Extra Space Storage Inc (EXR) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Extra Space Storage Incorporated earnings conference call. My name is Jen and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. James Overturf. Please proceed, sir.

Good afternoon and welcome to Extra Space Storage's second-quarter 2005 conference call. With us today are Extra Space Storage's CEO and Chairman of the Board Ken Woolley; Senior Vice President and CFO Kent Christiansen; Senior Vice President of Operations Karl Haas; and Scott Stubbs, our Senior Vice President of Accounting.

In addition to our second-quarter press release and 10-Q, we have also furnished additional unaudited financial information about the operating results for the Company's property portfolio. This supplemental information can be found in the investor info section of Extra Space Storage's website at extraspace.com. You'll also find a PDF document of our second-quarter press release.

Please remember that management's prepared remarks and answers to your questions contain forward-looking information 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, revenue, FFO, and net operating 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 SEC and, in particular, the 10-Q for the quarter ended June 30, 2005. These forward-looking statements represent management's estimates as of August 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. I would now like to turn the call over to Extra Space Storage's CEO, Kenneth M. Woolley.

Thanks, James. Welcome to this conference call to discuss our second-quarter results. As you can all imagine, it has been an extremely busy few months because of the acquisition of Storage USA; and we have a lot of things to talk about today. Obviously the major news of the quarter is the fact that we closed on the Storage USA transaction on July 14. We have acquired very well located and quality properties, the majority of which are in our targeted core markets. The performance of the Storage USA properties has been excellent, and as a result the actual cap rate paid by Extra Space for its portion of the Storage USA properties, including all transaction costs, based upon the most recent quarter's operations, is a 7.65%.

We have made the decision to brand all the Storage USA properties with the Extra Space brand. We are also transitioning all Storage USA properties to the technology platform developed by and used by Extra Space. We're also well along in the transition of many employee benefit issues and the transition of all accounting to our Salt Lake headquarters.

The combined team has been working together since the announcement of the deal on the integration of various other systems and processes, and we're making very good headway. Karl Haas, who has joined us as Senior Vice President of Operations, will speak with us a little later in the conference call to talk about the performance of Storage USA in the integration plans.

Meanwhile, we're going to talk first just about the performance of the Extra Space before the acquisition. We finished the second quarter with 130 wholly-owned properties, 18 joint venture properties located in 20 states. As we did in the year-end 2004 and first-quarter 2005 conference calls, we will attempt to shed more light on the performance of our portfolio and also give you insights into our outlook for the future.

The second quarter is the most active quarter of our industry. The occupancy of our 110 wholly-owned stabilized properties ended the quarter at 88.1% compared to 87.4% last year. The occupancy of our 20 wholly-owned lease up properties was 69.5% at the end of the quarter versus 55.8% at the end of the same quarter last year. Since our portfolio is made up of wholly-owned, joint venture owned, stabilized, and lease up properties, I would like to cut our portfolio in several ways to give you more insight into our property performance.

The first group I would like to discuss is the 38 stabilized same-store properties that are wholly-owned in our financial statements on a same-store basis. These properties are shown in our second-quarter press release. Revenues were up 3.1% for the first six months versus the same period last year. Expenses were up 7.5%, resulting in an NOI increase of 0.8%.

However, a more comprehensive view is the performance of all of our 123 stabilized properties, which include both 110 wholly-owned properties and 13 joint venture properties. For these properties, the quarter ended June 30, 2005, revenues were up 4.6%, expenses up 1.4%, and net operating income up 6.4%. For the six months ended June 30, 2005, revenues were up 4.2%, expenses up 0.8%, and net operating income up .6.2% (sic).

We also have 25 lease up properties including 20 wholly-owned properties and five joint venture properties. As of June 30, 2005 the occupancy of these properties was 72.2% versus 61% the year before. In fact occupancy on these properties grew 5.9% in the past quarter alone. For the six months ending June 30, 2005, the NOI of these properties was 3.2 million versus $2 million the previous year, an increase of 80%.

Finally, a subset of the lease up properties is the 14 CCS CCU properties talked about in our original IPO document. As of June 30, 2005, the occupancy of this portfolio was 66.7% versus 50.3% the year before. For the six months ended June 30, 2005, the net operating income was $1.2 million versus 323,000 the year before, an increase of 374%.

On the development front, we opened an additional property during the quarter in Carson, California. This brings our total to four newly opened properties in the first six months of the year with a value of $28 million. We plan on opening four more properties this year, as well as completing two expansions. The total value of the remaining properties and expansions that we will open in 2005 is expected to be $37 million. One of these properties and both expansions will be owned by Extra Space Storage, the REIT.

Our 2006 development pipeline includes 20 new properties, two expansions, for a total development cost of $139 million. 19 of these projects, with a total value of 120 million, will be owned by the REIT in a joint venture format. The construction of many of these properties has already begun.

For good reason, our acquisition department has been very much focused on the due diligence and closing of the Storage USA transaction. We are now starting to investigate other acquisition opportunities; but we don't have anything going too much right now or anything to announce. With that I would like to turn our call over to Kent Christiansen, our Chief Financial Officer, who will comment on our financial results in a little more detail.

Thanks, Ken. Our financial statements covered in this report include the quarter ended June 30, 2005, compared to the quarter ended June 30, 2004. Results for the quarter ended June 30, 2005, include the operations of 148 properties, 130 of which were consolidated and 18 of which were in joint ventures, compared to the results of June 30, 2004, which included the operations of 114 properties, 93 of which were consolidated and 21 were in joint ventures.

Revenues for the entire portfolio for the quarter ended were 24.6 million compared to 13.9 million in the second quarter of 2004. The net loss was 1.2 million this year, compared to a $7 million loss for the same quarter last year. For the six months ended June 30, 2005, revenues were 47.5 million and a net loss of 1.9 million, compared to 24.9 million in revenues and 12.9 million in net loss for the same period in 2004.

The increase in our revenue was due to the acquisition of 52 properties and the purchase of our partners' joint venture interest in 66 properties during 2004, and the first quarter -- during 2004 and the first quarter of 2005. In addition to these acquisitions, we also saw increases in revenue to new and existing customers, as well as progress on our lease up properties. Out of our major markets, California and Florida remain the top performers, while Pennsylvania and New Jersey were below the overall portfolio average.

Our G&A expenses for the second quarter, after netting development fees, were $3 million. This amount is slightly higher than the budget, but includes $300,000 spent that is directly attributable to the Storage USA acquisition. For the quarter, our 38 same-store properties had a 7.6% increase in expenses. This is due mostly to property tax increases on seven properties. For the six months ended June 30, our expenses were up 7.5%. This is due mainly to the high snow removal costs, which we previously discussed in the first quarter, and the property tax increases I just mentioned.

As to our balance sheet as of June 30, 2005, our outstanding debt was 559 million. Currently the fixed-rate debt to total debt is approximately 83.7%, and our weighted average interest rate is 5.05 for the fixed-rate loans and 5.79 for the variable-rate loans. The total weighted average interest rate on our fixed and variable-rate loans is 5.17%.

As of June 30, 2005, we had 69 million available under our line of credit and at that time none was drawn. Our debt to market cap ratio at the quarter's end was 49.3%, and our debt service coverage ratio was 1.63 times EBITDA.

During the quarter ended June 30, we closed two separate trust preferred financings for net proceeds to the Company of approximately $76 million. In addition, the Company closed another trust preferred financing at the end of July for an additional 40 million. These amounts are preferred -- these securities are preferred stock that are recorded as debt on our financial statements due to the required repayment in 30 years. These preferred payments will increase our interest expense going forward of approximately 1.9 million per quarter.

During the second quarter we also closed a private placement equity offering where the Company issued 6.2 million additional shares at 13.47 for net proceeds to the Company of approximately $81 million. The Company will register this stock within 180 days of the close of the offering.

The registration statement that we need to file registering these shares will require the Company to prepare pro forma financial statements that will include the acquisition of Storage USA. In addition we will be required to file these pro forma financial statements in a form 8-K to be filed with the SEC by the end of September. These pro forma financial statements will include the audited financial statements of Storage USA by KPMG. The audited financial statements should be completed by the first part of September.

We are continuing the documentation of our internal control processes as required by Sarbanes-Oxley. Our initial testing has been completed, and we are currently in the remediation stage. We fully expect to be in compliance with these requirements by year end.

As reported in our press release and our 10-Q, our quarterly FFO per share was $0.14. Our projection for the second quarter was $0.19. In arriving at our $0.89 to $0.92 guidance for 2005, this guidance included our Storage USA acquisition. Let me break down the reasons for why we did not hit our $0.19 FFO per share. First, $0.02 was due to the closing of the trust preferred offerings, which were not anticipated to close until the fourth quarter. Those were done early and reduced our FFO per share in the second quarter by $0.02. We incurred G&A expenses related to the Storage USA transaction of $0.01.

By doing the private placement we had our dilution from -- an FFO dilution because of additional common stock being outstanding. This amounted to about another half of a percent. The short-term interest rates increased faster than we had projected, and this caused another one-half cent reduction in our FFO. Lastly we missed our projections on our property level revenues by about one-half of a cent. In total approximately $0.04 of our FFO difference was due and directly attributable to the Storage USA acquisition.

This next quarter will entail the majority of our onetime transition costs of this transaction. These onetime costs will affect our third and fourth-quarter FFO. Excluding these onetime transaction costs, we believe at this time that our FFO will be in the range of $0.77 to $0.82 per share. This is lower than the guidance previously given, due almost exclusively to the impact of the accounting treatment of the trust preferred stock that we have issued that we anticipate to be between $0.09 and $0.12 this year. This stock requires quarterly payments which are treated as interest expense as opposed to dividends.

Also, with the completion of our private offering, which we have previously discussed, we expect in the third quarter a further reduction in our FFO per share due to this dilution. With that, we expect our third-quarter FFO per share to be between $0.22 and $0.24. Now I will turn it back to Ken for a few more comments.

Thanks, Kent. We have with us today Karl Haas, who is our senior Vice President of Operations. Karl had been with Storage USA for 17 years before joining Extra Space, and Karl is going to tell everybody a little about the transition of our properties. Karl?

Thanks, Ken. By the way, I started Storage USA was 15 years old. I want to give you an overview about what has been going on with the integration. First, we have started the conversion of Storage USA's properties to the operational software used by Extra Space called Centershift Store. We recently converted 83 of the Storage USA properties to Centershift. These sites were up and operational within hours of the conversion, and it has all gone very well. By the end of next week we will have over 50% of the Storage USA facilities converted to the new software. We expect of have all the Storage USA facilities converted to the new software by mid-September.

We have finished the plan for realignment of our field operations team structure and will have it fully implemented by October 1. This new structure enables us to leverage our new size and market coverage to gain measurable efficiencies.

Now in terms of performance, the Storage USA facilities have been performing very well. For the quarter ended June 30, the 302 same-store stabilized Storage USA properties had year-over-year increases of 7.2% in revenue and 9.5% in net operating income. For the year, revenue has increased 7.2% and net operating income was up 9.1%. The occupancy of these properties at June 30, 2005, was 84.9% versus 82.2% at June 30, 2004, an increase of 2.7%.

Most importantly, the attitude of the people in the field is very positive. The executive team has been traveling around the country holding town hall meetings, which have proved to be invaluable in communicating our Company goals and plans for the future. We are about one-third of the way through this process, and when we finish we estimate that we will have met with 90% of the 1,500 field employees in our organization.

The feedback for the meetings has been very positive. Our field employees are enthusiastic about being part of Storage USA or being part of a storage company again, especially one that is growing and will continue to grow. The field has responded well to the technology and procedural changes so far; and even though we cannot guarantee that everything will go flawlessly, our people have the right attitude to make the integration process a success. With that I'd like to turn back to Ken.

Thanks, Karl. As I mentioned earlier, we have made several key decisions with regard to the Storage USA acquisition, which we were undecided upon last time we spoke. The first is that the new and expanded Company will be called Extra Space Storage. This was not an easy decision and not one we took lightly. We went through several rounds of customer research before making the final choice. We are now working on the final plans of what our retail look and feel will be as a Company.

Second, we have finalized on our core executive came and feel that we have a team that positions very well for the future. From the Storage USA side, we are pleased to add Karl Haas, Senior Vice President of Operations, whom you just heard from; Buck Brown, Senior Vice President of Marketing; Lee Harkavy, Senior Vice President of Acquisitions; and Sam Ratsandi (ph), Vice President of Revenue Management. All of these individuals have been heavily involved in the recent growth of Storage USA and in the transaction and transition that we are undergoing.

The operational structure of the new Company has been resolved and takes effect at the end of September. We have been able to retain the vast majority of the Storage USA operational field people, which has been a huge win for us. The last decision is with regards to the call center. Extra Space Storage currently utilizes a third-party vendor for its call center solution. Storage USA, as most of you know, utilized an internally managed call center. We have made the decision to test these two solutions side-by-side until the beginning of 2006, before making a final decision.

So what is in store for Extra Space Storage during the remainding (sic) of 2005? Well, the transition of Storage USA will continue to be our principal focus. We don't underestimate this challenge in the slightest. We're beginning to move forward on the refreshing of many of the Storage USA facilities to the Extra Space Storage brand. We have added human technology resources that we believe can boost our store level performance, and we are anxious to see how our increased scale can help us on the expense side.

The performance of the Storage USA properties continues to be very positive, and we are excited about the future. We continue to see the ability to raise rents in certain markets particularly in Southern California and Florida. However, some of our expense increases have been unavoidable, such as snow removal and property tax changes. We also had higher interest expense this quarter, with the majority of the increase resulting as a -- being a direct result of getting ourselves organizing to finance the Storage USA transaction.

We believe that a consistent pipeline of development properties is important to the growth and profitability of our Company in the long run. We currently have a good number of development deals in various stages of the process. These properties will not have a positive impact on our FFO for a little while, but they are crucial for growing long-term shareholder value.

The same is true of the acquisition pipeline. The Storage USA acquisition will not be our last. We're revving up the acquisition engine as we speak, and thanks to the financing we have in place we have the resources to make additional substantial acquisitions. I continue to believe that with the quality of our people, the quality of our processes, and of course the quality of our portfolios, this generate long-term shareholder value.

Self storage continues to be a great business, and we continue to be very positive about the self storage business and our place in it. With that, we are now ready for questions.

(OPERATOR INSTRUCTIONS) Brett Johnson with RBC.

I'm here with Jay Leupp. First question has to do with your same-store NOI. I know the same-store portfolio represents only about one-third of your total NOI. But just curious if you could talk a bit about why the same-store NOI growth within that portfolio -- I think it was about 0.05% this quarter and a bit over 1% last quarter is lagging what you guys are seeing in your broader stabilized portfolio.

Sure. It just so happens one of the reasons that I wanted to express the performance of all 123 properties is to give you a better insight into the total portfolio rather than a subset. That subset is heavily weighted in New England, where we had very heavy snowplow bills in the first quarter, and we had some pretty major property tax increases on several of the properties. It just so happened that overall our expenses did not go up that high; but in those particular properties they did. It's the one nice thing about having a larger portfolio.

Also the revenues lagged a little bit. If you can see, the revenues were not as high. Those revenues I think were up -- what were they up? 3.9%; no, 3.1%. Excuse me. Whereas the overall portfolio was up -- no, it's 4.6%. It just represents where they are in the country, frankly. Whereas the Northeast has been a little weaker for us than California and Florida.

So the Northeast has been lagging on the revenue side as well, as a broader market?

Yes, it has. In fact our weakest market has really been Northern Jersey. Massachusetts is up some. But on the revenue side Jersey has been our slowest and Pennsylvania second. But Florida has been our top; the revenue has been up roughly 88% in Florida. California up about 4, 4.5.

Great. Can you also summarize your expectations for the impact on earnings in 2006 of the CCS and CCU conversions?

Well first of all, if you look carefully at how the CCS CCU conversion affects earnings, you will notice that to the extent that CCS and CCUs are converted it is highly accretive. It is accretive to the rest of the shareholders as well. I think our guidance right now is that no CCSs will be converted until after the second quarter of 2006, when the run rate on those properties meets the minimum, I think $5.1 million. But as the NOI of those goes up, effectively part of that NOI goes to benefit the CCS converted shares; but a portion still becomes accretive to the overall Company.

Great. Then another question on your guidance overall for the next quarter's guidance for FFO. Does that include the impact of the Storage USA transaction costs that you guys had referenced? Or is that without any of those onetime costs?

The guidance for the FFO does not include any onetime transaction costs. The issue on the transaction costs is how much can be capitalized versus how much has to be expensed. All of the cost of the transaction has actually been put in an escrow account and is sitting in cash to be prorated between Extra Space and Prudential, our partner, with Extra Space paying about 19% to 20% of the transaction costs. These are all of the overhead transaction costs as well.

Internally we expect that number to be -- our share of that number should be anywhere from 2.5 to $4 million, which is the number we will see in the third quarter mostly, and maybe some will dribble over into the fourth quarter. We look at those as onetime costs even if we can't -- and they really relate to the changeover and the shutdown of the overhead of Storage USA in Memphis, and the personnel and retention costs, and those sorts of things.

But those would be primarily incurred in the third quarter, and that would come out of your FFO; it is just not in your guidance right now?

That's correct. I am giving you sort of the round number of where it should be. But it's not an ongoing expense. So the guidance we are giving you of between $0.22 and $0.24 a share is the guidance of where the overhead would be on an ongoing basis with all the property acquisitions. Just to relate that also, we had expected to close this transaction the first of July. In fact it closed on the 14th. So we lost a half a month of accretive income from that issue, while sitting on a lot of cash in our financial statement. So that hurt us a little bit on the accretion.

Last question, can you remind me again, what was your total equity investment in the Storage USA deal, now that it has been closed?

It is right around 560 to $570 million dollars.

560 to 570, great. Thank you very much, guys.

No, that's the total of everything that we put into that, which means our joint venture interest, our purchase of the wholly-owned properties, our purchase of franchise loans. That was the whole everything, not -- so --.

Of that approximately 435 million was the direct purchase of 61 properties, which was at a roughly 7.65% cap rate. The balance was for roughly $40 million for our purchase of the joint venture interest with Storage USA. The rest for interest in other properties and other parts of the business, franchise loans and joint venture interest in other joint ventures that Storage USA had.

Rod Nussbaum, Banc of America Securities.

It's Christine McElroy here with Ross. Just a follow-up from the previous question. Excluding the transaction costs, you are projecting an FFO ramp up from $0.14 in Q2 to $0.22 to $0.24 in Q3. Can you break out for us what the big drivers are behind that increase?

The biggest driver is the fact that we now own 61 new properties that we just acquired with Storage USA. The financing of that will drive the majority of that increase in our FFO, which is the revenues of those 61 stabilized properties, minus the expenses, less the interest expense -- is bringing a lot of the FFO increase.

So much of the financing has already impacted your Q2 numbers.

I'm sorry. Did you say how much?

I'm just saying so much of that has already impacted your Q2 numbers. So the increase is just the accretion from the acquisition.

That's correct. A lot of the financing was done prior to us closing on the transaction. So all of that was -- when I say prior to the closing, which means it was done near, right before June 30 or soon into July, before we closed on the transaction. All of that is now in place, and it is being shown in the guidance that we are giving.

Do you expect a further increase in G&A given that the transaction just closed?

Absolutely. You mean compared to last quarter?

Right. What kind of run rate are you looking at?

We are expected the cost of the Storage USA transaction, not including onetime amounts, to be on a run rate of about 23 million a year. So dividing that by four would be about 5.7 million per quarter.

Can you just talk about any other further capital raising that you plan to do this year, including common equity?

Well right now, as we said, we have approximately 61 million owed on our bridge loan; and we have used about 15 million of our line of credit, which means we have available the ability to borrow on our line of credit to do whatever. However, our bridge loan is due by the middle of January. So sometime between now and the middle of January we are going to need to do something to refinance that bridge loan. We haven't yet determined what that will be, whether it is a further equity offering if the equity markets provide us with that. We would look to possibly doing some kind of an equity offering in the fall, or some other kind of debt offering if the equity markets are not open for us to make that a permanent type of debt.

Just one last question. You have a property in New York in your joint venture least up portfolio where occupancy declined about 11 percentage points year-over-year to 73%. Can you just talk about what was behind that?

No, I don't really have a comment on it. That property is located in Brentwood, New York. It has been an underperformer for us. I don't have any specific information about why that property has gone down.

But it would not be indicative of the market overall.

I don't think so, no. Because we have properties in Plainview and Long Island, and also in Port Washington, and one in Kings Park that have also -- that have all done well. It could be specific to the manager or the specific competition in that particular place.

Sri Nagarajan, UBS.

I'm just trying to get a handle of what are the kind of integration issues that would remain at the end of September. If someone can just give me a brief overview of what would be remaining in terms of capital expenditures and as well as of integration of personnel.

The integration side (ph) from the capital expenditures, that will be something that will be ongoing on the properties for the next 18 months. So that will be a longer-term process, whereby we make the improvements at these properties that we believe are necessary. So from a CapEx perspective that is going to be ongoing for a long period of time.

The remaining types of integration issues that will be outstanding as of September 30, there will be some accounting and marketing and IT processes that will flow into the fourth quarter, where we will still need help from the previous Storage USA G&A team to help us complete those transactions. For example, finishing our financial statements will take a little more time; that won't be done by September 30 and we will need some of the previous Storage USA accounting people to help us with that. Those costs will still be incurred, and it will be minor compared to the total amount, because we believe we will have completed the vast majority of it by September 30. But some will flow into the fourth quarter.

Will you talk briefly about marketing? I'm wondering whether, obviously advertising integration will not begin until possibly fourth quarter, maybe next year, right? You'll be still advertising the Storage USA brand in the Yellow Pages, etc. etc.

Actually the brand is being transferred even as we speak. We've already made some decisions on Yellow Page ads that have been placed in the last two weeks, where we have been using either cobranding or branding with the Extra Space name. So that process has already begun. What happens is that that process will take 12 to 18 months as the Yellow Pages come due and we can make the transition from the Extra Space name to the -- from the Storage USA name to the Extra Space name. So that is why it will be ongoing over a period of time.

I have a question. If Karl could give us a state by state performance of the Storage USA portfolio, is that possible at this point in time?

I'm sorry. Could you repeat the question?

I was wondering if Karl could give us an overview of the market by market performance of the Storage USA portfolio at this point in time? As to what the weak markets were and what the strong markets were (multiple speakers).

Our strongest markets right now are Chicago, Phoenix, Tucson, Albuquerque, Florida, and Northern California. Probably the underperforming markets -- Houston, Fort Worth, New York City -- not outside of the city but the actual core New York City properties -- Detroit, and Columbus.

One question on the total debt today and the debt to total market cap as of today. Kent, could you give us those numbers?

As of today?

Yes.

As of today we are -- after the Storage USA transaction is completed, we are sitting at about 60% total debt to market cap. That is made up of about 1,330,000,000 million of debt and that assumes a market price on our stock of about $15. Of that number 76% is fixed, 24% is variable. The interest rate on the fixed is a weighted average of 5.28 and on the variable is 5.21.

William Acheson with Merrill Lynch.

I just wanted to be clear I heard you correctly on the G&A from Storage USA; 5.7 million per quarter, is that Extra Space and Storage USA? Or is that incremental on top of the more or less normalized 3 million G&A in the second quarter?

That is in addition to our amount of our G&A cost. Our G&A cost is not 3 million; it is actually about 2.5. Just a little over 2.5 million. In the 3 million, once again, there was 300,000 of cost directly related to our Storage USA transaction that would not have been incurred had we not been working on the Storage USA. So we generally have been running between 2.5 and 2.7 million on a quarterly basis. The 5.7 million is in addition to the 2.5.

The way I got the 3 million was the reported G&A for the quarter was 3.32 million; so I took 300 off of that.

Extra Space also, when we talk about our G&A cost, if you look at our financial statement there is about 260,000 of development fees that we -- all of the costs for the development people on our G&A. We normally talk about netting of those two numbers. So we take the 3.3 minus the 260 minus the 300, which is where we get to our 2.7 million.

Okay. But I mean in your financials going forward, that will be included in G&A?

Those will all be included in G&A. But we will always be showing our development fees and, once again, we look at netting those two numbers and coming up with our G&A cost.

I understand. Then one other question. Most of my questions are answered. On a consecutive quarter basis, a very strong occupancy gain. I'm trying to get at the incremental revenue to the third quarter. How back ended in the third quarter were the occupancy gains?

I would have to say that the numbers for -- as of when April May June -- each month there was progression that was made, which is normally what we see in our industry, with June being the strongest. So they would be back ended; but the amounts of increase in each quarter would be, you know, a point to a point and a half between each month.

(OPERATOR INSTRUCTIONS) Paul Adornato with Harris Nesbitt.

I was wondering if you have identified any markets that you would like to exit?

Going through the process with the Prudential people, Paul, there was substantial discussions about that. At this time we felt like the Storage USA people had done a pretty good job of going through the portfolio over the last two years and deleting properties that they felt were not in good markets or were underperforming. We felt like, as they had gone through their process, they had sold about 20% of their portfolio, which the majority of those where what they viewed -- they have gone through a process, have rated the properties from A to B, and sold many of the B properties.

So we felt like, as we went through the portfolio, that what was left were well-located, good properties. We do believe there's some CapEx that can be spent on these to give them a little bit of lipstick to make them look a little better. We think we have got an appropriate amount of money set aside for that. So as we talked with Prudential and with Extra Space, we did not feel like there were any markets at this point in time that we see that we need to exit from.

Kent, you mentioned in going through the Sarbanes-Oxley process that you are in the remediation stage. I was wondering if you could comment on what items need remediation.

There have been no major concerns or problems. The things they have come across -- for example, an invoice wasn't signed by the proper people. The proper approvals had not been obtained. There is a step here or a step there in our cash collection process that we need to shore up. So little things that needs to be relooked at. As we did our initial documentation we found that there were small holes in our process. So it is truly little things here and there that are being fixed and corrected.

There was not any substantial -- nothing came out from our testing that brought up that we needed to incur substantial dollars, hire additional people, or get other consulting people in here to help us fix. It's all stuff that can be done internally with the process we have in place.

A question for Karl. I was wondering if you could comment on the corporate culture at the store level. How would you compare Extra Space with Storage USA?

I would say very similar. The difference at Storage USA -- I mean Storage USA was, four or five years ago, was much more similar to Extra Space than it was a year ago in that we were a smaller company, closer to the actual CEO. Many of those people were still with the company. As evidenced by the town hall meetings that we have been doing, the people are very excited about being able to see the CEO of the company at a meeting where there was 120 other people or even less. We obviously did not have that while being owned by GE. I think it brings back a lot of good memories of about being a company where decisions can be made a lot quicker and the only concern is about self storage.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the presentation back to your speakers for closing remarks.

Thank you. We appreciate you all listening to the conference call and we hope that we have been able to answer the questions. We are very excited about what is happening in the future. We feel like the transition with Storage USA is going very well, and we thank you for your patience as we go through this transaction -- transition, and we expect great results in the future. Thank you very much.

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