CubeSmart (CUBE) 2012 Q2 法說會逐字稿

Hello, and welcome to the CubeSmart second-quarter 2012 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 that this event is being recorded.

I would now like to turn the conference over to Daniel Ruble, Vice President of Finance. Mr. Ruble, please go ahead.

Thank you, Keith. Good morning, everyone. Welcome to CubeSmart's second-quarter 2012 earnings call. Participants on today's call include Dean Jernigan, Chief Executive Officer; Chris Marr, President, Chief Operating Officer, and Chief Investment Officer; Tim Martin, Chief Financial Officer.

Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the Company's website at CubeSmart.com. The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks and uncertainties, and other factors that may cause the actual results to differ materially from these forward-looking statements. 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 Securities and Exchange Commission, specifically the Form 8-K we filed this morning, together with our 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 measures can be found on the Company's website at CubeSmart.com.

I will now turn the call over to Chris.

Thank you, Daniel. The second quarter of 2012 was one in which we performed quite strong operationally, made significant progress in meeting our investment objectives, and completed our balance sheet repositioning strategy. We significantly grew physical occupancy, produced healthy absolute revenue growth that accelerated throughout the period, maintained operating expense controls, posted strong same-store cash flow growth, continued portfolio quality improvements through targeted acquisitions and dispositions, and put the final touches on our balance sheet strategy with our debut 10-year unsecured bond issuance.

Our rentals were extremely strong, and our occupancy reached levels not previously experienced by this portfolio. Our same-store rentals were up 9.6% over the second quarter of 2011. Despite the substantial increase in rentals, same-store vacates were up just over 1%. As a percentage of occupied units, vacates actually declined compared to the second quarter of 2011.

Same-store average length of stay for all customers who vacated remained flat to last year at 14.3 months. Same-store ending physical occupancy, as a result of extremely strong rentals and consistent length of stay, increased 360 basis points over June 30, '11, ending at [83.6%]. This represented a sequential improvement from March 31 of 470 bps.

Same-store revenue grew 3% in the second quarter, with occupancy as the primary driver of revenue growth. Same-store discounts, measured by the average promotion dollars extended to each new rental, declined 6.3% compared to the second quarter of last year. Obviously, with such an outstanding rental season, absolute discount dollars are up with the higher volume of rentals.

We remain consistent in both the timing and amount of rate increases to existing customers, and have experienced no measurable change in our customers' behavior as a result of receiving their increased notice. With respect to ancillary revenues, we converted 93.7% of new renters to tenant insurance during the second quarter. And at the end of the second quarter, we had 66.9% of total same-store tenants insured, an improvement of 700 basis points over the second quarter of '11.

Same-store operating expenses declined 0.7%, driven by energy savings contributed by bulk energy purchase, and continued installations of Envirotrol units at the stores, as well as savings on credit card fees as a result of new regulations. We have also experienced positive results from our ongoing real estate tax appeal process.

We've added a new page, page 23, to our supplemental package. This page provides operating disclosure by region and major markets within those regions. This data is consistent with the themes discussed in June at NAREIT. The Northeast stores market dynamics resulted in strong occupancy growth and revenue growth outperforming our total same-store results.

In particular, our New York, New Jersey, and Washington, DC area stores performed very well. And it is important to note that by square footage, only 64% of our total Northeast portfolio is represented in these same-store figures. Given the quality of the non-same-store assets in this region, we would expect that the strength in these markets continues into 2013. Our strategy here was to maximize revenue in these markets by keeping pricing and promotion relatively consistent, and leveraging our Internet marketing efforts and store quality to gain occupancy and revenues.

Touching on a few highlights from other regions, we experienced extremely strong growth in the Inland Empire and Southern California markets -- 900-plus basis points gained in physical occupancy and revenue growth of 4.4% and 6.6%, respectively. In these markets, our systems in March pointed to an opportunity to sharply lower our asking rents and generate a volume of rental sufficient to maximize revenue at those properties.

The Ohio markets produced strong occupancy and revenue growth. The tactic here was targeted adjustments, both up and down in Street rates, depending upon the property and submarket, resulting in an overall modest reduction in Street rates.

Our challenging markets are Phoenix and Tucson, Arizona; El Paso, Texas; and Sacramento, California. Phoenix, Tucson, and Sacramento struggled. However, rental performance picked up late in the quarter, and we saw an 18% improvement in rental activity in these markets for the month of June, compared to June of last year. That strength continued into July, and it feels like we have started to turn the corner in these markets, and are optimistic of the beginnings of a slow recovery.

El Paso was purely a function of troop deployment. We are experiencing a lack of demand in this market as troops return, and there are no new deployments. All of this very positive leasing momentum continued into the third quarter. We ended July with same-store physical occupancy at 85%; 390 basis point gain over the end of July of 2011. Notably, this July 31 level represents a 610 basis point gain in occupancy since the end of the first quarter.

Looking back to 2008, historically, the increase from our yearly low occupancy to the yearly peak occupancy has ranged between 370 and 480 basis points. As of July 31, that spread was 710 basis points.

Switching over to our Storage Deluxe portfolio, we completed the transaction yesterday with the closing of 135th Street. Closing the final two assets in the Bronx clearly took longer than we had hoped, and it hurt a bit operationally as we were unable to integrate those two important Bronx stores into our platform during the busy summer season. I was in the Bronx earlier in the week and the stores looked fantastic. The level of customer activity was energizing and our employees were providing outstanding customer service. I was very proud to show off our assets and our people, and we welcome anyone who would like to tour those assets to contact us.

From occupancy perspective, the lease-up assets have been a bit behind schedule, while the stabilized assets are ahead of expectations. Performance of the Bruckner development property has been very strong, far ahead of where we had budgeted; having just opened in September 11, the property is currently nearly 75% occupied. In total, occupancy is right on target.

All Storage Deluxe assets have been rebranded except for the 135th Street store, which closed yesterday. Painting is complete at all stores except for Bartow, which closed during Q2, and 135th Street. So we're very pleased with the performance; very pleased with the rebrand there, and are obviously quite proud of those assets and looking forward to continued strong performance into the future.

Switching to investments, we continue to see a healthy deal flow in our core markets. We remain disciplined in our approach and are comfortable with our guidance range of $75 million to $125 million of investment, not including the Storage Deluxe assets closed on this year. Currently, assets closed or under contract represent an investment of $92 million. These assets are 81% occupied with $15 rents.

We disposed of assets in Michigan and the Gulf Coast during the quarter, eliminating ownership of assets in these markets. We have seven additional storage facilities under contract for sale, with closing expected in the third quarter. We guided the disposition activity in the range of $35 million to $50 million. And with closings, our assets under contract totaling approximately $36 million, we remain comfortable with that range. Just as a point of reference, the disposition assets, average rents were in the $8.00 range.

Third-party management platform continues to grow, standing currently at 135 stores, totaling approximately 8 million square feet. This represents 31% growth in number of stores under management compared to the stores we managed entering 2012. Additionally, we are moving forward with the purchase of our partner's 50% interest in the Heitman JV.

In summary, we accomplished many objectives during the quarter. We are optimistic about the positive impacts those accomplishments will have on the balance of 2012, but more importantly and especially 2013. Our objective is to hold a great deal of our occupancy gains into the spring of next year. Accomplishing that objective will have us entering the busy season next year with an even more significant occupancy spread over our 2012 levels. And we believe this will create a continuation of the accelerating revenue gains we expect in the last half of this year, and result in a very strong 2013.

With that, I would like to turn it over to Tim Martin for his comments.

Thanks, Chris, and thanks to everyone for joining us today, and for your continued interest and support. As we've discussed in the past, when we arrived as a management team in 2006, we believed, and have consistently articulated, that our optimal capital structure is to have an unsecured balance sheet and credit metrics that are consistent with an investment grade-rated company.

An unsecured strategy provides us many benefits, including being nimble and opportunistic in managing our portfolio; providing a lower risk profile for our investors and lenders, that will create better long-term returns and reduce our overall long-term cost of capital; and also to provide us access to the full spectrum of capital sources, allowing us to be flexible and opportunistic through all phases of the economic cycle.

We've done a lot of heavy lifting over the years to transform our balance sheet. And last year, we were assigned investment grade ratings from both Moody's and S&P. During this past quarter, we put the finishing touches on our multiyear balance sheet transformation, as we completed our debut public bond offering and issued $250 million of 4.8% 10-year senior unsecured notes. We had great execution by our book renters, and were pleased with the strong demand as the deal was nearly 5 times oversubscribed.

We've been very active over the last several months, meeting with fixed income investors, ensuring that they were well-informed on both the sector and on our Company. We believe those efforts were rewarded, as the order book was full of high-quality institutions. Investors were attracted to the stability and strong operating fundamentals of the self storage sector, as well as our strong credit metrics.

We're delighted with the quality of the investor group who participated in the offering, and we look forward to them not only being long-term holders of these bonds, but also to be active participants in future issuances, as we are committed to this market being an important component of our capital-raising activities in the years to come. Also, during the quarter, we repaid secured debt totaling $167 million. And in doing so, we unencumbered 56 assets and addressed all of our remaining 2012 maturities. We have only $34 million of debt maturing over the next 24 months, and have extended our overall weighted average years to maturity to 5.8 years.

We ended the quarter with nothing drawn on our $300 million credit facility, and a cash position of nearly $138 million at quarter-end, that provides ample capacity to fund our post-quarter-end acquisition activity, the buyout of our partner's interest in one of our joint ventures, and other deals that we have under contract. Our balance sheet is strong, and we're well-positioned to be nimble and flexible to act on attractive growth opportunities as we identify them.

Our second-quarter results were a bit ahead of our expectations, as we reported FFO per share of $0.18 for the quarter. Chris touched on the details and drivers of our 5.2% same-store NOI growth, and expenses in particular came in lower than our expectations. Additionally, with our bond offering closing on June 26, it had very little impact on the quarter.

As detailed in our earnings release, we raised our full-year FFO guidance to a revised range of $0.70 to $0.73 per share, and we introduced third-quarter guidance of $0.18 to $0.19 per share. The increased guidance reflects the impact of our bond issuance at pricing that was better than our prior guidance, albeit the timing was on the early end of our guidance range. We increased our expectation of full-year same-store NOI growth from 3% to 4% up to a revised range of 4% to 5%, reflecting stronger core operating performance.

At the midpoint, our full-year same-store revenue guidance reflects accelerated growth in the second half of the year. Our same-store expense guidance reflects our expectation of year-over-year growth in operating expenses during the second half of the year. In particular, we expect our marketing spend to be a good bit higher during the last half of '12, compared to the same period in 2011. G&A expense is now expected to be between $26 million and $27 million.

Our third-quarter guidance range reflects the short-term impact of having a large cash position entering the quarter, resulting from the proceeds from our June bond offering. Our cash position entering the third quarter is being used to fund the acquisitions we've closed to date, and will be used to fund acquisitions under contract that Chris discussed earlier.

Overall, the second quarter performed very much in line with our expectations, and the improvements to our guidance metrics reflect the continued execution of our business plan. We reached a significant milestone with our debut bond offering, and our balance sheet has never been stronger.

Thanks again for joining us for this morning's call. In particular, I noticed from our call participant list that we have several folks joining us today from our new fixed income investor base. Thank you all for joining us and for your recent support. Also, of particular interest to that group, we have added disclosure in our supplemental information package on page 22, that provides details on our covenant compliance related to the recent unsecured senior note offering.

At this point, I'll turn the call over to Dean.

Okay. Thanks, Tim. Good morning, everyone. I just want to make some brief comments today on a couple of subjects. So, one, the economy, and the second one being the consolidation in our sector.

The economy, as evidenced by this morning's jobs report, continues to go sideways, from my perspective. You know, I've referred to it over the last couple of years, we expected a very slow growing economy, a check mark recovery, something that has a very long tail to it, that -- and that of course has been playing out. And I see that playing out maybe for another two or three years. It's a -- it is a slow slog, if you will. And not only is it a slog, but we have all those dark clouds over us that have drifted over from Europe.

And so, how does that relate to storage? Actually, I'm going to suggest that's a positive for some of us. It's a positive for the public companies and it's a big positive for CubeSmart. With the economy the way it is, we're not going to have any new construction. We have no demand from a broad perspective out there that would require new construction. So, that's good for those of us in the business who have nice balance sheets; and, as Tim just described, able to be nimble and able to buy storage facilities that are in the right markets for us, with good or great upside potential.

That, of course, leads to the second subject that I want to discuss just for a moment, and that's consolidation. We're seeing it play out before our eyes here today with our news release. We've been talking about this for a couple of years now. And consolidation is, in fact, happening as we speak.

With the third-party management program growing in this Company, that's what I call operational consolidation. For the most part, we're putting our brand on it; but operationally, it's coming onto our platform. And, in addition to the operational consolidation, we have the ownership consolidation. And of course, Chris has been speaking to that, with all these nice properties in these great markets that we're buying.

So, I could argue -- in fact, I will argue -- that the economy that we're in today is actually a big plus, a positive for CubeSmart. We have the great balance sheet that Tim discussed. We're able to buy assets and consolidate the sector. Those companies that are not interested in selling but are interested in getting on our platform, from an operational efficiency standpoint, are seeing the wisdom in making that move. And we're talking to those people every day, and we have some of those people joining us every month.

So from a consolidation standpoint, the economy going sideways, with little to no jobs growth, to almost no new construction in our sector, is a big plus for us. So, I'm very optimistic over the next two or three years that this Company will continue to outperform the broad economy. We'll continue to do exceptionally well with the occupancy runway we have in front of us, with us reaching 85% occupancy at the end of July is terrific, of course. We -- that would indicate we have another two years past this year of an occupancy runway that we'll be able to enjoy. And I look forward to the results of this Company during that period.

I will slow down there and we'll take questions. Keith, if you're ready?

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) Christy McElroy, UBS.

Chris, you touched a little bit on this in your opening remarks in your market-by-market commentary. But I'm just trying to get a sense more from an overall portfolio perspective, in terms of your revenue management, from an occupancy standpoint, you've said in the past that we should expect about 200 basis points, maybe 250 of upside each year. So you sit today at about 400 year-over-year.

Yet it seems like you've adopted a strategy toward rents that I don't remember seeing from you in this up cycle so far, which is that you've lowered Street rates by about 4% year-over-year. And you can even see that change from first quarter to second quarter, where, in first quarter, you set Street rates at about [12.37%] on average in your same-store pool; but in second-quarter, you dropped them about 3% to under 12%.

So I guess my question is, has there been a clear change over the last few months in how you're approaching the portfolio from a revenue management perspective, to be maybe a little bit more aggressive on rents? You know, raise occupancy at a more rapid pace and then raise rents later? And then I'm just sort of wondering to what degree did you push rents on existing customers in 2Q?

Okay, thanks, Christy. If you go back to the fundamental strategy, which has not changed, and it's to maximize cash flow from each individual property. And we've always talked about the fact that there are multiple levers to achieve that maximization of the cash flows.

What our system started showing us in March was that we had an opportunity in certain markets to bring down Street rates, and it showed that the gain in rental activity should more than offset the reduction in the asking rent, and therefore, maximize revenue at those particular properties. The concern you always have, if you go back to the gas station analogy -- there are two gas stations on either side of the street on the corner, you drop rates -- or you drop your gas price, and the guy has visibility to it across the street; he drops his gas price, and you end up in that proverbial death spiral.

So we started testing some targeted reductions. The success was there. We didn't see anybody follow. So we went back to seeing if we could be a little bit more aggressive in April, in terms of moving those rents back up. We didn't get the answer that we were looking for.

So, it's not a change at all in overall strategy. It's the fact that, again, market by market, we saw an opportunity to maximize the revenue at the store through a combination, depending upon the market, of our marketing spend, of our price adjustments. And it has been successful for us.

And so, as we talked about at NAREIT, when we met, the Northeast markets were ones where rate was not as much of an issue, and we were able to relatively hold rate and hold discounting, still gain occupancy, still put up good revenue numbers. We saw opportunities, particularly in California, to be very aggressive on rate. And we got the outsized performance from an occupancy perspective that maximize the revenues there.

Markets like Chicago are probably directly in between there. Our rental rates are up modestly. Our occupancy is up modestly and our revenues are up modestly. And that's an indication of the demand dynamics within the submarkets of our stores in Chicago.

So, what you'll see going forward is a continuation of that strategy of maximizing revenues at the store through a combination of factors. It just has gotten to a point here over the summer where our systems were showing us an opportunity to be less aggressive on asking rates, and gain the physical occupancy.

Hey, Christy, I want to add one thing, if you don't mind. If you recall, I always said that once the slashing of rates came to an end, and once some folks filled up, that we would take the opportunity to maybe take our rates down some and gain more market share than would be normal. So we always promised that 200 bps, but always gave you that caveat. Well, unfortunate for me, it came on -- Chris took over operations in January, and he gets all the credit for it now. But that is exactly what we did.

So it seems like it's very different from a market by market perspective, in terms of what you're doing on rate versus occupancy.

Yes, that's absolutely right. It's really -- in order to use that rate lever, you obviously have to have the confidence that the volume of move-in activity is going to accelerate, and offset the fact that you're renting that specific cube at a lower price. And that's played out in many markets.

Now, in Phoenix, Tucson, Sacramento, I talked about, it's in El Paso for a different reason. It's a demand issue. So, you can't drive that incremental customer if they're not there. And we're obviously, on a daily basis, taking market share from the smaller operators. But if you can't get that volume, then that doesn't -- then that's not the strategy.

From your question on in-place rents, nothing has changed there. We continue to be aggressive on passing along in-place rents to existing customers. The pattern of behavior upon receiving that rental rate increase letter has not changed. And I know on other calls, this topic has come up. And absolutely, you run the risk when you pass along rate increases and provide that customer with a piece of correspondence that you wouldn't ordinarily do; you run the risk that it changes their behavior. But our models continue to show to us that the reward we get in terms of the incremental revenue more than offsets that risk of waking up that customer.

I think last quarter, you were raising existing customer rents by about 8% to 10%. Is that still the case?

Yes.

Okay. And then, just lastly, I sort of -- I asked a similar question last quarter. I understand that the [5.4] average yield in the first half on Storage Deluxe, and the 2011 acquisition is sort of a pro rata number. And that even the Q2 numbers don't take into account a couple of the assets that haven't closed yet.

And I also understand that the 6% sort of guidance yield is supposed to be somewhat of a pro forma number for 2012. So I'm wondering what that sort of apples-to-apples comparison is for the first-half? So if you look at the first-half performance, what is that pro forma yield on that stuff?

Yes, I (multiple speakers) --

(multiple speakers) I think, last quarter, you said it was somewhere between a 5.5% and a 5.7% for the first quarter. So I'm just wondering, just in terms of thinking about what -- how much the yield needs to improve to get to that 6% pro forma, what are we looking at in terms of second-quarter performance?

Yes. I guess if I understand the question, it's hard to answer because we'd be relying on the performance of the prior operator up until we took over, to pro forma that. And I don't think that's a fair comparison. So if you just do the math, the 5.4-ish first-half implies that we're obviously north of 6% on those yields going into the third quarter, and then again into the fourth quarter. So it's a continuation of where we stood at the end of July continuing to be in a positive trajectory, going through the end of the year to aggressively get you to that 6% overall yield for 2012.

And you still have a lot of confidence in your ability to improve the NOI to get to that 6% average, given that you're at 5.4% for the first half?

Yes. The performance for the first half is not significantly different than underwriting, albeit a little bit below. And so, yes, I think bringing Bartow and 135th on is going to be very helpful to us. Because if you know the Bronx, those two stores are integral to kind of that triangle that we were achieving through this acquisition. And having those not in the portfolio -- and again, we were competing then against the existing operator for customers on a daily basis -- getting those closed is going to be very helpful for us.

Okay. Thank you, guys.

Gaurav Mehta, Cantor Fitzgerald.

Just a couple of questions here. First on your guidance, it looks like in your same-store revenue guidance, there's some upside embedded for the second half of 2012. And I was just wondering if you could provide more detail as to -- I know you don't provide guidance on occupancy, but what's your strategy for the second half? Do you still plan to push occupancy? Or do you plan to push rates?

Yes, this is Chris. As you think about those gains that we achieved in the summer, particularly in June and July, the strategy is going to be one of holding onto as much of that occupancy as we can, up through the beginning of next rental season. So I don't think you'll see dramatic changes either up or down in rental rates, as we get into the third and fourth quarter. We had some opportunities in July on the up, because of the occupancy gains in certain markets; but it will largely be an acceleration of revenue growth driven by physical occupancy.

Okay. And then when you think about your occupancy gains this year, did you see any variants in occupancy gains at your superstore versus non-superstore?

Yes, the superstores in our portfolio that were there for a comparable period of the first -- or for the entire second quarter of the year continued to outperform the non-superstores. So if you look at just on an occupancy metric for the first six months, the performance gap within their relative markets to the non-superstores is about 100 basis point outperformance.

Okay. (multiple speakers) And actually, Chris, you mentioned your decision to purchase 50% interest in your Heitman JV. I was just wondering if you could provide more details as to what triggered that decision?

The opportunity -- the first opportunity we had under the structure of that transaction to redeem them out was in this quarter. And when you look at the economics of that transaction and the returns that were -- that we had subordinated to Heitman to in that deal, it made economic sense for us to go ahead and take advantage of redeeming them out.

That was, on a relative basis, an expensive piece of capital. But again, you go back to what was happening in the world at that time. It was an excellent transaction for us, and was a vital component of our recap that ended with our large equity deal that we did in August of that year.

Okay, thanks. That's all I had.

Ki Bin Kim, Macquarie.

Could you just talk about the trajectory of your same-store revenue growth during the quarter? And so, I guess from April, May, June, leading up to your overall average of 3%. And the only reason I ask this is because it seems like you did change your strategy a little bit by, like Christy said, cutting rate for the sake of occupancy. So I just want to see if -- how same-store revenue was actually impacted.

Yes, if you just look at July and work backwards, July accrued rents, store level revenues were obviously higher and a higher percentage gain over July of last year. June, a little bit less so and so forth, going all the way back in time. So the revenue gains accelerated from April through June. That carried on into July. And obviously, from the guidance, we assume that that acceleration continues through the balance of the year.

That was my point about next year. You know, if we can hold this occupancy as best we can, given just the seasonal nature of the business, and be in a position going into the rental season of next year to have what will be then an even greater gain over the 2012 comparable occupancy, and we can do another 300 to 400 basis point improvement over that, then you've got the portfolio up into the 88% to 89% occupancy level by July of next year. And we believe that all of that will translate into a continuation, then, of that revenue acceleration that we expect to see in the balance of this year through 2013.

Okay. Have you looked at your occupancy on a kind of competitive asset-by-asset basis versus your private market? And how far are you above the private market?

Yes, it really is going to depend upon -- it's going to depend upon market. So it's hard to give you a broad answer to that. I think if you look at the data that's available out there from an SSDS perspective, or when you look at the data that we have in our systems for our peer group, we are significantly outperforming the, I guess I'll call them, the smaller operators in both occupancy as well as revenue. But it's going to be property-specific.

Okay. And just last few questions. What would the cap rate be for the Heitman deal?

Yes. You know, we already own half of those assets and they're on our books. So, it's not -- and the buyout is a contractual calculation, not a negotiation. And so I'm not sure that's the most relevant measure, but it's in the upper 8's.

Okay, thank you.

Eric Wolfe, Citi.

Dean, I wanted to follow-up on your comments that you made about the slow economy and how it's positive for storage, because you're not really seeing much new supply in there. I think you said there isn't enough demand right now to justify that new supply. But I guess just looking at your results and your peers, it seems like all of you are either seeing rapid occupancy growth or rental rate growth. So wouldn't you see that as a sign that the demand is there and maybe supply is just slow to follow?

Hi, Eric. The demand is, I don't think, there. I think that's really taking market share. I just was out in California last week, I guess, or two weeks ago, speaking to that -- to the State Association out there. And I'm always getting my input from stops like that. And I feel the demand is not there yet.

I mean, it will come from housing when housing starts to heal itself, those small construction workers get back to work. It will come from the discretionary customer when 90% of the population is employed. When they get to a point where they're starting to spend their discretionary income on items that they need storage for, that's when the demand really comes back. I think at this point in time, it's not demand that's taking market share.

Right, so your good results or the result, they're at the expense of your smaller peers, then?

Yes, that's correct.

Right. And just on your third-party management business, I mean, would you say that all the stores that you are currently managing -- and obviously, you've had a very nice push there -- are viable acquisition candidates down the road? Or are some of them just ones that you're managing for the fees and insurance commissions?

Yes, it's a balance of the two. You know, we've been harvesting that third-party managed pool for our acquisition candidates since we got into that business with great success. One of -- two of the assets that we've acquired thus far this year were assets that we were managing. And we would expect to continue to use that as one leg of the stool for acquisitions. There are other opportunities, particularly at this stage of the cycle, where the consolidation is really just beginning, that are a fee-based relationship and not assets that would fit into our longer-term strategy.

Right. And I guess as you think about growing this business, I mean, is there any sort of limit to how much resources you want to put it out at? What sort of things do you have to change from an organizational perspective, as more and more assets come under management? And also, are you comfortable with the returns you're getting there?

Yes, the systems are very, very scalable. So that's not a constraint. And again, focusing in on opportunities that we accept versus those that we don't, one of the criteria is, clearly, that ideally, the additional overhead burden is zero to limited.

So, I don't think there is a -- I don't think there's a governor from either of those two perspectives at all. I think it -- it's a very fertile field for us. The returns -- the returns to us are quite good, as long as we continue to stick to the discipline of where we accept transactions and where we don't. The returns are quite nice, because again, you're not adding incremental cost. So a good portion of that fee flows right to the bottom line.

Understood. Thank you.

Todd Thomas, KeyBanc Capital Markets.

It's Jordan Sadler. Just following up, I guess, on the ramp in occupancy, I guess you know I'm curious about one of your comments regarding the ramp for the rest of the year. So, the focus looks like to be on ramping occupancy. I think you made a comment about you expect to have a more significant spread next year in '13 than you do in '12. Can you just maybe elaborate on that a little bit?

Yes, that's just going to come from the comp, right? So if you look at what occurred in the portfolio at the end of last year, for example, we would have had a greater seasonal decline in physical occupancy than we would be targeting this year. So, as a result, the spread going into spring of next year, as opposed to where those properties were in the spring of this year, will be, we would expect, wider than that 360 -- 390 basis point improvement. So I think that comp is going to be in our favor, going through the first-half of 2013.

Okay. It's not specifically about and relative to the 360 basis points of occupancy, per se. I mean, that you'd have a higher spread than that necessarily.

Yes, you would expect to have a higher spread from that, only because, if we can hold onto the occupancy through this slow season (multiple speakers) --

Then get the same sequential gains essentially, it'd be higher. I got you. I got you.

Correct. (multiple speakers) Now, in terms of (multiple speakers) --

(multiple speakers) And that's your expectation?

Yes. Now, in terms of -- again, just to clarify one point, the expectation would not be that there is a net gain from where we are today through April 1 of next year. I think the seasonal factors to the business will create some decline. I just -- our expectation is, that decline is much more muted than it would have been historically.

And then come next April, you get your usually -- usual peak leasing season kick (multiple speakers) --

That's right.

-- and ramp. Okay. For Chris or Dean, just on market, we've seen some employment and just some just general conditions, fundamental conditions, ramp in Texas markets and in some Florida markets, obviously, employment, some of these markets being the highlights. And it was showing up in some of the competitor's markets in terms of the revenue. But -- and I see you guys made some progress as well. Can you maybe just elaborate on what you're seeing in Texas and Florida?

Yes, Texas has been historically very strong for us. But it is, again, market by market. So, Dallas/Fort Worth is a market for us that performs very, very well. As we look at Houston, we do well there. Obviously, I talked about El Paso and the challenges that we have there. And we have a smaller presence in San Antonio and Austin that are performing very nicely.

So, there, there's a lot of construction activity going on, particularly in Dallas. A lot of infrastructure work. They were never really hit at all by the recession. Employment there is quite good. The housing market on a relative basis is good. So, we're seeing very, very good performance there.

Florida is coming back. Now, we were less aggressive or on rate there, so we brought rates down. We saw some good result from that, particularly in the Ft. Lauderdale/Miami area. So, we are starting to see good gains in occupancy there. The revenue contribution from that was fairly muted in the quarter, but picked up in July. And we're optimistic that that's moving in a good direction.

And from a same-store revenue perspective, would it be fair to see a little bit of a lag and maybe a sharper pickup in those markets or regions in the back-half of this year?

It would be absolutely fair to see better results in Q3 and Q4 from those regions than we saw in Q2, yes. I think the pace of the recovery in Florida on the revenue side will be a little bit slower.

Okay, thank you.

Todd Stender, Wells Fargo.

Just looking at how the Storage Deluxe assets just closed and some of the other properties. When you kind of layer those in with dispositions, I want to try to get closer to what you think the realized annual rent per occupied square foot is going to look like, you know, call it six, nine months from now?

Wow.

Better.

Yes, that's a -- that's a tough one. (multiple speakers) On a (multiple speakers) --

I mean, if you're looking at $20 rent plus for Storage Deluxe and you're getting rid of $8.00 rents, this looks like it could move.

Yes, the in-place, the ask at $13 compared to $12.26 on the same-store pool, that gap will continue to grow as we bring in those assets in those core markets, and obviously exit more secondary markets. But I can't -- I don't have a sense of an absolute number to give you here.

Okay, thank you. And then, it looks like W. P. Carey had made some acquisitions of self storage facilities, and you guys are going to manage them for them. Can you just share how that relationship was forged and if there's more to come?

Yes. We had been a manager for W. P. Carey since the United Stor-All transaction, which got us into the third-party management business. They were a customer of USSAM. So we have had a very good relationship with them as a third-party manager. And so these are just additional stores going into that relationship. And that's been ongoing. They've acquired assets in markets where we have a presence, and we've been a good manager for them.

Okay, thanks. And Chris, you gave some good color on Florida and Texas, but you did highlight California in some of your remarks. Can you just go into maybe what you're seeing out there? And if it's in the Inland Empire by chance?

Yes, you know, in California, just taking the individual markets where we have a presence, in the Inland Empire and in the -- in our Southern California assets, we've seen 900-plus basis point improvements in occupancy, strong revenue growth -- 4.4% in the Inland Empire, 6.6% in our other, more coastal Southern California assets.

We've got -- we have a great team on the market, in the market in both locations. And that was a -- that was an impact of our system showing that a strategy of being a reducer net reduction in asking rents was beginning to generate volumes that were more than offsetting that price reduction. And we continued that strategy through the summer, and it was very successful for us.

I'll contrast that with Sacramento. Sacramento has 10.5% unemployment. Our assets in the Northern California markets around Sacramento have shown gradual improvement. So, we started the year January, February, and into March, not being able to make much gains from an occupancy perspective or a revenue perspective. Made some pricing adjustments, started to see in June and now in July, some increase in occupancy.

The revenue will follow that, but it is not there today. And so we continue to focus on those markets from that perspective. So for our portfolio, a bit of a tale of the bottom half of the state and the top half of the state.

Okay, thanks guys.

Tom Lesnick, Robert W. Baird.

I'm standing in for Paula. Just a couple quick ones. What was included in discontinued ops during the quarter? Specifically were the seven properties under contract already reclassified?

Yes, we have -- at quarter end, we have one property that is under agreement, that's San Bernardino asset, that all the conditions were met for us to classify that as held for sale. So there was a hard money deposit from the purchaser. And all the other criteria exists, so that that property is moved on the balance sheet and placed into discontinued operations.

Okay. And then I'm sorry if I missed it earlier, but what was the date of closing on that final Storage Deluxe asset?

Yesterday.

Yesterday. All right, great. Thanks.

(Operator Instructions) Okay. As there are no more questions at the present time, I'd like to turn the call back over to Dean Jernigan for any closing remarks.

Okay, no closing remarks. Thank you very much for joining us today. We look forward to seeing you all again soon. Good day.

Thank you. This concludes today's teleconference. You may now disconnect your phones. Thank you for participating and have a nice day.