Extra Space Storage Inc (EXR) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2007 Extra Space Storage Inc., Earnings Conference Call. My name is Eric and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to your host for today's call, Mr. James Overturf with Extra Space Storage. Please proceed.

Thanks Eric. Hello everyone and welcome to Extra Space Storage's third quarter 2007 conference call. With us today, our CEO and Chairman of the Board, Kenneth M. Woolley, our President Spencer Kirk, CFO Kent Christensen, and COO Karl Haas. In addition to our press release, we have also furnished unaudited 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 of 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 represents management's estimates as of today October 30, 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 would now like to turn the call over to Kenneth M. Woolley.

Hello everybody and thank you for joining us today. We appreciate your attention and your interest in our Company. Joining me this morning are Kent Christensen, our Chief Financial Officer, Karl Haas, our Chief Operating Officer, and remotely Spencer Kirk, are recently appointed President.

Early this morning we published our earnings report and hopefully most of you listening have had a chance to read the press release and possibly look at the supplemental financial information, which is available on our website.

In summary, we had another good quarter of NOI growth and we hit our internal FFO and NOI targets that we were hoping to do. Our fully diluted funds from operations for the quarter was $0.29 per share, a 12% increase over the $0.26 per share of third quarter last year.

Our earnings were in line with our internal budgets and our guidance issued in August. The $0.29 per share of FFO includes a P&L drag from our on-balance sheet and joint venture development programs of approximately 7/10th of a cent. Without this drag, our earnings would have done a little over $0.30 per share.

Our same-store properties gained this year and had in the quarter a 2.9% revenue growth and a 4.9% net operating income growth compared to last year. That's 181 stores, and just for your perspective, those stores provide a large portion of the income from our Company. Somewhere in the range of 80% of the net operating income comes from those 181 stores.

The increases came as a result of increased rental rates to existing customers as year-on-year occupancy actually decreased 1.2% from 88% to 86.8%. Also the asking rents charged to new tenants remain flat on a year-on-year basis.

As has been the case throughout the year, Florida has had a negative affect on our same-store growth. Without the 23 Florida properties which represented 12% of the revenues of the same-store group. The NOI would have been up 6.1% and the revenues up 3.8%. So the Florida drag on the overall -- has been a significant drag on our overall portfolio and is one of the things we'll be talking about a little later in the call.

Just to put it into perspective, this year, this quarter, Florida's same-store properties were down 3.5% in revenues and down 3.5% in NOI. Last year, that same group of properties was up 7.8% in revenues, and that increase last year was extraordinarily high we believe partly due to the hurricanes that occurred in Florida the previous year, and this year we're seeing, what we believe is an unwinding of that hurricane effect from last year, and we're seeing that primarily in the West Palm Beach markets in West Florida in Orlando, not so much in Miami where the revenues have actually been positive.

During the quarter we -- and I'd like to put a little more reflection on our overall earnings. For the nine months, our earnings were $0.803 per share, up 16% from the $0.69 that they were a year earlier. Because we also have shown that we had a development drag of about $0.02 per share, which we didn't have in the previous year, without the development drag, our earnings would have been up another $0.02 and the rate of increase for our earnings for the nine months would have been 19.4%.

Well, one would ask the question, how can you grow earnings 19.4% on an FFO per share basis when in the nine month period, your same-store growth was only 5.9%. Well 5.9%, our Company is roughly 50% leverage, so that 5.9% translates into roughly a 12% increase in income, but yet we accomplished 19%. How is Extra Space growing faster than its same-store pool when the same-store pool represents most of its property income? And I just want to highlight for a minute why it's growing faster than the same-store pool.

One reason is property tenant insurance. We've had a dramatic increase in our penetration rate of property tenant insurance over the past year over our whole portfolio. Approximately 70% of new tenants are now taking our insurance and approximately 31% of our existing tenants are now taking insurance and that's up substantially from a year ago, and that's contributed about $0.015 per share incremental earnings.

We also have a number of properties in lease up, which are not included in the same-store pool and those lease up properties also contribute somewhere in the range of $0.01 per share. We also have joint venture properties with both Prudential and with other joint venture partners where we do get disproportionate returns based upon promotes, and that helps us get a faster growth rate.

Also, we have been doing acquisitions that are accretive and that's probably been one of the biggest factors in our performance. This year we've done already acquisitions of $317 million and the cap rate on those acquisitions have been over 7% and that gives us very good accretion to our earnings.

And then finally this year, earlier in the year, we did a preferred debt offering which gave us very inexpensive funds at about 4% which we initially invested in Securities earning about 5.3% and then as we've used the funds in Acquisition and Development, we've been having greater accretion and that's also helped our accretion. So I just want to emphasize that our Company is not just a company of same-store growth. It's a Company that actively growing and will continue to actively grow.

During the quarter, we acquired nine properties for a total price of $61.7 million, actually that includes one property that we acquired just after the end of the quarter. So we've now acquired 32 properties for a total of $317 million. We have under contract which we expect to close by the end of the year, three more properties for approximate $20 million to bring the total just shy of $340 million.

Many of you know that a few weeks ago, we announced the appointment of Spencer Kirk to be our new President. Spencer is very familiar with Extra Space. He joined the Company originally 10 years ago. He's been on our Board of Directors since we went public. He had been doing some voluntary service for his church for the past three years and has returned to the Company as an executive in the last six or eight weeks.

Before, when he was with the Company, he was really responsible for initiating our core technology, our marketing, our Human Resources, and other operational aspects of our Company. Right now, Spencer is really getting familiarized with the Company and with the details of how we're operating the business and we're very excited duty of Spencer rejoin us. Some of you shareholders and analysts have met Spencer on the recent road trip and hopefully many -- the rest of you will have a chance to meet him in the future.

Also, you may have read in the press release that we had a directors meeting yesterday in which we increased our dividends on an annual basis to $1.00 per share, that's $0.25 per quarter. This dividend increase signals our confidence in the growth in earnings and cash flow generating potential of our business.

We expect to review our dividend on a yearly basis, but there's no guarantee that we will increase it yearly. This is a one-time event. It's sort of a three-year catch-up since we went public three years ago; we've had our dividend constant at $0.91. I would like to now turn to call over to Karl Haas, our Chief Operating Officer who will give you more detail on our operation performance.

Thanks Ken. Before we get into our operations for the third quarter, I want to give you an update on our properties located in the areas affected by the fires in Southern California. At this time, we have incurred no fire damage and all of our properties are opened and operating.

One of our properties located in Fallbrook was evacuated last week and reopened on Friday. No other properties were impacted by the mandatory evacuations. At this time, we're offering in that market, one free month for all properties with no limitation on occupancy. It's a tough situation for those folks down there and we wish them the best.

Now to our third-quarter operational performance. Our same-store group of 181 stabilized properties, once again experienced positive growth during the quarter with a 2.9% increase in revenues and a 4.9% increase in net operating income. For the nine months, same-store revenues were up 4.3% and NOI is up 5.9%.

The quarterly increase in revenue came entirely from increased rents to existing customers as was previously mentioned; storefront occupancy was actually down 120 basis points compared to last year. REVPAF or revenue per available square foot, for our same-store pool, was $12.20, which represents a 2.9% increase in year-to-year revenues.

Our expenses, when compared to last year, dropped almost 1% for the quarter. We did a good job of controlling are controllable expenses for the quarter. Payroll, repairs, and maintenance, and office supplies, fall under this category. Utilities and property taxes also came in lower than expected. We typically expect 3% expense growth, so this quarter was really exceptional.

The pool all of 589 stabilized properties that we manage, had results similar to the same-store pool for the quarter with a 2.9% increase in revenue and a 4.6% increase in NOI. Square-foot occupancy for this group of properties, as of the end of quarter, was up 20 basis points over last year at 86.4%. Street rates for this pool and 181 same-store our flat to last year as of the end of the quarter.

Both are same-store and overall stabilized pool of properties has been adversely affected by significant year-on-year drops in occupancy in revenue in Florida. Florida accounts for approximately 12% of our overall wholly owned NOI. Taking Florida out of the equation, our revenue for both property pulls would have been higher by 100 basis points.

While Central Florida showed some recovery, West Palm Beach and western Florida continued to suffer. We start coming up against some better comparables starting Q1 in 2008 for Florida, but we do not expect a significant improvement in this upcoming quarter.

Our best markets in the third quarter were Columbus, Denver, Houston, and Chicago. These markets have experienced year-on-year increases of revenue 7.5% to 11%. Our four largest NOI producing MSAs -- Boston, Los Angeles, New York/New Jersey, and Baltimore/D.C./Virginia are all performing in the 3% range.

With a moderately softer demand in comparison to recent years, we are being proactive when it comes to new and existing customer rental rates as well as discounts and promotions. Using our revenue management system, we recently deployed a dynamic pricing application that we refer to as triggers. It changes Street rates real-time based on the demand, much like the airline and hotel yield management systems. In short, rates will automatically increase or decrease based on preset occupancy and availability tolerances at both the site and the individual unit level.

Though our discounts year-to-year are essentially flat, we continue to experiment with various discounts to move the needle. We continue to see the ability to increase rental rates to existing customers with an average increase of about 6%.

We recently had our National Operations Meeting. It was the most successful and positive meeting that we've had in the actually 10 or 15 years of doing these types of events. The Operations Team is functioning very effectively and efficiently. We're committed to the task at hand and I'm confident that we will be able to reach our goals we set for the upcoming quarters. Now I'd like to turn the call over to Kent Christensen.

Thanks Karl. Good morning to some, good afternoon to others. Extra Space is currently in a very good position with our balance sheet. We have nearly $91 million in cash and short-term investments and 93% of our debt is fixed and at a manageable level in relation to our total market capitalization.

We recently closed on a $100 million revolving line of credit, which replaces our previous line of credit with Wells Fargo. The interest rate on the line of credit fluctuates between 100 basis points and 200 basis points depending on our debt shortage coverage ratio of the amount that was drawn on the line for the previous quarter. The facility term is three years expiring on October 31, 2010 and has two one-year options.

The line combined with our available cash and our unleveraged properties gives us about $400 million of capacity. That interest rate is 100 to 205 basis points over LIBOR.

Total outstanding debt as of September 30th was approximately $1.27 billion including $120 million in notes payable to trust and $250 million in exchangeable notes. Our fixed rate debt has 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 of our total market cap including OP units was 54% at quarter end, and our fixed charge coverage for the quarter was 2.4 and so far year to date is 2.2.

Ken already spoke a little bit about our acquisitions. We closed on nine additional acquisitions for the quarter for $61.7 million. Eight of these properties were already properties that we manage and were existing joint ventures with one additional property being purchased as the final property in our 5A transaction.

Ken spoke a little bit about our acquisitions, a little more information about that. We're being very conservative on our acquisitions right now and what we're seeing. We have seen little to no decrease in seller's expectations for the types of properties we want to acquire. With our balance sheet able to grow, we want to be wise and judicious about how it is we're allocating our capital.

In the development area, we've recently completed another development property in Gurnee, Illinois located north of Chicago for about $9.1 million. We've completed four properties to date for a combined cost of $38 million. Two of these properties are wholly owned and two are owned in joint ventures. We expect to complete an additional two properties in the fourth quarter for a total cost of $16 million. One of these is wholly owned and the other is in a joint venture.

For 2008, our development pipeline is 14 properties for a total cost of $123 million. All of which are going to be wholly owned on our balance sheet. We expect the drag in 2008 -- to be at a -- sorry at 2009 to be at a similar level. The long-term positive impact of our development program on our net asset value and our FFO is significant and makes Extra Space unique.

The 14 properties develop in 2008 using a total share count of 70 million are estimated to contribute over $0.08 of FFO in 2012. Though extremely valuable in the long-term, our development program does have a short-term impact on our earnings. This fact must be considered when modeling Extra Space's net asset value and earning projections for the coming years.

For 2007, we will be close to $0.025 of development drag. For 2008, we are modeling approximately $0.065 of FFO drag from our own balance sheet program or an increase of $0.04 over our 2007 total.

In terms of earnings accretion, utilizing a forward-looking run rate of 15 wholly owned properties per year, we anticipate the development program to become FFO neutral in 2010. From 2010 on, it becomes exponentially accretive by adding an estimated $0.14 of FFO in 2012. From 2008 to 2012 we will go from a negative $0.06 to a positive $0.08, or a swing of $0.14.

For the three months ended September 30, 2007 our CCS/CCU calculation outlined in our IPO prospectus allowed for the conversion of approximately 504,000 additional shares and units. Total CCS/CCU shares converted to date is approximately 1.45 million with approximately 2.65 million remaining. The table on page seven of our supplemental package details this information.

Our G&A for the third quarter, net of development fees was $9.1 million, our management fee income for the quarter from our joint venture and third-party managed properties came in at $5.2 million. When netted against our gross G&A, our cost to manage our wholly owned properties during the third quarter was approximately $4 million. When annualized, it comes out to about $15.5 million per year.

As stated in our press release, our FFO for the quarter was $0.29. Taking into account the drag from our development program, which we've discussed, we would have been approximately $0.30. At this time, we estimate are fully diluted FFO for the fourth quarter to be $0.28 to $0.29 per share. This equates to an annual estimate of between $1.08 and $1.10 per share. These are estimates only and do include the development drag which I've talked about.

We will be giving our estimates for 2008 in our fourth quarter call which will be done in February. With that I'd like to turn the call back to Ken.

Thank you very much, Kent. Over the past few weeks, we've been speaking with several of you in person over the phone. The focal point of these discussions has been the economy and its impact on self-storage. The economy is a big question mark in a lot of people's mind given the meltdown in the credit markets and specifically the problems in the housing markets.

If you look at past -- first of all, we're not in a recession currently. I know that some economists say there's a 50% chance of there being a recession. I don't think I'm here today to predict a recession, but I would say this, we do - we are definitely seeing a recession in the housing business. We are not seeing a recession in other types of real estate, either in the retail industry or the offices, or the hotels, or industrial, or in self-storage.

We still have good revenue growth, but our rate of growth has slowed in the fourth quarter. People ask me all the time about the effect of housing, and is self-storage really being affected by the housing. We actually did a correlation here between the MSAs, where they have the worst housing problems and the self-storage performance in those MSAs, and frankly, we could find no correlation between our results and the negative housing problems. But if I could talk about what I believe self-storage does correlate with, based on our experience, let me name a few things.

First of all, self-storage performance -- this is a business and there is a component to the performance which is related to good management, and so different companies in our business will perform differently in the same markets based upon one Company doing a better job of management than the other. And so there's a management function which we hope and we believe that we are good managers and it's partly one of the reasons why our Company has been performing well.

Second, property quality, no matter where it is, is an important indicator of long-term performance and we believe that Extra Space on average has a higher-quality property portfolio than some of its competitors.

Third, the general regional economy, what's going on in that region's economy because the region's economy affects the consumer. It affects how much money is in the hands of the consumer and therefore, and the consumer along with the small businessman is our customers. The customers are not necessarily just people moving into new houses, it's all sorts of consumers who need storage for various reasons that have nothing to do with new housing generation, and 20% of our business is to small businesses who are directly prospering as a result of the health of the general economy.

Fourth, supply/demand dynamics affect us in a dramatic way and let me just name a few. Las Vegas has not a good performer for us in the last two years. We believe that it was not a good performer when it was in a boom two and a half years ago, and it was primarily due to a lot of supply coming into the Nevada, Las Vegas market.

On the other hand, the economy of New England has not been all that strong and yet New England sat for several years without much growth, but this year New England is outperforming the other major metropolitan areas. Boston, for example, in this recent quarter, the Boston area revenues were up 4.6%. That is the highest it's been in four or five years and we believe part of that is a catch-up because there's been virtually no new supply in Boston for several years, and as a result it is sort of made our existing properties do better.

And then finally there is a component related to housing and clearly, in the areas where there was the biggest housing booms, places like the inland empire of Southern California, to some degree in Florida, and to some degree in Georgia and Atlanta areas, and some degree in Las Vegas and Phoenix.

We have had seen some affects, particularly in the areas of most housing creation in the new housing supply where there's been a slowdown in those properties. But if you really look at the number of properties we have right in the markets where the housing boom and therefore the bust has been the worst, is not very many. So it's probably a minor component of the self-storage equation for Extra Space.

I hope that puts a little color on what's going in. Clearly we have seen a bit of a slowdown, but when you adjust for the Florida phenomenon, which we believe is primarily an unwinding of the huge demand we had as a result of the hurricanes a couple of years ago, that slowdown has been modest. It's a slowdown in the major metropolitan areas of in the range to 1% or 1.5%. The slowdown does not appear to be increasing meaning the rate of slowdown seems to be about stable over the last several months. Also, our rental activity is about flat or even which where it was a year ago; it's not down.

I've been involved in the self-storage business since the early 70s and I have been managing self-storage through three major recessions. The one of the early 80s, the one of the early 90s, and the one of 2002, and during that time frame my own experience has been that self-storage revenues and I'm talking about portfolio revenues have not declined, but they have dipped, they have slowed, but they have continued to increase.

Also, another interesting fact is we here at Extra Space did a little study of the public companies over the last 20 years and we looked at their same-store revenue performance by quarter of all the reporting public companies, including Storage Trust, Sure Guard, Public Storage, Storage USA, Extra Space, and U-Store-It, and Sovereign, and the average quarterly increase over a 20 year period has been 4.5%.

Now the faster increases that we saw last year, the same-store increases of in the sixes, was probably a little higher than normal and right now we're a little -- were more close to the normal level or slightly below the normal level.

Now with respects to our future opportunities, what's going on in the opportunities for buying properties? We're hoping that that market opens up. We do know that many of the private buyers are sort of being priced out of the market by the availability of debt and the high leverage that was available, say a year ago. That still is available, but it's more expensive. We however, we have seen some softening of the lower quality properties, but we have seen no softening in the prices of the types of properties that we like to buy.

We've seen a little bit of increase in the number of properties on the market, but not very many. We're hoping that we, as a result of not having to compete with private buyers quite as much, we'll have the opportunity, continues the pace of our acquisitions during the coming year. However, I would caution everybody to say right now we have not seen any actual move out in cap rates with respect to our ability to buy it at higher cap rates.

So therefore, we're being careful, we're being judicious, but we do -- we're optimistic that because of the stronger financial strength and power we have as a REIT and the money behind us that we will be able to grow accretively in the future. Also now, with respect to new supply coming into the market, on a national basis the new supply of self-storage is really very slow. There isn't a lot of new supply.

There are a few markets in which new supply is starting to affect our business. We're seeing more new supply in Phoenix, for example and certain areas of the California Valley, we're seeing more supply, but on a national basis supply is not a problem. You would ask, well why not? And I think there's two or three reasons.

One is that self-storage has never been the preferred zoning for cities. It's always been a pariah property type for most cities because we provide no -- very little employment and we provide no sales tax. So much of the retail land that we'd like to build new self-storage on, the cities are not as excited about self storage. And in many cities, for example almost half of the jurisdictions in Southern California have zoned self-storage out. Well that's great for the existing properties, but it's hard for the developer.

Where new supply happens is where there's not a lot of zoning restrictions. And so we see a lot more new supply in areas that are sort of secondary and tertiary rather than in the primary metropolitan markets. And also the large increase of land cost that we've seen over the past two or three years as the real estate boom has happened has meant that it's harder to make self-storage properties pencil also given the fact that self-storage, unlike many other types of properties, has a little bit longer lease up time.

I think all this bodes well for the future of our business, the fact that there's not a lot of new supply, so I'm optimistic about future. We are being very proactive in regarding our pricing and are discounting and utilizing our leading operational and technology systems. Our portfolio is a high quality, well located, and high-density, dynamic markets. Our people are focused and committed and we expect them to be. As we speak today, I continue to be positive about the self-storage industry and our ability to grow and prosper in it.

And in closing, I want to thank everybody for your interest and support. With that, I think we'll be ready to take any questions that you have.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Christine McElroy with Banc of America Securities. Please proceed.

Hey, good afternoon guys. Karl, you talked about better comp starting in Q1. What does that mean for your expectations for overall revenue growth and NOI growth in '08?

Well, I was really talking about for Florida, that we are going to start going against, you know Florida started to drop in the last quarter last year and so by the first quarter of 2008, you know that growth was not a whole -- was really starting to slide and so we won't be seeing as much of a drop. You know we're looking at, for the fourth quarter, but we're still working out the numbers and you know really we won't have hard numbers until February.

So in terms of the 3% to 4% that you're expecting in terms of revenue growth in the fourth quarter, you can't give any indication as far as how that might trend into next year.

Not at this time.

Okay, and then what were the average cap rates on the acquisitions that you completed in Q3, the ones that you completed month to date and those that you have under contract if you break those out between the market transactions and the off market transactions that you did with JV partners.

Christy, this is Kent. The overall cap rate on all of the acquisitions that we've done this year is over a 7%. The cap rate on both the joint venture assets that we've acquired and the properties that we did not have any ownership or management in, have been pretty similar this year. There's been unique examples of above and below that average in both instances, but as an overall, we've seen a good ability for us to get these properties and above a 7% cap, both existing and joint venture opportunities.

So just following up on what you're comment earlier, that hasn't changed given the change in the credit markets.

We, as the company, we have been bidding a higher cap rate on properties that were bidding on, but we've, as Ken stated, we have yet to see any of those transactions come to fruition yet. And so what we've told you is what the cap rates are that we've been bidding and we've been successful in getting properties under contract that we've been able to buy at a good price. There still is a substantial amount of properties that we've been bidding on, over $1 billion, that we've not been able to get under contract because we were not willing to pay a high enough price.

Okay, and then just lastly, as you ramp up the construction pipeline, how should we expect to see development starts and completion trending over the next five years and then, what kind of stabilized deals are you projecting and in what timeframe say from opening to stabilization?

We project doing 15 properties a year starting, as we just stated, we have 14 on line for next year and hope to do 15 properties a year. We would model those ratably over the calendar year, just spreading them out over each of the quarters and the yields that we're seeing right now are between 8.5 on the very low end and those are not very frequent, up to 9.5 on the high end.

Great. That's helpful. Thank you.

Ken has another comment, also.

Christy, let me explain a little more about that modeling. We do model approximately 36 months to get them leased up, but we do not model any increases in prices, so the 8.5 to 9.5 is based on the rental rates in the market at the time. So when you really model it down the road, what you have to do is adjust for any market price increases that might occur if they were on average 3% or 4%, to come up with what the yield is at the end of the three-year period when the property is finally leased up. And then, of course in the cost side, we sort of model all of the negative cash flow in that 8.5 to 9.5.

We model all the negative cash flow as if it's a cost of construction as opposed to just a negative operating cost so that's what's in the model.

Okay, great. Thank you.

Your next question comes from the line of Jeff Donnelly with Wachovia. Please proceed.

Ken, I know you touched on this before, that you aren't seeing much of a movement in cap rates, but I was curious if you're seeing any pressure either from the way the buyers are underwriting self storage assets or to the extent that the way lenders are looking at financing self storage?

Well, on the lenders side we are. I mean we are seeing -- the lenders that we have talked to are quoting us a lower loan cost. We were able to get a loan cost of 82% six months ago, today it's more like 75. The spreads have increased from about roughly 100 basis points over the corresponding treasury to more like 160 to 170 today.

But more importantly, there's less willingness to underwrite lease up in the activity, so that you can only write -- you can not only underwrite or get a good conduit loan on a property which has the cash flow in place and has proven to be in place and that's probably a big factor in a lot of deals today because many deals were done, even with us, on a pro forma, looking forward basis, as opposed to looking backward so that's what we've seen. But we haven't seen much on the buyer's side.

That's helpful. I apologize. I'm sure someone just asked this, but it's extraordinarily loud here because the Red Sox rally is outside my office window right now.

Good. What are you doing on the phone then?

I just have a question. I apologize again if somebody just asked this, but on the same-store numbers, I guess as we head into '08. You know I think at the beginning of the year you were kind of looking for '07 to be up 4% to 6% and now, say around 3% to 4%. Do you expect that deceleration to continue, or do you think we've bottomed?

No I think it's bottomed right now. I think our -- what we think is that right now we don't see a further deceleration for the next quarter from where we've been recently, but we do however -- I would caution you that in our same-store numbers, we had extraordinarily low expense growth during the third quarter.

We would not expect the fourth quarter's expense growth to be that low, but that will average in for the year. On average, we're expecting a kind of a 3% growth in expenses. We would not expect that to change, but we had an extraordinarily high NOI growth because of the very good expense performance and part of that was, I think a little bit of an over accrual of property taxes and insurance last year during the third quarter which got unwound in the fourth quarter last year so that's why we had the low -- that's part of the reason why we had the better expense performance on a year-on-year basis.

Now going forward, it's hard to predict next year. I think we are confident that the slowdown has sort of stopped slowing down, but no one can be that for sure. If we have a recession in this country, I would expect that self-storage would slow further, but it would not go negative. That's what I would expect. But we are not prepared right now to give a forward estimate for next year.

That's helpful, guys. Thank you.

Next question comes from the line all of Michael Knott with the Green Street Advisors. Please proceed.

Hey guys. I'm just wondering if you can help me with the basic math of the 3% to 4% same-store NOI increase for the full year, since we're already three-fourths of the way in and you've got almost 6% growth and apply a really low number for 4Q.

The number that -- it was for revenue growth, was between 3% and 4%, not NOI.

Okay, I thought the press release said NOI growth of 3% or 4% for the full year, but maybe I misread it. Okay --

If the press release said that, then we'd have to correct it by saying that it was revenues that we intended to grow that way. Depending on the expense growth, we would not expect -- in other words, you're implying that since we've already had, for the first nine months, a 5.9% increase in NOI that would imply a disaster for the fourth quarter in order to get it down to 4% for the whole year. Is that what you're saying?

Right, exactly.

And we would agree with you that we don't expect that kind of a disaster.

Okay, and then as far as the third quarter, can you talk about the R&M expenses being lower and how that impacted the reported NOI growth?

I'm sorry, you're saying -- the question was for the third quarter.

Yes.

Well, I think part of it was, once again going back to the prior year. In 2006, our Repair and Maintenance expense was up considerably over prior periods and this year has gotten back to a more normalized level.

In addition to that, Mike, there in that category that you're looking at, there's also utilities and our utilities are down from a year ago so it's repairs and maintenance, utilities, and then we had a lower amount of sales of our merchandise, which is also included in this which reduces our cost of merchandise, which is also in that category. So it's a combination of all three of those, repairs and maintenance, utilities, and resell merchandise.

Okay, and then my last question, can you just talk about your view on concessions and where the market has trended on that?

This is Karl. It really has pretty much leveled off. Our discounts this quarter were actually slightly below the same quarter last year and during 2006 we saw a fairly significant increase, but it's -- we kind of peaked and really are kind staying at the same level.

Thank you.

Your next question comes from the line of Christina Kim with Deutsche Bank. Please proceed.

Hey, good morning. This is a follow-up to last question on discounts. It seems like offering the first month free is becoming more of an industry norm. What are your thoughts on that and should we expect discounting to increase, I guess going into '08 as more and more operators offer the first month free?

This is Karl again. We're not really seeing a change and it really hasn't gotten more aggressive, as far as the discounting. We're at pretty much the same level as we were in the last year in the structure of what we're doing.

Now we're continuing to experiment to see whether one area that we currently have thresholds on our discounts that we offer. We don't offer the one-month free and every unit type. Occupancy gets to a certain level and we stop offering it. We are experimenting on some properties to see whether lifting that limitation would have a positive impact.

You know, the negative is that doing that in the short-term results in increased discounts, but in the long run could offset it by having higher occupancy, but at this point, we don't -- we haven't seen a significant change in what our competitors are doing and we haven't changed anything.

Great, and in terms of San Francisco it looks like that market, or Northern California in general, occupancy was down sequentially. Could you talk about some of the factors that are influencing that area?

Okay somebody's mentioning that it's adding in the 5A properties, which have overall lower occupancy. They're extremely large properties. Our typical property is 65,000 to 67,000 square feet. The 5A properties, some of those ones in the San Francisco area, are more like 200,000 square feet, 170,000 to 200,000 square feet and one of the reasons that we look at that as being an opportunity for us is the overall occupancy of those properties is in the 70s so that's brought it down.

Overall, that market, the Northern California market has continued to do well, although I would say that the properties in the Northern California market that are in the 181 properties are doing not as well as the Northern California properties that are in the larger pool of properties.

And I guess --

Let me just answer that a little, put a little more color on that. When you look at Northern California, there's weakness in the Sacramento Valley. Sacramento, Modesto, Tracie, Stockton, and sort of even the East Bay a little bit. But as you get over into San Jose, and San Francisco, and the Peninsula and down into Monterey and Santa Cruz, that area is very strong and extraordinarily strong, so it's a little bit of a mixed bag. It's really strong, sort of in the West Bay and down into Monterey and it's a little weaker as you get east and into the Valley.

Great.

It just happens that we have more wholly owned properties in the 181 wholly owned that are in that territory as opposed to over on the Peninsula.

Okay, great, perfect and my last question is just on call-center volume and traffic. Have you seen any significant changes year-over-year and has there been any difference between different regions of the country?

No, we have not seen any significant change in the call-center volume.

Let me add a little color though related to the other method we get sales and that's the Internet. We have continued to see an increase in the number of rentals and inquiries coming off of the Internet and a decrease from Yellow Pages and the Internet is now outpacing the Yellow Pages and it represents between 17% and 20% of our new rentals and we expect that trend to continue.

But do you track the traffic trends and whether it be the Internet or Yellow Pages, or whatever else by region?

We have that information but we haven't a really regionalized it. It's probably something we should do them probably will do more of.

I know we had some internal discussions about this. We don't have the data for you, but I can tell you anecdotally, it's higher in the Bay Area in Boston that it is in Kansas City.

As far as the Internet.

The Internet, yes. It's just a function of -- it's partly a function of just sort of how our American consumers are and the fact that the more highly educated, the more highly -- people who are more in the 21st Century are more using the Internet and the people in the farm communities and in the older parts of our country are not using the Internet as much.

However, it's continuing in all parts of the country.

Yes it's growing everywhere, but it's -- there's way more penetration like if you look at the Internet penetration in Palo Alto, California, it's different than it is in Wichita, Kansas.

Okay great. That's helpful. Thanks guys.

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

Good morning everybody. How are you doing?

Great.

I guess Ken or Kent, could you help us understand what do you guys view as a normalized AFFO payout ratio going forward given that you pushed the dividend a pretty healthy clip this quarter.

I don't think we really have a comment on that. I mean you can calculate our AFFO and on this year, our AFFO is probably going to be over $1.00, but the dividend increase is beginning effectively January 1st. It's not for this year going backwards, it's January 1st going forward, so you can do your own calculation on that.

So you guys don't -- you guys are not apt at this point to say, hey we want to target somewhere between 80 and 85 or 85 and 90, that's still to be determined.

Yeah, that's to be determined, but I think you can do your own math based a time where your act. We do expect the Company to continue to grow and we feel that the dividend coverage on an AFFO basis next year, which is when really this new dividend takes place, is going to be adequate.

Okay and I apologize if I missed this in the supplemental and I know it may be something that you want to talk about to begin with, but in terms of your retention in the quarter, I know you talked about your ability to push rents on existing tenants and customers.

Can you talk about their retention? How has that been trending and that as a follow-up, can you talk about the level of rental increases that you push down to existing customers versus, let's say, new customers or new space that was newly leased.

Well, our overall -- this is Karl, our increases to existing customers has been running about 6%, and that's really where we see most of our growth coming from. Our street rates have been rather dynamic during the year and we're trying to do a lot of different things to try to impact our occupancy.

In March, we lowered our prices fairly significantly and overall brought our rates down. We've been climbing back up. We didn't really see a dramatic, positive impact of the rate decreases although one of the things that you never know is if we hadn't done the rate decreases, whether we would have seen an even further drop in occupancy, because as we reported our overall occupancy is down about 1.2% on the 181 properties. On the 559 or 580 overall, the larger group of mature properties, actually our occupancy is up slightly, so we have seen kind of different reactions based on the different portfolios.

Okay so I guess on the retention percentage, I mean is that increasing, decreasing, are folks staying longer then let's say trends have come out over the last several quarters?

Yeah, we really haven't seen a change in retention.

You had asked though, Chris, if you're occupancy's flat and your new tenants are flat, meaning your asking rent is flat and you're discounting is the same as last year, and your increases in existing tenants is 6%, why isn't the growth of your revenues faster than -- you know why isn't it more, instead of it being, for example 2.9 or whatever, why is it faster?

Part of the reason for that is the fact that in many properties, the rate that the existing tenant is paying is higher than the rate the new tenant is paying, so that means when a tenant moves out under natural churn and the new tenant moves in, that the new tenant may be coming in at 6% to 8%, 10% lower price which then causes a drag on the overall rental increases that you get.

I got you. I guess you ended the quarter at 86.8%. How has occupancy trended over the last month portfolio wide and are there any market outliers that pop off the page at this point?

There aren't any market outliers except the trends you can see already that you can look at. Of course occupancy declines because of seasonality from September to October to November, December and bottoms at the end of January, early February but our occupancy trends are very much on top of last year's occupancy trends. Our activity during the month of October so far has been basically similar to last October both in rentals and vacates.

I guess, Ken, just the last question for you and then I can follow up a little later. Any thoughts on Canada? I know you talked about some of the sentiment related issues that may be tempering demand vis-a-vis housing and some other things.

I think I would argue maybe in certain housing markets in Canada, you don't have the same type of issues we have here and in some cases, some of those public storage REITs up there are traded off pretty significantly, so what are your thoughts about Canada as maybe a growing market or a new market for Extra Space?

We haven't put any mental or otherwise effort into looking at Canada so we really -- I have to be honest that we haven't looked at it and we have probably no intention to look at it.

Okay.

Canada is smaller than California.

Okay, thanks a lot guys.

Your next question comes from the line of David Toti with Lehman Brothers. Please proceed.

Hi guys, most of my questions have been answered, but I just wanted to talk a little bit about assuming that they're some continuation of acquisition volume into '08, how you're thinking about financing acquisitions given that your debt ratios are sort of climbing up into the mid-50s range.

We would expect to finance acquisitions initially with available capital that we have, but as our debt ratio climbs, if the equity markets are not available to us, we will look to joint venture partners to provide the capital or a large portion of the capital to fund our acquisition pipeline. We have had talks with the number of joint venture partners.

There is a great deal of interest in joint venturing with Extra Space and there's a couple reasons for that. Number one, there's a lot of capital out there still. And number two, if a large capital provider is looking to get into self-storage in a major amount, it's very difficult to find an operator that they can joint venture with you that can really do a good job of operating a good-sized portfolio and we're one of those few companies that can do that, so your attractive as a joint venture partner.

Great, and then just lastly, what is your general estimate of construction costs for the '08 development pipeline, sort of the cost per square foot excluding the land costs?

There's a total of $123 million per square foot. I think we detailed that in our supplemental.

Does that include land prices as well?

That cost that's in our supplemental is total cost.

Okay, great. Thank you.

Your next question comes from the line of Buck Horne with Raymond James. Please proceed.

Hey, thanks guys, very good detail here. The only question I have left would be just talking about Florida a little bit more specifically and do you think it's going to get a little bit worse in the near term before it bottoms out and what's your strategy really to hold occupancy and have you seen any competitors doing anything maybe a little more irrational down there?

Well, first of all, no we didn't say it was going to get worse before it bottoms out. In fact, we see an improvement in Orlando but secondary we've already implemented a strategy of lower rents and higher discounting so that we've stemmed the tide of occupancy declines although we have declined sequentially in occupancy. Right now, it appears to us -- first of all, the Miami area is not negative; it's positive.

Second of all, we have not on a, just on a current basis, the last three or four months, it's not getting worse in Florida, so were optimistic that long-range, Florida's going to be just fine. We think this is actually just a temporary thing of Florida. Now I just can, if you look at various markets in Florida and how we are doing occupancy wise. You know Miami and Fort Lauderdale are down 2.7% in occupancy but the revenue is about flat, but as you go south from Fort Lauderdale it's better than it is Fort Lauderdale North.

West Palm is down in occupancy 5.2%, but the revenues are down 8.5%. Well, that's a disaster. Well West Palm is going to take a while to recover. Tampa, St. Petersburg, occupancy is down 3.9%, revenue is down 4.1% but it's not getting worse.

Orlando, it stopped, even though the occupancy from a year ago was down 5.7% and the revenue is down 4.9%, there is definitely a positive trend going on in Orlando right now which is very encouraging. Fort Myers area, the occupancy is down 5.8%, revenues are only down 2.1%. Naples is down 4.9%. We have one in Punta Gorda, which is actually up 5.5% in occupancy and revenue is flat.

It's a bit of a mixed bag, but the way I look at it, the economy in Florida is long-run going to be a great place for self storage and this is really mostly, it's not a housing phenomenon, it's mostly the unwinding of the tremendous increases as we head over a two-year period and the increases in occupancy as a result of all the dislocations that was caused by the hurricanes.

Okay great. Thanks guys.

Your next question comes from a line of Michael Salinsky with RBC Capital Markets. Please proceed.

Good afternoon guys, just a couple of quick questions to follow-up here. With the slowdown in the rental rate growth, have you seen any change in collections at this point, specifically relating to some of the troubles in the housing market?

I'll take it. This is Karl. No, we have not seen -- actually our receivables have decreased. Some of that is more focus of ours rather than change in economics but no we haven't seen any kind of spike in bad debts or receivables related to the economy today.

If you look at the real bad debt, a factor of self storage, it's running around 1% actual loss and the receivables are, we run receivables at the rate of 4% after 30 days and we have to constantly work with those receivables. And bad debts are higher in the lower demographic areas than in higher demographic areas and we have to. It can get away from you without good management if you're really not on top of it all the time, but our systems keep us on top of it and it's really not a worry for us. It's not like something that spiking right now.

Okay. Ken, this is a question for you. You mentioned having been through a number of cycles. I was curious what occurred with the average duration of stay during a recessionary period, whether people moved out a lot sooner, and what kind of changes you saw along those lines.

You know I have to say that we weren't measuring duration of stay like we are today. We had the measures really accurately because of our center shift product so I can only tell you anecdotally that I guess I really answer is I don't know. I only know that the revenue performance declined and in the worst places, it was negative because it is right now negative, you can argue that there's a recession in self-storage in Florida.

It's gone down negative, but I mean one anecdotal piece of information I can give you is that we own the property in Worcester, Massachusetts that I built in 1986. It's a large property. By 1989 it was fully occupied and it had -- Worcester had a 13.5% unemployment in 1991. It was pretty bad, a lot of people moved out of Worcester, and it was a disaster, the economy was just horrible.

And the revenues on that property did decline from peak to trough, 5%, but that was the worst performance in the whole country and that's a pretty dramatic unemployment, whereas in that same recession to revenues throughout Southern California on a pretty good-sized group of properties actually trended positive the whole time and that's during a time when the revenues of many other property types were going negative.

Okay, a follow up -- a question real quickly under development. You touched upon that you seen some definite rises in spreads on self-storage facilities specifically for lease up properties. As you look at your developments, you've indicated previously that your finance, a lot of that was in place mortgage debt. Have you seen any changes in the rates on the development pipeline and does that cut into yields at all?

Not on the development -- this is Kent. Not on the development side. On the development side are all of our loans are obtained from banks that do on-balance sheet loans and so the pullback in the credit markets has been all on stabilized properties. We have not seen any pullback from Extra Space's perspective on the development side. In fact, we have lots of lenders who still want to give us loans for us to do our developments, so on the development side the credit markets are still very wide open.

Similar loans of -- loan to cost, loan to values, not a big change in the interest rate that's being charged for those loans so from that perspective everything's pretty similar and Extra Space, as a general rule, while the property is under construction, we finance those properties pretty heavily, up to 80% of cost but then once they open and are approaching lease up, we would refinance them to more of 50%.

Okay, good to know, and then the final question. I know recurring CapEx you guys have talked about would be up a little bit this year. What's the normalized run rate using for next year and is there any properties or markets you expect to spend a little bit of money to do some upgrades?

As far as rating --

CapEx, CapEx. Do you want me to take that one?

Yes.

This is Kent. We're, right now, in the process of doing a really substantial evaluation from the CapEx perspective on all of our properties to answer the question that you just asked. We haven't completed that. There are some properties in some markets that we are evaluating and looking at upgrades and improvements to property but at this point in time, we're still in the middle of that process so it would be premature for us to make any kind of a representation as to that right now.

Okay, thanks guys.

Your next question is a follow-up question from the line of Michael Knott with the Green Street Advisors. Please proceed.

Hey Ken, I was interested in your comment about street rates versus rates on existing customers. Is the current relationship pretty steady with what you've witnessed historically? Obviously, in the public markets you're going to get a lot of disclosure on the differences in those two, so.

I mean I'll jump in here. This is Karl. I think that the one thing that has occurred is in the change and kind of how everybody is doing business is that we've gotten more aggressive on existing customer rate increases and in the last year and a half to two years, the street rates haven't really been climbing at the same level and whereas in the past, I think it was pretty much you just had existing customers raised when you would increase street rates.

I think what's evolved now is that we're constantly, we are not waiting to do existing customer rate increases once a year. We're doing them on ongoing, every month basis and so the gap between street rates and existing customer rates has grown and I would guess that that's probably pretty much everybody in the industry. Ken, do you have any more to add to that?

Well, this sort of principle of raising people above the street rates, we've probably been the leader in that. It hasn't been done by all companies and what we found is that in times of slower economic activity in a particular region when -- like take Florida for example.

Probably all of Florida's properties, the existing customers on average have higher rents than the new customers coming in, but where there's fast economic growth, where things are going well like maybe possibly in Dallas or someplace, you may have street rates leading your existing customers where, and that occurs in fast economic growth places where you are then able to drag out the existing customers so your economic occupancy is below your physical occupancy.

Right now, nationwide, I would say on average were probably more in a situation where the average existing customer is a little higher than the street rate.

Okay that's helpful. And then my last question is, is there any update on the small investment you made in Mexico and then also just curious, the enthusiasm for Mexico but not for Canada?

Well, yes I can tell you the enthusiasm for Mexico, not for Canada. The cap rates for development in Mexico are way higher than they ever would have thought of being in Canada. The economic growth in Mexico is higher and the immaturity of the market in Mexico is, and the market is almost nonexistent, whereas the market in Canada is quite mature.

With respect to Mexico, we have really nothing to report. It's too early days really for us. We're working on a few developments with our partners in Mexico and is going to take several years really before it has much impact on our FFO or our bottom line. We're hoping that if we see good success in the properties that are being developed in Mexico City and elsewhere in Mexico, that we will employ more capital in the future. Right now, it's such a small capital investment, that it's too small to register in our earnings.

Thank you.

And Mike, one clarification to your previous question about what we had in our press release on NOI and revenue growth, if you're still there, Mike, if you can still hear. We were talking about total wholly owned stabilized properties which on our supplemental page five, it shows a year to date number of 4.65%, and in the press release we did mistakenly put 3% to 4%. That was supposed to be 4% to 5%.

With a full year NOI growth --

With a full year NOI growth for all total wholly owned stabilized properties, so 230 properties.

Okay, 4% to 5% on 232?

Correct.

Okay, thanks.

We're showing no more audio questions in queue. I would like to turn the call over for closing remarks.

Okay, thank you very much for being patient and listening and we appreciate the good questions. We hope that the supplementals will provide a lot of color on what's going on and about our Company and we appreciate the support that you've all given us as our shareholders and as our analysts and we look forward to talking to you at NAREIT and at future conferences. Thank you very much.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.