Extra Space Storage Inc (EXR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Extra Space Storage Incorporated earnings conference call. My name is Lauren and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this conference (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like the turn the presentation over to your host for today's call, Mr. James Overturf.

Thank you, Lauren. Welcome to Extra Space Storage's, fourth quarter and year-end 2007 conference call. With us today are CEO and Chairman of the Board, Kenneth Woolley, President, Spencer Kirk, CFO Kent Christensen, and COO, Karl Haas. In addition to our press release, we have furnished audited supplemental information on our website. 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, NOI, FFO and guidance. We encourage all of our listeners to review more detailed discussion related to these forward-looking statements contained in the Company's filing with the SEC. These forward-looking statements represent management's estimates as of today. 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 the turn the call over to Extra Space Storage's Chairman and CEO, Kenneth Woolley.

Thank you. Thank you, James. Thank you for your interest in Extra Space and joining us with our call today. We will have on the call today are Spencer Kirk, Kent Christensen and Karl Haas. I would like to point out a couple of highlights for the quarter, and then turn it over to Karl and Kent to give you more details.

Before an impairment charge on auction rate securities, and development dilution, we earned $0.32 in FFO for the quarter and $1.13 for the year. After the impairment charge and development dilution, we actually earned $0.29 for the quarter and $1.09 for the year. Our FFO increase of 14.7% puts us solidly in the top 25% of all public REIT's. And even with the impairment charge, are FFO was solidly within the guidance range we gave at the beginning of 2007 and that we have given throughout the year of 2007. We also are confident in the accuracy of future forecast and budgets we will be talking about on this call.

Our same-store revenue and NOI growth for the quarter was again quite solid. We finished the year with revenue growth of 3.9% and NOI growth of 5.3%. We also have a tenant insurance program which we last year decided to take out of our same-store NOI and revenue growth. Many of our competitors leave it in. It is part of operating activities. If we had included our tenant insurance program our revenue growth for the year would have been 4.4% and our NOI growth would have been 5.8%. We in fact achieved those revenues and NOIs, but it was shown elsewhere in the financial statements.

Our expense control at the site level was excellent. If you look at the financial statements in detail. In 2007, we benefited from a number of initiatives. We had an intense capital improvement program at the property level, which helped improve the quality of our properties. We continued to invest in technology systems and automate our process so that our overhead activities became less expensive because of technology. We continued to refine our revenue management systems and we believe that this is helping us and also, we have improved the skills and performance of our personnel through extensive training.

We are also continuing to benefit from our acquisition and development program. As you can see in 2006 and 2007 our acquisitions were above expectations. In 2007 we acquired interest in 50 self storage properties for approximately $385 million. 38 of those, for $375 million, were wholly owned properties and we acquired some joint venture interests in 12 properties for about $10 million. The acquisition environment is changing with the change in the credit markets. But so our expectations remain high and we have to be careful to make sure that in our acquisition activities we are conservative in our budgeting. And so in the future we do not expect acquisitions to be quite az robust in the current year.

We also are continuing to develop properties in high barrier-to-entry-markets. Our development program drives long-term growth and ultimately earnings accretion. It also enhances our NAD and our overall portfolio quality. We completed the development of six projects in 2007 for $52 million, and we have 12 more on tap for 2008, including--for about $103 million, and 12 more in 2009 for another $126 million.

Basically the Company's in good shape. We are performing well and we will get into the details about our performance as we-- I turn the call now over to Karl Haas, our Chief Operating Officer, who will give you more detail. Thank you. I will be back later in the call.

Okay, Ken. Hello, everyone. As Ken mentioned, we had another good quarter our same-store growth of 181 properties had 2.8% increase in revenue and a 3.6% increase in that operating income.

For the year, same store revenue growth was up 3.9% and net operating income was up 5.3%. Occupancy as of end of the year was at 84.1% compares to 85.1% the previous year. We once again had a very good expense control quarter as our same store expenses increased a modest 1.1%. For the year our expenses finished up 1.3% which obviously is pretty good. The lower expense growth certainly aided our bottom line net operating income growth. We did a good job on our control of expenses; however, keep in mind that this quarter's results are historically low increases and not necessarily the norm. We are forecasting same-store growth for 2008 to be between 2.5% and 3.5% and we have seen some snow, some increase in snow removal costs in January '08 well above January '07. Thanks to-- can't control Mother Nature.

REVPAF or revenue per available square foot, for our same-store pool was $12.14 which represents a 2.5% increase year to year. The quarterly increase in revenue came from increased rents from our existing customers and a reduction in discounts at our same-stores which were down--the discounts were down approximately 6% for the year. REVPAF was mitigated by lower square footage, foot occupancy, which as previously mentioned was down 100 basis points at year end.

During 2007, our monthly same-store year-on-year revenue growth decreased from January through August; however, we seem to have stabilize since August at about 3%. Our pool of 589 stabilized properties that we manage had somewhat better results than same-store pool during the quarter, with a 3.1% increase in revenue and 5.5% in net operating income. For the year these properties had a 3.4% increase in revenues and a 4. 3% increase in net operating income. Square footage occupancy for this group of properties as of the end of the year was flat when compared to last year at about 84.1%,which coincidentally is the same as our same-store pool.

Our street rates for new tenants were down as of the end of the year when compared to 2006; however we continue to find traction with our existing customers with rental increases being given to approximately 30,000 customers on a monthly basis. As we have said in previous calls our growth in 2007 was hampered by Florida which accounts for 10% of our overall net operating income. This is really a return to normalcy from the tremendous demand after hurricanes in 2005 for Florida. Taking Florida, out of the equation, our revenue for the same-store pool for the year would have been higher by 100 basis points and net operating income would have been higher by 150 basis points. It appears that Florida as a whole is reaching the bottom with slightly improving year-on-year comparisons. The markets of Miami, Fort Lauderdale, Tampa and St. Pete are better this year; however, West Palm Beach continues to really struggle. On the positive side, our best markets for the year for revenue growth during the fourth quarter were Chicago, Columbus, Dallas, Detroit and Houston. These markets experienced year-on-year increases in revenue between 7% and 13% and also were among our best performers for the year. Detroit has had a bounce-back year and has felt the benefit of aggressive price increases--or decreases that we put into place in late 2006 and early 2007. For our largest net operating income producing MSAs-- is Boston, Los Angeles, New York/New Jersey and Baltimore/Washington, we showed increases of 2.5% to 4% for the quarter and the year.

It is interesting to note that there, that there are ranges of performances within each of these MSAs, for example in Boston, the stores in Boston Central are out performing those in the South Shore and the western suburbs considerably, with a revenue increase of nearly 8% for Boston Central. In the New York MSA, Long Island is leading the way with growth over 9%. The South Jersey and Philadelphia markets continue to be one our weakest. We attribute most of the weakness to new competition. That new supply according to our measurements is low throughout the U.S. This particular market has seen an increase in supply with more scheduled to come on line in the next year. As in other weaker market we are going into this year's rental season in South Jersey/Philly with aggressive pricing to new customers in addition to being proactive with discounting.

The Operations Team is looking forward to 2008 which just happens to be my 20th year in the self storage business. Though many components of the business have evolved, operational success in self storage still comes down to preparation and a focus on good pricing and promotions, sales skills and keeping properties well maintained, we call it clean and green here and controlling receivables. We are doing these things well. Goals for 2008 are well defined and we have the team and the tools to enable us to achieve them. Specifically we are training our people well and increasingly satisfied with their jobs and responding beyond our customer's expectation. We are maintaining low turnovers to sites, and 75% of our employees gave us high ratings in job satisfaction in 2007, and that's up from only 63% in the previous year for same kind of survey. The executive team also conducted 40 town hall meetings during 2007 and met with over 1,400 of our employees. We are hearing good feedback from these meetings and overall, we continue to further improve our processes and training.

This year our online, our on line training program won major awards from the training industry. We conducted over 150,000 training hours during the year, utilizing proprietary web-based learning management system combined with face-to-face training. All of our site personnel is required to achieve a base level of certification before managing one of our properties, and we are continuing to raise the competency--that's a tough word to say--competency bar throughout the organization.

So, thank you and now I would like the turn the call over to Kent Christensen who hopefully will be able to pronounce his words a little better.

Thank, Karl.

As we disclosed our FFO per share for the fourth quarter, came in at $0.32 per share before an impairment charge on our auction rate securities and dilution from our development program compared to $0.26 in the same quarter last year. Taking into account the $0.018 from the impairment charge and the $0.008 in drag from our development properties, our fully diluted FFO per share for the quarter came in at $0.29 compared to $0.26 a year ago. Driving our growth was 25% increase in our property rental income and significant growth in our insurance program. We did an outstanding job with our G&A which rose just 2% over the same quarter last year and fell to 14.2% of our revenues from 17.3% a year ago. For the year our FFO came in at $1.13 per share before the non temporary impairment charge and development drag compared the to $0.95 last year. After consideration of the impairment charge and a development program, our FFO for 2007 was $1.09 per share, which was as Ken stated earlier, which was the budget we had set for the beginning of the year.

Regarding the impairment charge that affected the fourth quarter and the year, we decided it would be prudent at this time to write down our investment in our auction rate securities. We are working with the broker dealer managing this investment for us and we feel we will come to a mutually beneficial outcome in this matter. The permanent impairment charges as a nonoperating loss in other income which affected impacts at FFO by $0.018 for the quarter. We also recorded a temporary impairment charge of $1. 4 million which is recognized as an unrealized loss in shareholder's equity.

Moving on to our acquisitions and development, we had another good quarter of acquisitions and finished the year on a high note adding several properties during the fourth quarter. We acquired interest in 19 self storage properties for an aggregate cost of approximately $79 million. Seven of the properties acquired are wholly owned and 12 are owned in various joint ventures. The properties acquired during the quarter are high quality, well located assets in the states of California, Connecticut, Florida, Illinois, Massachusetts, New York, Rhode Island and Texas. For the year, we acquired interest in 50 self storage properties for an aggregate cost of almost $385 million.

As we start into 2008, not much has changed on the acquisition front. We remain conservative as we see little to no decrease in seller expectations. We still have the capacity to grow but we are being careful with capital allocation. To this point in our guidance we have not included any acquisitions at this time for 2008, but we are still looking for good accretive acquisition opportunities. During the fourth quarter our Development Team completed a joint venture project in Sacramento for $7.1 million and a wholly owned project in Laurel, Maryland for $8.7 million. For the year the team completed six projects for $52.1 million. Three of these projects were wholly owned and three of them are in joint ventures. Ken already spoke a little about our development program for this year and what we anticipate completing in 2009. The properties we have that are in our development program are in high barrier-to-entry-markets in California, Florida, Chicago,and the Baltimore, Washington D.C. area. The total outlay for both years is between $25 million and $35 million dollars. The debt markets are still favorable and are still open for us for our development program. In order to illuminate the effect of the development program we have several tables in our supplemental package posted on our website. You can see by looking at the analysis that although it is extremely valuable in the long term, development does have a short term impact on our earnings. For modelling our FFO and our NAV we estimate that our drag our development program will be approximately $0.06 in 2008 and if all of the properties that is we have developed in 2006, 2007 and 2008 were open and fully stabilized today, and using the rents today, their contribution to our FFO would increase from the negative $0.06 to a positive $0.09 or a $0.15 swing.

Our balance sheet is in good shape. Our debt is manageable at a total debt to market capitalization including all P units of 57% at year-end. The total debt outstanding as of year end was approximately $1.3 billion, and our fixed rate debt which comprises 90.5% of our debt has an average interest rate of 5% and the maturity of our debt is well staged. Our variable debt at the end of the year had an average rate of 5.9; however, because of the drop in the LIBOR rates it is now currently to 4.48%. And our fixed charge coverage for the fourth quarter was 2.4 and averaged 2.3 for the whole year.

For the three months ended December 31st, 2007, the CCS/CCU calculation outlined in our IPO prospectus allowed for the conversion of an additional approximately 455,000 additional shares and units. Total CCS/CCU shares converted to date is approximately 1.9 million. G&A net of our development fees was $9.2 million for the quarter and $36.7 million for the year. Management fee income for the year from our joint ventures and our third party managed properties came in at $20.6 million. When you take our management fees and net them against our G&A, the cost to manage our wholly owned properties is $16.1 million.

In terms of our outlook, we estimate at this time that our fully diluted FFO for the first quarter to be between $0.27 and $0.29 per share before the development dilution and $0.26 to $0.28 after consideration of the development program. I'm sorry. The numbers I just stated were incorrect. That's $0.27 to $0.28 before the development dilution and $0.26 to $0.27 after the development program. For the year we estimate our fully diluted FFO to be $1.23 to $1.27 per share before the development dilution and $1.17 to $1.21 after consideration of the dilution. The assumptions behind that guidance are listed in our earnings release but I will highlight that it assumes, as I said no additional acquisitions and also no further impairment on our auction rate securities.

With that I would like to turn the call back to Ken.

Thanks. Our outlook for the coming year for same-store growth is similar to what we achieved in the current year. I think that's prudent given what we are seeing in the economy. Given our estimated range of guidance, we will see FFO per share before development growth dilution grow between 9% and 13%, which will be an excellent performance given that it assumes no new acquisitions. We do however expect we will be doing acquisitions and that could cause a better result.

As we continue to grow, we believe that we will continue to harness economies of scale which have been very helpful to us in achieving our cost control and excellent revenue growth. It also reflects the continued contribution of earnings of our acquisition and development properties. In all, I feel Extra Space is in a very good position in our industry and is one of the premier operators.

I would like to speak to self storage for a minute. We've had a lot of investors and analysts talk to us about the relationship between self storage and the housing difficulties in our economy. We are not seeing much relationship between the two. Storage demand arises because of life changes. It can be a wedding or a graduation or a death or a birth or some other, or a divorce. But those types of life changing events occur whether or not the economy is going up or the economy is going down. In fact in some cases, if the economy is in some stress and people lose their jobs or there's a foreclosure, it can actually give rise to demand for self storage. Also there's a significant part of storage demand that relates to small business and business activity. It has nothing to do with housing. It is all about business activity in general. Of course business activity slows there's an anticipation that that market would slow slightly. Also there's a stickiness about the storage business. When people store, once it gets there, there's a tendency for people to forget it and not want to remove it from the storage. So it is one of the reasons that we are able to get reasonable rental increase to existing customers because it is a big, big job to undo the storage, get rid of their stuff. Storage-- there is a, an addictive nature to storage. People like to hold on to their material goods, and there is Tan emotional aspect to keeping them. All these things are unrelated to housing. Certainly in some of the markets where we have seen very active new housing formation and that new housing formation has slowed, we have seen a slowing of self storage activity; but those markets are not big in terms of the overall of Extra Space. Those markets would include parts of Phoenix and Las Vegas and the Inland Empire and parts of Florida. But much of the rest of the country we believe has been unaffected by changes in housing value. It is one of the reasons we continue to see excellent demand.

year ago or approximately a year ago on our call, I mentioned that we were seeing slowing rental activity, and that did occur in October, November, December, January, February of last year. But currently, our rental activity is actually up over the previous year and it is doing fine. So we are not seeing anything negative with respect to rental activity. Karl did mention, however, that our achieved--that our asking rents are down slightly, and that is true. We are being more competitive on an asking rent price basis in order to maintain our rental activity; however, he also mentioned that our discounting was down versus the previous year which is also true. So we have been a little less aggressive on discounting but a little less aggressive on the asking rents. Our occupancy is actually, we believe going to be moving slightly to the positive relative to the same time at the same year. I think most of you know that our year-end occupancy for our large same-store portfolio and our stabilized portfolio was 84.1%. That of course will achieve a peak of 300 or 400 basis points higher in the summertime and then we will fall back again next year. But our own internal goal is to increase occupancy during the year slightly, but to continue to operate our business based upon maximum growth and income.

I can say without hesitation that self storage business is just an excellent place to be. Extra Space Storage is a unique company in that business because we are active developers of self storage, number one, which our competitors are not, and number two; we have a substantial joint venture business that leads, that gives us experience in operating with institutional partners and will give us as time goes on, excellent return on investment through promoted interest with our joint venture partners. We believe that sets us apart as a company. We also have achieved as a company, the highest rent per square foot of any of the self storage companies, and that really is a result of the quality of our properties and the markets that we are in and we expect to continue to be the leaders. Our acquisition activity continues to be careful and prudent. We did, more than $1.8 billion worth of properties, during 2007 as you know, we bought $385 million. The reason we didn't buy the rest was because we in many cases underbid our competitor by 15% or 20% because we weren't willing to pay what the market was serving up. We think it will lead to higher shareholder returns over time. Anyway, with that I am going to turn the call over to questioning and we will answer any questions that you have.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Christie McElroy with Banc of America.

Hi. Good morning. Regarding your same-store revenue growth forecast of 2.5% to 4% you mentioned occupancy, but can you quantify the expected upside there and what do you expect rent growth could look like? So essentially how much of the revenue growth do you expect to come from rent growth and how much from occupancy upside and are you forecasting any change in the concession activity in 2008?

We are, our goal for 2008 is to improve our delta on square footage by about 1.3% from October '07 through December '08. So, about 1% we hope to get from occupancy gains. We do not see any dramatic change in our discounting. I will say that the reason that our discounting is kind of flattened out here in the latter part of 2007 is really two things. One, we had experimented and were doing some three months half off promotions in late 2006 and part of 2007 and we stopped doing that. We determined that it just didn't get us a better answer. But it did result in higher discounts. And the other thing that we have done is we really have tightened up the discounts that kind of, the discretionary discounting that our managers can do. We have found that, that wasn't always used in, in a way that really got us to the best answer. So, while we actually have done, changed some parameters that could increase discounting, we have offset that by reducing the discretionary discounting and reducing the three months half off.

Okay. And then, Ken, can you expand on your thoughts on the tighter credit environment and if it plays out, what impact do you expect to see on the demand and supply of self storage and do you see the potential for larger well capitalized storage companies to take advantage of an environment like this? And if so how?

Well, lets talk about the supply side first. The credit crunch, we believe, and in talking with people in the local communities and people in the self storage association, it appears that less capitalized developers are having a more difficult time getting loans from banks just because of the more conservative nature of the banking environment and the lending environment. That works well for us because it is going to, I believe, decrease the new supply of properties. There's always a lag time in this business because the supply that's coming on this year is mostly properties which were, already underway last year. So it is really going to affect supply probably in late 2008, 2009. We will see a decrease in new supply. That will help us. On the demand side, theres no question that self storage, if we have a recession in our economy as a whole, self storage is you know, it is a business. It is related to the business world. We have seen less. It is a business that seems to have less ups and down with the cycle of the economy than other businesses. And so I don't see a lot of decrease. You might see a slight dampening of sort of revenue growth on the demand side. But I think if you look at our numbers you will look at the excellent results we've had if places like Detroit where we have, I think, I don't know 12 or 13 properties, and yet, we would all agree, I think that Detroit is in a recession as a place or as, Michigan if any place. Yet we've had increases in self storage activity. So, it is, we don't see a lot of correlation there. So, I think we are going to benefit because where we have the most trouble in self storage is when there is too much supply, as we mentioned in South Jersey and Philadelphia areas and other area of the country where there's too much being built. That really hurts us. We think on the whole, the credit crunch isn't going to hurt the operating statistics much. It may in fact help it. On the other side of the credit crunch is the supply of funds to companies like Extra Space Storage. Clearly, Extra Space, we are trading at a value currently that we believe is under our NAV and I think most of the analysts who rate us would also say that. And that means that it would be unwise for us to tap the equity markets to get new equity. Also our debt ratios are high enough that, that it is unwise for us to increase our debt by very much because we don't want to get over leveraged or get in any kind of financial condition. That's leaving Extra Space to be very conservative on its acquisition activities, and also, it is leading us toward looking at more joint venture possibilities for further acquisition activities. We do, as you know, have good relationships with our joint venture partners, and I suspect that in the future we will be doing more activities with joint ventures because of the state of the capital markets. If the capital markets open up we will go back to growth using the conventional capital markets.

Thank you. Really quickly my last question. With regard to your new development pipeline, are you buying the land ahead of time and holding it on your balance sheet, or is all of your land under option until you are getting ready to start the project?

This is Kent. We try to balance that activity you just described and have in our agreements with the sellers as much time as we possibly can to get the project ready to-- as close as we can to starting construction. There are, however instances when the land and the property that we are acquiring so valuable and the seller knows that, that we've had to buy the land before we are ready to start construction. But as a general rule we will not acquire the land if we know, unless we are, unless we can confirm that the entitlements and what we would like to build on the land, the city will allow us to do. So we would try to push that to get us as close as we can, but in some cases we are acquiring the land before starting constructions.

I think at year end we had raw land on our books of about $50 million in our assets.

Right.

Great.

I'm sorry, Christie. What?

That's what I was going to ask. Thank you.

Your next question comes from the line of Christeen Kim with Deutsche Bank.

Hey, Ken, you mentioned seeking out joint ventures or using your current partners to acquire assets given where the stock price is and where your debt levels are. What are you guys seeing in terms of institutional appetite for self storage at this point? Have there been any changes?

The appetite remains robust, but to be very have not gone out yet have note yet actively to pursue a joint venture partner. So, we don't have first hand experience with the current marketplace.

Okay. Great. Then in terms of your guidance, your core guidance assumptions for this year. What have you assumed for Florida, have you assumed going back to positive growth there or flat or negative?

Flat.

Okay. Thank you.

And your next question comes from the line of Michael Salinsky with RBC Capital.

Good afternoon, guys. Real quickly, Ken, can you touch on your investment capacity you have on balance sheet right now and the unencumbered asset pool?

This is Kent. We have about $250 million of available--of property that are unencumbered, that if we were to tap the debt markets on those properties that we could get financing, that would allow us to to acquisitions.

Okay.

Let me clear that up. We have $100 million line of credit which is untapped and we have properties worth more than $250 million to which we think we can borrow $250 million. So that is $350 million total. If we were wanting to leverage up.

Okay. And secondly, in terms of the debt markets right now, where is pricing for debt product essentially in the self storage market relative to maybe this time a year ago? How much is it up on a year-over-year basis basically?

Well, the spread, that you get as far as the CMBS quote over the last two months have ranged from 200 to 400 basis points. It depends on the week you are calling and the information that we are getting from our lenders. But obviously with treasuries dropping, it is so-- and the pricing we were getting before the credit crunch that occurred in the middle of last year was 100 to 125 basis points over the applicable treasury. So you are somewhere between 75 basis points higher to 275 basis points higher on the spread but then the treasuries are lower. So that is where--adding those numbers would give you what the rates would be. There appears to be some interest in the non CMSB markets on book, deals that could be done for us to be able to obtain financing, smaller amounts of financing not large amounts but smaller amounts of financing that companies are wanting to do on book loans. And those would be more variable rate loans and would be somewhere between 200 and 300 over the variable rate amounts like the 200, 300 over LIBOR.

So the insurance companies and some of the other financial institutions are still out there lending?

Yes.

Okay. And finally in materials of recurring CapEx for 2008. I know you got some work you are doing on some of the 5A Rent-A-Space properties. Could you describe what is your outlook for recurring CapEx and how much you plan to spend just on portfolio improvement stuff?

We are doing-- the budget nor year is about $0.35 per square foot and which that does include, that does not include the 5A. The 5A stuff we are able to, we had budgeted about $10 million and about $2 million of that was completed by the end of the year, and we still need another $8 million or so to be done this year. So in addition to the $8 million on the 5A we are planning on about $0.35 for the rest of the portfolio.

Great. Thanks, guys. Congratulations on a good quarter.

Thank you.

Your next question comes from Michael Knott with Greenstreet Advisors.

Hey, guys. I am wondering if you can give us a little color on what buyers are underwriting today in the market for self storage, what types of unlevered returns or cap rates?

We haven't seen a lot of transactions close. So we are not--we know that we are still getting out bid on the transactions we are bidding. We are bidding between a 7.25 and a 7.5 and we are still getting outbid. That produces you know, a 9% or 10% IRR depending on what kind of inflation factors and other assumptions that you make on your equity. Those are the underwriting numbers we are using and as I stated we are getting outbid. So that implies that people are coming up with number that are lower than those.

Okay. And then, could you guys give us an assessment of your '07 acquisition activity, given that it was sizable and given the negative comments about the state of values in the for-sale market today?

Let me characterize a little bit. There were 38 wholly owned properties that we purchased. I don't know, ten or 12 were the, the [NUPP] 5A Rent-A-Space properties that was one transaction that was sort of we didn't really have competition on that. It was a privately negotiated transaction off the market. The rest of the transactions all but one were transaction where we purchased the properties either through existing private relationships or from our existing partners where we either managed or had a joint venture interest before in the property. Only one property we bought that was widely marketed. This means that the average cap rate that we achieved for properties that we purchased in 2007 was in the range of 7% in actual numbers. The properties that we bid on that I told you about $1.8 billion worth that we didn't get, we were typically outbid by as much as you know, 10% to 15% and some times even more which implied that the cap rates in the market were in the low 6s, not really in the 7% range. The only reason we were able to add higher cap rate and something accretive to us is because of the way we went about it. We continue to hope we will, we will go about it in the same way this this year as you noticed in our guidance we are not showing any guidance for acquisitions. We will be doing acquisitions. We are active but where we sort of moved up our cap rate number, just based upon our financial markets, but we haven't seen the properties come up yet in cap rate or down in value.

Okay. And then earlier you said you are not forecasting any acquisitions but you are continuing to look for accretion deals. Can you help us understand whether you are primarily focused on earnings accretion or value accretion.

Both. We are focused on value accretion without earnings dilution. Which means we are not going to be buying very many lease up properties that could be value accretive but earnings dilutive. So, unless we find a joint venture partner to do that with. So, we want to have both value accretion and earning accretion.

Okay, and then my last question. Kent, can you help us understand whether you still have capital in the auction rate securities or whether you are out of that now? Can you help us understand that.

Right. There's $24 million of cash that we had used to buy auction rate securities that those are all started to fail in August of last year. So we still have, this $24 million that is tied up in our auction rate securities. To date all of those auction rate securities are held or are investments from insurance companies and none of them are backed up by any kind of CMBS loans or subprime loans. There's only two of the 13 securities are backed up by the companies that insure these products, companies called MBIA and Amback, but otherwise, the other 13 are all securities held by insurance companies. Currently all loans are currently paying their interest payments. We get an interest payment every 28 days. They're all current and for the most part they're AA or AAA rated, but because of the ill liquidity of the product, none--there's no transactions occurring today. That's why there's a suspect as to what the value of these is. There's not any question that the principle is at, that we have a problem with the principle--it is whether or not because of the liquidity aspect what the value is.

Okay. Thanks.

Your next question comes from the line of John Calone with Merrill Lynch.

It is actually Chris. Good morning, everybody. Can you hear me?

Hi, Chris.

Okay, good. Ken, you talked earlier about the performance of storage through a recession. Some would contend we are actually there already in many ways. Can you talk about what type of timing lag if you have historically seen one, given your experience in the sector between when let's say the MBER officially calls a recession and any down side inflection in any operating fundamentals?

I don't know that I could give you that information. This is really anecdotal not analytical. My anecdotal experience would be there isn't a timing lag, that it is concurrent, it is not a lagging indicator, it is a concurrent indicator if there is any. Recognize tag we are running, if you take Florida out, same-store revenue growth many the range of 4%, during this, if we are in a recession, that's pretty good. That's just where it is right now.

Okay.

For us.

And I guess a question for Spencer, I don't know if he's there, last time we can meet, you talked about revisiting some of EXRs best practices and some of the innovations that the Company has brought forth the last few years and trying to actually identify, to what extent there is value there relative to the cost. Here we are 90 days plus after that meeting, just wondering how that project is proceeding and if there are any preliminary observations you guys can share with us on that?

I appreciate the chance to respond, Chris. I have been vigorously working internally on something that you will be hearing more about called Enterprise Content Management. There's a lot of information about our customers, their behavior, their purchasing decisions, and as you look at taking the data that is proprietary to what we have learned about how customers go about using self storage, we think that there is tremendous opportunity in revenue management, cost containment, in web marketing and design to pull together a competitive advantage that gives us integration of the information that will allow us, we believe, to in an agile way, more quickly respond to realtime pricing demands in the marketplace and further enhance our ability to serve up to the customer exactly what he or she desires at the point of purchase. If I could further expand that, many people look at the concept of a customer from cradle to grave, and we are thinking outside of the box, that at Extra Space, there's a lot that goes on even before the customer acquisition where it is really from first glance or first inquiry to grave. My efforts with what I would consider a significant and capable technical within Extra Space, I think al allow us to take the Enterprise Content Management, and drive our results to a level that has not been seen within storage because technology and automation to our advantage. We will invest aggressively, and my desire is to support compliment and enhance what Karl and the Operational Team is doing so well already and get them further energy and information to out maneuver the competition.

So is this using data that EXR has accumulated on existing preferences with respect to current customers and extrapolating that over a larger opportunity set or is it just looking proactively at potential trends and you know, customer tastes and expectations coming in as a new user.

The answer is yes to both of those.

Okay. And I guess just a last question. I don't know if there's any, if you could remind me the update on the external call center, I know quite a few were in Beta and just wondering how you guys were thinking about that, and how that call center would work its way into some of these initiatives that Spencer is working on.

Well, it is one of our key initiatives this year to upgrade our call center and we are working with outside consultant and also an outside call center. We really haven't made a decision on which direction we are going to go although we are confident we will end up with a call center either operated by us or operated by a third party in Salt Lake City near the end of the year.

Okay. Thanks a lot, folks.

Thank you.

Your next question comes from the line of Paul Adornato with BMO Capital Markets.

Hi. Could you talk about the performance of the development properties specifically the lease ups, the discounts promotions, and street rents that you are asking and if that provides any insight as to the state of the economy or the industry?

What we are seeing in the rent ups is pretty much consistent with what we have seen in the past. California properties, rent up a lot faster than properties in the east, and it really depends. We've had some that are performing great even in the east and we've had some that have had slower rent up. The rates are pretty much where we had projected them when we did original projections. And all in all, they're, you know, if you take the whole package and wrap it together, it is pretty much performing where we would have thought it would, they would be performing.

What's your appetite for new developments looking out to perhaps 2009, 2010?

This is Kent. We've-- our development team has constantly and continuing to work on new opportunities in the development area. Ken mentioned the 24 that are possibly opening this year and next year, in addition to those 24, we had another between 25 and 30 property that is are in our pipeline of openings in either 2009 or 2010 or 2011. So that's a program that is still going full speed ahead.

And switching to insurance, you mentioned that your tenant insurance program had some nice growth. Is that just because of a larger pool of properties under management or is that greater penetration, greater sales on the part.

This is Karl. It really has been as a result of greater focus and, which is resulted in much higher penetration.

And do you feel that you have plateaued there or do you have more to go in terms of penetration?

We feel we have more growth. It won't be at the same rate that we, that we grew in 2007.

And what percentage of new customers get the insurance?

It's in the 60% to 70% range.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Paula Poskon with Robert W. Baird.

Thank you. Most of my questions have been answered just a couple of follow ups ms as you consider acquisition opportunities do you see any difference in the sellers expectation between those selling stabilize assets versus those selling lease up opportunities?

This is Kent. Still to date we are still, that would be an area where you would think that the expectations would change. But starting about two years ago, there-- a lot of properties came to market with the expectation of even though they were in lease up, sellers were expecting full value. For the things we are bidding on, once again, these transactions haven't closed but we have been outbid on them. We are putting a discount on properties where they're in lease up but we are being outbid. So that is what we--we still have not seen sellers expectations change there. You would think that would happen but we haven't seen it yet.

Thanks. Lastly, just to follow up on your commentary again, about the demand drivers in this stickiness of storage et cetera, to the extent you are tracking this, are you seeing any bumps in demand from households combining and the swelling housing markets or from owners down sizing that are moving from homeowner ship back to rentals.

I would say there's so much noise in the data that it is very difficult to separate that out. So it may be there but the noise is too great. So I can't answer that.

Okay. Thanks very much.

One thing I can say is we are not seeing extraordinary high move outs than a year, or two years ago.

That's helpful. Thank you.

Your next question is a follow up from the line of Michael Knott of Greenstreet Advisors.

Hey, guys. Can we just touch again on the capital strategy? Let say in a poor case scenario, the public market doesn't reflect any change in values 12 months from now and debt market are still challenging. How do you fund the development pipeline for '09 and '10, how would you strategize in that type of circumstances where equity is not appealing and debt is still challenging?

Well, to answer your question. This is Kent again, Mike. The capital needs for our development program for the next two years is as I aid between $25 million and $35 million. So with the availability we have on the line of credit plus the properties that are unleveraged, it would cause our debt to total market cap to go up slightly, but we could easily fund all of the development programs that we have in place right now. The debt, --that assumes we can get 80% leverage on those property, and as I also stated, the appetite for banks to go do our development programs is substantial. We have numerous banks that would love to do our development programs. We aren't having any push back, in fact, we've just closed on some loans in the last two weeks on the program at the kind of rates I am talking about. Very aggressive and very good terms on our development programs, so that's why the cash we feed to do this is very limited to the $25 to $35 million which we have today.

But, you know, to further talk about that, that's one of the reason ares that we are being very modest in our expectations for acquisitions this year. We view the development program as being much more important to our long-term viability and growth as a company than acquisitions. We can turn acquisitions on and off but once you get development going it is harder to turn it off if you turn it off it is harder to start it again and it is much more accretive in the long run for us than acquisitions.

Okay.

Your next question is a follow up from the line of John Calone with Merrill Lynch.

It is Chris again. Kent, sorry if I missed this earlier but with respect too the ARS position, so I guess if I am reading and understanding things right, the combined one two and one four, that is really with respect to Q4; correct.

Well, the what occurred is that the auction rates fell in August. By the end of December, the brokerage house we are use to go trade in these sent us a statement where they had determined that the security hearsay gone down in value as of December 31st. We then subsequently received another statement from the brokerage house as of January 31, further showing, further reduction in the value of these securities. Of those securities, we reviewed them with our auditors and with the brokerage house and determined that some of them might have an impairment that should run through the income statement while others of them should have only a temporary impairment and that's why the total amount of the statement that we received from our brokerage house as of January 31st, has been written down, part of it through earnings, part as a temporary impairment. This was a very fluid issue. The accountants and Extra Space and I think everybody is trying to deal with what it is that is actually happening here. This is our best assessment as to where the market is today.

Okay. I guess just in thinking about it. It has really come to the forefront of economic news head lines within the, within the last few weeks or so. And I just want to make sure we are thinking about, you know all future expectations with respect to any further write downs. I guess does this impact the P&L? Is it only other income, through the other income line item? Where does it hit the P&L.

It is in other income.

Okay. So again, this one four of temporary, temporary charges or temporary impairments, that could get reversed or, or what, what is this?

If we are ultimately able to liquidate the security at face value, then everything we have recorded would be unwound, the $1.4 million would be reversed off the balance sheet and $1.2 million would be reversed back through the income statement. If we are able to come to a resolution and we are able to somehow unwind these securities, not knowing how the ultimate out come of that is going to be caused us to make the entries we did.

Okay.

Let me emphasize we wrote them down on December 31st, to the January 31st value, not the December 31st value.

That's what I was trying to get to Ken.

Okay.

So to the extent there's any other write downs between January 31 and now that's just a wait and see.

Yes. We don't have a new number from January 31st. So we wrote down everything we knew as of the end of the year.

Okay. Okay, sir. Thank you very much.

This concludes our question and answer session. I will turn the call back over to Mr. Ken Woolley, for closing remarks.

Thank you everybody for joining our call. We appreciate your interest in our company and we look forward to talking to many of the analysts and our investors in the coming months too. And we are also kind of looking forward to the new year. It is starting out well for us and we are happy about that. And we do appreciate the support of all of our shareholders to our company. And, we will end with that comment. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.