CubeSmart (CUBE) 2011 Q2 法說會逐字稿

Good morning and welcome to the U-Store-It Trust second-quarter 2011 earnings release conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Dean Jernigan, CEO. Mr. Jernigan, please go ahead.

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

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

Good morning to everyone. Thanks for joining us. With me this morning is Chris Marr, our President, and Tim Martin, our Chief Financial Officer. I will lead off this morning.

I want to talk a little bit about the economy and how I see that impacting our sector, and specifically our Company and what my vision is for next year or so, as it relates to the economy that we're suffering through right now. And then I'll turn it over to Tim and Chris.

It was February 2010 when we had this quarterly call, we were on our Q4 call, when I talked about the economy flying at a stall speed, using the metaphor, the airplane metaphor, of course. And we talked a fair amount about what it means to fly at a stall speed. And at that point in time, I really thought that we would eventually gain a little bit more speed and climb out of that level that we were flying at.

But it appears that we are not doing that at this time. Now I think it's quite possible that we have stalled as an economy. Those of who you have done some flying, as you know, airplanes can stall and recover nicely after a brief descent and regaining some airspeed. Economies can do the same.

I will talk more about that, but I am very concerned about where we are as an economy and how we got here. I think the European contagion has reached our shores. The debt ceiling fiasco that we all watched down in Washington is causing our consumer and also corporate America to rethink virtually every spending decision. This is causing our economy to stall.

So, if I'm right about that, and I am not --- well, I guess I'll make a guess, I think it's probably a little bit better than 50/50 that we could go back into a short recession. If I'm right about that, what does that mean to our Company and to the storage sector? I don't think it really means anything in the negative sense. We have no discretionary customers today. They all left in the first quarter of 2009 and haven't come back.

All of our customers today, we are providing a very good solution for their needs. No one enjoys renting a self-storage unit. You do it because you have to. The disruption in housing is huge for our sector, and we continue to rent units to people who are downsizing.

I think there is a real strong correlation today between self-storage and the multi-family sector. People need apartments today. Even though they might like to own a home, they are choosing apartments because they want the flexibility of mobility.

Many, of course, can't afford a home, and so they are choosing housing. I think that if you look at the multi-family sector and you look at our sector, you see a number of things that look similar. First of all, you look at results.

If you look at the results of the 4 public companies in the self-storage sector compared to the results in the multi-family sector, we are right in there. In fact, maybe a little bit toward the high end. So, I think the good press that the multi-family sector's been getting over recent months is deserved because we do, as we've talked in the past, have a very large part of our population moving from single-family housing to multi-family housing.

But, I think you also should consider the fact that that is a huge positive impact for us, as well. So, where are the head winds? We certainly don't have any new construction. It's my opinion that the economy is not even slowing us down based upon what I was saying earlier.

We are the solution for our customers, and they are finding us on a daily basis. We are enjoying robust rental growth. Our vacates are at a normal level. In fact, if you look at them as a percentage of occupied units, they're flat. In whole numbers, they're up 1%.

If you look at the public companies in our sector, about how do we continue to outperform going forward. If the economy's not an issue and we don't have new construction, all those are positives. But, you also can't understate the fact that we continue to take market share from the smaller operators.

This is a huge competitive advantage that we have in our sector. And it's really unique, I think, to the self-storage sector, where we have 50,000 storage facilities around the country, and the vast majority, over 90%, are owned and operated by nonpublic companies. Those nonpublic companies, of course, do not have the marketing departments, as we've talked about many times, and the marketing budget, to compete for capturing customers, as we do today with the public companies.

So, I see a number of reports have been written the last few days about our sector out-performing. And I think those reports are exactly right. I think our entire sector is a buy. And of course if you look at our Company, I think we're probably at the top of the list.

So, let's talk about the next 12 months for a few minutes, if you want. And I'd like to go back and look at the last 3.5 years before we talk about the next 12 months. As we all know, we went into a recession right at the beginning of 2008. And if you look back at the results of the 4 public companies in 2008, they were outstanding considering the fact we were in a recession.

So, in effect, we lagged the recession by about 12 months. 2009, we've been in a recession for a year. All of the discretionary customers were leaving us. And we did underperform on a rental standpoint, on a revenue standpoint. But, only in a minor degree, in my opinion. The whole sector was only down just over 3% in revenue.

2010 was a turnaround year. All 4 companies reported positive revenue gains in 2010. So, we lagged 1 year going in and we lagged 1 year coming out. Then 2011 comes along and we start to perform as a sector like it's a normal year. In fact, I think, I know we are and I think the other 3 companies are as well, back to pre-recession levels with our revenue.

We crossed over in May. So, our revenue today is higher than it was in 2008 prior to Lehman bankruptcy. We're very pleased with that. And I think all 4 public companies are probably there, although it's difficult for us to see with what they report.

So, if you want to consider something that we've talked about for years, or I've talked about for years, the recession resistance of this business, of this product type, I think you can look back to the last 3.5 years. And I can't find a definition for what recession resistant means, but I think it is self-storage. I think we had tremendous performance through the Great Recession. And now, if my guess is right, we might be headed for a double dip.

So, what does that mean going forward? I don't think it has any negative effect on our sector and on our Company. Again, as I said, we have no discretionary customers today. Everyone needs self-storage who are renting from us today.

I think that other effects that could happen are very positive for us. I do think consolidation continues to be a great opportunity during recessionary times, or during tough times, as a small player is learning every day that they have trouble competing. And that is bringing more acquisition opportunities to us and, of course, more management contracts for us to operate their properties on our marketing platform.

So, I'm very optimistic as far as the next 12 months are concerned. Optimistic on our storage sector and on our Company, extremely optimistic. We had a very good July, and we'll talk some about that, I'm sure. Perhaps Chris will or we can talk about it in Q&A. And we see us having continued robust rentals on into August now.

So, I'm extremely optimistic going forward on our Company, on our sector. But, perhaps, very pessimistic on the economy in general. I think it will correct. It will correct in time. And I think our sector will, of course, benefit at that point in time when the economy does start to correct. But in the meantime, we should outperform admirably.

With that, I will pause and turn it over to Tim.

Thanks, Dean. And thanks to everyone joining today's call for your continued interest and support of U-Store-It Trust. We've made significant progress to date on accomplishing our strategic objectives for 2011. We're pleased to report that we beat expectations for the quarter.

We've increased our guidance for the balance of the year and improved each of the underlying same-store revenue expense and NOI assumptions. We continue to successfully execute on our acquisition and disposition programs, resulting in increased investments and higher growth, high barrier to entry markets. And we completed unsecured term loans that further improved our debt maturity schedule and our balance sheet and liquidity profile.

In June, we closed on a $200 million unsecured term loan facility that included a $100 million 5-year term loan and a $100 million 7-year term loan. Interest on the loans is based on a spread over LIBOR. But at closing, we entered into interest rate swap agreements that effectively fixed the interest rate on each of the loans through their respective maturities.

The 7-year loan had an effective interest rate at closing of 4.52%. And the 5-year loan has an interest rate of 3.7%. While we had limited maturities in 2011 entering the year, we had an objective of being opportunistic to find ways to extend our maturity profile, unencumber additional assets, and improve our balance sheet and liquidity position. These term loans accomplished these objectives.

We were delighted with the support we received from our lenders. Their confidence in our business plan execution allowed them to aggressively underwrite the loans. In particular, the 7-year loan is of note, as it was the first bank-sponsored unsecured term loan to a REIT with a maturity as long as 7 years.

Proceeds from the loans were used to repay $100 million of existing unsecured term loans scheduled to mature in 2013, $31 million of various secured loans that had a weighted interest rate of 7.25%, and to repay amounts borrowed under our credit facility.

We're also very pleased to report that in July, we were assigned a BAA3 investment grade rating from Moody's Investor Service. The rating represents a validation of our capitalization strategy, and recognizes our balance sheet transformation over the last several years.

Achieving this investment grade rating was a clear objective for the Company and an important component of providing us access to efficiently priced capital in the unsecured bond market to refinance future maturities and to support the Company's growth.

For the second quarter, we reported $0.15 of FFO per share, which was $0.01 higher than our guidance of $0.13 to $0.14. And $0.04 higher than the $0.11 we reported in the second quarter of 2010. Same-store revenue grew 3.5% for the quarter. Occupancy gains were the primary growth driver and accounted for about 66% of our quarterly revenue growth.

We gained 200 basis points of occupancy at quarter end compared to last year. These occupancy gains were driven by increased levels of year-to-date move-ins over last year, offset by slightly higher levels of move-out activity. We continue to grow our other property-related income with the primary driver being tenant insurance. We provided insurance to 92% of new renters during the quarter and now provide insurance to 58% of our customers.

Expenses on the same-store portfolio decreased 2.3% during the quarter. These declines were impacted primarily by the timing of our marketing spend compared to last year. Included in our second-quarter results are 2 nonrecurring items. The first is a noncash $2.1 million charge related to the write-off of unamortized deferred financing costs associated with the $100 million term loan repayment during the quarter that I mentioned earlier.

The second nonrecurring item is $1.9 million of income related to proceeds the Company received in conjunction with a property that was taken by the state of California through eminent domain proceedings back in 2009 as part of a roadway expansion project. These proceeds are reflected as income from discontinued operations on our income statement. These 2 nonrecurring items effectively offset each other and have an immaterial net impact to our earnings for the quarter.

Our press release includes the details of our revised earnings guidance. But since we're increasing our guidance and the underlying assumptions, I'll take a moment to review the highlights. We've increased our 2011 FFO per share guidance to a range of $0.60 to $0.63, an increase of 5.2% at the mid-point compared to prior guidance.

We raised our full-year same-store revenue growth expectations to 3.5% to 3.8%, reflecting our year-to-date results and expectations of similar growth for the balance of the year. We reduced our full-year same-store expense growth expectations to a range of 1% to 2%. Finally, we increased our full year NOI growth expectations from a range of 2.5% to 3.5% previously, to a revised range of 4.5% to 5.5%.

Overall, I believe we had a very, very productive quarter on many fronts as we continue to make great progress on accomplishing our 2011 objectives. Thanks again for listening to today's call. At this point, I will turn the call over to Chris for his remarks.

Thank you, Tim. We mapped out a strategy heading into the year of continuing to improve the quality of our portfolio cash flow by investing in Class A assets in our defined core markets, and divesting of stores in the lower barrier-to-entry slower-growth markets and submarkets.

We defined the target for our investing at $75 million to $125 million. And as we enter the 8th month of the year, we have completed and pending deals totaling approximately $114 million. Of that $114 million, approximately 86% of that investment is in stabilized assets. Markets include the Washington DC metro area, the metro New York City area, Greater Philadelphia area, Miami, Houston, and Atlanta.

Going-in cap rates average 7.3% for that pool of 2011 acquisitions. The remaining 14% are investments in assets at various stages of lease-up, with going-in yields averaging 3% and expected yields of stabilization slightly north of 10%. These assets tend to come to us from lenders and have either been taken back by the lender or are short sales.

We targeted asset sales in the $35 million to $50 million range. We have transactions in process at various stages of due diligence that, assuming closing, will provide proceeds approaching the upper end of our target. We continue to see cap rates on our dispositions that range approximately 100 basis points wide of our acquisition cap rates.

We targeted adding 15 to 25 new third-party management contracts to our third-party management program. We are in that target range with 17 deals that have either been finalized or we are completing the contracts.

Putting all this activity into the perspective of the evolution of our portfolio, assuming closing of pending transactions, we will have increased the square footage of our portfolio that is in our defined core markets by 49% since January of 2008. To further illustrate the impact that acquisitions are having on overall portfolio quality, assets we acquired over the last 1.5 years exhibit asking rents that exceed those of our same-store pool by 75%.

Likewise, operating margins of acquired assets run 600 to 700 basis points higher than those of the same-store pool. We are very pleased with our progress at this stage of the year. We have plenty of work to do bringing our pending transactions to completion. We have a strong pipeline of opportunities that we expect to bear fruit over the balance of the year.

Our other 2 key objectives for the year were to improve the quality of our balance sheet by extending maturities and pursuing an investment grade rating. And to continue to deliver strong internal cash flow growth from our existing portfolio. Both Tim and Dean have articulated our successes thus far in 2011 in achieving both of those objectives.

In summary, we established our strategic objectives, communicated them internally and externally and have made excellent progress against those objectives thus far in the year. We look forward to continuing our positive momentum into the balance of the year.

And at this point, Operator, we would be pleased to turn the call over for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Jeff Spectra with Banc of America Merrill Lynch. Please go ahead, sir.

Good morning. If Dean could please comment a little bit more on his initial comments that there's no discretionary customers in the portfolio today. Is that a difference between today and pre-recession?

Hi, Jeff. Absolutely. Pre-recession, we had upwards of 10% is our estimate as to a discretionary customer. It normally runs in that 7% to 10% range. And we've seen this happen 2 times over my career. It happened in 2001 after 9/11. We immediately lost the discretionary customer. Then it happened again in Q1 of '09 when we all realized that we were in a deep recession and everyone had to rethink their spending habits.

Thank you. And then, I don't know if you can provide some statistics to demonstrate your performance versus the private players in your markets. You commented that you continue to outperform those owners.

Sure. There is a report put out from an organization called SSDS -- a quarterly report. And this past quarter, it again showed same-store occupancy down 3.5% year-over-year; Q2 '11 over Q2 '10. It was also down 3.5% in Q1 this year. So they continue to lose occupancy.

I get out and speak and serve on panels and meet a lot of small operators. I ask people about their occupancies. And clearly, they are continuing to lose occupancy, as I determine it on those conversations, but also this SSDS report, of course, versus our results.

Okay, thank you. Then just 1 question on your optimism. On the rental side, is there a point where, if we did fall into recession, that there is a threshold of how much you can really push rents? How should we think about that?

The Great Recession was just --- is right behind us. And I will tell you that we aggressively pushed rates to existing customers all the way through the Great Recession. We have been aggressive with rent increases to our existing folks in the 8% to 10% range. And we were able to collect that kind of rate increase to our existing customers during the Great Recession. So I don't see us changing that habit.

Gaurav Mehta, FBR. Please go ahead.

Good morning. Just a couple of questions. First, in regards to your superstore program, could you touch a little bit upon the status of that program and if you have been able to roll out that on any of your stores yet?

What was the second part of your question, Gaurav?

If you have been able to roll out that on any of your existing stores yet.

Okay. We're on target for everything. When I saw you in NAREIT in June, what I said there was we had 1 up and operating, and we would roll out another 24 by the end of July, and we did that. We now have 25 superstores up and operating. Of course it's very, very early, but the comments we're getting from customers are outstanding.

And our services are starting to be used at all locations. But it's too early for any kind of really real report on results. We plan to do that for you on next quarter's call.

Thanks. Second question, in regards to acquisitions. I was just wondering if you could touch upon the acquisition activity in general in the industry. One of your competitors last week mentioned that they are seeing a slowdown in the acquisition activity and I was hoping to hear your view on that.

Sure. This is Chris. I would say that activity levels this year as compared to last year, to the positive, were more robust in the first half of the year than we saw last year. So the momentum picked up last year, as it tends to do post busy rental season. This year, there was a good bit of activity, as you can see by our results and others, in the first half of the year. And I would say that that will continue into the second half of the year on a one-off basis. I think the few larger opportunities that were out there percolated through the system here in the first part of the year.

And right now don't see anything of size out there. And don't expect to see anything of size for the balance of this year. But there are plenty of individual asset opportunities out there. And companies like ours continue to mine our third-party management program and our network program to dig up deals on a direct basis.

That's helpful. And lastly, could you touch upon the drivers of your same-store expense guidance decline?

Good morning. This is Tim. The drivers are related to the continuation of our ability to manage expense levels, a little bit better visibility into real estate tax levels, and half a year's worth of our marketing spend. So our guidance range change is driven mostly by our year-to-date performance and an expectation that the second half of the year is consistent with what our expectations would have been entering the year.

Eric Wolfe with Citigroup. Please go ahead.

Hi, thanks. Dean, you mentioned in your remarks that people don't enjoy renting a storage facility, they do it because they have to. Just wondering, if that's actually the case, why try to make this push to create higher amenity facilities through your superstore concept? It would seem like, from your comments, that it wouldn't draw any more people or discretionary customers to your facilities anyway.

Eric, they don't enjoy spending their Saturday morning at their storage unit, I can assure you. I was there just a week ago Saturday in my storage unit doing an inventory with our new Smart Tracker program that we have to help our customers better manage their stuff in their storage units. But clearly it is a necessary solution for all of our customers today.

No one really enjoys doing it. But the easier we can make it for them, and the more pleasant we can make it for them, I am very confident we will attract more customers to our facilities. So that is very clear to me.

And I appreciate your comments about the economy is potentially stalling and entering a double dip. But are you seeing any specific evidence of that in your business, that we're maybe more in trouble now than we were just a year ago? Because it seems like everything is going a lot better today than it was when you gave those comments in February of last year.

When I talked about that in February last year, I think I said the same thing I said today. The economy may stall, but we should plow right through it without a hiccup. That's exactly what I'm telling you today. There's no indication of the economy stalling in our business unless you look at the other side of it.

We have a lot of customers showing up today who are still downsizing and are still looking for ways to take costs out of their household budgets. That's, of course, a positive for us, but we still see a lot of stress in the economy out there today. But nothing more direct than that for us.

That's helpful. Just one last question to follow up on Jeff's question. How do you know that you don't have any discretionary customers left, that they all need storage? It seems like you've seen some pretty favorable occupancy trends during this recovery. So why wouldn't we expect that to unwind if we went into a downturn?

We do surveys, and we pretty well know what people are storing with us. And I can assure you, no one has shown up lately with their Harley Davidson motorcycle that they just bought without telling their wife and they want to rent a storage unit to put it in. Seriously, we have customers, and they do tell us a lot more than we want to hear sometimes when they are storing with us, about their divorce or about their downsizing, losing their home. And we are solutions for people.

I think discretionary spending is down in all sectors. It's almost non-existent, if not totally non-existent, in our sector.

Okay. But just to put some specifics around it, do you think the current occupancy levels that you're seeing today you could maintain those if we went into a downturn? Obviously, that's very speculative about how deep the downturn is. But do you feel like you could stay in the high 70%s?

No, we're going to grow out of that, Eric. We're clearly going to grow out of that. We grew 680 basis points through the recession. Our trough was 74%. And during Q1 of 2009, our trough was 74%. And we closed the other day at 80.8% on a same-store basis, 680 basis points. That is because of what I'm saying. People are finding us as a solution and we're also taking market share.

So you've heard me talk about the cyclicality of our business. We will grow this year from trough to peak, we grew 460 basis points from our bottom occupancy level this past spring to the other day at 80.8%, 460 basis points. We'll give some of that back over the winter. And I've said before that I can almost guarantee you 150 basis points gain each year as we go forward.

This year's it's going to look like it's going to be substantially more than that because I don't think we'll give back more than 260 basis points on occupancy over the winter time. So it looks like we'll gain at least 200 basis points this year. So, no, we're not at all looking at just standing pat with our occupancy during a potential downturn. We will continue to gain occupancy, if we do have a recession, through the next one like we did the last one.

Paul Adornato, BMO Capital. Please go ahead.

Yes, thanks. Good morning. Dean, you talked about the public operators still taking market share from some of the mom-and-pop operators. I was wondering how long do you think that trend can continue?

I see no reason why it would change, Paul. It's been consistent now all through the recession. And I guess there could get to a point where the economy is so great and everyone is back to spending a lot of money again, and they have survived and they've leased up to a certain level that they're happy with. But again, 60% of our customers are shopping online with us before they rent from us. You've heard that number before. They don't see the small operator. So I don't know what changes that.

I really do think it's the hotel sector all over again that you've heard me talk about, the '80s for the hotel sector. 20 years from now, 15 years from now, there will be just a few flags in the self-storage sector as there are in the hotel sector today. You cannot go out and build a hotel on an expressway interchange and put your name on the hotel. You've got to have a flag. That will be no different in our sector as we go forward.

What should we expect in terms of street rates versus in-place rents over the next year?

We do have pricing power back and I'm optimistic that some of our competitors are going to start taking advantage of that pricing power. I hear them talking about it on their calls. So, right now, our street rates are just a little bit ahead, about 1% ahead of our in-place rents. I see that growing.

Even though we're passing along healthy rate increases to our existing customers, I see our street rates growing. I don't think it's going to happen this year. I think we're going to continue to enjoy revenue growth this year as a result of lower discounting. That has started to happen.

I'm happy to report that -- we survey our competitors who put their prices online. We survey them on a continuous basis, weekly, in fact. And we crawl everyone's web site and we crawl all of their facilities and we get thousands and thousands of rates. And I'm happy to say that this last quarter that Public Storage is only giving away the first month free at 81% of their facilities. Historically that's run at 99%.

So I see a good break there in that we'll see them having, I think, better revenue results because of that. And once the discounts burn down, then we're going to get to pass along rate increases, but I think that's probably going to be next year before that happens.

Todd Thomas, Keybanc Capital Markets. Go ahead, please.

Hi, good morning. Dean, you mentioned that occupancy ended July at 80.8%. I was just wondering if you could tell us what that delta is year-over-year?

Over July -- that's not coming out of my head. We've got guys looking for it. What else do you want to talk about, Todd? Maybe we can come up with it here in a minute.

Sure. You also mentioned that move-ins were up in the quarter and move-outs were also slightly up, as well. First, I was just wondering if you had the comps for the quarter for both move-ins and move-outs? And then, also, it sounded like some of your peers are seeing lower move-out volume. So I was just wondering if you could comment on what you think is driving the difference in move-out activity in your portfolio?

Sure. I'm not sure I agree with your observation, but let me come back to that. We're up 240 basis points, is the answer to your question. We closed last July at 78.4%.

As far as move-outs, there're 2 ways to measure them. You can look at them just in just whole numbers, and we're up 1%. But if you looked at them as a percentage of occupied units, which is probably a more appropriate way of looking at them, we're down 0.1 of 1% on move-outs. Move-outs have stabilized. Move-outs are not an issue. We had some gains last year on fewer move-outs. But at this point in time, they have stabilized. And as I see going forward, our opportunity is not on the vacate side but on the rental side with our rentals being up 3.8% for the quarter.

Okay. And then I know that the superstore concept is still in its infancy. But putting that aside, I was just wondering if you could talk about the trends you've seen for small businesses and the small business customer today in general?

They're trying to figure out how to save money and we're a solution for them. We continue to have business customers renting storage from us who are coming out of flex space, small warehouse space. And I'm happy to say that those customers are also taking larger spaces from us now. You know, when we went through the Great Recession, for the first time ever, I believe, our smaller units were more highly occupied than our larger units.

We are starting to see business customers come to us now and rent larger spaces, but they're downsizing. So that continues. Everyone is still trying to figure out how to take costs out of their P&L. That's where we're a solution for the small business customer.

Okay and then just 2 more quick ones. One, I was just wondering on the other property income, if you have a breakout of insurance and other ancillary income?

Yes. Our insurance program continues to be outstanding. And that is the large driver of that. Of the 3.5% revenue growth for the quarter, 1.1% of it was, in fact, from our insurance program. So we continue to be very high on that. We've gone through 60% now, during the month of July.

I hear other people talking about where can this program get to? We have districts that are above 70%. And I always say if you can do it in 1 district, you can do it in all of the districts. I don't think that program slows down for a while. So I'm extremely pleased with the results of our insurance program.

So other property-related income, that's all tenant reinsurance income? I'm just wondering because, as the superstore concept continues to grow, I was wondering if you'll be breaking out some of that additional ancillary income there?

When we talked about it in June, I think that's what I said then. When it becomes obvious that the income is worth talking about, we'll break it out for you.

Todd, it's Tim. Just to clarify something you just said. Our other property-related income is, roughly, just a little bit more than half of it, relates to tenant insurance and miscellaneous sales of boxes and locks and the like. And a little bit less than half of it comes from fee revenue -- administrative fees, late fees and the like.

Paula Poskon, Robert W. Baird. Please go ahead.

Thanks very much. Apologies if you covered this already. What is the average length of stay of your customers now? And how does that compare year-over-year and to historical norms?

Yes, hi, Paula. It's Dean. It's level with where it jumped to during the Great Recession. We're up to 7 months now on median length of stay and 14 months on average length of stay.

I know 1 of our competitors looks at it a different way, and they look at just their existing rent roll and how long they've been with us. That's like over 4 years. There's a number of ways to look at average length of stay, but I think we're consistent with everyone else. Average length of stay for all of our customers are about 14 months.

I would have guessed that it was a lengthy number. And so I'm still, as some of the other analysts have said, trying to reconcile that with the notion that these aren't discretionary customers. I understand that new customers, that storage is a need and filling a temporary solution to some problem that the customer's having. But looking at the whole tenant base, it's hard to imagine that somebody can stay 14 months and have that be truly need-based and not some portion of that be discretionary.

You have to remember, 20% of our customers are commercial customers and they rent 30% of our space. So they're operating it as inventory space. A lot of different reasons that commercial customers rent from us. Those people stay with us for a long term.

Then you've got the person moving. They come, hoping to stay 3 or 4 months, but they end up staying 6 or 8 months in normal times because their house doesn't get ready on time. But then we're not in normal times, so now you've got people moving from a house to an apartment and they're storing their extra furniture with us. And they're still in that apartment. So that's the reason our average length of stay has gone from 11 months, which historically it was, to 14 months. Discretionary, I guess you have to put a definition around that.

People are storing stuff today that you and I might look at and wonder why are they spending the money to store the stuff. But, I don't think, if you just think of our consumer that we have today, still very much in debt, still trying to get their balance sheet in order. I don't think many of them would consider what they're storing with us to be discretionary. It's something that they want to keep. I'm very confident that we have virtually no discretionary customers out there, as I think of a discretionary customer.

That's helpful. Thanks, I appreciate that. Secondly, can you talk about the drop in advertising expenses year-over-year? Just give us more color on that.

You just have to look at the 2 quarters together, Paula. We told you at the first quarter, we spent -- invested more money in the first quarter on our Internet advertising program to set us up for the year. And I think that was successful. And so if you put the 2 quarters together, you'll see a much more reasonable expense picture as it relates to marketing.

Todd Stender with Wells Fargo Securities. Go ahead, please.

Hi, thanks, guys. If we just go back to your superstore concept, you rolled out the stores so far, I think your original costs were about $50,000 per facility in cost. Where did that end up once they're implemented?

Yes, Todd, that estimate is still a good estimate. We're through -- as Dean mentioned, we're through opening the first 25. And each store has a little bit different cost structure, but on average, the $50,000 is still a good number.

What really goes in? What are the bulk of those costs? I think there were some kiosks. What represents the bulk, would you say?

Todd, this is Chris. It's hard assets. So it's kiosks, it's our customer experience screen which sits on the counter and allows the customer to take an immediate survey which helps us in analyzing why they're renting from us and how they found us. And also allows them to make payments.

And it is certain amenities in the office in terms of the way we set up displays to articulate the services that we're going to provide, down to some smaller dollar items but still hard asset in the form of a coffee station, a work station, our UPS weigh station, et cetera. So, by and large, it's hard assets. A little bit of it is some marketing and other advertising type collateral that are in the superstores so that folks know what the offerings are.

Okay, thanks. Just sticking with that theme, how are you guys measuring the success of the program? Is it going to be an occupancy number, length of stay, percentage of business customers? How do you measure that?

All 3 of those plus income. I try to play down the income part of it because the bigger play for us is the -- opening the funnel wider at the top and having more customers find us because of the offerings. But we will also have better ancillary income.

Chris, just to stay with you in your opening remarks, with the acquisitions, I think it was 14% represent facilities in lease-up. What are the range in occupancies that you're seeing with that?

Todd, as they were last year, those tend to be deals that we looked at on a discount or replacement cost, price per pound type basis. We bought a few of those last year in New Jersey. So if you look at the ones that we have this year, they would range from occupancies in the 30% to 40% level, I think, is probably a good average for what we're seeing on those types of deals that we're investing in.

Largely, they're developments where the reality is, the pro forma that was done for the bank, the market clearly has changed so rates are less than what they would have pro forma-ed. And their pace of lease-up to stabilization is elongated and/or they paid too much for the land and overdeveloped the asset and were unable to maintain it. And then we have come in and either bought it directly from the bank or the bank orchestrated a short sale.

Do they typically come with assumed debt? Is that pretty standard, or you can pay that off?

No, we're an unencumbered buyer when and how much as we can. So, no, those tend to have come to us and we buy them unencumbered.

(Operator Instructions) Michael Knott with Green Street Advisors. Go ahead, please.

Hi, guys. Dean, obviously your revenue is trending higher than you'd expected. But were you surprised or disappointed that the realized rent was merely flat with last year? Is that specific item trending a little lower than you would like?

I have a realized rent up 2.7%.

That's asking. So realized is flat, which I think is just indicative of the fact that there's not a lot of upward momentum at this point on street rates. So our street rates are up about 2%. But you're just not seeing a lot of pricing movement.

Okay. Let me answer the question. And rev path is up 2.4%. Yes, the pricing hasn't come yet, Michael. It's reasonable to think that discounts need to burn off first. And I would like to see some pricing come at the same time because we have the pricing power. And yes, I am disappointed as a sector we're not raising rates yet. But it will come and I think it will come pretty soon.

So those burn-offs will happen as the scheduled rent is 2% higher now? That was your initial point, Dean?

The burn-off is, like discounting, people are offering free rent on fewer units. We offered first month free this last quarter on 64% of our units, and the other guys were higher than that. And as those come down, you'll get more full-price rentals and you'll get more revenue. As those discounts come down, people have --- they feel more comfortable with passing along rate increases. I personally think we can do both at the same time, but we'll see how it plays out.

Then you mentioned street rates 1% higher than in-place. That I'm guessing is probably skewed a little bit because we're in the rental season right now. So I'm just curious what that number was, say, for same time a year ago. It was probably negative, right?

Just barely. We got it back in line about a year ago. It's been just below or just above for about 4 quarters now. Really, only during 2009 did in-place rents get ahead of asking rents. And for us, it was never too far ahead because we didn't take our asking rents down as far as some of our competitors did. Pretty well through 2010 and first 2 quarters of this year, we've been on top of each other.

Can you just repeat those end of July occupancy numbers? I missed those. I had last year was 78.4%? What was this year?

80.8%.

80.8%, okay, thanks. Then, Chris, how much is left to sell in terms of portfolio pruning? And then also, I just wanted to ask, it sounds like your dispositions are in the low 8%s, maybe 8.3% or so. How does that compare to what you expected and then how much is left in the portfolio that's in that mid-8% cap rate vicinity?

In terms of what's left to sell, if we complete everything we've got in progress here, we don't have very much left to sell. We do have a few assets that are encumbered that will become unencumbered as we pay off the CMBS pools in late summer/early fall of next year that fit the profile of disposition opportunities for us. But there are a dwindling number of assets that fit that profile.

In general, cap rates have tightened. They've tightened in the markets in which we're looking to buy. And it's helped us a little bit that they've tightened in the markets in which we're looking to sell. So, I hope that's responsive.

Yes, thanks. So just to clarify, it's only a small percentage of your portfolios as people are thinking about doing NAV for you guys where the right cap rate is that 8.3% that you're selling at?

That's correct, very small.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Dean Jernigan for any closing remarks.

Okay, thank you very much. Looking around at my notes, I think we've covered most of the questions today. Yes -- no additional answers today at the end of the call. Thank you very much for your interest. And look forward to talking to you soon. Good day.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.