Extra Space Storage Inc (EXR) 2004 Q4 法說會逐字稿

Good afternoon, my name is James and I will be your conference facilitator today. At this time I would like to welcome everyone to the Extra Space Storage, year-end earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers remark there will be a question and answer period.

[Operator Instructions]

Mr. Overturf, you may begin your conference.

Thank you James. Good afternoon and welcome to Extra Space Storage's Fourth Quarter and Year-End, 2004 Conference Call. With us today, are Extra Space Storage's CEO and Chairman of the Board, Ken Woolley; Senior Vice President and CFO, Kent Christensen and Scott Stubbs our Senior Vice-President of Accounting.

Before I turn the call over to them please remember that management's prepared remarks and answers to your questions contains forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward looking statement 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 operating income. We encourage all of our listeners to review a more detailed discussion of the risk 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 10K for the year ended December 31, 2004.

These forward-looking statements represent management's estimates as of March 15, 2005. Extra Space Storage assumes no obligation to update these forward looking statements in the future because of changing market conditions or other circumstances. With that it is my pleasure to turn the call over to Extra Space Storage's, CEO Ken M. Woolley.

Thank you James. Welcome all of you to this conference call. I am happy to have the opportunity to talk with you about our year-end results. 2004 has been a year of many accomplishments and many challenges for our company. Extra Space Storage is more than 25 years old but has seen more changes this year than in any year in our history.

On August 12th we completed our public offering which along with the exercise of the underwriters over allotment options brought in 290 million of new equity to the company. We were able to complete the acquisition of 44 properties this year for a total purchase price of 243 million. Four of these properties were purchased in the fourth quarter for a total price of 26 million.

We were also able to acquire our joint venture partnership interests from our joint venture partners in 22 additional properties. In addition, we opened 9 new development properties. We finished the year with an122 wholly-owned properties, and 18 joint venture properties located in 20 states. Since the end of 2004, we have purchased an additional 7 properties, for a total price of $58 million and opened 3 new developments.

The fourth quarter of 2004, is the first full quarter we are able to report as a public company. Most of the comparisons between 2004 and 2003, however, are not very relevant because they do not compare like portfolios. We will therefore attempt in this conference call, to shed more light on same-store performance of our portfolio.

The occupancy of our stabilized 111 properties was 85.4% at year-end, exactly the same occupancy as the year before. Many of these properties were not owned by Extra Space a year ago. Top storage is a seasonal business, particularly in the Northeast where many of our properties are located. Occupancy of this group of 111 properties peaked last summer at approximately 90% during the peak rental season. And we expect a similar pattern this year.

For lease-up portfolio of 29 properties, occupancy increased from 57.1% at the beginning of the year to 69.7% at the end of the year. Since our portfolio is made up of the combination of wholly-owned, joint venture owned and stabilized lease-up properties, I'd like to talk about our portfolio in a more understandable format.

The first group of properties is a portfolio of 31 stabilized, same-store properties that are not in joint venture and can truly be analyzed on a same-store basis. In that portfolio, revenues were up 3.5% in the fourth quarter versus last year and 3.4% for the full year. These properties had 0.7% increase in NOI for the quarter, and a 3.7% for the year. Occupancy year to year was essentially flat.

However these 31 stabilized properties are not all the stabilized properties we have, that we operate in our portfolio. A better measure for stabilized properties review is 67 properties which we have owned either in joint venture or wholly-owned, for at least 2 years, and have been stabilized for at least 2 years.

These include the 31 stabilized properties plus an additional 36 other properties which are not specifically measured in the 10K or in the press release. On these 67 stores, both quarter to quarter and year-on-year, NOI growth and occupancy growth was similar to the group of 31.

Recently this larger group of properties has shown promising growth on a month to month basis. The 67 same-store portfolio has see year-on-year revenue growth of 4.1% in December, 3.9% in January this year, over January last year, and 4.3% in February. Revenue growth continues to be even stronger as March continues. These growth rates are around what we hoped for during the rest of 2005.

The third group of properties is the 29 properties in lease-up. These properties will provide a significant amount of growth in revenues and the NOI in the future. Right now the lease-up portfolio average is 69.7% in occupancy as of the end of the year up from 57.1% at the same time last year.

The last group of properties are the 14 CCS/CCU properties which were part of the group of each 29 lease-up properties. This portfolio was 57.5% occupied as of the end of December 2004, up from 36.4% at the same time in 2003.

The pipeline we were working on in the fourth quarter has resulted in the acquisition of 7 more properties in the first quarter of 2005, on additional 58 million. We bought 1 in California, 4 in Florida, 1 in Georgia and 1 in New Jersey. All of these properties complement our existing portfolio in terms of quality and locations. The properties that we acquired as part of our IPO transactions from storage pod have performed much better than we forecasted.

On the development front we expect to open additional 13 properties this year and 2 expansions, 5 of these new properties will be owned by the REIT and held in a joint venture format and will cost approximately 27.2 million in total development cost.

Our pipeline for opening in 2006 includes 12 properties, for a total development cost of 97.9 million. We expect to have additional properties for 2006, as the 2005 year continues and we get more properties into the pipeline. Constructions for these properties will begin in 2005. All of our development properties will be owned by the REIT in a joint venture format.

We recently welcomed a new member of Board of Directors, Mr. Joe Margolis. Joe comes to us from a company called Arsenal Capital where he has just formed a new venture with 2 other partners to do money management and asset management in the real estate field. Before forming his own company, Joe had been with Prudential Real Estate Investors for 12 years. We had worked with Joe on the other side of our joint ventures, during the past 6 years as we work with prudential and have found him to be a very bright capable, knowledgeable person in real estate as well as in finance and law. Joe is a lawyer by background.

We are very happy that Joe has joined our board and we look forward to working with him closely. With that I would like to turn the call over to Kent Christensen, our CFO, who will comment on our financial condition on more detail.

Thanks Ken. The financial statements covered in this report include the quarter and year-ended December 31, 2003 and 2004. The year ended -- the year ending this December 31, 2004 includes the operations of our predecessor company, prior to the time of our IPO, which is the period of time from January 1st through January 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 and its subsidiaries for the period from August 17th though December 31st.

What we have reported on is the performance of the portfolio that represents 147 properties for the quarter and the year-ended December 31, 2004. 128 of these properties were consolidated and 19 were in joint ventures, were accounted for using the equity method. This compares to the results for the quarter and year-ended December 31, 2003, which included the operations of 94 properties, 57 of those were consolidated and 37 were in joint ventures accounted for using the equity method.

The results for the quarter and year-ended December 31, 2004 include the results of 6 properties in which the company did not own any interest and one where the company sold its joint venture interest in 2004. Here are some of the details about our fourth quarter, 2004.

Revenues for the quarter were 22.9 million compared to 9.6 million in the fourth quarter of 2003. Property net income was 13.2 million compared to 5.1 million for the same quarter last year. These increases were due to the acquisition of 44 stabilized properties and the purchase of our partners' joint venture interest in 22 properties for a total of 66 total additions during 2004.

Increases in revenue to new -- in addition to the acquisitions there were increases in revenues to new and existing customers as well as progress on our lease-up properties.

During the quarter the company saw continued quarter-over-quarter revenue growth, and consistent levels of occupancy, in the 111 stabilized properties, which were stabilized at an average of 85.4%. California and Florida remained our top performing markets, while Pennsylvania continued to lag. The company saw occupancy and revenue growth in New England during the quarter, which reversed the negative trend of previous quarters.

Discounts decreased substantially in the quarter ended December 31, 2004, as compared to the same period in 2003.

Revenues for the full year ended December 31, 2004, were 66 million compared to 36.3 million, for the 12 months ended December 31, 2003. This increase in revenues for the 12 months was due to the acquisition of these 66 properties and the continued occupancy gains in our lease-up properties increases in our existing customers and reductions of discounts on our non-leased properties. Property net income for the full year rose from 18.2 million, to 36.6 million, for 2004.

Our G&A expenses for the fourth quarter were 2.8 million after netting development fees. Extra Space Storage had projected and anticipated the capitalization of our acquisition department expenses. However after additional research, we have determined that these costs should be expense. This effect will -- this change will effect our 2005 G&A costs. We had expected on quarterly amount of G&A -- I'm sorry -- our quarterly amount of G&A costs had expected to be 2.3 million. But we now expect that number to be 2.5 million, for the quarters in 2005.

On our same store properties, we had increases in insurance, because we had added hurricane insurance on our Florida properties, early last year. Our property taxes were adjusted in the fourth quarter to bring the accruals to actual. This caused an increase in our fourth quarter same store expenses to be up 9.6%. But for the year we were up only 2.7%. We expect an increase in our 2005 same store expenses to be in the range of 3% to 4%.

As to our balance sheet as of December 31, 2004, our outstanding debt including the 39 million drawn on our line of credit was 473 million. Currently the fixed rate debt to total debt is approximately 59%. The weighted average interest rate is 4.70 for the fixed rate loans and 4.19 for the variable rate loans. The total weighted average interest rate of all fixed and variable rate loans was 4.52%.

As of December 31st, we had 63.5 million, available under our line of credit with 39 million drawn. Our debt to market cap ratio at the year-end was 52.23 and our debt service coverage ratio was 1.98 times EBITDA.

Extra Space Storage is clearly well underway in the documentation of our internal control processes as required by Sarbanes-Oxley. We have, we expect to have the documentation testing completed by the end of the third quarter. The G&A costs that I spoke of a few minutes ago, include the costs of our Sarbanes-Oxley compliance.

As expected, our funds available for distribution for the quarter were not sufficient to meet our dividend. We continue to expect to increase our revenues so that we have an -- a FAB payout ratio which meets our dividend requirements by the second or third quarter of 2005.

As recorded in our press release, our quarterly FFO per share was $0.13 and on a yearly pro forma basis was $0.55. Because of the changes of our treatment of accounting acquisition department costs timing of actual and potential acquisitions, lower than expected cap rates on our acquisitions and the higher than expected expenses on our CCS, CCU properties Extra Space Storage expects our FFO per share for 2005 to be between $0.87 to $0.91 per share.

Now let me turn back to Ken who has a few more comments.

Thanks, Kent. As I said, we were busy during the quarter. We made some progress and we faced some challenges. We are pushing ahead and making big plans for the future.

So let me give you our view of Extra Space Storage, for 2005. We are very bullish about the self-storage business. It is a great business to be in. There are many positive trends in our country right now. Storage demand, clearly follows the growth in the consumer society. Our portfolio is located approximately -- mostly on the east and west coasts, where incomes are highest and where the growth of incomes are highest. We expect that this year with a good economy there will be a increase in demand for our product.

Storage is one of these businesses, which has become part of the mainstream of our society, somewhere around 6% to 8% of all people in the U.S. today, are using storage units. Why? Because ewe have too much stuff. Most of us have too many material goods. And we don't seem to want to give up the habit. And so, what's going on in our country and in our, particularly in the stronger economic regions of our country is, as people become more affluent, they have more things, they can't get rid of them. And they end up storing them, with Extra Space or one of our competitors.

We have seen recently, and particularly in the last 4 or 5 months, much more ability for us to raise prices. I think those who are up-to-date with the other public companies in our field, will also recognize that we are not the only ones in this position. We've all been able to raise our prices. We are happy with this result. At the same time, the actual supply of new storage properties has decreased. And -- meaning the rate of building of these storage properties has decreased. This bodes well, frankly for the future, of increases in the income and occupancy in our properties.

The cap rates for storage properties have gone down. Meaning values are out. We had hoped to be able to apply our properties in the range of an 8% cap rate. We are not able to do that. At least the quality properties that we would like to own. As a result, our acquisitions are looking more like in the low 7s. Fortunately interest rates have popped up, they haven't popped up so much, so that we can't have a positive result by acquiring properties on that basis.

The good thing though, is that there are a lot of operational opportunities for new properties because of the positive market dynamics. So, we are on our way in 2005 to continue to acquire more properties. We have lofty goals for this year. We have a number of things in process. And we are hoping that -- and in the future our development activities will start adding to our FFO. But right now, we will opening a few properties this year and quite a few next year. But they won't significantly really affect our FFO until the year 2007.

Beyond that however, we believe that a constant growth of development properties is an important mix to keep the quality and location of our properties the best we can. So we are happy that we have many good shareholders in support of us, and we appreciate the support we have been given. And I'm now for any questions that you might have.

[Operator Instructions]

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

I''ve just got a couple of questions from some of the line items on your income statement. The interest expense, the 6.5 million that does seem high relative to the average interest rate balance was, for the fourth quarter. And also G&A you said it's 2.5 million per quarter; it was well above that in the fourth quarter. Can you talk about those two line items?

Brian, this is Scott Stubbs. The interest expense -- we actually didn't actually complete the payoff of all of our loans until end of the third quarter. We also, obviously for the year, there was quite a bit of defeasance on those loans. As far as the G&A cost go, we feel like our run rate is going to be in the $2.5 million range. The fourth quarter had some not some abnormal items but some items, which we don't feel like will be reoccurring in regards to some acquisition costs.

Some of our, Brian too -- let me add a little bit to that, Brian that in our acquisitions department, we pay bonuses based on completed transactions. What occurred in the third and fourth quarter, those bonuses were paid in the fourth quarter. That's why it's unreasonable -- abnormally high.

Thanks. And can you keep talk about your discount program. You said that the discounts are lower this year versus past year. I believe you started really reducing your discounting, going into the seasonally softer months, which is certainly a different approach than maybe others would take. Can you talk about what's going on as far as far as the occupancy rate quarter to quarter? And whether you are able to remove a lot of your discounts and continue with a fairly strong occupancy rate?

This is Ken. Let me, kind of, take that. We decreased discounts because we saw a stronger market. Also during the fourth quarter we raised prices, across the board and are stabilizing in some of our leased properties. For the first time in our history, and those price increases are now coming into effect in January, February and March, we were able -- we also reduced discounting and had no negative occupancy effect. Our occupancy year-on-year is almost exactly flat than the previous year. So what we are trying to do is sort of reduce discounts to increase revenues without reducing occupancy.

Its during this time of the year, both the fourth quarter and the first quarter, it's hard to do much promoting to cause anything to happen in our business, because of the slow amount of natural traffic to the stores. We will be doing more active discounting and promoting particularly in our lease-up properties as the spring continues. We will be beginning in about 2 weeks.

Can you, sort of, talk about in general terms, I mean, your average rental unit what -- versus a year ago what type of programs are you going to be using? Is it like the dollar for the first month or are you using no discounts whatsoever on your average unit right now?

This is going to be highly variable by sight and by location. We will be using discounts which is $1 per unit, in some locations. In other locations, we'll be using other types of flyers or 50% off the first month. And in other locations we will not be doing, using heavy promotions because of much heavy occupancy.

And I'm just trying to think of year-over-year just comparing last year versus this year, I mean would you say the average discount is half of what it was a year ago at this exact same time?

I've got the number for that, yes, I've got the number for that, Brian. Compared to 2003, our discounts for the fourth quarter were 14% below the amount in 2003. And for the year, we were 11% below, that's for our same store 31 properties. On our 67 properties that Ken spoke of, those numbers are 25% below for the quarter and 17% below for the year.

And would you expect to see that for all '05 again? I mean, so in other words, the first quarter and the second quarter of '05, you expect another 25% haircut on the discount?

Yes, we would because we are seeing that, as Ken stated, we are seeing continued demand for the product without having to give discounts to get that demand.

Now at the same time you rate your street rents?

Absolutely, we did.

By how much?

And our street rents and these rents to existing customers ...

... We have raised rents, our street rents raises have been in the range of 4% to 5% on average. And our customer rents have been in the range of 6% to 8%. And that's ongoing. And we are quite aggressively raising rents currently.

So let me just tie that back to your 4% to 5% NOI growth. Why then, if expenses are only up 3% to 4% and your rents will be up more than 5%, why only 5% NOI growth.

The reason for that is that, if we have been too aggressive on raising street rents, or rents to the public directly. We could have suffer in-occupancy. So, we would be very hesitant to give you revenue estimates of 6% or something like that. So what happens is, this is a fairly -- we are raising rents fairly aggressively right now to our existing customers.

If we don't have a backlash that will be a good result for our company and we will have higher revenue growth. If we do have a backlash, we may have less occupancy from the end of May than we thought we would. And that could affect it. So therefore, that's why we are hedging in terms of not wanting to project higher NOI growth between 4 and 5.

OK, thank you.

Thanks, Brian.

Your next question comes from the line of Ross Nussbaum with Banc of America.

Everyone, good afternoon. I'm here with Christine McElroy. I got a couple of questions. First on the operating expense line, you talked about there being a real estate tax throughout in the fourth quarter that brought the number up on the expense side. Can you quantify what that was?

What the -- what the operating -- what the tax, how much it was?

How much the true up was, right. Because you had a true up in the fourth quarter that is going to be recurring?

Right, that is about $100,000.

OK, so not too off the chart. OK.

No, it wasn't. That's why, that's all that was the unusual amount in the fourth quarter comp.

OK, and on the G&A line, I was a little curious. Your comments on the acquisition bonuses in the third and the fourth quarter. Why wouldn't those be recurring if you are going to be acquisitive?

They will. They could be, they will be a reoccurring for what happened in 2004, was that for the middle 6 months of the year, we effectively put on hold our acquisitions strategy while we are going through the IPO, and bunched all of that into the latter part of the year. So as opposed, the number for the whole year was about what it should be, but what you had at the real bunching of that number in the fourth quarter. Going into this next year, we expect that to be spread out over the whole period of time.

OK, makes a little more sense.

On your occupancy numbers Q3 to Q4, obviously it was down sequentially but is a seasonal issue. But it looks like occupancy fell off more than I expected. I'm just curious, where it was relative to your expectations?

It was exactly where we had the year before. It was what we had expected. In fact with the increase in rental rates and increase to some of our customers, we'd actually expected a little more of a drop off. The fact that it stayed up and was exactly the same as the year before, we were very -- we felt that that was very positive.

It just seems to me that your occupancy fluctuations in terms of season are a bit stronger than from your public peers?

But some of our public peers we are not so highly weighted in the northeast of the United States, either. If you look at for example, the public storage, they are much more rated to California in the South, than we are. And so you have a difference in the seasonality of the occupancy, by region. It's much more stronger in New York and New England, than it is in Southern California, or Florida. It is almost non-existent in Florida.

That makes sense. This is an accounting question, but the amortization of intangibles, can you explain why that number was what it was in the fourth quarter in terms of the add-back to get to FFO was up. I think it was up pretty substantially from the third quarter. And I guess maybe a tie in there as your real estate depreciation has been jumping around quarter-to-quarter as well. Have you been changing accounting policies there?

Ross, this is Scott. We have not changed accounting policies. We use straight-line for our real estate depreciation. As far as the amortization of intangibles, what is that is it's the customer relationships. When we buy a property, we allocate a portion that is equal to 2 months rent to these intangibles. That's just part of the accounting treatment that's required for the acquisition by the SEC as well, as the accounting rules.

We then amortize those over 18 months. Which is what we term to be the average length of stay. We have a large number of acquisitions that took place halfway through the third quarter, towards the end of the third quarter. We bought 26 properties; those are then going to be amortized over the next 18 months. So you had a lot more intangibles amortized over a short period of time.

OK. And then a follow-up question is I want to make sure I was reading this right in the press release. Did you swap fixed rate debt over the variable?

We did. That was in our prospectus too, if you look. That particular swap was contemplated at the time we went public.

OK, so that's not anything new,

No, that's nothing new. It was something that we did right after the public offering, and it was part of the prospectus.

OK. I just thought it may have been a new transaction. How comfortable are you operating with 40% of your debt floating? Seems like a high number, in a rising rate environment.

Well ...

... No, go ahead, Ken.

Right now today, we fixed more of our debt recently, with some of the new acquisitions we did. And right now today we are 64% fixed and 36% variable. Our target frankly is 70/30. We are in a rising rate environment.

But if you look over the long term, it's our philosophy, and I think the markets would bear me out, that in the long run, variable rate debt is frankly less expensive than fixed rate debt. And we feel that having some portion of our debt in a variable rate format, in case you get downward trends in interest rates is a good thing, not a bad thing. It's just a philosophy. It's kind of, where we're at. So our target's we're going to be around 70% fixed, to 30% variable.

OK. And then final question on your guidance of $0.87 to $0.91. What do you have in there in terms of acquisition volume?

We had accomplished 83 million before this call. We had hoped to do 175 million, in the rest of -- in the total since we went public. We believe we are on pace to do the 92 additional million, between now and the end of the year.

So that includes an additional $90 million worth of acquisitions? Above and beyond the 58 you did already in the first quarter?

In fact the other -- that one we closed already. That would anticipate $90 million. Now if you look at how that accretes, that's about $0.04 of accretion. The additional 92. So if we didn't acquire any more, our expectations will be $0.04 lower.

That's helpful. Thank you.

Your next question comes from Sri Nagarajan with UBS.

Thanks. Hi. You talked about interest expense. And there were several components of interest expense that -- if you can sort of, throw light on what a good quarterly run rate will be for 2005, given that you have acquired properties. You have swaps going on in there. Then you have some properties that were deconsolidated?

I'm sorry, could you say the question again, Sri?

Yes, you talked about run rate for interest expense. I was wondering what the good quarterly run rate for 2005 would be?

Are we expecting that starting about 6.1, and then ramping up, to include the acquisition, and an increase in interest rates that we budget at 25 basis points per quarter.

Then we have of our debt, 36% is currently variable?

Right.

Right now, the day and as of March 15th our average interest rate on our variable rate debt is 4.7%. And the average interest rate on our fixed rate debt 4.82%. That's as of March 15th

OK.

And in our current total debt outstanding as of March 15th is $516 million, with fixed rate debt of 330 million, and the balance, variable?

The second -- the variable part, right now the average interest rate is 4.7. Most of it is LIBOR based. All -- there is $186 million of it, all but 14 million is LIBOR based. The 14 million is Prime based.

OK, thanks. You talked about -- Kent, you talked about FAD payout ratio being over 100%. Yet you don't publish the recurring CapEx per square foot numbers. Could you share with us the recurring CapEx per square foot for the year as well as probably, by quarter-by-quarter if you have those numbers?

We are expecting a $0.22 per square foot CapEx expense. That's what our budget is for 2005. And we came in just under that in 2004.

Are there any other line items that are in between the FFO to the FAD that you are considering in your net calculations.

Loan fee -- there is loan fees -- the amortization of loan fees would be the other item.

The run rate would be about 500,000 per quarter, would you say.

So that's an add back the other direction.

Right, that's right.

That's correct.

It is about 200 -- almost 300,000 per quarter.

300,000 per quarter. OK. Specifically in terms of the occupancy issues with respect to lease-up properties, is that wholly seasonal of do believe in certain markets like Illinois, there are some -- could you care to share with us some of the market experiences in Illinois and in Massachusetts.

Yes, first of all in lease-up properties, our experience is that they lease-up very well in Florida and in California whether it is summer or winter.

And in the Northern Clients, and I am really talking about New York, New Jersey, New England and Illinois. Our experience is that whatever occupancy increases we are going to get for the year, we get by about the end of October and then things are flat all the way thorough until sort of mid-March and then it starts growing again.

Right now is when things start picking up and so the experience is fairly -- is this the actual number here ...

That's the actual number from last year.

I don't have it, but that's generally the trend. So all of the growth happens between April and October, is that answering the question you are asking or I might ...

Yes, that's fine. I mean in general I want to know whether you know it is seasonal or if there is some of the trend that you are seeing in terms of competition and pricing.

No, it is property by property.

Right.

Some properties will have more competition. There are more issues with getting occupancy. Some are slower than others. It is not always predictable. Once you have owned the property for about a year, you can predict the ultimate point at when you are going to get to 90%, much better than you can before you have opened it. And some properties are positive surprises and some are negative surprises.

Some of them are taking as long as 4 years to get the lease up and we have 6 properties in the CCS/CCU properties that really beginning late last summer, and into the fall, their occupancy slowed down way faster than we had expected and there was no growth. And so this year we are not predicting as much revenue growth in those properties as we had, early last spring when we were doing the whole analysis for the IPO and what we projected for 2005.

Those properties are our Mount Vernon property Montana, California, South East Massachusetts, Dedham Massachusetts, Ashland Massachusetts, and Wethersfield Connecticut. So those are 6 of 14, the other CCS/CCU properties are in fact ahead of budget and they are doing fine.

That's really helpful, thanks. One last question on the JV projects that are coming online in'04, obviously it is -- what percentage JV is, I am assuming that these are not going to be consolidated and is it in the usual JV format that you guys already have out there.

That's correct, they will be consolidated and they are in the usual JV format. I can tell you which properties they are. Ones -- they are located in San Bernardino, California, in Chicago, in Baltimore, in Phoenix area and another in Chicago. Those are the ones that are in Joint ventures and it will come into the REIT.

For next year, if this is helpful. The properties we have slated that we know that we will open in 2006 are in Santa Monica, California; Gurney, Illinois which is near Chicago; Wooster, Massachusetts; Mokena, Illinois another one near Chicago. Let's see, North Aurora that's another one in Illinois, Northridge California; Rancho Cucamonga, California; Delmont, California; Los Angeles, California; Sacramento, California; another one in Los Angeles, and finally one in Clinton, Maryland.

Those are all properties that are -- we have under contract, we closed on and we are doing all of the A&E work but we don't expect to start construction on it until later in the year.

One last question. In terms of the properties that you mentioned, some of the JV properties seem to be stabilized and performing in terms of NOI better and given the top acquisition environment, what should prevent you from transferring some of these to REIT itself.

The JV properties that are in the REIT, you mean the 18 joint-venture properties.

That's right.

Those properties are in joint-ventures with -- primarily with Prudential and the Bristol Group, there is one in -- 50/50 joint venture in Pennsylvania. Right now we don't have these -- we could exercise buy/sell with these partners. But we have very good relationships with both these partners and we want to have a continuing good relationship

And so there is no real advantage as to try and force a buyout and they are JV partners that would like to do more with us in the future, both Personal group and Prudential. And so we see, we don't expect to be acquiring those JV interest we see in the future the possibility of expanding those relationships.

Thank you so much.

[Operator Instructions]

Your next question comes from the line of Jay Leupp from RBC Capital Markets.

Hi, good afternoon. I am here with Brett Johnson. Gentlemen, what gives you comfort that you think you will be able to get better control over operating expenses at the property level, in the back half of the year, particularly since the second and third quarters tend to be periods of rapid lease activity and also pretty strong occupancy growth and what are your rent growth targets in the current portfolio as we move into the peak leasing season.

Our rent growth targets for next year, Jay, are 4% to 5% and do you want us to break that down a little bit more by markets.

That'd be great if you can.

California we expect 5% to 6%, Florida 4% to 5% Massachusetts 3% to 5%, New York - New Jersey area 4% to 5% and the Colorado 4% to 5%.

OK, and then ...

Those are our major markets. There are some other minor markets.

Sure. In the ...

And as far as you question about expenses ...

Right.

I guess, if I understand your question correctly, it's, how do we know that our expense increase that we are projecting is a good number for next year. Is that what ...

Right. You have the ability to give good guidance on the operating expense number, particularly given the fact you are going to be aggressively pushing rents and probably getting some occupancy turnover and also you are going to have some lease-up cost during the second, third quarter this year, putting more people into these properties.

I guess, to clarify Extra Space doesn't have a lot of expenses associated with increased activity of lease-up or increased activity of getting new tenants. Our site managers who are at the site are the ones that are doing all of the lease-up activity, it is not a -- we don't -- there is not a commission based system for paying them.

So the costs that are already in our cost structure are representative of what the costs are going to be going forward for doing all of the leasing activity we are talking about. So we don't see a dramatic increase in payroll because of the kind of activity that we are talking about going forward.

And the one unknown in all of our expenses is property taxes and insurance. We feel like we have got our insurance tied down this year because we have already got quotes and already in place for the year. Property taxes, we have. We have seen increases in 2 states, in Florida and New York. There have been reevaluations and increases in property taxes in those states. We think we have a pretty good handle on that and have built into our projections, the property tax into the 3% to 4%, what increases the property taxes as we know about.

Now that given, the one other unknown variable is snowplow and snow expenses in the Northeast. And so far to date, we have some pretty good snowfall back east. And I am not sure yet, what the impact of all of that is going to be. We have budgeted for that but that's one of those hit and miss. We're either really far under budget, or it could be over budget, we are waiting to see on that one.

OK, and then also, can you talk much about potential increases in construction costs on raw materials and if that's affecting your returns on new development. And then may be give us some color on what your targeted returns of equity are on new joint ventures.

You've given us some pretty good color on new cap rate assumptions for acquisitions but in terms of where you are going to be doing new development and particularly in the joint venture format, what are your targeted returns on Extra Space equity.

OK, first of all let me talk about cost increases. There have been very substantial cost increases in steel, some in concrete and a lot of other items in the construction areas. Our construction costs are up substantially and I am talking about sort of in that 15% range, from just in year and half ago, say. I am not sure how much faster they are going to continue to grow up. But construction cost is only one element in the cost of self-storage.

The other big cost is land cost and in areas that we are developing and you noticed, I listed up a whole number of properties in California. California has seen a very substantial increase in land cost in the last 2 to 3 years. Some cases, land has sort of doubled and tripled. And that's impacting us more, frankly, than the construction cost issue.

The result of that is that the return on cost in our pro forma, when you look at the total cost of development versus the stabilized income and you divide it out, we used to be trying to attract to a 12 to a 13 and we are down in most of our developments now between 9.5 and 11. And the ones that are the 9.5 are the ones that are well located in really good areas in Southern California. We -- in our eastern developments in Chicago, we are usually targeting sort of 11, you know more like the 11 number.

Now the question of our return of equities is an interesting one because it is nearly infinite. We don't put very much equity on these properties. Our joint venture partners put most of the equity in.

For example, in our you know roughly half our developments are being done with Prudential and the other half are being done with the Everest Fund, out of Chicago and in the case of Prudential, our equity requirement is 2% -- 2.5% of the total capital needed and that equity doesn't really come in until after the properties are up and operating between that time, during the construction period et cetera, it is 100% debt, and in the case of the Everest Fund, we are putting up 3.5% of the total capital. Actually no, it is less than this, about 2% again of the total capital.

So, it is not while the capital of $100 million development program, we are talking about $3 million with the capital and the fee structure for that is we are getting development fees out of your 5% of 6% of total cost.

So we actually have very little cash in these deals but they perform very well for the future in terms of cash flows. But you know recognizing the sales storage in the development side, doesn't hit breakeven, if it is unlevered until you hit 35% occupancy. And the typical lease-up during these days is between 2 to 4 years. It really takes quite a while before we see some significant cash flows coming in form new properties. That's sort of long winded answer.

No, that's just fine. Thank you.

There are no further questions.

OK, well thank you, all of you for listening to our conference call and those analysts and shareholders who want to call either Kent or I individually about anything to do with this year, you are welcome to do. And we are looking forward to 2005 and we appreciate all of you who are investors and hope you will continue to have confidence in our company.

Thank you very much.