Life Storage Inc (LSI) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the second-quarter earnings release conference call for Sovran Self Storage. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Ken Myszka. Please go ahead, sir.

Good morning and welcome to our second-quarter conference call. As a reminder, the following discussion will include forward-looking statements. Sovran's actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences is included in our Company's SEC filings. Copies of these filings may be obtained by contacting the Company or the SEC.

Well, our second quarter was quite busy. Sovran delivered another quarter of strong operating results with same-store revenues and net operating income increasing by 5.8% and 6.9%, respectively, over the second quarter last year.

These numbers are even more impressive when considering that the last two years' second quarters were also very strong. As a matter of fact, this marks the 12th consecutive quarter with top-line growth greater than 5%. Dave Rogers, our Chief Financial Officer, will provide details in a moment.

But a major contributor to our performance continues to be our customer care call center. We fielded nearly 15% last quarter, in second quarter this year, than we did in Q2 2005. We are also encouraged to see improvement in several of the centers' efficiency this last quarter.

In addition, the number of rentals generated over the Internet increased by nearly 50% compared to the second quarter of 2005.

Similarly, our truck program continues to add to our rent rolls. We currently have trucks at 222 of our stores. Last quarter, over 7,100 new customers use one of our trucks to assist their move-in to an Uncle Bob's store. To point out the popularity of this program, on average, one out of every four Uncle Bob's customers utilizes our trucks during their move-in process.

Our humidity control system, Dri-guard, continues to attract new customers as well. The rates we collect on Dri-guard treated units are running approximately 27% to 28% higher than nontreated units. We have Dri-guard operational currently at 77 of our stores.

We also completed five expansions and three climate control conversions during the second quarter. Total cost of this work was approximately $4.6 million. Year-to-date, we have completed 17 projects at a total cost of just under $9 million.

On the acquisition front, we purchased 26 properties in the second quarter, totaling 1.6 million square feet, for a total consideration of $105 million. 24 of the 26 stores are attributable to two portfolio purchases. 19 of the stores are in markets where we already have a presence -- Dallas with six; San Antonio with three; Southeastern Louisiana, five; Tampa with three; and Manchester, New Hampshire, with two. We also acquired seven stores in St. Louis, Missouri, a new market for us.

Nearly all of these stores opened for business in 1999, 1998, or later and offer most of the amenities we look for in a modern self-storage facility. Several have expansion capabilities as well.

Just to let you know, this was the most active acquisition quarter for the Company in its history. So with that, let me ask Dave to comment on our financial performance this last quarter.

Thank you, Ken. For the quarter, total revenues increased $6.3 million or 18.5% over 2005 second quarter, and property operating expenses increased by $2.1 million. These increases, resulting in an overall NOI increase of almost 19%, were primarily due to improvements in the same-store results we will get to in a second; the addition of 46 stores we purchased since this time last year; and the effect of consolidating our Locke Sovran I joint venture into the financial statements.

Average overall occupancy was 86.6% for the quarter ended June 30, and average rent per square foot was $9.90.

Same-store revenues increased by 5.8% over those of the second quarter of 2005. Broken down, the rental rates increased by a little over 3%. Our average weighted occupancy improved by 160 basis points. Other income, which is primarily truck and cell tower income, increased by $165,000.

For the three months ended June 30, 2006, weighted average occupancy for our 269 same-store group was 87.4%. For the same period in 2005, it was 85.8%. At the quarter end date, same-store occupancy was 88.2%, up 140 basis points from last June 30; and rental rates grew to $9.92 per square foot from the same-store rate of $9.63 last year.

Total operating expenses on a same-store basis increased 3.8% this quarter, which was a bit lower than we budgeted. Even though utility costs grew by almost 18%, and our property taxes were up the expected 7%, advertising cost and truck-related expenses were actually down from prior-year levels. Other operating costs were pretty much in line with increases of 3% to 5% across most categories.

Looking ahead to, we are most concerned about property insurance expense. Our policy year ended June 30, and we worked right up to that date shopping coverage and rates. The end result is a policy with premiums of more than double those of the prior year and coverage -- at least as it concerns hurricane-related damage -- of a lesser amount. I will get into this a little bit more when we discuss guidance for the rest of 2006.

So taking same-store operating cost increases of 3.8% away from our 5.8% top-line growth, we achieved a very healthy 6.9% same-store NOI for the second quarter.

G&A costs for the period came in at $3.7 million. This is about $700,000 more than last year's comparable period and reflects the increased staffing and facilities we put in place to handle the 46 stores acquired since mid 2005. Also included in this number is the increase from the effect of consolidating the G&A component of Locke Sovran I and the increased due diligence costs that we had this quarter relating to the higher acquisition volume. I think we would expect G&A costs to run a little bit behind this $3.7 million quarterly pace.

With regard to our capital structure, during the quarter we issued 123,000 common shares via our DRIP plan and as a result of employees exercising options. On that total, almost $6 million was raised via these issuances.

The quarter's $105 million of acquisitions were funded by the assumption of $34 million of mortgage debt, $40 million of borrowings from the line of credit, $6 million from a just-mentioned DRIP issuance, and borrowings included in the 10-year note financing that we completed in April.

Effective April 1, we acquired at a cost of $8.5 million additional interest in Locke Sovran I and Locke Sovran II, which are joint ventures we formed back in 2000. The additional equity contribution gives us majority control of both entities and provides us with the opportunity to invest in the properties owned by these ventures and have all of the resultant benefit accrue to the Company.

As mentioned, the results of Locke Sovran I have been consolidated with those of the Company effective this quarter. Locke Sovran II already had been from its inception in 2000.

On April 27, we completed an offering of which we sold $150 million of 10-year unsecured notes bearing interest at 6.38%. We used the proceeds to pay down our bank line, repay short-term notes, buy five properties, and acquire the aforementioned controlling interest in Locke Sovran ventures.

Our total outstanding debt now totals $503 million and, with the exception of $40 million on our line of credit, is all long-term and fixed rate or hedged to maturity. A little over 20% of our borrowings are secured.

We have in place a $100 million line of credit facility which is at LIBOR plus 90 basis points, and it has an accordion feature that allows it to expand to $200 million. $40 million is drawn on the line as of June 30, and the line expires in 2007 with an option to extend the agreement to September of 2008.

Our debt service coverage in the second quarter was 3.3 times EBITDA, and our fixed charge coverage for the quarter was 3.1 times EBITDA. Debt to enterprise value was 33% at June 30. So as usual we remain conservatively capitalized and we have plenty of capacity to fund the growth plan.

With regard to guidance for the balance of the year, operating fundamentals in the business continue to show strength. We do see competition in many markets, but nothing really in any event to an extent that it should hurt us much. Demand is good, and I think looking forward our top-line growth should be 5%-plus for the coming quarters that we can see.

For the most part expenses have moderated; but as we described earlier, we're absorbing a pretty considerable hit to provide adequate insurance coverage. The additional premium of almost $2 million will shrink our margins and deduct about 175 basis points from same-store NOI growth in the coming quarters. We expect further pressure on margins as a result of rapidly increasing utility costs, especially in Texas.

So putting all this together, we are forecasting an approximate 4% to 5% same-store NOI growth for the balance of 2006.

The acquisition environment is steady. There is more individual properties and portfolios coming up for sale. We are pleased with the stores we have acquired so far this year, but cap rates do remain challenging and we plan to remain prudent.

We are forecasting 30 to $40 million in accretive acquisitions through the end of the year, with most of that occurring in mid to late 4Q at an expected going-in cap of about mid-7s. We also project 5 to $10 million of opportunistic acquisitions, which we classify as younger properties with 20% to 30% occupancy growth left to attain before maturity. Cap rates at this group are priced below 6, and these too are expected to be fourth-quarter deals.

As Ken mentioned, we are undertaking a pretty extensive expansion program over the next two years. We expect expenditures of up to $20 million in this year, 2006. We have also moved ahead to accelerate our painting, paving, fencing, and roofing projects at 60 or so stores in an effort to improve curb appeal sooner.

Accordingly, we will be expanding spending as much as 10 to $15 million this year on non-revenue-enhancing projects, as opposed to our usual $4 million or so.

We put a $150 million term note on our balance sheet this quarter, as well as $65 million of mortgage debt. Just to give you a better handle on our interest costs, we are now obligated on $462 million of long-term fixed rate or hedged loans. Our annual interest cost to carry this debt is $29.5 million, and this block of $462 million of debt, this $29.5 million interest charge should not change until late 2008.

So the only variable component in our debt structure is related to the line of credit, which as I mentioned before there's $40 million outstanding at a floating rate of LIBOR plus 90 basis points.

We expect to issue some shares through our Dividend Reinvestment Program but have, as mentioned in prior calls, restricted the stock purchase plan sales. We're projecting 15 to $20 million in equity issuance this year via these programs, as compared to about $50 million in 2004 and $13 million last year.

Financing and property acquisitions and the revenue enhancement projects in the third and fourth quarters will be with these DRIP proceeds, borrowings on our line of credit, and a possible equity offering once our line balance nears or exceeds $100 million.

So given all the above, and offsetting some of the tougher news with some of the better news, we are reiterating our estimate of Funds from Operations to come in at between $3.20 and $3.25 per share for the full-year 2006 and between $0.83 and $0.85 per share for the third quarter. At this point, Ken, I will turn it back to you.

Thanks, Dave. That concludes our prepared remarks, and we would be pleased to field any questions that any of you might have.

(OPERATOR INSTRUCTIONS) Ross Nussbaum with Banc of America.

It's Christine McElroy here with Ross. Your 15 to $20 million of share issuance guidance is up from the 10 to $12 million you alluded to last quarter. What is the reason for the change?

We are a little happier at prices that we're seeing with our stock, and we have a lot of pressure from some old shareholders; so we might be opening up a little bit more. Nothing -- not significantly higher than before, but it is just something that we're seeing.

I do expect most of the equity, if we need it this year, to come from an offering, as I mentioned, once we get to close to $100 million on our line of credit.

As we move into Q3 and Q4, do you expect your year-over-year comps to get more difficult, given the impact the hurricanes had in Louisiana and Florida -- had on your same-store growth over the last year? So aside from the higher insurance premiums, is there a potential for additional slowdown?

Well, we have been concerned about this for the last couple of years. At this point, we still see quite a bit of -- quite an active market in Florida. That is the one that we have been most concerned with. So we are kind of hedging a little bit; but at this point, we think they are going to hold. We haven't seen a lot of new competition come in.

So we are trying to be as conservative and yet realistic as we can. So that is our best guess, that we're going to hold fairly strong in Louisiana, in Houston areas, maybe a little bit of leakage in Florida; but it is all up to Mother Nature to some extent.

And you commented your real estate taxes are trending up. Can you give us a sense for what you expect in the back half of the year?

The back half of the year for us, as we have noted a couple times, we do as best we can with estimates; but our big states, Florida and Texas, we don't get the bills until late November. So we are accruing as to what we expect.

If you remember, perhaps, in '03 we had a nice gain because we over accrued for the year by a percent or 2. Last year we didn't get that gain, but we didn't we suffer; we were right on.

So we are forecasting a 6% to 7% increase in property taxes. For the bills we have seen in other states, that seems to be holding true.

We certainly watch our tax valuations. We watch our assessments. We have people who protest and who evaluate all 300-plus of our properties with regards to the new assessments that come every year. There's nothing we can do about the millage rate applied by the municipalities.

But I think it is our best guess; we are trying to be conservative. I don't think we will have any surprises of any great nature one way or the other. But there is over 40% of our stores that we don't know the exact property tax for until after November 15. So we think we are there, but we're not positive.

Okay, thank you.

Jonathon Litt with Citigroup.

It's Craig Melcher here with Jon. Looking at your revenue growth, that you expect to be able to continue the 5% growth or so, how do you expect that to breakdown between increases in rental rates versus occupancy gains?

We don't really plan that, Craig. What we do is we are always looking to see where we can raise rates. We charge our area managers and our regional vice presidents with rate management.

As I have shown you before, we basically have the revenue management system, whereby any one of our unit sizes in any store, when it achieves an occupancy level of 90% or more, we go to what we call position one pricing, which bumps our price a little bit and precludes the use of incentives to bring people in.

If you get to 95% occupancy in that type of unit class at that store, we bump to position two pricing, which gives us a little bit more. So we are always using occupancies to push rates.

As such it is hard for us to say we want to achieve 89% occupancy across the board, and we will let -- it is kind of a push-pull, and every store has its own dynamic. Actually sometimes each unit mix within that store has its own dynamic.

So it's hard for us to say that we're going to achieve 3% via occupancy and 2% via rate. It's a constantly shifting dynamic and it changes region to region, store to store.

The last couple quarters the rental rate growth has been slowing a little bit. Do you expect this 3% number or so is a reasonable number? Or are you getting a little bit of pushback in terms of pushing the rents and you're seeing more success in occupancy?

We were just saying we don't really care where it comes from. The market is going to determine whether we are going to increase occupancy or increase rates. So as Dave said it's somewhat of an art and somewhat of a science. It could be more as far as rates or less. It just depends on how the market responds to our pricing as we go through it. I can't answer any better than that. Sorry.

Dave, just in your comments on G&A, can you just go over that again? [As] you say this run rate, this is a little bit high, the second-quarter number?

It's a little bit high in that we had considerable due diligence costs for the big acquisitions that we had. So it is not significantly; we ran at 3.7. I think we are somewhere planning in the low 14s for the total year, 14 to $14.5 million.

Last question is just on the acquisition market. What are you seeing in terms of pricing and cap rates on deals you're seeing now versus, say, six months ago?

We are seeing more deals out there. The owners still are not convinced that the pricing as high as we think it is. But it's good to see and we are encouraged to see there is more activity out there.

A year ago, we didn't see that much activity, and what we did see was pricing out of this world. So I think as you get more activity, more things out there, I think the pricing will loosen a little bit.

Interest rates going up will have the same impact, but there is always a lag between the time that interest rates go up and the owners of properties realize that their properties aren't as valuable as perhaps they were maybe a year ago.

Thank you.

Paul Adornato with BMO Capital Markets.

Just one additional question. I was wondering if you could identify and talk a little bit about your top and bottom markets. Tell us what is going on in some of those places.

Sure, well, the Florida, Louisiana, Southern part of Texas in particular, have done exceedingly well. Florida for the last few years, and I love to say it, because we got -- and I think we are very good managers. But a big part of that was the disasters that hit those areas.

But things that we can control, we have seen some improvement over the last couple of years in the Phoenix market. Atlanta is doing better than they were a couple of years ago.

Some areas that we need to improve is in the Northeast, Ohio, mid-Atlantic. What we see there is a little bit of the market; a lot of shoppers there and competition. Frankly, we have made some personnel changes over the past six to nine months which we think -- we hope to see some improvement from that as well.

Is that personnel at the supervisory level, or at the store level?

Both.

What prompted? Was that kind of just based on your assessment that you could be doing better in those areas?

Partly, yes; it naturally is. Yes.

Okay, thank you.

Jordan Sadler with KeyBanc.

I just wanted to -- I guess something wasn't clear to me a little bit on guidance. You blew through the full-year acquisition goal in June. You are trending towards the high end of the range in terms of your original same-store NOI guidance. I guess G&A might be running a little higher.

But what is offsetting some of these positive factors that causes you to leave the range unchanged at this time?

Partly, we have exceeded what we thought we would buy, but if you look at the timing of it we didn't do that much in the first quarter. We did the lion's share of the 2Q acquisitions right at the end of June.

So if you look at the midpoint, we said $120 million, 100 to $120 million of acquisitions for the year; it actually kind of fell in pretty close to that. Because we don't see much more until the very end of the year. So we are not going to do any pop, at least accretion-wise, this year from that.

So while it looks like we are already home free in terms of hitting our target, if you weighted-averaged the time that we have owned those stores it is not too far off a $120 million acquisition pace.

We did do the refinancing at that a little bit higher than we thought. We came in at 6.38% on the 10-year. Back at the end of December when we put out guidance rates were about 105 or 110 basis points lower than that. So we are paying more interest now than we thought we would beginning of the year.

The G&A is a bit higher, naturally, just because of some of the things that we have been doing.

But I think we factored all of this in when we gave guidance, and we are at the 4% to 5% for the balance of the year on NOI growth. Again we, as Ken said, we are still hopeful that we're going to hang onto Florida. It looks like we are. We put that in right from the beginning, that we might lose some occupancy from the 2004-2005 move-ins resulting from the hurricanes.

So I thought the 320 to 325 guidance that we issued at the beginning of the year was conservative at the beginning of the year. We're comfortable with it now, but it isn't nearly as conservative as it was. Obviously, the insurance pressures and the utility pressures that we're concerned about are working against us.

What was the cap rate again on Cornerstone?

The going-in cap rate is about a 7.19. We've got a couple new -- we've got the big new market of St. Louis there, so we are going to get a grip on that. We don't know how much we're going to be able to grow that one. But the going-in cap rate is 7.19.

Could you tell us the occupancy?

It ranges. The lowest store was 65%; the highest I think was 88%; the overall was 81% when we bought it.

I assume you guys would expect that to come up to kind of your average portfolio level over time.

Over time, sure.

So that brings it up to a stabilized expected yield of high 7s?

I think we're looking in the mid 8s, by the time the end of 2007 is here. At a snapshot of that point in time, 18 months hence, I would think we would be a good 150 basis points over where we bought it.

Then, in terms of just coming back to the occupancies, obviously you guys have been successful pushing rate for some time. Your occupancies still tend to be in sort of the mid to high 80s and have moved up over the course of the last several quarters to sort of the higher end of the range you guys have been at over the last five, six years or so.

Do you think that operating-wise you are seeing a trend towards push driving higher occupancy at all in your stores? Or that is not necessarily -- you're still kind of doing the same exact thing in terms of operating the stores and not necessarily looking to push occupancies up higher?

That is not -- the goal is obviously to improve the rates that you're getting and the revenues that you generate. I think part of the higher physical occupancy that we might be enjoying is attributable to retrofitting a number of unit sizes at a number of stores. When you acquire (technical difficulty) sometimes they have got a number of unit sizes that you just can't rent.

So we have systematically over the past couple of years been having unit conversions, converting unrentable 5 by 5s or 5 by 10s into larger unit sizes. They make it a little bit more appealing to the customer. So that may be a byproduct of that program that we put in.

Is there some opportunity that is similar to that within the existing portfolio?

Absolutely. We are constantly looking to see what unit size is at every store. We have low occupancies at various times, and if there is opportunities -- now sometimes you just can't do it because of the construction that you have there (multiple speakers). I'm sorry? Go ahead.

I'm sorry, I was just -- I didn't mean to interrupt you. But do you think that the difference between your occupancy levels that you operate generally and, let's say, your largest public competitor is really the configuration of stores? Or is it just methodology in terms of how you operate?

I can't speak for the other companies. We have explained over the years how we do it. It has worked fairly well for us and we will continue to do it.

Lastly was just in terms of what you have seen, and it speaks to the acquisition market question again. Are you seeing any differences in terms of the buyers you're up against at this point with rates being higher? Are there less leveraged buyers out there, or no change?

I don't know how all the buyers operate. One thing that might add a little color, at the beginning of the year there were two significant portfolios that came into play. I think in '04 and even through the first half or three quarters of '05, those would have gone to a bidding war and been a very highly-publicized, probably very high-priced story to talk about.

Interestingly, we were invited to bid. We looked at the properties. We put together something that we liked, but was way below, I think, what expectations were. We have seen or heard nothing about those two large portfolios since they were put up for bid.

As I said, I think last year, the year before, those would have been snapped up and absorbed into one of the public players; or perhaps by a large fund or somebody looking to get into the business.

So I think when Ken mentioned that that we are looking for, perhaps, a bit of relaxation in prices, the people in our industry are very cognizant of what goes on. If they are seeing deals not getting done because price expectations were too high, that may relax a bit. That is one part of question.

The other part with regard to the leveraged buyers, we are still -- I would say of the last half-dozen deals that we saw that were of a one-off or a two-off type transaction, those that we didn't get were two highly-leveraged guys coming in. Private funds or private money coming with a lot of leverage.

That seems to be on the wane, though, with rates going up and so forth. So it is hard to say. We look at a lot of deals, we don't who is winning many, many times unless it is one of our public peers. So it is hard to really answer your question dead on. But that is just a little bit of flavor what is going on out there.

No, that's perfect. I appreciate it. Thank you.

Michael Salinsky with RBC Capital Markets.

As you look at the expansion and repositioning portfolio, I know you guys bought in about a fourth via total development thus far this year. Kind of for the next few quarters, does the bulk of that fall into 2007 at this point? Or should we expect a major completion in one certain quarter? Or how should we look at that basically coming online?

Well, for the rest of this year, we have about close to, say, between 16 and 20 projects currently underway that we hope to be completed by the end of this year or early '07. Total cost of that might be in the range of say 10 to $12 million.

Then we expect probably another 12 to 14 projects to be started later this year with some completion sometime in '07. Total cost of that might be another, $9 million or so.

Okay. Next question, and I guess, with the addition of such a large number of properties during the quarter, do you guys at this point feel comfortable with the staffing at the call center and your property level personnel, both in terms of property level managers and district managers? Or should we expect some additional hirings over the next couple quarters?

No, we have a kind of a formula as to how many stores each account rep, each call center operator, each supervisor can handle. Dave already mentioned that we ramped up some of our G&A to account for that. So we did take that into consideration head of time. Because we like to -- when we take over some properties, we want to be ready to hit the ground running when we take over.

So for the most part, the expenses of those stores that we have acquired to date have been assimilated into our operations. Now if something happens with some potential acquisitions the rest of this year or the following, we will try to get out ahead of it.

Okay. Final question. I know you guys have not given any indication about '07 at this point. But you have been on a very nice growth clip here in terms of acquisitions over the past couple quarters. Do you see this level of acquisitions maintaining into '07 at this point? Do you see it going back to a more normalized level?

I would hate to say, Mike. Obviously we don't ever put a number out there and strive to hit it. We are always looking for good deals. There have been years where we have wanted to buy 2 and $300 million worth of property, and bought like 20.

This year we decided to get a little bit more aggressive on pricing, but not much. I think there is going to be some movement; perhaps a bit of a climate change here.

I guess, we will gather as we always do in the fall and then again in the first week of February with our Board and so forth, and put together a plan. But I think maybe we will see a little more change due to rising rates, due to sort of the lack of our public peers being that active, and take a look.

But I don't think we're in a position at all to talk about what our plans are for next year, other than if there is good quality properties at a decent price, we will definitely be in the hunt.

Great. Thanks, guys.

Ross Nussbaum with Banc of America.

Question on the expense side, Dave. I was a little curious why weren't you impacted in the second quarter by rising utility costs? I would have thought that that would have already been hitting you.

Yes, we were hedged. We had some good contracts in place, especially in Texas, and we were hedged from -- just as a matter of course. It really wasn't that high profile when we entered into the contracts 18 months ago. But as it turned out, they were sweet deals. They just -- the hedging contracts.

We are not hedged now. I am not sure that we are going to be, because we can't get a handle on what we're supposed to do. But we put some buy contracts in, especially in Houston and Dallas, which is where the real pain is. It is in Texas right now.

Even Florida with the concentration of stores we have, it is more usage than rate that we are suffering from. But in Texas, that is my main concern right now. It didn't hit us.

Much like our insurance, we were locked in on insurance rates right through June 30, and July 1 wasn't a real happy day around here when both insurance policies had a change and the hedges ran off the Texas utilities.

Right. On the insurance front, can you talk a little bit about what changed on the deductibles and just the overall coverage? I assume those are not as favorable as they were.

Right. What we had previously was -- and basically the only change in coverage, and the reason for the rate increase, all come about because of hurricanes. As far as other things go, fires, liability, any other kind of damage, we have had a stellar track record for 22 years in the business. So our experience rating is excellent.

What got the insurance companies upset -- not with us but with the whole east and southern coast of the United States -- is the hurricanes. So basically the only change to our coverage comes in a named storm condition. Much like Hurricane Chris, right now; that is a named storm. If that hits land and takes out a bunch of our stores, we will have a total per-storm obligation of the first $500,000 of storm damage.

Now if you remember back to '04, we suffered with Charlie and Ivan I think something in the range of about $850,000. It grew actually. We absorbed about $1 million in costs on that. That was a per-store deductible of somewhere in the range of $50,000 per store. Now what we have is a $500,000 deductible per storm.

So if a storm comes in and does a lot of damage across the board, it would probably be a neutral situation. If it does a lot of damage to one store and not to the others, it will be a less favorable thing.

But we went a long way with this. We actually bounced our carrier, our long-time carrier, because they could not come anywhere near what we have. We are wrapped up on a pair of policies with an umbrella, and we've got Lloyds of London involved, it's just -- you wouldn't think it would be that complicated in a business such as this.

But it got to be such that we had to satisfy creditors, we had to satisfy ourselves that we were okay with the shareholders. But in a nutshell, we have a $500,000 deductible now per named storm. Any other casualty loss is a $50,000 deductible.

Did you put anything in your guidance for the back half of the year for hurricane damage?

No.

Okay. The other question I have for you is just in terms of the mix of traffic that you are seeing. Any sort of changed over the last six to 12 months in terms of residential versus student versus small business? How is sort of the tenant mix shaking out here?

Really it's not much of a change over what we have seen historically. We still have commercial business in the range of say 30% to 34%. It generally varies between there. The students, they come every May and leave every September.

What we have seen over the past couple of years is in the military towns business is booming with the soldiers being deployed overseas. So that is one thing we have noticed over the past couple of years, where with that we have enjoyed some high occupancies there. But other than that, the traffic would not be noteworthy.

Okay. Then just strategically on the acquisition front, I know you have talked about it a little. But would you attribute the second-quarter increase in acquisitions to the fact that your competitors are not being as aggressive? Are you being more aggressive on pricing? I'm just tried to get a sense.

Because you look at the spectrum now and you've got U-Store-It on the sidelines; PSA is probably going to step back a little; Shurgard is going to be gone. It would seem to me like there is very much going to be a window for you to see more acquisitions than you have seen over the last year or two.

Well, intuitively, you would think that is true. What happened here, we had been negotiating on these two portfolios for, gosh, what was it, about seven, eight months or so. So you just don't know. They could fall apart after six months' work, and nobody would know it. So it just happened they happened to fall in the second quarter.

But we do hope your analysis is accurate. If there are not that many buyers out there, obviously prices should somewhat moderate.

Thank you.

At this time, there are no further questions. Mr. Myszka, are there any closing remarks?

Well, I would just like to thank everyone for their participation and their interest. We are working hard on our shareholders' behalf; and we look forward to speaking to you three months from now. Have a great day.

Thank you for participating in today's Sovran Self Storage second-quarter earnings release conference call. You may now disconnect.