Extra Space Storage Inc (EXR) 2006 Q1 法說會逐字稿

[starts in progress] -- and uncertainties that may actually 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 & Exchange Commission, and in particular our Form 10-K for the year ended December 31, 2005. These forward-looking statements represent management's estimates as of today, May 4, 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 would now like to turn the call over to Extra Space Storage's CEO and Chairman, Kenneth M. Woolley.

Thanks James. Welcome today to this conference call to discuss our first quarter results. The quarter was positive and it's a good start to 2006. Early this morning we sent out our first quarter earning's press release and posted supplemental information on our web site.

For the quarter we achieved fully diluted FFO of $0.20 per share which is 33% above 2005's number. We also showed strong same store and overall portfolio growth with increases in revenue in every region of the country.

These results provide further evidence of the progress we are making following the acquisition of Storage USA Both Extra Space legacy properties and former Storage USA properties are performing well. We finished the quarter with 198 wholly owned properties, 355 joint-venture properties as well as 81 properties which are in our franchised and managed programs.

Due to Extra Space's mixture of properties that are wholly-owned, joint venture and managed it is sometimes a challenge to understand the operating results of the company as a whole.

For this reason we have further supplemented information posted our website that gives a detailed and a complete performance of all the difference property groups. I will highlight the performance of a few of the property groups.

Perhaps the best view of our first quarter performance on a comparative basis are the 103 same store, stabilized properties which were wholly owned and held in the REIT before the Storage USA acquisition.

Income increases for these properties came primarily from rent increases. For the quarter average occupancy was slightly up at 85% versus 84.4% in 2005. Revenues were up 6.4%, expenses up 5% due mostly to increases in property taxes and utilities and [anali] was up 7.3%.

These stores have benefited greatly from the synergies created by the integration of Extra Space's technology platform and Storage USA's revenue management team. This combination is having a positive impact on these properties and is very encouraging for our overall prospects this year.

The next group of properties are the 57 stabilized properties that Extra Space acquired from Storage USA on a wholly-owned basis. We actually acquired 61 properties, but we consider 57 of them stabilized. These properties also had a good year compared to last year. Average occupancy for the quarter was 84% versus 80.9% in 2005. The occupancy increase had a positive impact on revenues which were up 6.1% with expenses limited to 4.6% and anali was up 6.9%.

Next is our complete count of 563 stabilized properties which includes 174 wholly-owned, 346 joint-venture and 43 managed properties. This group gives a comprehensive view of the overall performance of all the markets in which we operate. Average occupancy was 83.2% in the first quarter compared to 81.8% the previous year. Revenues were up 5.3%, expenses were up 4.8% and anali was up 5.7%.

Let's talk about our continued growth. The market is not exactly cheap at the moment and we are being very careful at what we buy. However, Extra Space continues to grow through acquisition and development. On the acquisition side we acquired seven properties at a total cost of approximately $40 million, during the quarter. These properties are located in Florida, Georgia, Pennsylvania and Washington State.

The cap rates paid on these properties range from the low to mid-sevens. Subsequent to the end of the quarter we closed on the acquisition of seven additional properties. Five of these properties representing a total of $22 million are what I would call an opportunistic purchase. These properties were previously held in an unconsolidated joint-venture with debt provided by the REIT. As part of this transaction Extra Space was able to recover $10.3 million in loan receivables that were assumed at the time of the Storage USA transaction. These properties are located in Kansas, Tennessee and Texas. The cap rate on this purchase is approximately 7.8%.

Also this week we closed on two properties located in North Hollywood, California and Dallas. The total of these two acquisitions was $26.2 million. In total then we have acquired 14 properties for approximately $88 million since the beginning of the year.

The amount of acquisitions we have done so far is in line to achieve our stated goal of 150 to $200 million. However, we continue to see a competitive acquisition environment and we want to be smart about what we buy. We therefore are not certain that we will meet our goal. We do however have four other properties under Letter of Intent, at this time, for approximately $31.5 million.

Since the acquisition of Storage USA 11 of the 15 properties we've acquired have been part of our strategic partners program. This program which includes the legacy Storage USA franchise and third-party management program, we see as a continuing source of high quality acquisitions.

Now, on the development side. We completed two development projects in the quarter for a total cost of $22 million. These projects are located in San Francisco and Baltimore. Our remaining 2006 development pipeline consists of ten new properties and three expansions for a total development cost of approximately $69 million.

These properties are located in our core markets of Boston, Chicago, Los Angeles, Miami and San Francisco. We anticipate four properties to be completed during the second quarter. Ten of the 2006 development projects with a total value of approximately $49 million will be owned by the REIT.

Our 2007 development pipeline currently consists of nine properties owned by the REIT for a total development cost of $72 million. The construction for many of these projects has already begun.

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

Thanks Ken. Our financial statements covered in this report are for the quarter ended March 31, 2006 compared to the March--the quarter ended March 31, 2005. Results for the three months ended March 31, 2006 include the operations of 553 properties, 198 of which were consolidated and 355 of which were in joint ventures. Compared to the results for the three months ended March 31, 2005 which included the operations of 148 properties, 130 of these properties were consolidated and 18 were in joint-ventures.

Total revenues for the quarter were $45.4 million compared to a $22.9 million in 2005. Net income was $738,000 compared to a net loss of $640,000 last year. Our financial position remains strong. As of March 31, 2006 our outstanding debt was approximately $893 million which includes the $120 million in notes payable to trust under our trust preferred off-financing that we executed in 2005.

At the end of the quarter our debt-to-market cap was 48.3%. Our fixed-rate debt to total-debt ratio was approximately 87%, and the weighted average interest rate is 5.3% for fixed rate loans and 6.2% for variable rate loans. The total weighted average interest rate for all of our debt was 5.4%. The fixed charge coverage ratio, including our OP units, as of the end of the quarter was 1.85. This ratio has improved considerably since the end of the first quarter of last year.

Our projected fixed charge coverage ratio for 2006 is 2.03 times EBITDA. As of March 31, 2006 we had $75 million of capacity on our line of credit, of which 25 million was drawn. Our financial structure gives us the ability to continue to grow through acquisitions and development.

We have an additional 22 unleveraged properties that can be mortgaged, which could increase our borrowing capacity by an additional $110 million. G&A expense for the quarter, after netting development fees was $9.2 million. This amount includes non-cash compensation expense, relating to options and grants of $386,000. Our non-cash compensation expense has been included in our previous 2006 FFO projections, but was not included in our G&A estimates.

We estimate our full year, 2006 G&A to be $36 million including the $1.5 million in non-cash compensation expense. The $36 million is net of development and acquisition fees. From this point forward we will include this amount in our actual and projected G&A.

G&A and interest expense were approximately $600,000 above our first quarter projections. This amount includes one-time expenses of approximately $800,000 relating to professional fees, consulting fees and final transaction fees on the Storage USA acquisition and some write off of loan fees.

In our earnings press release we reported first quarter, fully diluted FFO of $0.20 per share. Our property level performance was higher than budgeted, but was offset by one-time increases in G&A.

In terms of guidance for the second quarter we estimate our fully diluted FFO per share to be in the range of $0.23 to $0.25 per share. We are reiterating our fully diluted FFO per share estimate for the full year to be in the range of $0.97 to $1.01.

Our full year FFO estimate includes $36 million in G&A and the 14 acquisitions that we have closed so far in 2006. No other prospective 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 more insight on the operational performance of our properties.

As Ken and Kent mentioned we had solid operating results during the first quarter. All of our internally defined regions had positive increased in revenue on the year-to-year comparison.

Our top-performing regions in terms of revenue increases were Florida, Northern California, South East and the South West regions. The revenue increase for the regions was between--7--for these regions was between 7.9% and 9.8% for the quarter.

Our weaker performing regions were the Central, New York, New Jersey regions with revenue increases of only about 3%.

Our top performing larger MSAs were Chicago, Houston, Miami, Ft. Lauderdale, West Palm Beach, Phoenix and San Francisco. We continue to modify a few integration related items as we move into 2006. Without exception these items are procedural in nature and it's nice to have some wind at our back as we move forward as one company, especially into the best quarter of the year.

To add to what Ken said, I think the results that we've seen in the first quarter are a testament to the continuing progress of the Storage USA/Extra Space integration efforts. The continued hard work and dedication of everyone at Extra Space Storage, especially our field employees, has been outstanding.

To continue to ensure the high level of moral that has characterized the integration so far, Ken, Kent, other members of the management team and I continue to travel around the country visiting our properties and holding Town Hall Meetings. So far this year we've met over 500 employees and seen nearly 200 properties in seven states including Washington D.C. Without a doubt the overall attitude of the employees we've met, remains positive.

This does not mean that we do not have ongoing challenges however, they are more of a routine nature and not related solely to the integration. The issues we do have we are addressing head on with honesty and integrity.

It speaks volumes to the field when the CEO, himself, in person, at group meetings is answering questions about health insurance, changes in office, access hours and how we are handling customer-rate changes. Changes at the store level are often difficult for staff to buy into however we continue to make excellent progress in achieving buy in. And in the long run these changes will make us a stronger, more resilient and profitable operation.

Our capital improvements and rebranding efforts continue to crank along. Nearly 200 Extra Space Storage signs are currently in production. These projects will continue for the rest of the year, but the bulk of them will be started in the next two quarters. The sites where large-scale improvements have taken place look fantastic. Those of you that have visited the Storage USA properties before the upgrades will be impressed by the changes.

As a reminder, the total budget for all the capital improvements and rebranding projects is $48 million. This covers the original ESS properties, the 61 owned Storage USA acquisition properties and the 259 Storage USA properties purchased with Prudential. This budget was part of the original purchase price of Storage USA.

We continue to implement operational initiatives that will have a positive impact on our operational efficiency. These projects are starting to pay dividends. One of the programs in particular is called Pulse. Pulse is our new customer satisfaction monitoring program designed to keep our finger on the customer's self-storage rental experience and our level of customer service performance and delivery.

On a regular basis we contact our new, current and past customers via an automated integrated, voice-response system to enquire about their experience. The data provides us not only with a benchmark to gauge performance from time-period-to-time-period. But also compare our properties, districts and divisions performance in achieving customer satisfaction goals.

Moreover we are collecting satisfaction levels from our customers about their previous experience with our competitors. This allows us to determine our customer service level versus the industry and individual competitors.

In addition to performance tracking we have an opportunity to further enhance our culture of high customer service through service recovery efforts and continuous improvement.

We continue to spread Extra Spaces Clean & Green quality assurance program to all of our properties. All in all as a result of Pulse we will no longer have to rely on subjective guesses on how we are doing in achieving industry-leading customer satisfaction. We will have tangible evidence of our performance by district, division and company and benchmarks to prior periods.

We are looking forward with great optimism to the second quarter which historically is the peak season for self-storage. I think we are well positioned operationally to have an excellent quarter.

With that let me turn it back to Ken.

Thanks Karl. Well, the first quarter of 2006 brings a couple of opportunities to mind as we proceed into the remainder of the year.

The performance of our properties of course was positive and we are looking forward to a goal of becoming the best-operated self-storage company.

We know that the proof of this statement will be in continued operational performance and we are optimistic that the operational results of the first quarter are a sign of things to come.

With the continued positive environment for self-storage combined with our revenue management, operational and technology systems working in sync we have the opportunity to have a very good year for our properties.

The acquisition and corresponding integration of Storage USA has proved to be challenging. But positive change to the way both Extra Space and Storage USA used to do business. The integration is a combination of best practices between both companies with similar cultures and ways of doing business.

We are now moving forward with the unified approach. We still have issues, as all companies have to some extent. As mentioned by Karl, I joined our management team in travelling around the country, visiting our properties and meeting with our people. This has allowed me to get a first-hand view of properties and their operational performance and their capital expenditure needs. And I am very encouraged by the progress I have seen in the field.

So our focus this year is operations. We will continue to grow through acquisition and development, but it's not our primary goal. The acquisition environment is tough right now. Our peers, institutional investors and private equity continued to aggressive purchasers in the market place. In this competitive environment we will remain committed to a disciplined acquisitions approach

Frankly, self-storage has had a good run and we see no reason for a slow down in our ability to increase rates as the fundamentals of the self-storage business remain positive in most of our markets.

Our portfolio, due to it's weighting in the better storage areas of the market is well positioned to take advantage of this continued positive trend.

American consumers show no sign of reducing their demand for self-storage. They continue to buy and hold and fill up their houses with too much stuff and their tendency is our opportunity.

So I continue to be bullish on the self-storage industry. The economy is good right now we don't see any negatives on the horizon. It's a great business and one that is dynamic and I think it's going to be dynamic for years to come.

So I believe that the quality of Extra Storage Space--Storage's people, processes and of course, the quality of our portfolio will generate long-term shareholder value for all of us.

Thank you for listening to this call and we now look forward to hearing any questions that you might have.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Ross Nussbaum with Banc of America. Please proceed sir.

Hello, it's Christine McElroy here with Ross. Will there be any impact from the CCSs and the CCUs on the share count this year and is that included in your guidance?

It's included in our FFO estimates and we do expect to have a small amount of CCU and CCSs convert, after the end of the third quarter. And so our estimates on a per share basis are including that increase in the CCS and CCU, in the conversion of those shares.

And can you give us a sense of the impact there?

The impact?

On the share count?

Well yes, I would guess that the maximum number would be in the range of 2 to 300,000 shares.

Okay. And then can you comment on your interest expense in the quarter, are there any one-time items in there still or is the Q1 level a pretty good run rate for the current portfolio.

There was Christine this is Kent, about $100,000 of loan fees that were written off in the first quarter that will not be going forward in the future. So I would take the number for the quarter and reduce it by $100,000 and that would be a good run rate.

Okay.

Without respect to end changes in interest rates on our variable rate debt.

And then what level of tenant insurance income are you projecting in '06?

We expect that the income level in the second, third and fourth quarter will remain constant. We did have, included in that number I gave a minute ago of our one-time expenses, we did have some cost of setting up our captive insurance in the first quarter that we wouldn't expect to see going forward in the second third and fourth quarter. So the expenses will drop, but the income level should stay constant or--we're expecting it to stay constant. And the number that we had in the first quarter was about $125,000 was our one-time expenses.

Okay great. And then I believe Ross has a question.

Hello guys. Ken, you mentioned a couple of times in describing the integration you used the words issues and challenging I think two or three different times. Can you just walk us through what those issues and challenges have been, specifically.

Yes, one of the issues is getting everybody on the same page about keeping properties clean and in an orderly fashion. We have sort of a Clean & Green mantra that we're working through right now. A second issue has been the integration of the health insurance and other employee benefits where we actually reduced the level of benefits that the Storage USA employees were having and that caused some angst.

Also, the aggressive rent increases that we've been doing have had some impact. And some of the people have not been happy about that.

Also, there's--when you put two groups of people together you have different cultures. And there seems to have been people on the Extra--who were formally Extra Space employees, complaining that we became a Storage USA company and people on the Storage USA complained that it became an Extra Space company. And what really happened is we had to look at every operational procedure and combine them and try and use best practices so each group of employees had to have a big change.

And sometimes that causes angst as people don't like change. So that's one of the things we've been addressing in our Town Meetings and as we go around the country looking at properties and talking to employees.

Okay, the other question I had was--I guess in your supplemental information which is helpful, your wholly-owned stabilized properties did a little over 7% same store growth this quarter. But the Prudential JVs only did 2.5% same store growth. And I guess I'm wondering if I was Prudential and I saw that I'd be asking the question what's going on there. So I guess on behalf of Prudential I guess I'm asking that question, why the variation between those two groups of assets?

Part of it could be the issue of--I'm going to look at this right, I want to look at what your number is because I'm not clear on that.

This is on the first page in your supplemental. The 253 properties for the new Prudential JVs at 2.5% same store growth.

Do you want to comment on that Kent?

I think Ross, that when you're talking NOI there's--this is on the 253 Prudential joint-venture properties, the 2% NOI, that's the number you're looking at?

Correct.

What's happened on those is that in comparing the way Extra Space and Storage USA accounted for certain items, Extra Space pushed some of the costs that were historically pushed down by Storage USA. And so when you're comparing previous year to current year there are, it's somewhat of a non-apples-versus-apples comparison and that there are some costs included in our current year numbers that historically were incurred but not pushed down to the site. And that's what's making the NOI number on this schedule look a little lower.

So for example, one of those items is the call center. Extra Space has historically pushed the call center expenses down to a site level where Storage USA did not. And the costs of the call center are now in the Prudential joint-venture expenses whereas historically they weren't.

Okay. I don't want to hog it all, so I'll follow-up with you on that afterwards.

All right.

Your next question comes from the line of Eric Rothman with Wachovia Securities. Please proceed.

Yes, good afternoon. I just want to clarify something in your guidance. You used the phrase reiterate your 97 to $1.01 range for diluted FFO per share. If I go back to the transcript from the last call the diluted FFO range was 96 to $1.00 with the basic being 97 to $1.01. So is it basic or diluted guidance?

The reality is we dropped our guidance by a penny.

Okay, that's great. I noticed that the Amortization of Intangibles line, in the FFO reconciliation was a little bit smaller this quarter than it had been in the prior two quarters, third quarter or fourth quarter. Why is that and maybe you can help us understand that line in general?

Yes Eric, this is Kent. The amortization of intangibles is an allocation of the purchase price of assets that we acquire to the customer lists that we get when we acquire the properties. The amortization of that, allocation of that expense is done over an 18-month period of time. And so it's a very short timeframe. So what will happen is when you acquire the property you allocate some costs to that intangible and it quickly burns off.

In that we had a substantial number of acquisitions occur at the time that we went public and the--you're seeing the full amortization of some of those costs burn off. You will also see that occur the rest of this year and early into next year with the amortization of the intangibles on the Storage USA acquisition.

So that number is going to go away quickly, on other words over 18-months.

Okay, great. That definitely helps with that. And then lastly, with respect to the acquisition that you had mentioned, the--those that you've bought out of unconsolidated joint-ventures I think you quoted a 7.8 cap rate. What should we expect for, to the extent that you are able to do other acquisitions from the franchised and managed pool, is this anomalous the 7.8 or do you think that that's where you can achieve it [inaudible]?

This particular acquisition was part of the unwinding of a portfolio that was larger than the five properties we purchased I think it was eight or nine properties. Where the joint-venture partner took three of the properties and we took five. And as part of it all of the franchise debt was paid off and there was sort of the complete reconciliation of the backs-and-forths between the two partners. So the 7.8% cap rate, where it's an attractive cap rate, is partly reflective of the cost basis of our portion of the joint venture carried on our books and a number of other things. So it's not representative.

However, and really if you look at where the properties are located they are not in our core markets. But because of the relationship we had and some of the problems we had in that relationship we felt it was best to seperate that relationship and us take five and the partner take three properties. And it's a high cap rate, but on a continuing basis the cap rates are probably going to be more around that 7 to 7.5 range, or in the low sevens.

And then lastly the other--the two properties that you mentioned that you have purchased for $26.2 million. What roughly is the cap rate on that is that--?

The cap rate on those is in the low sevens around seven.

Okay, fabulous. Thank you very much.

Your next question comes from the line of Chris Pike with Merrill Lynch. Please proceed.

Good afternoon folks. Can you just talk about the pipeline at all. I understand that acquisitions might be getting a little tight. You commented a little bit on what you're seeing. What does the pipeline look like now versus a year ago, some color there?

First of all, the pipeline, our specific pipeline isn't very deep and we do have four other properties under letter of intent. And so our pipeline is not deep. We're looking at a lot of deals, most of them are trading below 7 cap. Much of what we see in the market place is not of a quality that we want to purchase it.

So either because of price or because of quality issues it's not there. Even though there's probably 5, 6, $700 million worth of acquisitions out there that we could do or we could bid on right now. Much of it we're not able to because of either location or quality.

And for example there's a big portfolio of properties that are available on the market that's in Detroit and Minneapolis and certain areas of the East, its an older portfolio, it's not--it's quality, it's physical quality isn't that great and its in less attractive areas in the market, were not bidding on it. We don't know what cap rate it will go at.

So there's a lot out there, but it's not a lot out there in the markets that we want to be in which is California and Florida and the West Coast, and to some extent, the best areas of Texas.

So that's why we're not saying that we're going to do huge amounts of acquisition volumes in the next six months. If we can hit the $150 million or between--$170 million for the total year I think we'll be pretty happy. Now things may change, because it appears to us that there hasn't been a lot of aggressive acquisitions going on by some of our public competitors, in the case of Public Storage and Shurguard for example because they are very involved in their merger together.

And we don't know with what's going on with [U-store-it] that's been very, very aggressive, whether that aggressiveness will continue or not. So that could be a dynamic that would change the environment, but right now, to date there's not a lot out there.

Okay, I guess, and I don't know, maybe this is just better to go offline. In terms of looking at some of our JVs and the promotes that are associated with that, just from a now perspective, is there any disclosure you can add in terms of what the promoted interest is in some of your positions are right now so we can get a better understanding of our NAD calculations?

I think all of that is disclosed and I think if we take that off line, Chris, I think we can point you to where that's disclosed in all the public documentation. It might be easier than doing that, then on the conference call.

Okay great, thanks a lot Ken.

Your next question comes from the line of Paul Adornato with Harris-Nesbitt. Please proceed.

Given the many moving parts this year I was wondering if you could provide a little bit of color as to how the quarters, the remaining quarters of 2006 may shape up?

Well typically the--we've given you guidance for the next quarter and typically the strongest quarter of the year is the third quarter where we would expect higher than the second quarter. And then if we can, we would expect a little bit of decrease then in the final quarter so that our guidance of 97 to 101 sort of stands.

We're not giving guidance today exactly, on each quarter, but I would say that if you added a penny or two to the guidance that we gave you for the second quarter it's more likely to be what the third quarter would be and then possibly slightly less for the fourth quarter.

Our seasonality always works that way for our business.

Okay. And given that you benefited from some old franchise acquisitions from Storage USA, I was wondering if you looked at the franchise business and if that has any appeal to you today?

Paul, this is Kent. I think if I understood your question it is, did we explore the franchise--the concept of a franchise business and continuing that, is that your question?

Yes.

The concept of a franchise business comes with it a substantial number of legal requirements for you to call it a franchise business. And in essence it does act a lot like a third-party management or a joint-venture arrangement. We're more inclined to move towards a third-party management or a joint-venture type relationship instead of trying to go through all of the legal aspects of a franchise, the rules of the franchise-type of set up requires.

So while we have explored that, we still have the expectation of doing third-party management and entering into joint-venture relationships with people similar to what we would have done in the franchise program, were just not calling it a franchise program.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Rick Murray with Raymond James. Please proceed.

Ken, I was curious if you could perhaps provide us with a little color in terms of what you see in the industry in terms of supply and perhaps compare that to a year ago, or six months ago, in terms of new supply that is?

Well I can say that the market that we're in that has the biggest impact of new supply would be the South Jersey and Philadelphia. Which is bye the way our weakest market in the country for our same store performance. That's a market that is oversupplied.

If you went back three years ago Long Island was oversupplied and now that's tightened up because there hasn't been much new supply coming on in Long Island. There's been a little bit in Northern Jersey.

Boston there's been virtually no new supply coming on for several years and finally we are seeing the Boston market recover. We has a 6.2% NOI growth in the Boston Metro-area for the quarter which was a really positive thing.

In the areas of California, Southern California, the supply growth is moderate, primarily driven by very high land prices and the difficulty that developers are having in getting approvals. So there's not a lot going on, I mean there is some, there's just a few properties.

Last year there was a drop in construction starts, that's 2005 over 2004, that's when it was supported by the Self-Storage Association.

So we're not seeing a lot of new supply. So just--the one market I'm--that's causing us some angst is that Philadelphia, South Jersey market.

Okay great, that's helpful. I was also curious about your comments with regard to a lot of aggressive capital in the space. Could you expound on that a little bit? And you referenced private equity, can you just talk about how that landscape looks at this point versus again, a year ago. If you see a noticeable change any new players now in the space that haven't been there previously?

I wouldn't say we've seen any new players, but there seems to be lots of institutional money out there who are making targeted investments, who want to make investments. A number of institutional players have contacted us about doing joint ventures and finding ways to invest in the sector, but have a hard time finding ways to do it because they need to align themselves with some kind of a management company.

There have been funds out of Australia that have come in and other foreign investors. We continue to see tax-deferred exchange buyers. California continues to be the lowest cap area of the country. And a lot of the properties that have traded in California have traded not to the large operators but to the private buyers because of, I guess people making money on other types of properties and wanting to exchange into storage.

Up until recently Public Storage had been very aggressive in buying. I think with the Shurguard acquisition we haven't seen them out there bidding as much. So there's just a variety and if you want to talk offline I can give you the list of people that we know are in the market place.

Okay, thanks.

Your next question comes from the line of Paul Puryear with Raymond James. Please proceed.

Yes, thanks. Hello Ken, one more question actually. You know when you completed the Storage USA deal you talked about the management fee income and if I am correct at the time you felt like you really didn't make anything from the incremental management fees. Is that still the case, and how do you view the management business and particularly as you pick up more JVs and you look to get more fee income.

Yes. The answer is that the management fee is roughly break-even. When you consider the total cost of taking on the total Storage USA overhead, as a company, it was roughly break even.

We're getting a little accretion out of it from the fact that we have all the insurance revenues come to us, so that helps us just a bit.

On an ongoing basis, because now we do have all the infrastructure in place to manage 600 properties, it's clear that on an incremental basis, in a market where we're already operating the incremental cost is not 6%. But if we--for example, if we were to take on a brand new market say like we were to take on a bunch of properties in Minneapolis or something, or some one-offs in different markets, the incremental cost would be much higher. We are sort of targeting in our analysis that the incremental cost is in the range of 3 to 4%.

So it is slightly accretive. If we buy something and we impude a 6% management fee.

Well is it something that you are really, aggressively would like to get or if you pick up management fees, okay, it helps. What's your view there?

Our view is this, our management fee deal, when we're going out to get people to manage properties we want to have it--there's a couple of reasons for it. Number one, it' usually new properties, and it's usually properties in markets that we're already managing and we always get a first right of refusal. So that we have the opportunity to have that managed property be a pipeline property for our acquisitions.

Other than that there is no real reason to do third-party management. So we will not take on--if someone brings to us a portfolio of five properties that are 20 years old in some market where--we're not going to manage them for that person.

If someone however, who is--brings us a brand new property in a market that we're already operating in we're going to go aggressively about trying to bring that property into our management program and get a first right of refusal so that eventually we may be able to acquire it.

So we don't consider ourselves in the third-party management business for the management fees alone, its really for the ultimate objective of acquiring the property.

Okay, that helps. Thank you.

Currently at this time there are no further questions in queue.

Well thank you everybody we certainly appreciate your listening to us today and learning about our company. And we look forward to the current quarter and we're going to do the best job we can to--for you as shareholders. Just for a note, we will have our Annual Meeting in Salt Lake City on May 24th. Anybody who would like to come is certainly welcome. Thank you very much.

Ladies and gentlemen this concludes your presentation you may now disconnect. Have a great day.