Life Storage Inc (LSI) 2008 Q2 法說會逐字稿

Good morning. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to Sovran Self Service second quarter earnings conference call. 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)

Thank you, Mr. Myszka, you may begin your conference.

Thank you, Angie. Good morning. And welcome to our second quarter conference call. As a reminder, the following discussion will include forward-looking statements. Our actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences are included in our SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.

Well, we experienced another solid quarter as we again increased revenues and net operating income at our properties. Same store revenues and NOI increased by 1.2% and 1.8%, respectively, over the second quarter of '07.

There were two areas in particular that negatively impacted our results, Florida and the Capitol district. Without these two areas, our same store revenues would rise from 1.2% to 3.9%, our same store NOI would go from 1.8% to 5.9%. You can see, with the exception of these two areas, our portfolio is in good shape and performed well.

The second quarter quarter started stronger than it ended with move in activity in June well below that of June of '07. Rentals did improve somewhat dramatically and vacates were up, or about flat for July, which are encouraging signs for us. However, we've had to increase the number of concessions offered to attract new customers which accounts for most of the reason we have lowered our guidance as we'll discuss further on the call.

But we had a busy quarter. We formed a $350 million joint venture with Heitman, LLC, a firm based in Chicago. This will enable us to use our operating platform to expand in our current markets as well as new areas of the country. We completed a $375 million unsecured credit facility with favorable terms amid what we'd call pretty turbulent financial times to strengthen our balance sheet and provide us the capacity and flexibility to expand and improve our business.

And just after the close of the quarter, we closed in the JV, the purchase of 21 stores in five states at a cost of $144 million. We also completed 12 expansions during the second quarter, at a cost of just under $16 million, and sold our only store near Detroit, Michigan, for $7.4 million, generating a profit of approximately $700,000. So it was a busy quarter.

I'll ask Dave Rogers, our Chief Financial Officer, to provide some details on this transaction.

Thanks, Ken. Good morning. Regarding operations, our total revenues increased $2.3 million, or 4.7% over 2007 second quarter, and property operating expenses increased by $700,000. These increases resulting in an overall NOI increase of 5.1% were primarily due to improvements in the same-store results I'll get to in a minute, and the addition of the 20 stores net that we purchased since the beginning of 2Q last year.

Average overall occupancy was 82.3% for the quarter, and average rent per square foot was $10.35. Same store revenues increased by 1.2% over those of the second quarter of '07. The gain was purely rate-driven as our same-store weighted average occupancy declined from that of 2007's second quarter by 220 basis points to 82.6%.

At the quarter end date, same store occupancy was 83.5%. Rental rates were higher at $10.51 per square foot, compared to the same-store rate last year of $10.24. Total operating expenses on a same-store basis increased by only 10 basis points this period. Our payroll costs were up about 5%, and our utilities were up 17%, but insurance cost savings made up for that and all other categories grew only nominally. We think that, for the most part, expenses have been and should continue to be well-contained.

Growing the top line by 1.2% was only a negligible increase in operating costs resulting in a same-store NOI growth of 1.8%. G&A costs to the period came in at $4.1 million which is pretty much as expected, and while this was about 10% higher than last year's second quarter, we're operating more stores at this point.

With regard to capital matters, we didn't acquire any stores during the period, but we did sell one, as Ken mentioned, near Detroit for $7.4 million. We realized a gain of about $700,000. There were no encumbrances on the property so all the cash came to us. We do not include such gains on sale in our FFO computation.

We used the proceeds of that sale to fund the last remaining piece of our first joint venture, Locke Sovran I, LLC, which was formed in 2000. We paid $6.1 million now for the right to own 100% of the venture which operates 11 properties.

Late in the quarter we announced the formation of Sovran HHF Storage Holdings, a joint venture formed with investors advised by Heitman. The venture expects to acquire about $300 million of quality self-storage properties in strategic markets throughout the continental United States. Sovran will contribute 20% of the venture's equity and Heitman's investor will contribute 80% with leverage around 60% expected to be utilized. Sovran will manage the venture's properties and will receive fees for its services. The facilities that are acquired by the venture will be branded under Sovran's Uncle Bob's trade name.

In late July we made the first acquisition for that venture, which was a nice 21-property portfolio that cost $144 million. Eleven of the stores are in markets where we already have a presence, Tampa, San Antonio, Dallas and Houston, and the other 10 stores take us to new markets, including Columbus, Ohio, Louisville, Kentucky, and Denver, Colorado. Approximately $68 million of the purchase price was financed with assumed and newly issued mortgage debt.

We successfully refinanced our short term and near term debt obligations during the quarter. Proceeds from a four-year $250 million term loan were used to repay the outstanding balance on the company's $100 million revolving credit facility, and $39 million worth of short-term notes due to mature later in '08. The company also prepaid a $100 million term note that was due to mature in 2009. And the excess proceeds of $11 million were used to fund part of our share of the joint venture capital contribution.

Additionally, we obtained from the same bank group a three-year $125 million unsecured line of credit with an accordion feature of up to $50 million more, and an extension provision of up to one additional year. Interest on the line of credit is LIBOR plus 137.5, term loan interest provides for interest at LIBOR plus 162.5. We entered into interest rate swap of contracts which effectively fixed the interest rate payable on the four-year term loan at 5.97% through September 2009 and just a shade higher from then through June of 2012.

Our outstanding debt is now $610 million at June 30th, all of its long-term and fixed rate are hedged to maturity. Approximately 18% of our borrowings are secured.

Our debt service coverage in the second quarter was 3.1 times EBITDA, as was, since we don't have any preferred shares outstanding, our fixed charge ratio. Debt-to-enterprise value was about 38% at June 30th so we remain conservatively capitalized and now, especially with the renewed line, have sufficient flexibility and capacity to fund our needs.

Concerning guidance, as Ken mentioned, we've encountered some pretty strong headwinds in some of our markets and judging by what we've seen this leasing season, we expect to continue with this quarter's leasing incentives and aggressive marketing. We're curtailing our same store revenue growth expectations for at least the next couple of quarters and are looking for increases of between 1% and 2.5% for the balance of the year, net of incentives.

We expect expense growth to be contained in the 1% to 3% range, so our same story NOI growth is forecast at between 1% and 2.5% for Q3 and Q4, 2008.

G&A costs are targeted between $4.2 million and $4.5 million per quarter, depending on the acquisition pace of the JV. These additional costs incurred to operate the JV properties are expected to be more than offset by management fees earned from the JV.

For the coming two quarters and perhaps beyond, we plan to acquire additional properties primarily for the benefit of the joint venture. The acquisition environment is pretty much unchanged. There's a lot of properties and portfolios on the market. Unfortunately, despite recent jolts to the REIT markets and to the overall debt markets, seller expectations have still really not been appreciatively reduced.

For purposes of guidance, we're forecasting a total of $30 million of company contributions to the JV, including the July investment of $15 million, and expect those contributions to earn about a 7.5 yield. Our expansion program will continue and we expect to make expenditures of about $40 million in 2008 to enhance revenue capabilities at our existing properties. In 2007 we spent almost $25 million on such improvements and so far this year, approximately 16 stores at a cost of $17 million have been put online.

We've continued our program of accelerating the painting, paving and fencing projects at many of our stores in an effort to improve curb appeal sooner. As mentioned before, we expect to spend about $12 million on our same store pool in 2008 and about $5 million more on our 2007/2006 acquisitions.

To give you a better handle on interest costs we are now obligated on $610 million of long-term fixed rate debt. Our annual cost to carry this debt including the amortization of financing costs is $39.1 million. This is not expected to change materially for the next four years. So the only variable component in our debt structure is related to our line of credit, which as mentioned carries a floating rate of LIBOR plus 137.5 and at June 30 we had nothing outstanding on the line.

To summarize our expectations for the balance of 2008 as we see them today, revenues are projected to be reduced by the impact of aggressive incentives and move-in specials to the tune of about $1.5 million to $2 million per quarter. Operating expenses are expected to remain in check, coming in somewhat under budget. Investments and acquisitions have been replaced by expected investments in our joint venture. The expansion and enhancements planned for 2008 have been moderately cu tailed from approximately $48 million originally to about $40 million now.

Management fee income from the joint venture is expected to provide $0.02 to $0.03 per share for the balance of 2008 in earnings. The refinancing of our short-term debt obligations with the long-term fixed rate notes has created a $0.06 drag for the balance of 2008. So reconciling all the above to the previous guidance we issued, we feel that the newly planned investments in the JV will compensate for the fact that we aren't planning to make any acquisitions for our own account. That the interest interest costs resulting from terming out the short-term line debt are offset by expected management fee revenues, and reduced operating costs.

The slightly reduced construction program has really no impact on current year's FFO. And given all this, we really don't have anything left to compensate for the net decrease in revenues we're bracing for and our battle to gain market share and improve occupancy will cost us an expected $0.06 to $0.08 per quarter. Accordingly we are now projecting FFO per share to come in at between 335 and 340 and between $0.86 and $0.88 per share for the third quarter.

With that, I'm turn it back to Ken.

Okay. Thanks, Dave. Before I open up the conversation to some questions, I mentioned earlier that except for Florida and the Capital District, our portfolio's performing well. And I'd like to just shed a little more light on these two points.

Regarding the Capital District, we're frankly not too concerned there because two stores really accounted for much of the poor performance in the second quarter. And we've taken steps to address these issues at those stores. Returning military had some impact, not major now, but it is a factor we will be watching in the coming months.

That leaves the state of Florida to consider. There are a combination of factors that have contributed to the poor performance there. Recapping, in the aftermath of the hurricanes that hit that state in 2004 and '05, most storage facilities were full or near full. In response, a number of new competitors opened, and with demand soaring due to the storms back then, these new stores posed no immediate threat. However, in early 2007 demand started to wane and we were faced with a tough combination of somewhat excess supply and less demand.

Add to that the generally poor economic conditions affecting many parts of the nation, and frankly, they're magnified in Florida because its economy had been so hot for so long. In fact, according to Wachovia Economics Group, the state's economy shrank from April to June this year, and was the first quarter decline they've had in 16 years. As a result, Floridians are very cost conscious and are looking for deals.

Add to that the fact that new homes just aren't being built like they were before, and that impacts our business in two ways. When construction is booming, we get customers who are moving and are in between homes and need a place to store their household items. We're not getting them. In addition, contractors use our facilities to store their equipment. So, much of the business we get from them has temporarily dried up. So those are the negatives, as we see it.

Now, you're probably wondering what are we going to do about it? Well, first let me say this, and we indicated this before, we think we're pretty close to the bottom. After a horrendous June, July was the first month this year where move-ins in Florida were greater than the corresponding month of 2007. So that's obviously a good sign. And we'll be closely monitoring August and September and the months activity in the future.

But this good news didn't come without a price. We have had to be very aggressive with concessions to build occupancy. We're offering more full--month specials than we ever have in the past. As a result, the revenues won't hit the income statement for a while.

Among the other things we're doing, we've further refined our already sophisticated revenue management system so that rates and concessions can be self-adjusted, self-adjusted several times daily under strict occupancy parameters. This ensures we're getting maximum revenues from existing customers as well as new customers. We've made several mid management personnel changes in those areas in Florida and the Capital District. As we've alluded to before, we've been very aggressive with our specials and localized targeted advertising.

So summing it up, we've been successful in the past with turning around struggling areas. Case in point, frankly, is New England. Back then, as we have here, we identified the areas that needed improvement and we aggressively attacked those and we're doing that now. Less than two years ago, New England experienced slow or no growth. Today's stores in that region are generating same-store revenue growth greater than 5%. So we've done it before, and we're confident we're going to do it again here.

So with that, we're ready to take any questions you guys might have. Angie?

(OPERATOR INSTRUCTIONS) Our first question is from Christy McElroy.

Hey good morning, guys. Dave, regarding your new joint venture, can you provide a little bit more color and maybe quantify kind of all the various property and asset management fees as well as the acquisition and leasing fees?

Sure. It's pretty straightforward, it's pretty simple. We did a reimbursement of our acquisition and due diligence costs of 50 basis points of the net cost of the property. There's a 6% management fee. And we are using our call center and charging 1% of revenues for the call center. Then there is a promote that we don't expect to hit for the next few years.

So then just reconciling some of your guidance assumptions, you said that you expect that the rise in G&A will offset some of the fees going forward. Can you give us a sense for all accretive you expect the fees will be net of G&A? I think I heard $0.02 to $0.03 in '08. Is that net of G&A?

Yes, it is.

It is, okay. I'm sorry, go ahead.

No, that was it, it is.

It is. Okay. Can you update us on any acquisitions that are in the pipeline and what tap rates do you see being able to buy assets today versus a year ago and given an overall decline in property level growth assumptions, what does that mean for where you think cap rates should be assuming similar IR requirements in your underwriting?

Unfortunately, we haven't seen much of a decrease in seller expectations for quality properties. The 21 pack that we brought to start the joint venture are best in class in every market we're in. Those are wonderful stores. We were at about a 7.1%, 7.2% cap on those.

The stores that we're looking at for Heitman are all in the similar vein, strong, very strong with very great likelihood of continued strong cash flow. Upside potential for this joint venture is not -- it's important but it's not as important as basically being bulletproof. So we're looking at stabilized mature properties, best in the markets, and that we expect to pay around a 7%, 7.1% cap for.

Really, there's a lot of stuff that's sub par. Some of it might be good turnaround type opportunity but that's going for high 7's perhaps. But for the most part, anything that we'll be interested in buying for these ventures at this point anyway is not moving and probably going to be in the very close shouting distance of a 7. We just don't see any movement.

Okay. And then given -- can you give some color on what your strategy has been regarding pushing inplace rents. Are you finding the rate of move-outs following a rent increase is accelerating?

No, we're not seeing that at all, frankly. Because if you do it the proper way, you don't think you're going to experience that. What we're more concerned with though is getting people in. But what we're doing is, on an annual basis, we'll review our existing customers, when the last rate increase that they experienced, and especially if it's a high-demand unit that they're in, we're fairly aggressive at increasing their current rates to market.

What's the current gap today between inplace rents and market rents? How much of a drag is that -- is churn in your portfolio having on revenue growth?

Very little gap between, so it's really not much drag on that. We work pretty hard to deep our rate structure in place, so what we're doing and what we're paying for are initial incentives. First month, first month and a half, that kind of stuff. But the rate structure itself has been kept pretty sacrosanct except in very rare occasions.

Great. Thank you so much, guys.

The next question is from Michael Bilerman.

Hi, it's David Toti here with Michael. A couple questions going back to the joint venture. Is there any optionality in that structure with regard to putting properties to a partner first right of refusal, that sort of thing?

Yes, we've given Heitman at least initially a nine month right of first refusal, everything that comes by us, we'll share with them, and they have first crack at it, either nine months or $100 million of their equity.

Great. And is there any kind of geographic focus planned?

Good markets, not necessarily restricted to our footprint, as we said, Denver's a nice market, we've got a foothold of four stores there. There's no specific target although we'll evaluate each one as they come by.

Okay. And then is there development capacity in the entity?

We're not expecting development, no.

Okay. And then just moving over to the customer a little bit, you guys have stated in the past that you have about 42% of your residential customers use storage as kind of a closet. Do you see any kind of decrease in that percentage that's accelerating beyond the normal trend?

We basically have said in the past that about 20% , we think, of our customers use our space as an extra room for homeowners, and another 20% or so for apartments. No, we don't see it. Where we're feeling some of it, we think is in the moving side, people buying houses, selling houses and that transactional activity and the moving from house to house, our realtor referrals are not as strong. That's where we're feeling it. The extra room concept, not so much.

One last question. Going back to Florida, some of your peers have stated recently that they felt that those markets had pretty much reached a bottom in terms of the extent of the weakness. Do you feel that's the case? What's your outlook going forward for those market for the next 12 months?

Well, we're cautiously optimistic. July was, we hope, a turning point where for the first time, as I mentioned in my prepared remarks this year that move-ins in the state of Florida were greater than they were for the corresponding period last year. So the economy still is there, it's still very fragile, but we're working hard to offer as many concessions as we need to build that and with the understanding that we're not going to generate the revenues for those until a month or two later. But we're -- our forecast, on a more conservative side, I guess we would say, because we've been fooled where, we're hoping we'll be pleasantly surprised.

Great, thank you for the detail.

Our next question is from Jordan Sadler.

Thank you. Good morning, I'm here with Todd Thomas, as well. I just wanted to move beyond Florida. I think, Ken, you kind of went quickly past Maryland and Virginia. You said you weren't worried. But I was more curious about what you think happened there during the quarter?

Well, one of our larger stores is going through a renovation and we anticipated by, frankly, by the end of the first quarter, it would be completed. So that store, about half of the store or more has been unavailable for rent, which hurt us quite a bit. And another store adds a big influx every second quarter of college students, and a new competitor literally opened up almost right across the street from the college. So those two things had a big impact on our results there.

The other part that hurt us somewhat, and it wasn't huge but we're going to watch this, was as I mentioned, there was a fair amount of returning military. When they're coming back, they get their stuff out of storage, and that could be a trend we see going forward. We have to monitor that closely.

Okay. But you -- and then separately you kindly of talked about July being such a strong month for you guys, particularly year-over-year, and I guess I'm curious, is that a function of the increased advertising and stepped up incentive activity? More so than just short of what's going on in the markets? And is that sustainable?

Well, I think a big part of it was a response to our marketing efforts. We're giving a lot more concessions. And just to give you a feel, generally speaking, we will give a concession to maybe five or six out of 10 people who walk in the door. This year, it's closer to seven to eight people who walk through the door get a discount or a concession. But it's a one-time thing that we are generally offering to these people. We're trying to keep our street rates sacrosanct, give an incentive to get people in the door.

From him what's happening, we do surveys of our customers and when they move in, we ask them to fill these things out and ask them some questions. To them, before they move in, the most important thing to them, they say, is price. And then what happens is we asked them if anything changed after they moved in. And much of the time, in fact, I think it was like 60-some % of the time, people said it was more now customer service, security and convenience. So what we're trying to do is emphasize customer service to these people. When they come in we're trying to entice them because they're looking to get a deal, but giving good service and a clean, secure storage facility for their goods so they feel confident when they get their good, they're in the same condition. That's just as important once you get them in the door.

Okay. And the 12 expansions that were completed during the quarter, can you give us a sense of where those were, those 12? And separately, are those included in the same-store guidance? Or in the same-store revenues?

They are not. They are not included -- actually, for the most part, they've been costing us more than they've been helping us because we funded them, we've been carrying the load on $17 million and really the bunch of them just came online later June, and a couple even in July. They're sprinkled throughout the portfolio. We have about 42 projects in place and there is no real concentration geographically.

We did pull back some, as I mentioned, we had $48 million projected to do at the beginning of the year, $48 million worth. We scaled that back to about $40 million, in part. Some of the projects were on the cusp as to hitting our projected rate of return of 12% cash on cash. With the increase in cost of steel and concrete, especially, some of those sort of slipped below the breakeven point. And also, some demand has changed. A few of the Florida stores were holding back on the expansion side and focusing more on the lightening and brightening. So they're everywhere. Essentially I think we've got projects in Phoenix, Texas, Florida, New England, New York, Maryland, two in Maryland. Everywhere.

But you pulled the whole store off-line or you just don't take that -- or you take that piece out?

No, you're referring to what happened --

When you have an expansion.

No, generally speaking, that was an unusual situation where we will, if we're going to put an expansion in, we're putting in a new building or we're buying adjacent property, putting something there, or climate controlling. In this case, we had a whole refurbishment of the building. It an older building, we put in a lot of things, each time we opened up something else, a new thing popped up. It was like whack a mole, almost. But that was an unusual situation.

But as a rule, when you're doing expansions, like the 12 on average, do those stores came out of the same-store pool?

The store does not no,. Like I said, we've isolated the expansion effect. To this point, it hasn't been much. I see what you're getting at, we may actually have to do that, step aside and say here's our same-store pool of 348 stores and now we've got 20 of them with expansion. So the impact has not been significant or even measurable up to now, but hopefully starting third quarter and into next year, is where we're really see it, we'll have to do something to isolate that. Because it will be an unfair advantage.

But anything that was brought online over the past six to 12 months is still in your same-store pool?

That's correct.

I think Todd has one.

Yes, hi. Did you recognize any debt prepayment penalties or charges associated with the refinancing activity?

Yes, we did. It wasn't bad, it was about $90,000, we put it in financing costs. Because we prepaid the 2009 note, we had some prepaid expenses associated with it that we had to flush out. So we should have broken that out, I suppose, it's just in financing costs, impacted our FFO by about $90,000.

Okay. And then also can you provide some color on the acquisition of the balance of the Locke Sovran investment, in particular, I guess, the pricing on that and also the timing and how that deal evolved?

Yes. Back in 2000, we formed a close joint venture. We contributed, I think it was six of our properties. We had a contribution of a large property in Brewster, New York, from a partner who didn't want to sell but he wanted to join up with us, so he contributed his property for something like -- it was a very small venture -- he contributed his property for, if I remember right, for about $8 million, we contributed ours for about $15 million, we mortgaged all of them and went out and bought four more, I think. It was a $30 million note and an $11 million combined capital contribution.

We bought this partner out on a staged program over the last -- I think April 1st of last year, April foreign currency of '07 we bought the majority interest in Locke Sovran I and turned him into kind of a preferred shareholder. He had a $6.1 million remaining investment in the deal. We were paying him a preferred 8% yield, preferred meaning he got first shot at cash flow, and we wanted to improve a bunch of properties in this portfolio, he didn't have the pockets to match us, so we were throwing dollars into these stores that he was going to be the beneficiary of if we did sell or otherwise liquidate the partnership.

So back in April of '07, we preferred him out, as we like to say, gave him a $6.1 million set contribution, paid him $480,000 a year since then, and June 1st he was able to, he just basically said, okay, I'm done if you guys want to buy me out. I think it works out to be something on the order of an eight and a quarter yield. It was decent. The $6.1 million we should be getting about an eight and a quarter yield on. So it was a tiny -- back then, it was kind of a big thing but eight years later it's sort of just a pain in the neck. So we're happy to clear it up and wholly own this Locke Sovran I deal.

Okay, thank you.

The next question is from Christeen Kim.

Hey, good morning. Just going back to the concessions really quickly, are those mostly focused just on Florida and Maryland now, or are those being used portfolio-wide?

Well, it is concentrated in the areas that we're having some issues, but even in the strong area, depending on the unit size and the demand and occupancy, we'll be aggressive there, too. If we see a unit size even in New York where we've had great success this year, and there's a number of those that have been sitting vacant for a while, we'll be aggressive and offer perhaps a full month's special. But we'll do it judiciously.

So let me make sure I got this correct, you're trying to hold your street rates. Are they up year-over-year at this point or are you falling below where you were in '07?

No, street rates are, in most cases for most unit sizes, except in the troubled states, they're up.

Okay. That's all. Thanks.

We bring our customers along, but we don't want to get in that position where our existing customers are above street rates. But again, it's very micromanaged by market, by unit size, and but , yes, we're up on our rate structure in many parts of the country.

Okay. Thank you.

The next question is from Paul Adornato.

Hi, good morning.

Morning, Paul.

You mentioned the hurdle rate for expansions of, I believe, 12%.

Yes.

What's the hurdle rate for the lightening and brightenning projects?

Well, it's almost have to do, you know, there isn't. Some of it is, you know, you step back -- I guess I shouldn't say that. In the cases where we're remodeling offices, for example, we want to make sure we're going to improve our visibility and presumably improve retail traffic, although that isn't a big part of our business. To make a major expenditure on an office remodel has to have some kind -- not as high as 12% but some kind of tangible benefit in addition to really what's an intangible benefit. We're investing in some landscaping projects and some office remodels. The painting, the fence lines, the paving, that's all part of the normal, we've just stepped up some of it in a couple markets because we had the time and we like to get it done.

But it means something, it really does. Curb appeal is important. It's the biggest part of our manager compensation, how their stores look and how they present. But to put a dollar or a percent on that, we're arguing with the margin guys all the time about, and the managers. They want a nice looking store, it's hard to put a rate of return on it.

Okay. And what's your occupancy assumption for the rest of the year that's in guidance?

We're expecting to be about, for the third quarter and the fourth quarter, about 150 basis points below last year's levels. Which will be about 83%.

Okay. And could you tell us the cap rate on the Detroit property sale?

It was about -- well, it's a little different in that, it's backwards from the way we work it. I probably won't talk too much here. When we go out and look at a store, we see what the store's doing and we expect to bring efficiencies to the table. In this case, the seller lost efficiencies, he's not getting the benefit of our economies of scale so he was looking at it like he was buying it for about about a 7.1% cap. We were probably selling in the neighborhood of a 7.6% cap.

Okay. And you mentioned you made reference to a weak June but an okay July. Were you just talking about Florida or was that the whole portfolio?

No, Florida was stronger frankly than the balance of our portfolio. The rest of the portfolio we had percentage-wise probably 2% fewer move-ins than the year before.

In June, that is?

No, in July.

In July.

Right.

Okay. But it was still --

We're pretty much flat.

Okay. Okay, thank you.

The next question is from Michael Salinsky.

Good morning.

Good morning, Michael.

David, the guidance you're talking about raising concessions, raising marketing and stuff, it almost seems like you're switching gears a little bit trying to focus more so on occupancy as opposed to rate. In the past you mentioned as long as you could get the rate you weren't concerned about occupancy, a lot of these had higher vacancy components. Is there essentially a change in strategy right now with this, really focusing more so on the occupancy? And what occupancy levels do you want to get the portfolio back up to, essentially?

Mike, really what we're concentrating on are revenues, trying to maximize revenues over the long term. When we offer these concessions, the greater concessions now, we're not big fans of the full month off, now it's almost you have to to open a lot of places. So what our goal is, is to get the occupancies up where we can. We're doing an awful lot of advertising in those areas. But the Number 1 goal is increasing revenues. And if we have a lot of vacancies in some units, we're going to do what we can to fill them.

When a person comes in, we have to keep this in mind, our average tenant stays with us for about 11 to 12 months. So if you have the inventory, it does make sense for us to give a month, let's say, and have them pay then for the other 10, 11 months.

The other thing that we found in this environment is that our close rate, when we give a full month now, versus what we had been giving before, $20 off or a half month, our close rate is up almost 10% higher. So it just makes sense to react to what the market's telling us.

In the markets, are you seeing more concessions, more advertising from a lot of your peers in the markets? Or is it just something you're doing proactive right now in response to what you're seeing?

Keep I understand mind, most of our competition are the moms and pops in a lot of areas. We'll have within a five-mile radius we'll track the closest competitors. And generally speaking, we'll find in that, if there's five competitors in a five-mile radius or three-mile radius, maybe one is one of the larger ones and the other three or four are smaller. So they're not doing that much advertising, and frankly a lot of them are interested in getting full occupancy. So that's what we're competing with. We are, we think, pretty aggressive and pretty, I would say, market leaders when it comes to the various advertising we're doing.

We're doing things grassroots, community sports arenas, we're advertising in those places, mall advertising, back lit kiosk and elevator graphics, we're doing a lot of cross promotions with global businesses. So we're spending a lot of money there, we're reallocating funds from the Yellow Pages to the Internet because we see a lot more activity there than we've been getting from the traditional places. So we're very, very proactive in trying to generate revenues, whether it comes from occupancy or rental rates.

Okay. Dave, in your expense forecast, what are you banking in for real estate taxes, just several -- across the several sectors. We've heard that Georgia is seeing pretty big increases, there's also expectation for growth in Texas. Just curious what you're looking for.

We are concerned about Texas because that's obviously a very big part of our portfolio. We haven't seen it yet, and that's one of the states that always causes us to hold our breath through the course of the year but we're forecasting a little better than a 4.5% across the board, a little bit heavier in Texas. Georgia, I have to look at it, I'm not aware of issues in Georgia. But about 4.5% is our overall budget for property taxes for the year.

Can you touch on the performance of the 2007 acquisitions at this point, relative to expectations?

Yes. The pool there was the safe mini portfolio which was the Southeast, the Gulf coast, Montgomery, Alabama, the '07 properties that we bought in the first quarter, which were the western New York portfolio. The western New York portfolio is excellent. New York is up overall considerably, and a big part of it is the fact we brought those stores online. So that's excellent.

I think the Mobile and the Montgomery, Alabama stores are a little softer than we expected. They're not in the same-store pool, they came in the middle of the second quarter, I think May 1st was the day we brought those on, so they're not in the same pool. The new ones are doing much better than the existing, and that's typical of something that we buy. We're on track. We expect by the end of this year, 18 months after we close, about a 7.15% cap rate, to be somewhat on the order of 110 basis points higher, and I think we'll be there. All the properties we bought last year, they were all done in the first half essentially with the exception perhaps of Pensacola, I think are just great.

With the recent refinancing of your line essentially and the new term loan, were there any changes in the covenants on those, just given what we're seeing in the market currently?

No, we don't have the most liberal of covenants to begin with. So I'm not going to say we banged anyone down on that. We have a comfortable covenant package for the way we like to run the company. So the lenders that -- it was a difficult time, I've got to say. It was a fairly challenging effort to put together all of our banks to do this. But the covenant part we basically have three notes that -- now two notes that determine -- the notes that we sold to the insurance companies in 2003 and 2006 have covenants and we've kept those consistent across virtually all of our debt packages. So we are exactly neutral as far as covenant changes.

And finally, just having been in the market forming the joint venture with Heitman, can you talk about the appetite from private equity to get into the storage industry, what you're seeing in terms of them wanting to do joint ventures, wanting to buy portfolios. Just give us a sense of what you're seeing on the private side there.

We were pretty happy in the sense that when we paired up with Heitman, we didn't have to do a lot of exploring. That was a pretty expeditious marriage, if you will. So I don't know who else is out there in a big way looking to buy. I know there's a fair amount of distressed property that may be coming due in the next couple years with mortgages that are perhaps -- that went in at 80% or 85%. That might open the appetite for some equity investors to buy. I don't know of any big players anxious to part big dollars in on the leverage basis that we think people are able to get.

So it's a little quiet in that there's not a lot of data points. We get some inquiries to buy. We heard grumblings and rumors but nothing that I could say is credible.

Thanks guys.

You're welcome.

At this time, we have no more questions in queue.

Okay. Well, we'd just like to thank everybody for their interest and support. We appreciate your participation in the call. Have a great day.

This concludes today's conference call. You may now disconnect.