thoughts today.

Thanks.

Amy, are you there?

Yes. RJ Milligan at Raymond James.

Good morning, guys. You guys exited some tough markets, and bought in some pretty strong coastal markets. Chris, can you talk about the differences in cap rates you're seeing in those two types of markets? And who might be the buyers in the more challenged markets?

Sure. What's really interesting is that the spread between those two is really tight, surprisingly tight. We exited those properties that we sold at an 8.4% cap rate, and on an apples-to-apples basis, we entered markets at a 7.5%.So that 90 bip spread is surprising, to me at least, tight. A couple of things at work. One of which is, and maybe a primary reason for that is, when you're in those higher rent markets that I referred to, you tend to have, by nature, a higher value point on that individual asset. So when you start to talk about self-storage transactions with a value point of $10 million, $12 million, $15 million, your pool of buyers shrinks pretty dramatically, as compared to when you're selling an asset in a market where the value point is in that $4 million range. It's a little bit easier to finance, and it's much more easy for that entrepreneur to bid, and as a result you tend to see a little more on the demand side, which tends to drive down cap rates. So that's what we're seeing there.

There are quite a few yield-oriented buyers out there, for whom that low-8% cap rate is attractive. They are able to access the CMBS markets now. So they're getting financing. And so we are seeing a pretty healthy demand for that type of product. We've just been pretty successful between harvesting the opportunities from the third-party management platform and our relationships in those core markets, and turning out to be a buyer of choice, more so because of our ability to close and to do what we say we are going to do, in a very efficient way. Because I think pricing in those markets, the sophisticated buyers have tended to cluster around a pretty consistent value point.

So, financing has returned for the top 15 to 30 markets versus before it was only available in say the top 15 markets?

Yes, as a point of context, the deal we did in California, the buyer financed that through the CMBS market. They're back on acquisitions. There's zero financing available for development, which is why I don't think we'll see any for the foreseeable future, but for quality acquisitions, there's capital there for a seasoned operator.

Thank you. And I guess, Dean, can you talk about -- you guys are looking to add about 20% for your third-party management business this year. How do you see that growth rate going into 2012 and 2013, as an overall industry in terms of consolidation?

Yes, this is Chris. The opportunity set there is quite large. As Tim said, our ability to bring those assets into the portfolio seamlessly is also there. So there's no constraint from our perspective in terms of the number of assets that we could manage internally. We certainly have the systems, the people, and the technology to do that.

From an external perspective, the reality, as Dean said, of the challenge in customer capture is resonating and being experienced by the smaller operators, whether they be a small management company or an owner who is self-managing. The difficulty in being able to invest into digital media and into different ways to be more aggressive, as Dean said on the customer capture, is hitting the smaller owner/operators and managers head-on. They're seeing the challenges in getting the people in the top of the funnel, and getting the rentals out of the bottom.

So I do think the larger operators will clearly be consolidating this industry over time, not only on balance sheet, but in terms of assets under management. It's going to be those who have the platform and the technology and the marketing dollars to invest. And then I think it's going to be those companies who, like we have, put up strong internal growth on our own portfolio, and have the ability to demonstrate above-average growth going forward, are going to be those that attract that third-party management business because they want to be associated with that type of delivery of performance.

Okay, thank you, Chris. Just two quick follow-ups. What percent of customers received discounts in the quarter? Where do you think that's going to trend in the year, given the fact that you are out there aggressively looking for new customers? And just out of my own curiosity, I saw a promotion online for the one month free and a free hour for the moving truck. I'm just wondering if that was generating any interest.

I will take the second one first. Yes, our association with Two Men and a Truck has been very good. It is generating a lot of interest, and we use that to close a lot of deals, and we are pleased with that relationship.

As far as our full-price rentals, I'd like to take the other side of that, not having or giving discounts, but (inaudible) full price rentals without a discount, and that number for Q4 was 20%. Of course, the reciprocal is 80% of our customers are getting some kind of discount. I think the good news there is that 80% is coming down. I hear it coming down from our other competitors. I think I've heard it on the two conference calls previous to ours. And I think that, again, speaks to pricing power that we're all feeling like we have going into the spring season.

Thank you very much, guys.

Mark Montandon at Citi.

Good morning. Just on the guidance, are there any acquisition-related costs embedded, either for the first quarter or full year? And then also, the share count, wondered if you can provide any specific share number that you're embedding?

Hello, Mark, it's Tim. I had mentioned earlier in the prepared remarks that our guidance does not contemplate any impact of acquisition or disposition activity, and then accordingly does not impact any impact of any acquisition-related costs, really due to the lack of visibility we have as to the exact timing and volume of those transactions. We certainly expect to be acquisitive during the year, but it's difficult to pin-point that as you can imagine.

As far as our weighted average shares embedded in the guidance, really looking as to where we ended the year, and if you take the shares and units, and the impact of the treasury stock on all that stuff, you're looking at about 104 million shares and units outstanding, somewhere between 104 million and 104.5 million shares and units, for the denominator for an FFO calculation in 2011.

Okay, so no charge even for the acquisition already acquired in the first quarter.

That's correct.

Okay. Then, the 2012 secured maturities, it is a big chunk of the overall pie; when are your plans for this? Are you going to refi that? Is your plan to refi it with unsecured? And if so, what kind of rates are you seeing right now, if you were to achieve the rating by then?

The 2012 two CMBS lines you're referring to, at about $160 million, the current thought process is indeed to access the unsecured debt markets, ideally in the public marketplace, and to raise some longer-term unsecured debt to replace that in 2012. Depending on the term of that, if you think about a 10-year issue right now, that spreads over where treasuries are today, you'd be looking at low 6%, 6.5% type of issue. A lot of things can happen between now and 2012, but that's where you would see a transaction today.

Okay. Great, thank you very much.

You're welcome.

Ki [Vihn] Kim at Macquarie.

Thank you. So, first question, it looks like on your network program, the number of properties went down from 120 or so, down to 93 over the quarter. Can you give some commentary about that?

Sure, Ki, this is Chris. And thank you for asking that question because I've been doing this for about 16 years, and I always try to guess what the questions are going to be, and have an answer. I can ring my bell because I was waiting for that one. And I think you actually meant to say the management, properties under management, not the network program.In the third-party management, just to roll you all forward, we ended 2009, we had eight properties that we were managing for owners. We added 85 properties through our [USAM] acquisition, taking us up to 93.

And then we added 25 properties, a couple days later, quite frankly, from the Wells Fargo relationship where we were managing and assisting them from an asset management perspective, in liquidating those assets. So, going into that, the way that transaction was structured was with an objective that if we did our jobs as best as we could, we would have helped them divest of those 25 throughout the year. That in fact happened. We acquired five of them, the remaining 20 were sold. We then also acquired from our managed pool an additional three assets that were in the USAM transaction. We added a few sites and we had a few sites that were sold that we were managing for some other financial institutions in Michigan, in the Detroit area, that were then subsequently sold.

So, that basically gets you from that 126, the sale of USAM and our acquisitions, got you down a little bit below 90, to where we ended the year. And then so far this year, we've added two additional stores thus far in the first month and a half of this year, into the program.

And I know it's probably hard to say, but what is the outlook look like for that business segment?

As I said in the prepared remarks, we expect to continue to grow it. Were targeting a 20% growth from our ending '10 numbers through '11 in terms of the assets under management, and much like on the acquisition side, that's the visibility and pretty clean objective that we see today. We may get a few larger things done, which will provide a little bit of upside to both of those numbers.

Okay, and maybe a question for Dean. In going back to your corporate strategy, I know one thing that you were adamant about in the past, is not cutting prices, even during the recession, by too much. But it looks like during this past quarter, going to your website, some of your properties have been discounted heavily on pricing, some up to like 30%, at least on the Internet. Is this somewhat of a change in strategy. And also could you give some color on how that worked out?

Sure, if you go back to 2009, we did not participate in the race to the bottom, if you will, regarding pricing. We were going to lose that race, and everyone was going to lose. And in some cases they did. When you heard about other companies slashing their rates 15%, perhaps even higher, at times, we chose to hold ours much, much tighter and give up some volume. We ended up pricing down over that period of time about 7%. Then of course, we all know if you looked at the revenue results at the end of the year in 2009, we all finished with revenue down about 3% to 3.5%. So, I call that the first half, and I call that a tie.

First half, we ended up tied with the other players who did choose to cut their rates dramatically. We now have inventory that they admittedly don't have, that we now can grow our revenue by renting vacant units that for all intents and purposes, they're either full, or they say they're at their desired occupancy levels. And we also have pricing. We continue to pass along aggressive price increases to our existing customers, and as pricing power comes back this spring for larger players, we'll be right there. Now will we have specials that you will see on the Internet to try to sell some of our inventory? Absolutely. That's what you started seeing, Ki Vihn.

Some of it's testing, some of it you've just seen -- we do A/B split testing on about everything that we roll out, and you've seen some of that from testing and then of course, we've done some of that. We've tested everything from down 10%, to down 15%, down 20%, down 25% and down 30%. The down 30% was the most aggressive, but we are not using down 30% now. We proved that we didn't have to go that deep. But that's on the Internet, that's not for the person who walks in the store, and historically has not been the person who calls in our sales center.

If you look at the people, the percentages of your customers who come through the Internet, it's a relatively low number who come through the Internet, and go through and complete the process all the way through the Internet. So, it took our revenue down only, it takes it down only a very small marginal amount. And so we are trying to attract more customers through Internet specials, but our strategy on holding pricing as best we can is still in place, and we do expect to increase our occupancy going forward. And as I suggested before, maybe by stealing a little bit of occupancy as we do have that pricing ability.

And I wanted to ask that question, going back to your comments about trying to take market share, and to get more revenues out of every customer, but if you want more customers, it seems like you have to get more aggressive on either promotions or pricing, to actually increase your percentage.

We are doing it every day. Our discounts in fourth quarter were down 15% over third quarter, so we reduced our discounting. 20% of our customers are paying full-price rentals, but at the same time we are increasing our occupancy. As you saw that 120 bips year-over-year. We're going to do all. All that drives revenue. That's what we're in the business of doing, is driving revenue, it's not about occupancy. It's a soap box I have to get on from time to time, to remind people, we pay our bills with dollars that come from the revenue line, not the occupancy line.

Okay. Thank you, guys.

Lukas Hartwich at Green Street Advisors.

Thanks, guys. Tim, I think this is a question for you. Given that the in-place rents in the portfolio are 5% higher than last year, and I think it's pretty safe to say that there are some occupancy upside, I'm trying to understand the revenue guidance of 2.5% to 3.5%. Can you provide some color there?

I think you're referring to the 5% up, is the street rates. The effective rents were up about 1%, if you look at the effective rents comparing Q4 of 2010 to Q4 of 2011. So street rate increase is up 5% is true, however, the effective rates are up 1%.

So, on page 9, the scheduled annual rent is street rent, that's not the -- I always thought that was the in-place rent before discounts. So, that's street rent?

That is most closely aligned with street rent, that's correct.

Okay. Thanks.

So the effective rent captures the combination of everything that drives right into the revenue line, so that contemplates the street rate, it contemplates discounts, it contemplates bad debts and everything. So it's really the effective rates that we achieved, are up about 1%.

Okay, thank you.

You're welcome.

(Operator Instructions) Paula Poskon at Robert W Baird.

Thank you, good morning. I wanted to follow up on the third-party dialogue earlier in the call. How much management fee income is embedded in guidance?

If you look at the run rate in the supplemental, Paula -- this is Tim -- at a little bit more than $1 million a quarter. That is a pretty good run rate at the levels that we have currently. So if you think about Chris's earlier comments with our intent to try to grow that by 20% throughout the year, then you can extrapolate versus net run rate that we've seen over the last two quarters.

Okay, that's helpful. Thank you. And a more holistic question I guess on the third-party business, presumably what's attractive for owners to bring assets to you to manage is that you can do that more efficiently. Can you give some perspective on how the performance at those assets has improved on your platform?

Sure, this is Chris. When you just think about the size of the platform and the investment that we have, you tend to see improvement on the revenue line primarily being driven by our ability to have a revenue management system in place on a larger scale. So it's going to come from a variety of ways. One, obviously being physical occupancy being driven by our marketing platform, but then your pricing being a little bit more aggressive and more finely tuned to the market, given the intelligence that we have. So, you see those on the revenue side, you see some benefit from our -- because the dollars are small -- but from our expertise, in terms of the systems that we put in place to stay on top of accounts receivable, and on the auction process, so you see a reduced levels of bad debt. You see the focus that we have on the ancillary product sales, you have an uplift from there, although the dollars are small relative to rent.

So you get the revenue side of it. And on the expense side, the primary focus is our ability, again, to leverage off of our vendor base, and off of all the work we did in '08 and '09, in identifying those smaller items of low-hanging fruit, where we could reduce costs and operate more efficiently, and you overlay technology on top of that. You can see some positives in terms of expense reductions at the property. It's a combination of all of that, and when you look at the same-store expectations that we have for '11, those would be our experience, at least, much more robust than what core same-store performance that an individual owner or a small property manager would have in their expectations set for the future.

Thanks, Chris. And then just one last question. How do you intend to finance the acquisition volume that you're hoping to achieve?

I'll answer for Tim. This has been a focus of ours. When you think about over a period of time, our intention is to continue to finance the acquisitions on a leverage-neutral or better basis. And so you look backwards, and say how did we do the $101 million that we closed between the $87 million and $10 million, and the $14 million here at the beginning of this year. They were virtually leverage-free. We assumed about $7 million worth of debt. We sold $38 million worth of properties. We did $45 million to $48 million of proceeds under the ATM program when we had cash on hand.

So, that gave us a good opportunity here as we go into '11 to, again, look at things on an asset-by-asset, portfolio-by-portfolio basis. We certainly created an opportunity to do a little bit more this year, in the form of leverage, if that's what we choose, given how we financed last year's. It will be all of those. It will be recycling the sale proceeds. It will be selective use of the ATM program. It will be retained cash flow, and some leverage, which will be done ideally on an unsecured basis.

That's all I have. Thanks very much.

Okay. I think that concludes our questioning.We appreciate all the questions today. Let me think; I didn't prepare myself to give you any answers today at the end of the call like I've done a couple of times. One answer is that we found, in the 21 markets that we monitor, that we call markets within our organization, we generated positive year-over-year revenue gains for Q4 in all 21 markets. We are really pleased with that.

Household moves are picking up. The American Moving and Storage Association reports that during the first three quarters of 2010, corporate-arranged relocations were up 4%, and privately-arranged household moves were up 5%, so that is encouraging. I guess we all have our fingers crossed for construction, not so much for home construction, but we know multi-family starts are up dramatically. That's good for us. Any kind of commercial construction is good for us.

So, just generally speaking, cautiously optimistic on 2011. We feel good with our guidance. And we are happy to have you interested in our Company. So, thanks again. We look forward to seeing you soon. Good day.

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