Extra Space Storage Inc (EXR) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second Quarter 2007 Extra Space Storage Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. James Overturf, with Extra Space Storage. Please proceed.

Thank you ,Latasha. Good morning, and welcome to Extra Space Storage's second quarter 2007 conference call. With us today, are CEO and Chairman of the Board, Kenneth M. Woolley, CFO, Kent Christensen, and COO, Karl Haas. In addition to our press release we have also furnished an audited supplemental financial information on our website at extraspace.com.

Please remember that management's prepared remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ 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, FFO and guidance. We encourage all our listeners to review a more detailed discussion of the risks and uncertainties related to these forward-looking statements, contained in the Company's filings with the SEC.

These forward looking statements represent management's estimates as of today August 1, 2007. 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 Kenneth M. Woolley.

Thank you James. Welcome to our conference call. We have with us our Chief Financial Officer, Kent Christensen, and our Chief Operating Officer, Karl Haas. And we'll all be talking today. I hope everyone's had a chance to read the press release and take a look at the supplemental schedules. If you haven't you can do that at a later date.

But top line was that our FFO for the quarter was $0.27 a share. This is a 13% increase over last year's number for the second quarter of $0.24 a share. Our earnings were in line with our internal budgets and with the guidance we issued in April.

As we've discussed, the last couple of quarters our $0.27 per share of FFO includes a P&L drag from our balance sheet -- on balance sheet and joint venture development program. This drag is just a little hair less than $0.01 per share. So without that our FFO would have been $0.28 per share.

Our same-store properties had strong revenue and NOI growth, revenue was up 4.3%, NOI up 4.6%, in comparison to last year for the same 181 properties. If you look at it on a six month basis, our revenues were up 5.1% and our NOI was up 6.5%. We had an abnormally low expense increase in the first quarter, and a little higher than normal expense increase in the second quarter.

One of the reasons that our -- there are two reasons that our NOI in our same-store properties is lower than it was last year. First is, we have a different same-store group. Last year we had about a 122 properties which represented all legacy Extra Space properties. This year, included in our same-store numbers are the Storage USA properties, 61 of them, that we acquired two years ago in the purchase of Storage USA.

It's very interesting to note, that if we only looked at the same same-store pool that we did last year, our revenues would have been up for the six months, 5.9%, as opposed to 6.5% for the same group of properties the previous year, for the same six month period. The second reason that our -- and so basically, the Storage USA group of properties that we acquired have had less robust revenue growth.

Second reason, that we've had a little slower revenue growth has been the situation in Florida. In our same-store pool there are 23 properties in Florida, and without those 23 properties our revenue growth would have been 5.3% instead of 4.3%. And we've actually had negative revenue growth in Florida coming off of a unwinding of the excess demand caused by the hurricanes of two and three years ago, and to some degree, the housing situation in Florida.

But we are -- on a whole, we are pleased with our -- with our activity and with our revenue growth, and expect that we'll continue on a similar rate throughout the rest of the year. Acquisitions for the quarter were just excellent. We closed on the acquisition of 18 properties located in California, Florida, Georgia, Hawaii, Maryland, Virginia for a total of $216.4 million.

This included nine of the ten AAAAA Rent-A-Space properties for a total of $137.8 million. The last AAAAA Rent-A-Space property is closing today, which will complete the AAAAA Rent-A-Space acquisition. We currently have one property under contract in the state of California, in the Los Angeles area for approximately $13 million.

And we've also signed a letter of intent, or are very close to signing a contract with one of our joint venture partners to purchase their 51% interest, we own the other 49% interest, in seven properties located in various locations around the U.S. This is a good acquisition for us because this joint venture group of properties is financed at a very high interest rate loan, and we'll have the opportunity to pay that loan off. The total value of this deal is $43 million.

Year-to-date, we've acquired 22 properties for $245 million which places us pretty close to our stated year end range of $250 million to $350 million. So we believe we'll have no problem meeting our acquisition objectives. The market for acquisitions on average remains very competitive, particularly for larger portfolios in for [A] properties in A markets.

However, we're hoping that we'll see some turnaround in that as a result of the change in the credit markets that's occurred over the last couple of months, which makes it more difficult for private buyers to get very high leveraged low interest rate debt.

With regard to development, in the second quarter we completed the development of one wholly-owned property in the Bay area for $10.8 million. This is in Belmont, California. And, we expect to complete two more wholly-owned properties this year, for a total of $17.9 million. These properties are located in Los Angeles and in the Chicago area.

Next year, 2008, our development pipeline stands at 14 properties with a total cost of $123 million. It's little too early for us to estimate the 2009 pipeline, but I can say that we have a lot in the works, and we expect to have a robust development outlook for 2009.

With that, I'm going to turn the call over to Karl Haas, our Chief Operating Officer, who will give a little more detail on our operational performance.

Okay, thanks. As Ken stated our same-store pool of 181 properties had a good quarter of growth in comparison to last year, with revenues and net operating income in the mid 4% range. For the year, our same-store portfolio has achieved revenue growth, about 5.1% and net operating income growth of 6.5%.

Our same-store occupancy for the quarter compared to the same time last year, as of June 30 was down about half a point. As evident by our year-on-year square footage occupancy, rental activity was essentially flat during the quarter. In analyzing the results for the quarter, April was our slowest month for us, both in terms of rentals and vacates, however, May and June made up quite a bit of ground for us.

REVPAF which is revenue per available foot for our same-store pool was about $12, which represents a 4.2% increase year-over-year as of June 30, 2007. As we expected in the second quarter, our same-store expenses came back in line with more historic levels, as we finished the quarter with a 3.8% year-on-year increase.

Our same-store expenses included approximately $160,000 of additional advertising expenses related to our national cable TV advertising program. Without the cable TV advertising, same-store expenses would have increased about 2.6%, and net operating income would have increased 5.3%.

The total cost for the TV advertising was $1 million of which the wholly-owned properties will pay a total of approximately $300,000. $200,000 was expensed to the wholly-owned properties in this quarter. In the third quarter we'll expense the remaining the remaining $100,000.

As Ken said, the quarter showed the diversity of market conditions across the 600 plus market portfolios spanning 33 states. For example, we have several markets posting outstanding results that have been typically average performers in the past. These markets include Columbus Ohio, Denver Colorado, Houston Texas and St. Louis Missouri. All these markets had year-over-year increases north 7.5%.

In terms of our larger core markets, Chicago continues to perform at a high level, as well as San Francisco and Oakland. Our four largest MSAs, Boston, Los Angeles, New York/New Jersey and Baltimore/D.C. are all performing in the upper 3% range. On the bottom end of the spectrum, Florida is by far our worst performing market, with occupancy down 4.5 points and revenues down 2.5 points. Florida is now back, at where it was in 2005 before the increased hurricane activity.

For those of you who want to see the diversity in detail, as usual there are four tables in our supplementary package, that give detailed information regarding specific information by MSA for the quarter and the six months, end of June 30, 2007.

The national cable TV advertising program I referred to earlier, has been completed and we are analyzing the results in detail. By all accounts it appears that the program had a positive effect on our properties, especially in driving people to our website and getting them to reserve units.

The average number of visitors to our website increased about 25%, and the average number of reservations coming from the website increased about 35% during the weeks we ran the campaign, compared to the four weeks prior to the campaign. While some of this increase could be seasonally related, we believe the majority of it is related to the TV campaign.

One of the interesting findings from the program is that even though we had a noticeable increase in the web activity as I mentioned earlier, the increase in call center activity was not as dramatic. This demonstrates the growing importance of the web in the buying process, and shows that cable TV viewers in particular, are more likely to use the web rather than the phone in researching prospective purchases.

It was difficult to measure the impact of TV on customers who went straight to the property without calling or going online. But based on the results, we are planning to utilize cable TV advertising on an ongoing marking basis, to communicate and to drive to our customers to our website and properties.

The 30th year anniversary sale that we started, and we mentioned in the first quarter, has also stimulated rental activity, and helped us maintain healthy occupancy levels. While we call this a sale for marketing purposes, it really was a sophisticated set of pricing actions from our revenue management group, targeted to increase overall revenue and profitability.

As part of the sale, our revenue management team programmed occupancy and availability triggers into our technology system, which on a real-time basis, increased street rates for higher demand units or vice-versa for lower demand units.

We believe this testing, and the technology, will benefit us greatly in the future, because we've learned more about current and prospective customer behavior and pricing sensitivity to add to the extensive database we already have. The sale, we believe helped us maintain occupancy during the quarter, and the television advertising also helped.

I'd like to now, turn the call over to Kent Christensen, our CFO, who will comment on our financial results in more detail.

Thanks Karl. On the accounting, finance and treasury front, our condition is good. We believe our debt is at a manageable level and with the available cash, short-term investments, credit line, and our unleveraged properties, we have nearly $500 million available to pursue growth opportunities.

Our total outstanding debt as of June 30th, was approximately $1.25 billion and this includes the $120 million in notes payable to trusts and the $250 million in exchangeable notes. Approximately 95% of our total debt is long-term and fixed rate with an interest rate of 5% and an average maturity of nearly six years.

The total weighted average interest rate of all of our debt is 5.1%. Our total debt as a percentage to our market capitalization including our OP units was 52.3% at the end of the quarter. And our fixed charge coverage for the second quarter was 2.16.

The structure of the AAAAA transaction ended up being a little different than what we previously disclosed on our last couple of calls. Instead of being an all cash acquisition, it ended up being a preferred OP unit structure, the deal is financially accretive. However, at this time we are still working through some of the accounting issues with our auditors, regarding the recording and the calculation of earnings per share, and FFO per share.

We will provide additional information specific to the accounting treatment of this transaction in the future. We'll be spending approximately $10 million of capital improvements on these properties including in the installation of elevators, new signage, paint and offices, all of which have been included in our estimates. These properties have a good amount of upside and we're excited about being able to acquire such good real estate.

Our G&A for the second quarter, net of development fees was $9 million. G&A includes our acquisitions department. Our management fee income for the quarter was $5.2 million, meaning that our net G&A for the quarter was $3.8 million or just over $15 million on an annualized basis. For the year, we are on track to be between $36 million and $37 million in G&A net of our development fees.

For the three months ended June 30th, the CCS/CCU calculation outlined in our IPO prospectus, allows for the conversion of almost 413,000 additional shares and units on August 3rd. To date, the total shares and units converted will be 938,971. At the current rate of NOI growth, we anticipate converting approximately a total of 1.5 million to 1.7 million shares and units in 2007.

We've added a table in our supplementary package on page seven that shows the calculation of this and how each of the CCS/CCU shares have been -- how we're calculating that. As Ken stated earlier, and as outlined in our press release, FFO per share for the quarter was $0.27 in line with our estimate. Incorporated in the $0.27 is the, just a little less than $0.01 of drag from our recently opened development properties.

These include three wholly-owned properties and two joint venture properties, opened in 2006, and two joint venture properties and one wholly-owned property opened so far this year. Year-to-date total dilution from this development program is $0.012 and we estimate that the dilution for this calendar year is going to be between $0.02 and $0.03.

Our stabilized property revenue came in a little bit lower than we had budgeted, however we were below budget on our site expenses also, so the NOI difference was only about $0.005 behind our budget. Our tenant insurance program and income performed much better than we had anticipated and ahead of expectations, and has had a positive impact on our earnings for the quarter.

During the second quarter, our 2006 acquisitions contributed about $0.01 to our earnings, and performed at a better than a 7% cap rate. Our 2007 acquisitions to date have provided less than $0.01 of additional accretion. For the third quarter, we estimate our fully diluted FFO to be between $0.28 and $0.30 per share, after dilution from our development program.

For the year, we estimate our FFO per share to be between $1.07 and $1.11. Our NOI growth outlook for the remainder of this calendar year is anticipated to be between the 4% and 5% range.

With that, I'd like to turn the call back to Ken.

Thank you Kent. We are continuing to make growth the primary focus for Extra Space Storage. The second quarter was our most successful acquisition quarter since the acquisition of Storage USA two years ago. We are very excited about having completed the AAAAA transaction, and we're busy right now incorporating that into our operating platform.

We believe these properties will have a positive impact on shareholder value in the future. Kent mentioned that we expected to spend about $10 million. Also the average occupancy of these properties is only in the low 70s right now and we think there's quite a bit of opportunity to increase occupancy, and therefore income in the future.

There's been a good deal of talk about cap rates increasing. As of today, we really haven't seen it. However -- and also the best properties in the best markets continue to demand low cap rates and very high prices and are difficult to buy. But we've all seen what's happened in the credit markets in the last few weeks. It's affected our stock and the stocks of all the REITS.

It's also affected the CMBS market dramatically and we believe that this effect in the pricing of the debt markets could be very positive for Extra Space, because it will give us the opportunity to purchase properties which would be more difficult for some of the private buyers to buy on a high leverage basis. And since we don't need high leverage to buy properties, we're hoping that that will open up the opportunity to buy more accretively, in the coming months.

We expect on the acquisition side, that we will be raising our cap rate targets to be a little bit more conservative. And this could slow down just slightly our acquisition volume. We've met much of our goals for this year. I don't expect another $250 million in the next six months, like we did in the first six months. But we are actively pursuing and we're out there.

On the operational side of the business, our same-store revenue and NOI growth for the quarter was in line with the long-term historical averages for our industry, which is between 4% and 5%. It's nice to have a larger portfolio that's diversified across geography, so that when you have weaknesses in Florida, you have strength in Columbus and Northern California, and the two can offset them -- each other. It's one of the benefits of being involved in a diversified portfolio.

We expect looking at how operations are going right now, that we will continue to have revenue increases in that 4% to 5% range. We also think that those revenue increases compared very favorably to other types of real estate. The economy continues to be strong and that's very good for us, even though the credit markets have been roiled, the base economy is good.

Also, we have not seen any pickup in the amount of new competition being built in our markets. We've been monitoring that and there isn't any so that's very good for us in the future.

So in summation, I'd like to say storage is a great business. We have great opportunities to continue to grow in this country. There are 50,000 self storage properties in the U.S. We only have about 650 of them. So there's plenty of opportunity for Extra Space to grow in the future and we expect to do so.

With that, I'd like to thank everyone, and we're going to now be turning it over to you to ask questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Christine McElroy with Banc of America Securities. Please proceed.

Hi, good afternoon, guys or good morning to you. Can you talk about what caused you to adjust your Same-Store NOI growth down to 4% to 5%, from 4% to 6% three months ago?

And given that you've generated 6.5% same-store growth year-to-date, the new forecast implies a range of about 1.5% to 3.5% growth in the back half of the year. Is it just tough comps or what's driving that slow down?

I think it is a combination of tough comps and the revenue growth has slowed down. We were north of 5% and now we're south of 5%. And we just feel like we're going to settle in at that 4% to 5% probably in the -- closer to the 4.4% to 4.5% growth for the balance of the year.

[Christie], this is Kent. I want to make sure we're clear on our projection. We believe that for the calendar year, we'll come in between 4% and 5%, which means that during the last half of the year, we think that that 's where we'll -- the properties will also perform is [at] between 4% and 5%. We don't think they're going to be in the 3s.

Okay, and wouldn't the comps be getting a little bit easier in Q4 given that the Florida move out started in Q4 '06, or is that more of a Q1 '08 story?

But we still had very, very strong growth in the fourth quarter of 2006. We were at 6.3%, Florida did start to slow down, but it really hadn't gotten down to the --.

Florida has been at one point 10% growth, and then continued to decline as the year went on. And so in the latter part of the year it was coming down, but it hadn't come down anywhere near where it is right now.

Okay, and then Ken just following up on your comment on cap rates. Did you say that you expect cap rates on high quality assets to rise as well, or just opportunistic assets?

I expect them to rise because of what's happened in the credit markets. In other words, I would not be surprised and I am hoping that they do. But real estate by its nature, if it's going down in value meaning cap rates rise, implies usually there is a period of time where buyers are not willing to meet sellers expectations.

And so, velocity of activity slows down until sellers recognize that oh, maybe I can't get a 6 cap for a self storage property. And then the opportunity for the buyer who is willing to pay maybe a higher cap rate, and come in there and purchase it, he gets the chance.

In the past, we just had so much money chasing properties that it's been very difficult to acquire in the best places at the highest quality properties. But that's anybody's guess. We have not seen that yet, and so that's just my own prognostication based upon what I've seen in the credit markets.

Okay, and then just lastly can you update us on your international strategy?

Yes, we continue to work on our small little project down in Mexico. We've approved an investment in a couple of development deals there. It's small dollars for Extra Space.

With respect to the other big international area, which is basically Europe, we've looked at some things but frankly in the last quarter, we haven't seen any opportunities and so frankly, nothing's going on there at this point.

Okay, thank you so much.

And your next question comes from the line of Jeff Donnelly with Wachovia Securities. Please proceed.

Good afternoon, guys. Ken I apologize if you just might have said this, but how much specifically did you raise your cap rate target now for acquisitions? And where is that cap rate target today?

Our cap rate target has been in the range of 6.8 to 7, and we've been acquiring in that average 7, 7.1 cap rate. We would like to raise that about 30 basis points.

I'm curious, to the extent you are acquisitive in the future, I mean how do you intend to fund those acquisitions, and how do you weight that versus say share repurchases?

Well first of all, we have cash of well over $100 million and so the initial thing we'll be using our cash. After that, we'll be using our debt capacity unless there's change in the capital markets that makes it possible for us to go out and do an equity transaction.

But at this point in time, where our stock is today, we see no opportunity for equity transactions and we don't expect to. We have not seriously looked at buying back our stock at this point, and we have nothing to say about that.

And -- okay. Karl I'm curious now, do you think what was perceived as housing related weakness in Florida is really just reversion to call it pre-hurricane levels, so they really shouldn't think about results, in maybe at least in that market in 2006 as necessarily repeatable in the near term?

Yes, is a short answer.

Okay.

I mean if you want me to elaborate I can, but what we looked at is we -- 2006 if you look at 2005 and then you look at the growth in 2006, and then you look at 2007, we were able to just take advantage of an incredibly strong demand. And we pushed rates to street rates and existing customer rates very, very strongly. And now it's coming back to more normality.

So unless another -- unless they have another terrible hurricane season and I'm not wishing that on anybody, we don't see it coming back the way. But the results if you look back in 2005, where we are right now, is not terrible.

Do you think Florida has further to fall or maybe there's other areas of the country like for example, on the Gulf Coast, where you still have that issue maybe ahead of you.

No, we see it leveling out. Actually the worst areas seem to be West Palm Beach and from what I understand it's there, and there's just a lot of things that -- housing prices are really bad there. And West Palm Beach maybe a little bit more, but really South Florida, Miami, we're not doing badly there. West Florida seems to be settling down, so we think the worst is behind us on it.

And just one last question, is that at NAREIT, I think in meetings with you guys as well as the other self-storage companies, I think we almost heard consistently that there are people out there are cutting street rates or asking rates 5% to 7% to boost occupancies. But the results, at least your results this morning really seem to counter to that. Is that just a short-term event? Or maybe perhaps more isolated than folks are led to believe?

We have cut rates in some markets, to hold occupancy. And we're hoping to be able to push those rates back up, but it's -- with our lower rates and with our TV advertising, we're still just barely holding our occupancy. So we're going to do what it takes to hold occupancy and try to maximize revenue growth.

Thanks, guys.

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

Good morning, everybody. Just a couple of follow ups here, I guess in terms of the sequential and year-over-year changing in NOI, I don't know if it was Ken, or Kent or Karl, but you indicated that were on budget. Were you on budget in terms of both what you were expecting from a net rent perspective and an occupancy perspective?

And I guess this relates to what Jeff just asked, or were you able to push one or the other a little more than originally expected?

We're really, probably about where we -- we're a little bit lower on occupancy than we would like to be. We're hoping that we gain a little bit of occupancy so it's more -- we're probably getting a little bit more from our existing customer rate increases which is really helping to kind of keep us where we had budgeted.

Hi Chris, this is Kent. We -- as we stated on our first quarter call, we started seeing a little bit of a slowdown from what we had originally budgeted. So our second quarter revenue numbers came in about a 0.5% -- $0.005 behind what we had budgeted.

However, our expenses here to date have come in about $0.005 under what we had budgeted. So when we say we're about on budget, it's our revenues are slightly down, our expenses are slightly down which has made our NOI be about what we thought.

And as we stated in the first quarter call, we saw a little bit of slowness in the first quarter that's continued in the second quarter. And our projections for the rest of the year, we've outlined a projection where it's still going to be a little slower than what we originally projected, but not a substantial deviation from what we thought.

And is that across both the stabilized pool as well as the lease-up? Because I believe in the first quarter, you talked to us about basically, I think Ken termed it as turbo charging the overall revenue proposition with NOI growth in the lease-up pool of 18% to 24%. Has that been tempered as well, and is that what's causing the downside in the second half more so than, let's say the downside in the stabilized asset pool?

No, the properties that we're talking about where the growth has slowed down would be in the stabilized portfolio. Our lease-up properties for the -- there are exceptions to what I'm going to say, but for the most part our lease-up properties are continuing to lease-up at paces that we had expected.

And I think Ken's kind of touched on that, but we haven't seen a lot of new competition being built in the markets where we're talking about. So our lease-up properties are doing fine.

I think Chris, to put some perspective on it, our income this quarter is up 13% over the previous year. That 13% increase is not coming from same-store, it's coming from a combination of same-store, a little bit of accretion from acquisitions, and the fact that we have a big group of lease-up properties that are giving us much better growth, because even if you take the effect of the leverage out, that means that our companies before leverage is growing in excess of 8%.

And that's excellent, and that's -- we believe that is better than any of our peers in the self-storage business. And it has to do with the newness of our portfolio and with our overall strategy. Also if you actually look at it granularly, the actual number was much was a little higher than $0.27 per share, $0.272 or $0.273 and last year it was actually a little lower than $0.24 a share. So your actual increase is more like 15%, not 13%.

So, it's a little bit deceptive to only look at same-store. You need to look at the overall corporation and how it's performing, and the fact that we have a lot of lease-up properties really helps our revenue performance.

[Now] that's exactly why I was asking that question. With respect to -- I guess you mention the newness of your properties, I think you also talked about the SUSA assets resulting in [offers] that are a little lower than your total portfolio. I mean what exactly is driving that? Are you finding maybe you have a little more attrition at the management level?

I mean, you've all ready indicated that there's no notable increase in supply. I don't know if that is also related to those assets in those markets, or could it be a geographical concentration? I don't know.

Let me give you the numbers because it's not in the supplementals, and then I'll let Karl give you some color on it. If you look at it on a three month basis, that the same-store non-SUSA assets had a 5.1% increase in revenues now that's as opposed to the whole group having 4.3%.

And the SUSA assets had a 3.0% increase in revenues. For the six months, the non-SUSA assets had a 5.9% increase in revenues, and the SUSA had a 3.6% increase in revenues. This is within our wholly-owned property group. I'm going to let Karl to give you color on it.

Yes and then, I think it's really a combination of both. I think part of it is markets. I think the ESS legacy properties are typically less -- there's fewer of them in the lesser markets. So that's part of it. But another, probably to me, and what I'm seeing is the most important part is in -- I mean with Storage USA we saw this too, is the higher quality properties in the long run, performed better.

And an A property with an A location and an A quality, and great looking office and relatively new is going to perform better than a B or C property is over time, and even in the short run. And clearly the ESS legacy properties in general, I don't remember the exact numbers, somebody probably here does, but the age of the properties, the ESS legacy property I believe is like average of --

I think it's about eight.

About eight years, whereas the average of the Storage USA properties I think was 15. Don't quote me on those, those are estimates. But it's a big difference.

Okay, let me just -- one last question here. I guess everyone's talking about the dislocation in the credit markets and how that impacts things. If I remember correctly, you talked about a potential acquisition that you're looking to close. And if I remember correctly I think that comes from the strategic partners program that you're involved with.

Given this dislocation, do you think you're going to see a greater percentage of your acquisitions come from that captive acquisition opportunity if you will, relative to let's say expectations of your gross acquisition volume back 90 days ago, 180 days ago?

It's already been an important factor. If you take out the AAAAA transaction of $150 million, I think you would see that a majority of our acquisitions have been from our strategic partners program, except for that one transaction.

And I would guess that in the coming six months to a year, it may be that a majority will continue to be from that strategic partners program. And it's not all but it's -- part of it is that when you buy something that your all ready managing, you really can hone in on what the numbers are.

You have also eliminate a broker in the middle, so the seller can get the full price. And so it's a little bit better for the buyer, and it can be better for the seller too. Also, within the strategic partners program there's a better understanding of OP units and things like that, so it's easier to transact at something of that nature, although we haven't done many OP transactions.

So I guess with the cap rate expansion that you've opined about thus far, I guess once you've assumed that with respect to any near term acquisitions, we shouldn't really expect any significant back up in caps, at least with respect to this strategic program?

I wouldn't.

Thanks a lot, guys, I appreciate it.

(OPERATOR INSTRUCTIONS)

The next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Hi, looking at the joint ventures, I was wondering if you could comment on the performance of JVs. Are they -- how are they doing relative to your and Prudential's expectations?

They're performing slightly below the same-store properties, but overall they're -- I believe that Prudential has been happy with the performance. We're relatively close to the numbers and the budgeted numbers that we have given them. The relationship is good and their overall expectations are being met.

And the reason for their kind of underperformance relative to the same-store's, is it the same as the other SUSA same-store properties?

Absolutely. I mean Extra Space wasn't in Kansas City or Cleveland or Indianapolis, and some Detroit and a good number of Storage USA legacy properties were. And while some of those markets are performing pretty well, Columbus and we talked about Houston. In general, they just -- they're not going to be in the long term as stronger markets. Still good properties.

Right. What's the outlook for earning the promote on the Prudential JVs?

This is Kent, there are different JVs. Some have leverage and some don't. The ones that have leverage we're able to be into the promote structure sooner on those, possibly by the end of the year, on the ones that have more high leverage. On the ones that don't have leverage, we're looking at being in the promoted structure, possibly next year on those.

Okay, and Karl I think you said that the months of May and June were very strong. Did that continue through July?

We're still looking at July's numbers. July doesn't look much different than May and June. I don't think -- well May and June were good. They weren't great, but they were -- April was the month that was more the aberration.

Okay, and finally on the TV advertising, I'm sorry if I missed that, did you say that would continue that in the third quarter?

We will continue it, I'm not sure -- we don't have anything specific in the pipeline for the third quarter, but based on the results that we saw from it, we feel it is a good tool to get our name --.

The advertising we did was, we buy kind of off price stuff, off prime time advertising that covers that whole country, including places that we don't even have properties currently, but the economics are such that it really makes a lot of sense.

And we saw a lot of response to it and we feel like, for the relatively small investment, it helps to get our name out there and it does drive some business. So, we expect to continue to do it in the future.

Paul this is Kent. The program was -- the original program we put in place went May, June and July. So you will see some expenses in the third quarter from the original program, but it's -- the expenses from the original program not an extension of the original program.

Okay, thanks. And just in trying to measure the impact of the TV advertising, do you ever ask your customers how they heard of Extra Space? Or, how they got to Extra Space?

Yes, we certainly do. We survey customers and it's put into -- input into the system as they rent. And what really what you have to do is, you have to constantly compare to the same period, same year or the same month for the same period last year, because kind of on an absolute basis the responses are sometimes not really accurate, but you can look at it from here.

And what we have continued to see, and I think we've mentioned this before, is less and less dependence on Yellow Pages, more and more dependence on the web and meet your kind of communication -- the people who are going to the web and no big surprise, more and more. And that's what our surveys of new renters --.

Are you offering them to choose TV as a place that they heard of Extra Space?

Yes, yes we do.

And how is that --?

We don't have, I don't believe we yet have all the results, or we lag a little bit behind. By the end of next quarter, we certainly will have more information on the effect of the TV.

Okay, and just one more question. Looking at development relative to acquisitions, I think Ken, you mentioned that acquisitions might get a little bit more interesting. How does the tradeoff between acquisitions and development look, going forward at this point?

This is Kent, as you know Paul, our program and the current structure we have in place and the team that we have, can handle between 15 and 20 properties a year, which commits about $100 million to $150 million of total cost for that program.

As long as that group of people can continue to find parcels of ground, or renovation opportunities that allow us to grow at that pace, that's kind of the level that our infrastructure will allow us to grow. And, that's a program that we believe in and want to continue.

The opposite on the acquisition side is it becomes very dependent upon the market and what sellers are willing to sell their properties for, and what -- cap rates and debt rates and things like that. So, the acquisition side is going to be more up and down on a yearly basis, based on what's going on in the current market. But we think our development program's going to be pretty constant and growing, because that's one program that we think that will long term benefit our company a lot.

Okay, thank you.

Your next question comes from the line of [Erick Brethenoux] with [Urdane Security and Management]. Please proceed.

Yes, good afternoon. I wanted to just ask you about funding sources. If you've got $100 million to $150 million of development, and if I look at your guidance for acquisitions relative to what you've done, it looks like another 100 or so of need for capital there.

And I understand that you have about $100 million of cash on the balance sheet, but I guess, what's the plan to fund the rest of that gap going forward? Will you sell stock? Will you just continue to lever up?

Generally Erick, on the development side, today we have cash, and so we would use our cash to do development because it would be more cost effective for us to be using the cash instead of borrowing. But ultimately, we will obtain debt on all of the developments that we do. And we can get between 75% and 80% of the total cost of these projects.

So we would anticipate that the majority of the cost of a development project would be funded with debt, and we would only have between 20% and 25% of the total purchase total cost in the form of equity or the cash that we currently have sitting on our balance sheet. So, if you're looking at the next 12 months we would be looking at $25 million to $30 million of our cash being used to fund our development projects.

Sure, so I guess essentially you're levering up at the margin there for development.

For the development, that's correct.

Yes. Have lenders told you or have you looked into it yet, as to whether or not their changing their terms? Or ,whether or not they're still willing to lend on new development at 65% and the spreads change there?

The spreads have changed but they're -- on the development side, the lenders are still willing to do development deals, especially with Extra Space. Our track record is very good, and when we bring a project to a bank and ask them to fund that, we have a lot of interest from [and many] banks. And that still holds true, even with what's happened in the market in the last couple of months.

On the acquisition side, as you know, it's become a little more problematic. The spreads have changed pretty dramatically, and the rates that -- the percentage loans have also come down. But on the development side, we haven't seen that.

Do you think that you might? Is there a possibility that that --?

There is always a possibility of that, with what's going on in the credit markets, it's all based on fear and what the underwriters want to anticipate is going to happen.

So yes, that could happen which would then mean that in our case, we'd need a few million more dollars allocated to the development pipeline. But I can't see them going from 80% to 85%, down to 65%. It's not with Extra Space, maybe some small mom and pop developers we'll see that, but with the strength of our company I would expect that we would still be able to get a pretty good loan to value.

Sure. Then I guess, just [as closing] implicitly you're comfortable with your leverage here. But long run, is this where you want to see your leverage, given your equity [credit]?

As we've talked before, we want to be between 45% and 55%. And obviously with our stock price coming down that's bumped our total debt to market cap up. However, it's still in a range that we think is manageable, plus we think our stock price is substandard or just way below where it should be. So we're going to wait for it to come back up before we make any decisions about that.

Thank you very much.

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

Hey, I'm sorry guys, back to Paul's question with respect to promotes. Are any promotes baked into the guidance for '07?

No, well there are some that -- there are some of our joint ventures that are currently in a promote. One of those is the Extra Space Western Conference of Teamsters Fund. That's a joint venture that we've had for a number of years now and it's in the promote, and that is built into our numbers.

And another one of our joint ventures is called the Bristol Group. And that joint venture is also in the promoted structure. The rest of them however, we're just baking in our equity pickup on those.

So, net-net so let's say the 109 midpoint, how much of that is attributable to these ventures, being in the money on the promote?

It's very small. It would probably be about half -- less than 0.5% is coming from the promoted structures.

Okay, thanks a lot guys.

I see no further questions in the queue. I will now like to turn the call over to Ken Woolley for closing remarks.

Thank you for the good questions. I hope we answered them and I hope that we gave good clarity on how we view the market. I want to reiterate to everyone listening that self storage continues to be a great investment. The economy continues to be strong.

We're very pleased with what we're seeing in the field and our operations except for Florida, and hopefully Florida will recover. And we expect to have many good quarters in the future. And we expect our company to continue to grow at rates like this year, and hopefully even better. Thank you very much for attending, and we'll talk to you on a quarterly call in about three months.

This concludes the presentation. You may all now disconnect. Good day.