Extra Space Storage Inc (EXR) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2004 Extra Space Storage earnings conference call. My name is Anne Marie and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr. James Overturf of Extra Space Storage.

Please proceed.

Thank you, Anne Marie. Good afternoon and welcome to Extra Space Storage's third quarter 2004 conference call. With us today are Extra Space Storage's CEO and Chairman of the Board, Ken Woolley, and Senior Vice President and CFO Kent Christensen.

Before I turn the call over to them, please remember that management's prepared remarks and answers to your questions contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

Examples of forward-looking statements include statements related to Extra Space Storage's development and acquisition programs, revenues and net income. We encourage all of our listeners to review a more detailed discussion of the risks and uncertainties related to these forward-looking statements that is contained in the company's filings with the Securities and Exchange Commission, and, in particular, on Form 10-Q for the quarter ended September 30th, 2004.

These forward-looking statements represent management's estimates as of November 22nd, 2004. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

It is now my pleasure to turn the call over to Extra Space Storage's CEO, Ken Woolley.

Thank you, James, and welcome everyone and thank you for joining us on this conference call. The first thing I want to say is that we had hoped to have had this conference call a week ago, but we sort of got tripped up in the analysis of FIN 46 with our auditors, and I'm going to allow Kent Christensen to explain that a little further. In the end, however, we were able to resolve all the issues that sort of tripped us up last week, and we've been able to report our 10-Q and our earnings.

So let me tell you a little about the results. First, let me remind you that it's only been seven weeks since we last spoke. Because of the timing of our IPO, which was completed on August 17th, the third quarter was actually three days from completion at the time of the last call. Therefore, as you might expect, I had little new news about the third quarter that I have not already shared with you in the second quarter call. That said, I do want to give you a view of where we are positioned today with respect to our growing property portfolio, and where we think we are headed.

One important difference in this call compared to the second quarter call is that we have presented pro forma information that reflects the results of the full portfolio of properties, including our recent acquisitions, as if we had owned them for the entire year. In subsequent quarters, the comparison of results will become easier and more robust.

During the third quarter, we completed our IPO and raised approximately $290 million. We also completed all the formation and acquisition transactions referred to in our prospectus. Now that our IPO is completed and we are fully formed as a REIT, we will be able to execute our business plan by operating our properties and growing through acquisition and development.

Let me say that I am very pleased with our property portfolio and our performance. Let me also illustrate that with a few financial highlights before I turn the time over to Kent to provide you with more details

On a same-store basis - revenues for the quarter were 18.2 million, compared to 9.1 million in the same quarter a year ago. And for the nine months, revenues were $43 million, compared with $26.7 million. The majority of this increase was due to the addition of 62 properties to the portfolio over those nine months. Many of those additions were the consolidations or acquisitions of various joint ventures where we already owned a part interest in the properties.

On a same-store basis, our revenues increased 3.3% year to date on 31 properties. Internally, however, we used a larger population of 68 properties that include properties held in joint ventures to do our internal same-store analysis. This group experienced an increase in rental income of 3%, and an increase of net operating income of 4.4% year to date.

Our entire portfolio of 136 properties continues to perform well in terms of occupancy. Our square foot occupancy for our stabilized properties grew from 84.9% at the end of December 2003 to 88.2% over the last nine months. And our lease-up portfolio increased its square footage occupancy from 56.5% to 71.4% over the same period.

We believe this performance reflects the quality and location of our stores and our solid management of these properties. Looking into the fourth quarter and beyond, we continue to see healthy opportunities to grow our portfolio through a combination of acquisition and development.

We currently have six properties, totaling $35 million of acquisitions under contract. We have another nine properties totaling $75 million of acquisitions under letter of intent. The properties under contract are located in California, New Jersey and Pennsylvania, and overlap well with our existing portfolio. We expect to close a total of 12 properties, totaling $89 million, by the end of this year. The balance of about $21 million will be closed in first quarter of 2005.

On the development front, we now have 19 properties under contract, with total expected development cost of $125 million. These properties are located in Arizona, California, Florida, Illinois, Massachusetts and the D.C. metro area. Our development pipeline continues to be strong. This compares to 12 properties, for a total of $70.6 million, at the time of our IPO.

With that, I would like to turn the call over to Kent Christensen, our Chief Financial Officer, who will comment on our financial condition in more detail.

Thanks, Ken. Let me add to what Ken has said earlier about the nature of the numbers that you have been able to look at through our earnings release that was done on Friday, late Friday. Our financial statements covered in this report include the three and nine-month periods ended September 30th, 2003 and 2004. The period ending September 30th, 2004, includes the operations of our predecessor company, prior to the time of our IPO, which is the period of time of January 1st through August 16th of this year.

After August 17th, 2004, the financial statements covered in this report contain the results of the operations and financial condition of Extra Space Storage, Inc., and its subsidiaries for the period from August 17th to September 30th. Due to the timing of the offering and the formation transactions, however, we do not believe that the results of our operations presented in this quarterly filing is indicative of our future operating results.

What we have reported on is the performance of a portfolio that represents 142 properties for the three and nine months ended September 30th, 2004. One-hundred-and-twenty-four of these properties were consolidated, and 18 which were in joint ventures were accounted for using the equity method. This compares to the results for the three and nine months ended September 30th, 2003, which included the operations of 94 properties. Fifty-seven of those were consolidated, and 37 were in joint ventures accounted using the equity method.

The three and nine-month periods ending September 30th also included the results of six properties in which the company does not own any interest in, but which were consolidated because of the contingent liability that the company had on those properties. Five of the six of these properties were deconsolidated as of August 17th, and we expect the remaining property to be deconsolidated in the fourth quarter of this year.

With that, let me provide some brief comments on the third quarter, highlight a few details with respect to our operations and the balance sheet and comment on our view of the future. As Ken stated earlier, revenues for the third quarter of 2004 were $18.2 million, compared to 9.1 for the third quarter of 2003. Contributing to the increase in revenues for the third quarter was the acquisition of 31 stabilized properties during the period, as well as our continued occupancy gains from our lease-up properties, and increased revenues from our existing customers and the reduction of discounts on our non-lease-up properties.

Revenues for the nine months ended September 30th, 2004, were 43 million, compared to 26.7 million for the nine months ended September 30th, 2003, which is an increase of 61%. This increase in revenues for the nine months was due similarly, as for the third quarter, was due to the acquisition of 62 properties and the continued occupancy gains in our lease-up properties, increases on our existing customers and reduction of discounts on our non lease-up properties.

The net loss for the third quarter of 2004 was 5.1 million, compared to a net loss for the same period last year of 3.8 million. This increase was mostly due to the amortization expense of the related customer relationship intangibles on the 62 properties that were purchased in 2004 and the season's cost of 2.7 million. For the nine months ended September 30th, 2004, our net loss was 18.1 million, compared to a net loss of 9.8 million. The increase in net loss is due primarily to the additional amortization expense and a defeasance cost, as previously stated.

I'd like now to briefly review our current balance sheet as of September 30th, reflecting the effect of our IPO on our capitalization. As Ken stated, we raised approximately 290 million in equity in our new equity offering. As of September 30th, we have total debt of 454 million. Currently, the fixed-rate debt to total debt is approximately 76%, and the weighted average interest rate of the total fixed and variable rate debt is approximately 4.59%.

In October, after quarter's end, we entered into a $100 million credit facility, of which 56 million is currently available and 9 million is drawn. We also have 32 million of unrestricted cash, so we feel that we have the ability to meet our short-term growth objectives. As far as outlook is concerned, in our press release, we provided some additional pro forma information for the quarter and for the nine months ended September 30th, 2004.

These schedules assumed that we owned all 136 properties for all of 2004. The FFO per share for the three and nine months was 16 cents per share and 41 cents per share, respectively. It should be noted that during the third quarter, our company had non-recurring G&A cost associated with the IPO of approximately $600,000. We had anticipated a level of complexity and one-time costs in the completion of our formation transactions. Our first full quarter for reporting our performance won't occur until the fourth quarter of this year, which is historically our lowest-revenue quarter.

Given these facts, we remain positive that we will be able to obtain our 2005 projections, due to the strength of our property operations and our robust acquisitions and development pipelines.

Thank you for your attention, and now Ken and I are available for your questions.

(OPERATOR INSTRUCTIONS).

And your first question comes from Brian Legg of Merrill Lynch.

Please proceed.

Ken, what were the total number of properties, again, that you recorded same-store NOI growth that were stabilized that don't show up in this press release. Was it 68?

Sixty-eight, correct.

And just looking at the 31 properties, comparing the third quarter to the second quarter, it looks like you had both a dip in the same-store revenue growth, from 4% down to 2.8%, and expenses went up 6% versus negative 0.9% for those 31 properties. Can you talk about why the same-store performance, it doesn't look as good in those 31 properties in the third quarter versus the second quarter?

The second quarter compared to the third quarter?

Yes, it's the same 31 properties, looking at year over year.

In the third quarter, we had more discounts in the third quarter, Brian, than we did in the second quarter. Those discounts have been turned off, however, so going forward those discounts are being reduced dramatically from what they were.

Okay, and the acquisitions ...

Brian, this is Ken. The rate of growth slowed, and one of the reasons we wanted to give you the fuller portfolio is that when you're only looking at 31 properties and we have 136 properties in the portfolio, it's not a very good comparison when you're trying to do a year-on-year same store. The 68 properties are all in the REIT. Most of them are wholly owned by the REIT, but last year they were in various joint ventures, and so we couldn't do a same-store analysis.

Those properties were up 4.43%. Now, that's for the full year, for the nine months. But just for the quarter itself, they were up 3.23%.

And why the slowdown, again?

Well, there was a slowdown. The rate of increase, if you look at the revenues on the top line, they were only up 2.29% for the quarter and 2.78% for the nine months. It varies quite a bit by region, and I think that the regionality is the more significant story here, and I do have some information by region just to help you just sort of generalize the regions. The NOI, and this is nine-month information, for southern California was up 8.06%. Northern California, 6.14%, Florida, 4.54%. Those are all higher, but where were they not doing so well? Well, New Jersey was up 2.88%. This is NOI, as against the average of the total 4.43%. Boston was down 0.66%, the Massachusetts area. And then smaller areas, where we don't have as much revenues, in New York, Pennsylvania - New York was down 9%, but it only is two properties, so it's not really totally representative - and Pennsylvania was down 4.2%.

So it's a portfolio thing, and you can really see how right now northern California, southern California and Florida are really leading the NOI, whereas New Jersey is doing okay. It's a little bit of a laggard, but New York and Massachusetts are definitely laggards, and Pennsylvania.

Brian, this is Kent. One more comment about your question about expenses. In the third quarter, we added to all of our Florida properties wind insurance on all of our properties there, and that's why there's an increase in our insurance line item that makes a big component of the 6% increase.

Fortunately, that was done before the hurricanes.

That's correct.

Unfortunately, we didn't have to use the insurance, though, because the hurricanes actually didn't damage any of our properties. So it was good foresight, but it didn't really help us, particularly, because we didn't get hurt.

Now, just looking at a run rate for the quarter, is there anything else going on in the quarter other than the 600,000 of G&A sort of formation transactions, G&A that you should sort of strip out to get a real run rate for the quarter? And can you also talk about the NOI impact from your lease-up properties that were in the quarter that you hope to grow to a higher number by the end of '05?

There was one run rate thing that we probably missed in the pro forma, and that is that we're earning about 2% interest on our $32 million in cash, and the interest expense also includes interest on $9 million on our line of credit that was drawn and was pro formatted in as interest expense, but has now been paid off. And so our interest expense on a pro forma basis should be just a little bit lower in terms of where it is, and our interest income should be just a little higher. I think it makes about a $250,000 delta on a pro forma basis.

So you have the one-time G&A, and then you have the other item. With respect to operations, in terms of our own internal accounting, our own internal forecasting and budgets, we've been right on pretty much on budget, very close to budget, on our stabilized portfolio properties, properties that we've managed, and all of our lease-up properties, including the CCS properties. Our internal budgets, however, did miss on the acquisitions that we did early this year in February, which are included as part of the same-store analysis, and we're off on those in terms of our internal budgets for the year by $600,000, $700,000.

However, we've kind of caught up. We had a very good October and good November on those properties, and all of our properties, and on an internal budgeting basis, we're right on in the first quarter - the fourth quarter. So, if you look at property operations themselves, we're a little shy in that one area.

Okay, and you said the CCSs were in line the ...

We're right on budget.

They're right in on budget. Do you know what the NOI contribution was this quarter from those properties?

We don't have that.

We don't have that right here. We'll have to get back with you on that, Brian.

And last question, cap rates on your acquisitions, 89 million in the fourth quarter, and I guess the 21 million in 1Q '05?

The cap rates on those acquisitions are between 7.3% and 8%, where the 8% is only about 20 million of the total, and the rest are down in the mid-sevens. Now, that's on a where-they-are-today basis, either backward-looking or forward-looking. The forward-looking cap rate we think is just a little bit higher.

And you talked about when you did the IPO, you thought you could acquire things at 8%-plus cap rates.

Brian, I think I have to say that as we've been out very actively bidding on properties that we will be able to buy a few 8%-plus cap rate properties, but the reality is the market's down in the mid-sevens, low to mid-sevens. That's where it is right now, as we've gone out and tried to put things under contract and made bids and offers on things.

Okay, all right. Thank you.

Thanks, Brian.

And your next question comes from Brett Johnson of RBC Capital Markets.

Please proceed.

Hi, good morning - or good afternoon, guys. A couple of quick follow-up questions on Brian's question. First, on the discounting. Did you say that the discounts were up in Q3 and then down in Q4 so far?

Yes, that's correct.

Can you explain a bit just generally your discounting strategy, and why discounts would be down in a seasonally stronger period - I'm sorry, up in a seasonally stronger period and then down in a seasonally weaker period?

Well, first of all, the discounts, we had a number of our properties where we were offering discounts to compete with what was going on in the marketplace. As those properties got to levels of occupancy that were acceptable to us, we then turn our discounts off, and so what you have is discounts occurring in some properties for a period of time and then being turned off because our occupancy levels are where they need to be.

So, that's - I don't know if that kind of answers your question, but it's something that we manage on a monthly basis based on where the totals are.

And it's at a property by property basis, I assume?

That's a unit size kind of calculation based on every type of size of unit in every property.

Okay, so discounting, then, I guess in November has been lower than in the third quarter.

That is correct. Now, one point. I think Brian's question was regarding our revenues in total are stabilized. If you look at our discounts on our stabilized properties from year to year, they're down, but our discounts on our lease-up properties are up.

Okay, great. A couple of quick questions, too, on the acquisitions. Acquisitions that you guys are talking about, so the 89 million you already commented on cap rates. Are these stabilized properties? Are these lease-up or kind of later-stage lease-up properties?

Two of the properties are stabilized. There's 12 properties in that group. And actually three of the properties are stabilized. The balance we would call stabilized, but they're just barely reaching the end of their lease-up. They're basically fairly new properties that are just now getting to stabilization, so we think there's some opportunity in nine of those 12 properties to be able to increase income as the properties sort of further stabilize.

Are you using OP units for any of these transactions?

No, there's no OP units involved in any of these.

Okay, and then last question is just on the difference between - or, if you could reconcile your actual interest expense and then the pro forma interest expense for the quarter? In the third quarter, there was about a $4.5 million difference. Is that primarily just a defeasance cost?

That's primarily defeasance and also making the - again, the pro forma is as if we had obtained all of the debt on January 1 of this year, which obviously we didn't do that. So that $4.5 million adjustment is mostly a calculation to bring the interest expense to a level that as if we were to have gone forward from the day forward, that's what the interest expense would be.

I think if you do the ...

And it includes the defeasance, also.

If you do a quick calculation of our average interest rate, 4.59%, times the amount of debt we have, you'll notice that the interest expense in the pro forma is very close to that number.

Right. Great, thanks very much, guys.

Thanks.

And your next question comes from Rick Murray of Raymond James.

Please proceed.

Good afternoon, guys. I was just curious if you could follow up a little bit on I guess the occupancy question. Considering that your comments with regard to feeling that occupancy was where you wanted it or felt it was kind of a normalized level, does that imply that we should expect occupancy levels to stay fairly flat from where they are right now going forward?

No, our business is a seasonal business. We expect - in our stabilized portfolio, we expect occupancy declines in the fourth quarter, going through to the middle of February. Then the occupancies will come back up. Now, I think the occupancy on the stabilized portfolio was, like, 88.6 as of the end of September. It's probably less than a half percentage point lower today than it was at the end of September, and I would guess it would decline another 200 basis points on the stabilized portfolio into the February timeframe. It will be higher than it was last December. And then we expect it to go on up, so I would expect next summer that we'll be - instead of hitting sort of the 88%, 89%, we would be in the 90%, 91%.

But once we get up into that 90% or 91% occupancy level on a portfolio basis, it means we have a lot of properties that are up in the 95%, 96%, 97%, where we're pushing rent in order to increase income, and that tends to push down the occupancies. So it's sort of a management thing of pushing rents when things are strong, doing discounting when there's a little bit of weakness. And I can tell you that on an occupancy basis, New England and New York are weaker than California and Florida right now. Our strongest markets are Florida and California, and our two weakest markets are New England, and probably New York. New Jersey is sort of in between.

Okay, thanks. I guess following up on your last statement there, regarding Florida, I was curious if you could quantify any impact that the hurricanes have had recently. I know we've spoken with many people who have attributed at least several hundred points of occupancy to the impact from the hurricanes in Florida.

Well, I don't know if we have several hundred points. I think we have 13 or 14 properties in Florida.

Fourteen.

Fourteen - and we can identify four of them that have had considerable occupancy gain as a result of the hurricane. The hurricanes were very neighborhood-oriented. For example, our properties in Miami area saw nothing, but as you get up into West Palm Beach, we did see occupancy gains. And our property in Orlando saw gains, but other properties in the west coast of Florida didn't get hit by Hurricane Charley as hard. So it's a little bit spotty for us. We did see some gains. Probably overall in Florida, we picked up 150 basis points over the whole portfolio, but certainly nothing more than that.

We didn't by the way have any substantial problems in terms of losses as a result of the hurricane.

Okay, thanks, and Paul Puryear's here with me. I think he's got a couple of questions as well.

Yes, hey, Ken.

Hey, Paul.

Hello, Paul.

Yes, a couple of things. On the NOI for the quarter, in the pro forma statements for the three months, if we take the 20.6 million of revenues and then back out the expenses of 8.1, the NOI would be 12.6. I guess our question is, you talked about 600,000 or 700,000 of disappointment, I guess, from the acquisition run rate. Should that be added to that number to get a run rate going forward?

Yes, it should.

Am I looking at that correct? So, other than the seasonality and sort of the attempt to grow the NOI, that's a good base to start from?

I think so. Yes.

The other thing that's going on, also, is that in the fourth quarter, we still will have some income gains from our lease-up properties from the third quarter. In other words, the whole thing isn't stabilized. So you have sort of a mix of things going on.

And then you've identified 600,000 in G&A and another 250 of interest expense or income that should show up in the fourth quarter. Is that right?

That's correct.

That's correct.

So another 850 there.

Paul, the G&A, remember, that's a one-time thing for this quarter. It will still be in our yearly number, but it won't be in our quarterly run-rate number. It was attributable to our IPO.

Yes, so the quarter should be more like 2.3 million as opposed to 2.9 million.

I'm not sure we're going to get all of that $250,000 in interest, because we didn't pay off the one $9 billion loan until about the first of November, and so we'll get part of that. We won't pick up all 250 of it.

Right.

But on a going forward from November 1 we pick it all up.

Yes, okay, got you. And then one more question about cap rates, the 7.3 to eight that you quoted. I assume that those are GAAP, and also, could you comment on how the management fees are treated in that?

First of all, they aren't GAAP. They're internal estimates of how we view cap rates, and how we view cap rates is as followed. We take backward-looking revenues - if the property is stabilized, we look at the revenues for the last 12 months. We subtract from it the operating expenses, including expenses that we would have to pay on a pro forma basis. In other words, if their payroll's too low and we know it's going to cost more to manage it, we put our payroll number in. If the property taxes are going to go up, we'll put our property tax number in. This very often happens.

With respect to management fee, very often, properties have no management fee. We put in a pro forma cost to manage that runs anywhere from 3% to 4% as part of the operating cost in order for us to come up with an internal cap rate. And we do not include in that number cap ex expense.

Okay, but effectively it's cash before cap ex.

That's correct. It's pro forma cash before cap ex that we expect right where we are today. Now, that doesn't mean that we would - in many cases, we will pro forma a higher number for the coming year for the property, but we don't think that's fair to say that that's an acquisition cap rate. A number of these properties, we're just finishing lease-up, and in those, we're looking at the last three or four months of revenues, rather than the last year of revenues to get a cap run rate - to get an acquisition run rate if they've been in the last stages of lease-up.

So we would hope most of these for next year would be in the high sevens.

Okay, great, thank you.

(OPERATOR INSTRUCTIONS).

And your next question comes from Paul Adornato of Maxcor Financial.

Please proceed.

Hi, yes, thank you. I was wondering if you could quantify Sarbanes-Oxley-related costs, the one-time costs and also kind of the ongoing expense, and I was wondering if that's been reflected in your guidance for next year?

Thanks, Paul. In our numbers that we've presented historically, there are very little Sarbanes-Oxley-related expenses. There is some. Extra Space is not required to be 404 compliant until the end of next year. We have initiated the process of starting our 404 compliance with a company that we have retained and we're going through the evaluation process of that. Already, we will have better knowledge early next year as to what the extent will be for us to become 404 compliant.

At this point in time right now, we're unaware of what the full magnitude of that will be. That being said, Extra Space has had a pretty good organization and been an organization that has built in lots of controls into our processes through our software and the people that we have. So we are hoping to minimize the effect of the 404. We know that there will be something, but we're going to do our best to minimize the effect of that on our company.

We're hoping to have that process, the evaluation, completed by year's end, start the process of designing the controls and procedures and have all of those in place by mid next year, and then allow our auditors to test that process the middle of next year so that we can make sure that we can comply with the requirements and be compliant by the end of next year. We've kind of outlined our process and how we're hoping to get to that point.

Right now, as far as guidance for next year, hopefully, by the time we report our 10-K, we'll have better information for you, Paul, as to what the extent of that remediation or cost might be.

OK, thanks. And looking at the pro forma revenue per occupied square foot, can you talk about the gap between the stabilized and the lease-up properties? It was my understanding that you were going to be building kind of the same dense infill. Maybe you could talk about how you expect those revenues to age as the properties mature?

Yes, the biggest difference between the stabilized and the lease-up Paul is that as the calculation that is made is actual revenues collected, which then implies discounts given. And on all of our lease-up properties, we are doing substantial more discounting than we do on our stabilized properties. So when you add the discounts into the calculation, it brings down the effective rate of the rent per square foot on those properties.

We believe that as the properties that we have that are leasing mature, that they will get close to the number that is our average of all of our other properties as the discounts burn off and as the properties get into a more stabilized occupancy level.

If I can just add a little more to that, and that is if you look at our reset properties, there is a mix between what I would call suburban, single-story, drive-up, lower-rent type properties and urban, infill, high-density properties. So the mixture is going to end up being in the 13.50 (ph) range when they're stabilized, but there are a number of these properties that are higher than that, up in the 15, 16, 17, and there are some down in the $10, $11 range. To make up the average.

And given kind of the tightening entitlement process, do you still feel comfortable that you'll be able to do more of the infill development going forward?

I would take if you look at our 19 properties that are under contract right now, I'd say about 75% or 80% of it's the infill type.

OK, thank you.

Thanks, Paul.

(OPERATOR INSTRUCTIONS).

And your next question comes from Kent Green of Boston American Asset Management.

Please proceed.

Yes, I had a question about when they become stabilized properties, what kind of rev increases does the market usually tolerate on an annualized basis?

Well, first of all, the market in the last two years hasn't tolerated very much rental increase at all. We are just now getting into the stage where we can do more substantial rental increase. To give you an idea, on our stabilized property portfolio, we increased overall, if you look at all the properties in our whole system, we increased our street rents 4.8% this October over what they were early in October. And that's substantial, and that's really because the market's been strong. Normally, we wouldn't be increasing rates until in the sort of February/March timeframe and getting ready for spring. And so right now, we're hoping that we can see rental increases above 5%.

When properties first stabilize, and I'm talking about when they first get to 90% occupancy after they've been in lease-up, there is usually a pretty good opportunity to bump revenues, to a greater degree than if something is mature and it's four, five years old. And the reason for that is the fact that a lot of people may have come in on discounts, and you can start sort of weaning them out and bringing in more permanent tenants. Also, we have found that as a property stabilizes, the amount of turnover in the tenants slows down, and this is due to the fact that over time, a greater and greater portion of your tenants become what I would call quasi-permanent tenants.

And as that slowdown in turnover happens, it means that in order to attract enough tenants to replace the moveouts, you don't have to do anywhere near as much promoting, and you can charge a little bit higher price. And so we have seen, in our properties, as they first lease-up, the opportunity for rents to go up at a little faster than normal rate during that first I would say year and a half to two years after stabilization.

And then I wondered if you would address a question of Dean Jernigan resigning. I understand that he resigned for another opportunity, but will you replace him with somebody of comparable experience, or is that hard to find?

Well, we plan to replace Dean. We haven't yet. We've talked to a few people and we are in the process right now. Our nominations committee chairman, Roger Porter, and I are working together on trying to find a person, and we expect to find someone as competent as Dean.

Clearly, however, Dean had a unique ability and knowledge because he was the CEO of Storage USA, which was a public company in our storage area. And, frankly, I miss having Dean here. I would very much like to have Dean. He would have added a lot on our board.

It became pretty clear - Dean started a new venture with his son, called the Jernigan Property Group, last spring. I think he initially felt that it may not be competitive with Extra Space, but as sort of time went on, it appeared that it could become competitive and felt that we didn't want to get in any kind of conflicts of interest. And he actually called me two days before our first board meeting and said, I'm not sure it's a great idea that I remain on the board, and so he left, and I feel very badly. He's a good friend and he has a tremendous amount of experience, and we appreciate him a lot.

Finally, any thoughts about geographical acquisitions or expansion, given your comments about the Northeast being a lot weaker and the strength being in California and Florida, where obviously housing starts and markets are much more robust than up here in New England?

Well, if you're in New England, we're probably not going to be acquiring a lot of New England. Because we have a strong portfolio there now, we hope that New England and expect that New England's economy will sort of rebound, but we will however be acquiring properties from New Jersey all the way to Florida, and also in California, and those are the primary markets we're looking at.

A number of the - New Jersey's been a pretty good market for us, and if you look at our pipeline right now, it's sort of New Jersey and Florida-centric at this point. We have one property in California. We're continuing to look for opportunities in California. One of the problems with California is that cap rates are lower in California, and in terms just of cost of capital, it's pretty tough for us to sometimes compete, to buy properties in California. And very few properties are being sold to any public entities in California because of that, although we are developing quite a bit in California, so our portfolio will continue to increase there because of development.

How long does it take to develop a property, roughly?

I'd say the average time from the time we look at the property until we get a title in is about 1.5 years, and sometimes it's done in a year. They take about eight or nine months to build, and they take about three years to lease-up.

Thank you.

Thanks, Kent.

You have no other questions at this time. I'd like to turn the presentation back to Mr. Ken Woolley for closing remarks.

Well, thank you, everybody, for coming and listening to our call. We're sorry that it was delayed for a week. We're expecting a good fourth quarter, and we appreciate the support all of you have given in participating as shareholders and analysts. Thank you very much.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.