Extra Space Storage Inc (EXR) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Extra Space Storage, Inc. Fourth Quarter and Year-end 2005 Earnings Conference Call. My name is Carlo and I'll be your coordinator for today's presentation.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn this presentation over to your host for today's conference, James Overturf, Senior Vice President of Corporate Communications. Please proceed, sir.

Thank you, Carlo. Good afternoon, and welcome to Extra Space Storage's fourth quarter and year-end 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 Christensen, and our Senior Vice President of Operations, Karl Haas.

A couple of items for me to mention to you before management begins their remarks, in addition to our fourth quarter and year-end press release and 10-K, we have also furnished additional unaudited financial information about the operating results for the company's property portfolio on our website at www.extraspace.com. Click on Financial Reports and a document entitled, "Fourth Quarter and Year-End 2005 Supplemental Financial Information." The financial information that we released, early this morning, includes our GAAP results for both this year and last year, as well as non-GAAP information that we believe is useful in evaluating the Company's operating performance.

As required by Regulation G, we have in our earnings release, provided reconciliations of the non-GAAP information we will be discussing today to the closest GAAP equivalent results and information. These reconciliations can be found in the press release schedules included with the presentation material provided, today, and on our website. Please remember that management's prepared remarks and answers to your questions can 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, 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, net operating income, and FFO. 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, the 10-K for the year ended December 31, 2005. These forward-looking statements represent management's statements as of today, March 13, 2006. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

I'd 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 year-end results and fourth quarter results. It's been an exciting and productive year for Extra Space Storage. After last year, going public, and this year, acquiring Storage USA, we've had a lot to do and we've been very busy. We've been asked by a number of shareholders why we are reporting so late. During 2005, we changed our auditors to Ernst & Young, we acquired Storage USA for $2.3 billion in a complicated joint-venture structure with Prudential Real Estate Investors, and we went through our first Sarbanes-Oxley compliance audit. This caused the auditing process to take longer and we decided it would be best to release earnings only after the audit was completed. In the future, we hope to report earlier in the cycle.

Early this morning, we made our press release and filed our 10-K. We reported FFO per share of $0.23 for the quarter and $0.70 for the year. Our earnings were higher than guidance due to several factors. First, the revenues of our stabilized properties were essentially flat from September through December. This is unusual. We normally expect a decline and it is indicative of the basic strength of the business. Secondly, we had a modest amount of one-time overhead costs relating to the acquisition of Storage USA. We thought we'd have a lot more. Third, we had a one-time un-reimbursed cost of only 350,000 related to Hurricanes Wilma and Katrina. This was less than expected. The operations of Storage USA are now fully integrated into our Company and our overhead costs have stabilized at the rate of about $34 million net of development fees. This is down from a level of about $50 million for the two companies just before the merger.

I want to thank the entire Extra Space and Storage USA team for working so hard during the past eight months in order to make this happen so smoothly. After operating the Storage USA properties for eight months now, we are more pleased than ever with the performance of these properties and the benefits brought to our Company by the management added from Storage USA. The Storage USA portfolio consists of well-located, quality properties, the majority of which are in our targeted core markets of California, Metro Chicago, Florida, New England, New York, New Jersey, and the Mid-Atlantic states.

The strong revenue performance of the Storage USA properties has continued since the acquisition. With the combination of Storage USA and Extra Space, even though we are in 34 states, 81% of our NOI comes from the core markets that we have identified. The actual cap rate paid by Extra Space for the Storage USA properties, including all transaction costs based upon the most recent quarter's results, annualized, and before any management fees was 7.7%. After a 6% either paid or implied management fee, it was 7%. We won't be reporting this number in the future but based upon recent transactions in the storage industry, it now appears to be a very attractive purchase price.

We finished the year with 192 wholly-owned properties and 354 joint-venture properties located in 34 states, including Washington, D.C. We also managed an additional 85 properties as part of our franchise and management program. Because we have wholly-owned properties, joint-venture properties, lease-up properties, legacy's Extra Space properties, Storage USA properties, and same-store properties, it is sometimes difficult and confusing to understand the operating results of the whole Company. We have provided in a supplemental table, which is posted on our website, a detailed and complete breakdown of the performance of all these different groups. I will highlight the performance of several of the groups, however.

First is the entire universe of 553 stabilized properties. This is out of a total of 632 properties, which includes our wholly-owned, joint-venture-owned, and managed properties. These properties performed well for the year. The average occupancy for 2005 was 83.4% versus 81.7% in 2004. Revenue increased 6.8% and expenses were up 7.9%. Net operating income, or NOI, increased 6.1%. Next are the 123 stabilized properties which were held by Extra Space before the Storage USA acquisition. These properties, including 110 wholly-owned properties and 13 joint-venture properties, averaged 86.5% occupancy for 2005 versus 86.4% for 2004. For the year, revenues were up 4.9%, expenses up 4.2%, and NOI up 5.2%.

Next are the 57 stabilized properties out of a total of 61 total properties that Extra Space purchased on a wholly-owned basis from Storage USA. Average occupancy for 2005 was 84.2% versus 80.7%, the previous year. For the year, revenues were up 8.4%, expenses up 6.5%, and NOI was up 9.5%. Finally, our 14 CCS/CCU lease-up properties ended the year at an occupancy level of 71.1%. This compares to 59.1%, the previous year. Revenues were up 39.5% and NOI was up 105.5%. Based upon our current budget, we expect to begin converting CCS/CCU shares after the end of the third quarter, this year.

Extra Space Storage continues to grow through acquisition and development. During 2005, including the acquisition of 61 Storage USA properties on a wholly-owned basis, we acquired a total of 70 properties for $504 million. All told, we grew our wholly-owned portfolio by 60%. We purchased one property during the first quarter from one of our franchisees for 3.65 million. So far, in 2006, we have acquired six properties at a total cost of $36.2 million. These properties are located in Florida, Georgia, and Tacoma, Washington. We currently have ten properties under contract or Letter of Intent for a total value of $61 million.

We have several other acquisitions we are working on, but we don't have anything to announce yet. 13 of the 17 properties which we have recently acquired, or have under Letter of Intent, come from our strategic partners program. This program, which includes Storage USA franchise program, is seen as a continuing source of high-quality acquisitions for the future. We completed six development projects during 2005, two expansions, for a total cost of $30 million. Subsequent to yearend, we've completed two additional projects; one in San Francisco and one in Baltimore, at a total cost of 22 million.

Our remaining 2006 development pipeline includes ten properties and three expansions for a total development cost of $70 million. Ten of these projects, with a total value of $55 million, will be owned by the REIT in the joint venture format. Our 2007 development pipeline currently consists of 13 properties owned by the REIT for a total development cost of $91 million. The construction of some of these projects has already begun. Our development efforts continue to focus on California, Chicago, New England, the Washington, D.C. area, and South Florida.

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

Thanks, Ken. Our financial statements covered in this report includes the three and twelve months ended December 31, 2005 compared to the three and 12 months ended December 31, 2004. Results for the three months ended December 31, 2005 include the operations of the 546 properties, 192 of which were consolidated, and 354 of which were in joint ventures, compared to the results for the three months ended December 31, 2004, which include the operations of 147 properties. 129 of these properties were consolidated and 18 were in joint ventures.

Revenues for the quarter were 44.9 million compared to 23.0 million in the fourth quarter of 2004. The net loss was $250,000, compared to $300,000 for the same quarter last year. For the year ended December 31, 2005, our revenues were 134.7 million, compared to 65.7 million in revenues for 2004. The net loss for 2005 was $5 million, compared to 18.5 million in net loss for the same period in 2004. Our G&A expenses for the quarter after netting development fees was 8.1 million. We have made significant progress in reducing G&A since the acquisition. Since acquiring Storage USA, we have reduced our combined G&A from approximately $50 million to our estimated G&A run rate for 2006 of 34 million. This is net of our development fees.

Our secondary offering in early December has strengthened our balance sheet considerably. As of December 31, 2005, our outstanding debt was approximately 867 million, which includes the notes payable to trust under our trust preferred financing that we executed early in 2005. This is down considerably from the end of the third quarter, where our outstanding debt, which included the trust preferred financing, was 1.05 billion. With the 191 million in net proceeds raised from the secondary offering, we were able to pay down approximately 90 million in loans used for the Storage USA transaction and additional 100 million in variable rate corporate indebtedness.

We now have a fixed-rate debt to total-debt ratio of approximately 89%. The weighted average interest rate is 5.3% for the fixed-rate loans and 5.7% for the variable rate loans. The total weighted average interest rate of all of our fixed and variable rate loans was 5.4%. Our debt-to-market-cap ratio, including our OP units at the end of 2005, was 50.3% versus 62.2% as of the end of the third quarter. Our fixed charge coverage ratio for 2005 was 1.57, and our projected fixed charge coverage ratio for 2006 is 2.03.

As of December 31, 2005, we had 76 million of capacity on our line of credit of which nothing was drawn. We have an additional 18 properties that are un-leveraged that can be added to our line of credit, which would further increase our capacity. We believe that with our current capital structure, we have the ability to continue to grow through our acquisitions and development, which Ken has outlined.

We completed the documentation and testing of our internal control processes as required by Sarbanes-Oxley and no material weaknesses were found, and no significant deficiencies were identified. We are very proud of our accounting and information systems and the fact that we were able to integrate the accounting for the Storage USA acquisition and complete our first year of SOX testing without any significant problems. The total amount that we spent on becoming Sarbanes-Oxley compliant in 2005 was $800,000.

Now, to our guidance for 2006. For the first quarter, we estimate that our basic and diluted FFO per share to be in the range of $0.20 to $0.22 per share. For the full year, we estimate our basic funds from operation per share to be in the range of $0.97 to $1.01. We estimate our diluted FFO per share to be in the range of $0.96 to $1.00. These annual estimates have been reduced by $0.02 due to the effects of implementing FAS 123R, which is the accounting for non-cash compensation expense of stock options and grants. Our full-year FFO numbers include the six acquisitions that were closed subsequent to yearend and the ten other acquisitions that are under contract or Letter of Intent. No other perspective acquisitions have been included in our guidance.

With that, I would like to turn the call over to Karl Haas, our Senior Vice President of Operations, who will give us more insight on the operational performance of our properties.

Thanks, Kent. As Ken and Kent have mentioned, we once again have had positive operating results during the fourth quarter. For the fourth quarter, our top three performing regions were Florida, Northern California, and the Southwest region. The increase in net operating income for stabilized properties for these three regions is between 9.2% and 11.3% for the quarter. For the year, our top three performing regions were Florida, Northern California, and the Southeast region. The increase in net operating income for stabilized properties in these regions was 10.4% and 13.2% for the year.

Our weaker performing regions included the Central region, New England, Texas, New York, and New Jersey markets. At a more micro level, some of our top-performing MSAs were Atlanta, Tampa/St. Pete, San Francisco, and combined areas of Miami, Fort Lauderdale, West Palm Beach, Phoenix, and Las Vegas. This quarter, I'm glad to say I have a much shorter integration update for you. We're still tweaking things and I'm happy to say the vast majority of heavy lifting related to the integration is finished in 2005. We're back to operating self-storage facilities, and I for one am pretty excited about the proposition.

Ken, Kent, myself, and several other management team members continue our travels around the country, visiting our properties and holding Town Hall meetings with our field employees. We plan to visit between 400 and 450 sites, this year, and hold approximately 30 Town Hall meetings in 20 of our key markets. The overall attitude of the field remains positive and we are moving forward with training initiatives that will help up ensure a positive, consistent experience for our customers.

Now, for our quarterly hurricane update. Hopefully, the last one for a while. Our last two facilities in New Orleans, which were damaged by Hurricane Katrina, have fully reopened and are both greater than 95% full. The non-reimbursable casualty loss of these two properties was approximately $285,000, which hit in the fourth quarter. Hurricane Wilma had an effect on over 40 of our stores that we operate in east and west coasts of South Florida. The damage to the properties was not substantial, but it was widespread and all of the properties are operational. And with many of the effected sites, above 90% occupancy, so we're surviving that one.

We incurred an additional $65,000 of un-reimbursed expenses on our Florida properties, bringing total losses from hurricanes in the fourth quarter of 2005 to approximately $350,000. Our re-branding efforts to convert the Storage USA stores to the Extra Space brand are well under way and will continue until the end of the year. Many of the sites in the warmer climates have already been re-imaged and signage installations have begun. The site managers where these changes have taken place are very positive about what they are seeing. We have posted a few pictures on our website so you can see the difference that the painting and the signage change makes.

As for some of the initiatives that our operation team are working on for '06, the first is enhancing our exception reporting capability to enable us to focus in the critical areas where we have the most impact. A second initiative is the next update of center-ship store to incorporate changes that will improve the flexibility and effectiveness of this extremely important tool that we use for managing properties. The third initiative is refining our facility standards, continuing our efforts to extract the best practices of Storage USA and Extra Space. And the last of the '06 initiatives is the implementation of a process to solicit ongoing feedback from employees and customers to benchmark our performance in the critical areas of employee morale and customer satisfaction.

With that, let me turn it back to Ken.

Thanks, Karl. 2005 was a company-changing year for Extra Space. So, what's next? First and foremost, we will strive to become the best operating and best performing self-storage company. I think the benefits of our combination of best practice innovations and the financial synergies of our merger with Storage USA are yet to be fully realized, and I eagerly await to share those results with you in the future. The revenue management team, which joined us from Storage USA, is already paying big dividends and will be a major factor in our success during the coming years. When we combine this with our marketing and our industry-leading, high-key infrastructure, we believe that we have the people, the processes, and the properties necessary to maximize our revenue streams.

Expense control is an area where we are looking to improve. Some of the property-level expenses are not controllable. However, some of them are very controllable. We are currently looking at various initiatives to drive these costs lower. Our new scale enabled us to do this with much more effectiveness. We will also continue to grow, maybe not at the pace of the last couple of years. Our acquisition focus is in our core markets but we may purchase one-off properties from our strategic partners, which are not in the core markets.

Both the acquisition and development environments are very competitive and challenging, right now, especially in our core markets. This means that we may not be able to reach our acquisition goal of 200 million. Our ability to reach this goal will depend on whether we are able to find the quality properties which fit into our portfolio on an accretive basis. As Karl mentioned, we are in the midst of a capital improvement and re-branding effort. Over 50% of the Storage USA properties will be completely repainted and 100% will have all new signs. This will be completed by the end of the year.

The fundamentals for the self-storage business remain very positive in most of our markets. We continue to see the ability to raise rents, the economic growth rate in the U.S. is robust, and the consumer sentiment remains positive. Our business is one that derives income from peoples' needs to keep and store valued, personal, and business possessions. The more items that people purchase, the better it is for self-storage. I would like to finish by saying we're in a great business with excellent opportunities for growth in the future. And as I stated before, I believe that with the quality of our people, the quality of our processes, and the quality of our portfolio, we will generate long-term shareholder value.

With that, Kent and Karl and I are ready to answer any questions that you might have.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Sir, we have a question from the line of Ross Nussbaum with Banc of America Securities.

Hi guys. Good afternoon. Two questions. First, can you talk a little bit more about your decision to outsource the call center and talk about sort of the economics there? What are you paying to outsource that function, and how are the employees of that call center being incentivized to maximize value for Extra Space shareholders?

This is Karl. We tested, and I think we mentioned this in previous calls, we compared the call center that we eventually went with in Tucson to our in-house call center and the other external call centers at Extra Space was already using, and we found that their performance was superior to our in-house and far superior to the external call center that we were using. And we have found that, ultimately, the cost will be less than it was costing us to run our in-house facility. At this point, we're still working out the specific incentive plans that we will use because we had some that were working pretty well in our in-house call center and we're working with the outside call center to implement something similar.

And what's the name of the operator of this outside call center?

Online Self-Storage.

Okay, and then, my second question is - Ken, I think you touched on this with respect to the expense growth because it obviously hurt your same-store results in the fourth quarter, however you want to define those. Where, specifically, do you think the synergies lie with the bigger portfolio? I'm guessing it's not necessarily on the property taxes or the payroll. So are you looking at advertising and insurance? Or where would it be?

Ross, this is Kent. Our fourth quarter, same-store properties were up on expenses for two main reasons. The first being the casualty expenses, which Karl talked about, from the hurricane and that was a substantial piece depending on which group of portfolio properties you're looking at it. Our normal same-store group of about 113, 123 properties. That number was almost $350,000. When you take that out, our expense increase was 6.8%. Included in that number are one-time adjustments made to a number of our properties for property taxes that were acquired by the REIT from either new acquisitions or from our joint-venture partners. And so, there were upticks in property taxes for that. If you take the property tax adjustments out, then our expenses for the 123 stabilized properties was only 4.6%.

To answer your question, we do believe that there are synergies in our advertising. We're going to see some of that, this year, in that as yellow page ads come up for renewal in this calendar year, we will be able to see reductions then, synergies from that. We're already seeing some reductions in our insurance line item from the combination of our two companies and the amount of money that we're paying on insurance. And then, pro formad in our G&A expenses are synergies from our district managers and from a corporate level that we had hoped to achieve and we believe that we will be able to achieve, all of on the G&A side. And then, there will be other line items as payroll, office expenses, where we hope to find other savings because of the combination of the two companies.

Thank you.

[OPERATOR INSTRUCTIONS]

Sir, our next question is from the line of Eric Rothman with Wachovia Securities.

Good afternoon. How much top-line synergies are included in your forecast? Or your guidance, I should say.

Let me take that. This is Ken. There isn't any. That doesn't mean we won't achieve it because we believe we will get some top-line synergies from working back and forth between the properties. And also, this isn't really a synergy but it's a result of the re-branding effort on Storage USA. We believe that when you re-image all the properties and repaint them and make them look nicer and make the offices better, that there is upside potential to raise rents and to make our consumers and our customers happier. It's very difficult to quantify those things so we have not quantified them in our budget, but we do expect it to be a positive for the Storage USA properties. How positive? It's very difficult to put a number on.

Great. In terms of the re-branding cost, you mentioned that I think you spent about over half of it was completed and you expected to do another half of it in '06. What CapEx, what level of CapEx are we talking about there?

First of all, the answer is that very little of it was done in 2005. Most of it is being spent in 2006 and the number is about $50 million for the Storage USA properties, both the joint-venture properties and the wholly-owned properties for Extra Space. And so, I would guess less than $5 million was spent in 2005. The bulk of that is this year and it's being spent, right now. There's a lot of repainting, there's a lot of new signs, there's a lot of activity, primarily in the southern part of the U.S. and we're going to sort of move into the northern part as the spring comes and the weather gets better.

Great. Thank you, very much.

[OPERATOR INSTSRUCTIONS]

And sir, we have a question from the line of Rick Murray with Raymond James.

Hey. Good afternoon, guys. I guess I just wanted to touch on -- I guess in past calls, one of the recurring themes had been that trends were somewhat softer in some of your Northeastern markets, particularly Massachusetts. I was curious if you could give us an update there.

The Boston market is starting to show some signs of coming back and we are - while in 2004, it had very modest growth, we're anticipating in 2005, that that growth will be improving. The growth in 2005, I believe, was 2.6% on revenue and we're expecting that growth to improve significantly in 2006. One of the things that also happened in 2006 is that we have a lot of development properties in the Boston market that are actually going to move into the maturer pool and we expect that, also, to help boost our growth there.

Okay, great. Thanks. Another question I had was, can you give us any detail with regard to cap rates on some of your more recent acquisitions, as well as the property that you bought from a franchisee in your affiliate program, or partners program, I should say? And can you talk about any competitive advantage in terms of pricing, perhaps related to that transaction?

Yes. With respect to the franchisee cap rates, they've been in the range of 7% to 7.5%. We define the cap rate after taking out an implied management fee, not before a management fee. The competitive market cap rates for properties we've bought in the competitive market have been just a hair under 7%. Now, a 6.8% cap rate with an implied 6% management fee translates into a mid-7s cap rate if you apply the management fee, so it's a definitional issue, but one of the things that's true about acquisitions is that you have to imply a management fee because you do have an overhead cost increase, over time, when you do acquisitions. It really does cost 5% to 6% to manage these properties. So, when we look at it, we look at the management fee being included.

We are finding that the acquisition environment is extremely competitive and that we are seeing transactions happen based on our definition of cap rate, in the low 6s and even 6%. And of course, if you look at the Storage USA public storage transaction -- Shurgard Public Storage transaction, it's even considerably lower than that. So it's a real challenge.

The other thing is that we're seeing in the acquisition market is a lot of properties that have come on the market which are not fully stabilized, or barely, basically in the early levels of lease-up, and the sellers are expecting to get 7 cap rates based upon a pro forma, two years down the road, and this is very challenging for us to be able to try and buy properties like this. Some of the private companies are able to do this because they're not worried about quarterly earnings numbers.

Okay, thanks. That's helpful. Paul Puryear is here with me and I think he has a question, as well.

Hey, Ken. A question on the G&A. Given the complexities with your company, I guess the large management component, how do you measure G&A and how would you sort of present that to the Board as you compare to your peers?

Well, it's an interesting challenge. First of all, we define G&A as including all costs that are not at the direct property level. That means the district managers, the marketing department, the computer department, the accounting department, our divisional vice presidents, and everybody in operations is in the G&A. I believe public storage puts many of those costs in the properties so it's not an apples-to-oranges comparison. But we put it in G&A. I believe some of the other public companies put it in G&A.

Secondly, we obviously have big management fee revenues coming back in, and I think those revenues are in the range, on an annualized basis, of about 18 million to 19 million. So if you subtracted those out, plus we have a revenue fee stream coming in from insurance at all the properties, it's like getting a partial management fee. That's another couple of million dollars. You really have in that range of $20 million or $21 million coming in from management fees to offset the $34 million of overhead that we're projecting or at the run rate that we're at, right now. So if you wanted to net it all out and say well what's the management cost of Extra Space, given it's wholly-owned properties after you net out its management fees? It's in that 13, 14 million range. You can slice it any way you want. Then, if you look at the $14 million based upon our revenues, I think that's in the range of sort of 7% of our revenues. Is that helpful, Paul? Do you have a further question on that?

No, I don't. I've got one other question, though.

Okay.

If you look back at the business over a period of several years, what are the best operating margins that you've seen? I mean, right now, we calculate that you're at about 61% or 62%. That's the NOI at the property level.

Well, we might be that low but I think if you just take our stabilized properties, you're going to see that number is about 65%, 66%. So that -- the trouble with looking at operating margins is as follows; if you do a lot of acquisitions, let's say, in the state of California, your property taxes are immediately levied at the new price that you bought the properties for. If you happened to develop hundreds of properties in the state of California in the 1970s and 80s, your property taxes are going to be very, very low, particularly if your portfolio is heavily weighted towards California.

And this also means in any -- California's extreme, but in any place where you've done all your own development, your property taxes are going to be lower because they don't get inched up. But when you do acquisitions, you sort of get mark-to-market so that's one issue that's not comparable across companies. Secondly, your rent per square foot - certain expenses do not go up just because you have higher rent per square foot so we tend to have higher margins in our higher rent areas, particularly California, because even though property taxes are high there, they might be double for the same valued property in Washington, D.C. than they are in California.

So you would expect higher margins in California even with the reassessment of property taxes. So the sensitivities on operating margins has to do with property taxes and rental rates. And it's hard to sort of equate it all the way across the industry. So we see a marked variation by region. Another example would be Chicago, Cook County, property taxes are high, through the roof, and you have lower operating margins there just because your property taxes are 3% and 4% of value instead of 1%. New England's the same. New York City, even worse. So I don't know if that's a good answer, but our margins are about 65 right now. It's sort of mix and match all over the country.

Okay. Thanks, Ken.

And this concludes our question-and-answer portion of today's conference. I'd like to turn it back over to the group for any further comments.

Wait, wait. I think there's one more person.

Sir, we have a question from the line of [Chris Pike] with Merrill Lynch.

How you folks doing?

Hello, Chris.

How you doing? Quick question, being new to the company. Looking at leverage going forward, I know you brought it down to about 50.3% in the quarter. I wonder if you could maybe just talk about any future sources and uses, maybe perhaps next capital raise, and where your target leverage is?

Well, first of all, that leverage -- we consider our trust-preferred certificates, which represents part of that 50%, as being preferred stock, which it really is. It's on the balance sheet as debt but the reality is, it's preferred stock. So actually, debt leverage is lower than that. We have previously said that we would like to operate between the level we're at now, which is in the high 40s on debt, and to the mid to high 50s. We probably won't go over. We would feel uncomfortable going over about 58% or 59% on the leverage factor. What that means is that we can grow, I believe, through debt by sort of 400 to 500 million more before we need to go out to the equity markets for an equity offering.

We would anticipate that depending upon the acquisition cycle, one of the big issues for us is, are we going to be able to acquire a lot more, this year? The cap rates are so low that it may be that we won't acquire very much at all, and there'll be no need for any capital raise of any kind because we won't -- much of our development pipeline is taken care of by joint-venture equity and debt so we don't have to put too much money into it and if we're not doing a lot of acquisitions, we don't see the need for any equity raise, at least this year and maybe even into the first part of 2007. If the acquisition environment turns better and we get an opportunity to buy a better-sized portfolio, we may have a reason to go to the equity markets, but right now, we don't see it.

Okay. Thanks a lot.

And sir, you have no further questions.

Well, thank you very much. I appreciate everybody coming and listening to the conference call. We look forward to reporting to you, next quarter. It won't be too long from now, since we're already halfway through or three fourths of the way through the next quarter. Thank you, very much.