Life Storage Inc (LSI) 2008 Q3 法說會逐字稿

Good morning. My name is Samantha and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter earnings release for Sovran Self Storage 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, go ahead and begin your call, sir.

Good morning and welcome to our third-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 stores turned in a solid third quarter in a very competitive marketplace. Same-store revenues increased by 0.2% while the same-store expenses, impacted by several one-time charges, increased by 6.3% resulting in a same-store NOI of minus 3.3%.

Although our Florida markets remain a drag on our portfolio's performance, the numbers there are improving and move-ins for the quarter far outpaced those of the third quarter in 2007. In fact, we experienced similar move-in activity companywide. This positive trend did not come without a cost however. We were quite aggressive in granting concessions to spur this activity and as a result we won't see the revenues hit our P&L for a while.

On the acquisition front, in July we acquired 21 stores in five states at a total cost of $144 million into our JV with Heitman. With high volatility in the capital markets our balance sheet remains strong and conservative and we believe that the comfort of having long-term fixed-rate debt extending out nearly four years is well worth the substantial hit we're taking to current earnings. And with that I'd like to turn it over to Dave Rogers, our Chief Financial Officer, who will provide some details of our quarter's activities.

Thanks, Ken. With regard to operations for the quarter, total revenues increased $1.7 million or 3.4% over 2007's third quarter and property operating expenses increased by $1.5 million. These increases, resulting in an overall NOI increase of 80 basis points, were primarily due to the addition of the six stores we purchased since October of last year and the impact of the joint venture properties acquired during the quarter offset by a decline in same-store results I'll get to in a minute. Average overall occupancy was 83.3% for the quarter ended September 30th and average rent per square foot was $10.48.

Same-store revenues increased by 10 basis points over those of the third quarter of '07. The gain was rate driven as our same-store weighted average occupancy for the quarter declined from that of '07's third quarter by 170 basis points to 83.4%. At the quarter end date same-store occupancy was 83.3%, down 100 basis points from last September 30th, but rental rates were higher at $10.48 a foot compared to the same-store rate of $10.39 last year.

Now these results are rather underwhelming; they mask a lot of the effort we put into achieving occupancy. We treated many of our customers to the first month's rent free to the tune of over $2.1 million on a same-store basis compared to half of that during last year's third quarter. Our goal was to capture the traffic of the busy season to put customers in our stores ahead of the upcoming seasonal slow time.

Costly? Yes. Beneficial? We think so. Our September 30th occupancy of 83.3% was only 20 basis points behind that of our June 30th level. So typically by the end of the third quarter we're 150 to 200 basis points behind as we enter into the slower season.

Operating expenses on a same-store basis increased by 6.3% this period which was an unexpected surprise. Of this almost $300,000 was the insurance deductible portion of the damages sustained at some 20 stores in the Gulf region during hurricanes Gustav and Ike. Another $300,000 was due to spiked utility costs at our stores in the Houston and Dallas markets.

Unfortunately there was a lot of disruption to the transmission grid in that area throughout much of the summer and we were paying in the range of $0.15 to $0.16 per kilowatt hour versus our usual $0.07. We consider both the hurricane damage and the electrical charge as one-time items that should not have an impact going forward.

Property taxes increased by 3.6%, payroll by almost 6%, and curb appeal maintenance by about 13%, but we had planned for these. We think that for the most part expenses have been and should continue to be well contained. Absent the unforeseen hurricane damage cost and the Texas utility overages our same-store operating expense growth would have been under 3%. We expect this normalized level of increase in Q4 and into 2009.

Growing the top line by 10 basis points and absorbing a 6.3% increase in operating costs resulted in a same-store NOI decrease of 3.3% for the quarter. Taking out the one-time hits our NOI declined by about 1.5%. G&A cost for the period came in at $4.3 million which was pretty much as expected. The increase of 8% over last year's amount is primary due to cost incurred managing and overseeing the joint venture stores.

With regard to capital matters, our balance sheet remained pretty much unchanged during the quarter. We contributed $16 million as our 20% share of the previously announced joint venture purchase of a 21-store portfolio; we funded a little over $5 million in construction in process through our expansions and enhancements program, and we put another $5 million towards our accelerated lightening, brightening and office renovation program. This total of $26 million of expenditures was funded with $11 million of cash left over from our June refinancing, $3 million from the DRIP program, $3 million borrowed on the line, and the balance came from operating cash flow.

As mentioned on the last call, we were able to refinance almost all of our short-term and near-term obligations via a four-year note. As such we have little in the way of debt maturities or commitments through the year 2012. We also arranged for a new $125 million line of credit which, at the Company's option, can be expanded to $175 million and can be extended through 2012. Interest on the line of credit floats at LIBOR plus 1.375% and the Company has entered into an interest-rate swap contract which fixed the rate payable on the four-year term loan at 5.97% through 2012.

Our total outstanding debt is now $612 million. At September 30th all but the $3 million drawn on the line is long-term and fixed rate or hedged to maturity. Approximately 18% of our borrowings are secured. Our debt service coverage in the third quarter was 2.9 times EBITDA as was, since we don't have any preferred shares remaining, our fixed charge ratio. Debt to enterprise value was about 38% at September 30th, so we remain conservatively capitalized, have little in the way of debt overhang, and have sufficient flexibility and capacity to fund our needs.

With regard to guidance -- well, we've encountered some pretty strong headwinds as a result of overall economic conditions. And judging by what we've seen the past few months, we expect to continue with leasing incentives and aggressive marketing. We're curtailing our same-store revenue growth expectations for at least the next two quarters and are now looking for increases of between 0.5% and 1.5% for the balance of the year net of incentives. We expect expense growth to be relatively contained at about 3%, so our same-store NOI growth is now forecast as pretty much flat for Q4 and into early 2009.

G&A costs are targeted at between $4.3 million and $4.6 million per quarter depending on the acquisition pace of the JV. These additional costs incurred to operate joint venture properties are expected to be 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 recently formed JV.

The acquisition environment is pretty much unchanged, there's a good group of properties in portfolios either on the market or owned by folks who can be coerced into selling. But for quality stores seller expectations are still pretty bullish. For the purpose of guidance we're forecasting a total of $20 million to $25 million of company contributions to the JV in 2008 including the July investment of $16 million. We expect those contributions to earn about 8% on a leverage basis.

Our expansion program continues, although we have reduced our expected total 2008 expenditures to about $25 million to enhance revenue capabilities at the existing properties. So far this year we've significantly expanded 13 stores at a cost of $16.5 million and have 17 additional projects underway with $14.8 million expended so far on those.

We have continued our program of accelerating the painting, paving and fencing projects at many of our stores in an effort to improve curb appeal sooner. We expect to spend about $12 million on our same-store in 2008 and about $5 million more on our 2007 and late 2006 acquisitions. Most of this has been incurred as of September 30th.

To give you a better handle on our interest cost, we're now obligated on $610 million of long-term fixed-rate loans, our annual interest cost to carry this debt, including amortization of financing cost, is $40.4 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 the line of credit which, as mentioned, carries the floating rate of LIBOR plus 137.5 and at September 30th there was $3 million on this line.

Accordingly, and primarily because of the ongoing incentive program and its effect on our top line, we're now projecting our FFO per share in 2008 to come in at between $3.28 and $3.30 and between $0.80 and $0.82 per share for the fourth quarter. And at this point, Ken, I'll turn it back to you.

Thanks, Dave, for that explanation. And that concludes our prepared remarks. We'd be pleased to answer any questions that you might have.

Samit Parikh.

Good morning, guys. I need to ask you -- where are your street rents right now compared to your average in-place rents on the portfolio?

Just a tad higher I would say. In most markets our street rates are on par with the rates we're charging say for those tenants who are lagging a bit and haven't had an increase in the last 10 to 12 months.

Okay. And I guess as a follow-up to that, what is your general sense on storage fundamentals in '09? Do you think that you're going to have to begin maybe easing street rents to actually below your in-place portfolio to maintain demand and occupancy in your portfolio?

I don't think so. What our goal will be as to try to continue with concessions as necessary, but keep the street rates where they are and hopefully with a little bit more increase as time goes by. Our goal is to try to get the occupancy up. We have a one-time concession, as I mentioned, and it seems to be working as far as physical occupancy is concerned. Our customers generally stay 11, 12 months; we give one month free and they stay that length of time. Over the long haul we think it will be a positive for us. So the brief answer to your question is no, we don't anticipate softening our asking rate.

Maybe just to elaborate a little, if we haven't had to buckle in Florida, which has been just a terrible market for us the last 18 months, I don't think we'll have to do it anywhere. And the reason people are leaving in Florida is we think part of a natural cycle. They're not leaving because of the in-place rents. Our existing tenants are paying, they're absorbing rate increases. So as Ken said, we're fighting it out on the new lease ups with incentives, but we're protecting the core of our rates. And if Florida holds, boy I think anywhere would hold.

Okay. And just lastly, what were your management fees for the JV in the quarter? And can you just -- quickly just remind us of the calculation of those fees and what an expected run rate would be?

Yes, we're entitled to a 6% property management fee based on the rental revenues of the joint venture and 1% call center fee. So the fees for the quarter were really two months. We closed in late July, so August and September were impacted this quarter and we earned about $180,000 in fees for those two months. If we don't add any more properties that would be it, about $90,000 a month.

We've had the cost baked in because we anticipated putting this JV in place -- actually we anticipated at the beginning of the year. So we had staff on board and we've been absorbing some G&A over the last couple quarters. So the G&A run rate going forward won't increase as much as perhaps the management fees will going forward. But our run rate should be in about the $90,000 a month range until we add more property.

All right, thank you.

Jordan Sadler.

It's Todd Thomas on with Jordan. First, how's occupancy look through October? Do you have an updated occupancy figure?

I won't give you the -- Dave can give you the exact number. I can tell you our move-ins versus move-outs very encouraging. Companywide our move-ins for '08 over '07 were up about 16%; move-outs were up a little bit, about 2%. So the response is good to our concessions that we're granting. But as I said, it doesn't come without a cost. But the trend is good overall and in Florida in particular it kind of matches what we see with our portfolios as far as (inaudible).

Okay. So you've seen net move-ins at this point?

Yes.

Okay. Is there any -- has turnover increased at all or has there been any change also in the duration of the tenants' leases? You mentioned it's typically like 11 to 12 months. Has that changed at all?

No, we haven't seen any appreciable change in the length of stay. As I mentioned, our move-outs for the third quarter companywide were up about 2%, which for the third quarter is pretty good actually compared to prior quarters because third-quarter you do sustain a fair amount of move-outs with college students moving out. So that 2.4% is a little bit less than what we historically get, so that's another positive.

This is Jordan. The move-ins versus move-outs that you talked about, the plus 16% year over year versus plus 2% year over year, that was for the third quarter, Ken?

Correct.

And that trend you think continued right into October, move-ins out basing (multiple speakers)?

I misspoke. That 15% was October, the third-quarter move-ins -- I'm sorry, move-ins for the third quarter were up about 3.2%, move-outs were down 3% for the third quarter. That number I just gave you, the 16%, was increased move-ins for October and outs were up 2%, a little over 2%.

So what caused you guys -- if move-ins are outpacing move-outs, is that purely a function of the increased concessioning? Because something caused you guys to get much more aggressive. And what you would intuitively think as an outsider is that your move-ins were outpacing your move-outs, and so you were seeing a higher rate of vacancy or move-outs and that you tried to stem that going into the slow season. Is that inaccurate?

The reason the movements increased, we believe, is because of the concessions we were granting.

So the 3Q numbers move-ins versus move-outs were what?

3Q move-ins were up 3.2% and 3Q move-outs for Q3 '08 over '07 were down 3%. So it was positive on both sides for us.

So that's not necessarily intuitive. Was it at some point during the quarter that you guys turned that around? Was that reversed at some point during the quarter and you guys turned that around by getting aggressive on the concessioning?

One thing we have no control over is when people are moving out. So the fact that there were fewer move-outs really has nothing to do with our concessions that we're granting. But there's no question that there was a positive response to the concessions. Maybe I'm missing your point.

My point is you're saying the concessions don't have anything to do with it. But your concession to try and accelerate move-ins, right.

Right, correct.

Right, and so you're trying to accelerate move-ins I assume because you're concerned about occupancy.

Correct.

And so you would try to accelerate move-ins because your occupancy was down or weaker versus historical or trend or what you would've expected I would imagine. Unless you're taking a different tack than you would have historically.

No, you're right. Your prior assumptions were right.

So basically it started to get weak and so you guys responded essentially and turned it around?

Correct.

And the idea being we had traffic in the summer. You get a pretty good amount of traffic June, July, August, even September and then it starts to wane. And our thought was while this traffic is heavy let's capture tenants, let's get people in place. We're not getting any revenue for the first month, but at least we have tenants in place starting October 1st, November 1st when things are getting a little bit slower.

We're having a hard time catching up to same-store revenue growth in that regard because every month we're giving -- we're not charging compared to last year for those 11,000 or so tenants that move in every month. But at least we've got tenants in place, they're starting to pay 30 days after they move in and we've got a base to grow from.

Okay. And lastly, in terms of acquisitions, can you expand on what you're seeing and what your expectations for the fund are at this point? Will the time horizon or the initial investment window have to be extended? And also if you could comment a little bit more about pricing.

Sure. We're obviously being careful and selective with what we're buying a behalf of the fund. We don't have a lot of competition to buy properties as has been the case perhaps in prior years, but none the less we want to make sure that given all conditions that we're getting good value. We do have some $30 million to $40 million of properties under contract; hopefully we'll close before the end of the year. We're looking at some larger portfolios and some one-off properties.

As I mentioned before, our investor is interested in best in class and very high-quality properties and there are a fair number of those out there. There's been very little movement on cap rate and seller expectation. I think to get the type of properties we're looking at we're still talking in the low seven's as far as cap rates go on stabilized income. There's a lot of property out there for sale, a lot of it is C+ and lower I think and we haven't even looked at that. But when you see the volume I think that a lot of the brokers and day sheets are showing, that's what you're seeing is a lot of either markets poor or property quality poor.

I think also in the not too distant future we're going to be seeing a lot of properties that were built in '04, '05 perhaps '06 that haven't leased up anywhere near as fast as people thought they were. And the construction loans and short-term loans that were on those are maturing. That's probably not for this joint venture. But I don't know.

We gave our investor a nine-month exclusive to find properties, to come up with a total capital infusion of $125 million between them and us. I don't know exactly when that expires, but I think we'll fill it and I'm hopeful we'll go forward with it. But the acquisition market itself is sort of clouded a little bit with some distressed loan sales by some larger institutions and a lot of one-off smaller properties of a lesser grade. And there is activity in the quality properties, but pricing hasn't changed much in those over the last -- since certainly since last year.

Okay. Thank you.

Michael Bilerman.

It's David Toti here. Just going back to the issue of weakness, can you just us a little bit of color as to what you think the drivers of that weakness are? Is it a pullback by consumers, is it supply driven, is it competition from some of your peers?

I think it's more the economy. Florida in particular let's say was the boom/bust cycle, construction was rampant there. Part of it in Florida is a little bit more competition because during the aftermath of the hurricanes there were a lot more storage put up there and no hurricanes since 2004, 2005. So Florida maybe a little bit more competition plus the economy exacerbates the problem.

Throughout this portfolio though, in areas that we're having some difficulty it's more the economy storage. I've been visiting stores out in Denver and Phoenix, visiting with managers. And they're telling me that people are really shopping, they are price-sensitive. And so with this $1 move-in special, it's the right thing we think to do at the right time.

Can you just provide a little bit of color on the state of your business customers and the demand from that pool?

The only place that we've seen some fallback there is really in the construction area, because where there's a lot of homebuilding, these people, they need a place to go out of and as there's less and less of that activity there's less demand for our product. So I would say from an (inaudible) -- a business standpoint, that's the only area that we're seeing a reduction in. And the residential part in Florida, once again, there's less of that homebuilding, less moving, so that's where it is in that area.

Okay. Are you seeing any change in delinquencies?

No, as a matter of fact, that's another area when I was talking with the managers, our bad debt experience is historically about 0.5% or less and that's where we are. So it takes -- we've got to stay on top of these things as far as receivables and when the day comes at the end of the month, our managers are on the phone with people who haven't paid by the first, they've got five days to pay it. So we're on top of that and, knock on wood, we're still within the confines of what we think is a reasonable parameter.

Great. And then my next question is just moving over to the pullback in redevelopment. Has there been any capitalization on any of those projects that have been shelved?

No. What we're doing basically is we took a look back -- actually not because so much of a little bit of a slowdown in the business, but more because of the rising construction cost, particularly with concrete and steel, at the beginning of the year. And we're cautious with our capital and our liquidity position, so we took a look and said we've got $48 million budgeted for '08 and perhaps another $40 million for '09. With the cost of steel, asphalt and concrete does it still makes sense? So our guys basically started back at the beginning before we put any shovels in the ground and reevaluated them on a cost basis.

Then what happened? Basically starting in May, June we got a little bit more concerned with some of our markets and perhaps looking out 12 months how are these markets going to be? Does it make sense? Ironically as we started doing that the cost of steel, asphalt and concrete started coming down. So we're constantly looking, once we break ground and get going it is too late to stop. These projects are not that big.

So to capitalize anything and then let it sit, if that's what I understand your question is, wouldn't make sense because on average we're talking a smaller project is $400,000, very few crack $1 million a piece. So once we go, we put up a building, we put the air-conditioning in it and we go with it and we don't straddle once ground is broken on these things.

Okay. And then my last question along those lines is if you are indeed pulling back on some of these projects, or thinking about it, do you think there's going to be an impact to your repair and maintenance spending? Some of the redevelopment projects, will they flow back into the expense line in terms of sort of more minor attempts at redevelopment?

We're pretty careful what we call an expansion and enhancement and capitalized item -- that's a true new project. So we've been pushing more through our expense side on what we call the curb appeal expenses. We've been pushing some through what we detail in the press release as renovations. But no, the CapEx on the expansion enhancement program are truly new revenue-generating projects.

Great, thank you.

Mark Biffert.

My first question, I kind of want your view on the economy and the expectation of increased job losses and the impact that could potentially have on discretionary spending. And I'm wondering what you've seen in past cycles in terms of how that's impacted your business?

Certainly the economy has an impact on the self storage industry just as it does other industries. What we have found though is when a recession or a downturn comes in we begin to feel the effects a little bit later than other types of industries because we have the short-term nature of our leases, relatively less expensive. Once a recession begins we feel the effects along with everybody else.

The positive about our industry though is once again because of the short-term nature of our leases and relatively inexpensive monthly rent, when things start improving a little bit people will come to us sooner because they're reluctant to commit to a three- or a or five- or a 10-year lease; they'll go with us on a month-to-month basis.

So what we have found over the 20 some plus years we've been in the industry is that our recessions are shorter and shallower. And frankly, based on what we see with our industry, we think we are now beginning to feel it along with everybody which would tell us that we are in the middle of a recession even though our movements in the last quarter went up somewhat, it was in response to our aggressive concessions.

I think, Mark, just to elaborate on Ken's answer, a couple times ago when a caller asked about the effect on business customers, we are losing some in regards to construction work and so forth, but also this gives us an opportunity at a lot of our stores where our managers typically belong to a local chambers of commerce and Rotary clubs and we actually have a proactive marketing program where our managers try to go out and meet with businesses and show the benefits of $100 a month, no commitment, no long-term deal. But here, you've got a warehouse you're using, if you've got a retail shop that's too big and you want to downsize we're here for you.

So in some ways we take advantage of this. It's certainly -- never will we say we do well in bad times compared to -- all of us like a rising tide. But I think there are some opportunities where hopefully if things are bad we want to make sure that we do the best we can here.

So when you're building into your guidance looking ahead in terms of discounting, how long does the impact of that discounting last in your portfolio? In terms of the number of people you saw come in over the last quarter, what's the typical retention rate of those people over say the next three months? You've said typically on average 12 months they stay. What percentage of the people brought in actually stay the 12 months?

If they're business, which is about one third, it's more. If they're residential in normal times it's about seven or eight months. In these times we're not sure exactly what the reasons are. We're calling these customers residential tenants. If they're losing their house and they have to store their goods to move into an apartment or to move in with their parents or to move in with somebody else, that's a longer term typically.

So it's a little bit different set of circumstances now than we are used to measuring. I've explained before I think about the extra room concept that we have, that some of our people live in apartments and use us as an extra room or condos and some homeowners use us as an extra room for their seasonal goods to move in and out. This type of residential customer that's in distress is probably a little different.

We're gauging the success or failure of this first month free type of thing on a six-month term. But that doesn't mean -- we don't know yet what a lot of these distressed -- especially Florida, that's probably our worst market -- our Florida tenants, our residential tenants are doing. So we're playing defense now in a big way with regard to this free month rent. And we'll probably not be able to measure some of the effects for several quarters looking out and put that in our bank of knowledge for the next downturn.

Okay. And then lastly, jumping over to your joint venture, your partner's appetite for acquisitions, I'm just wondering why they would want to be out there in the market acquiring assets and your expectations for -- I think you're building in roughly $20 million to $25 million which implies I think $9 million of additional equity input from you guys. And I'm wondering why you would want to be out of acquiring assets if cap rates -- nobody knows what cap rates should be in this environment and what the cost of capital will be going ahead. So what makes you feel comfortable that you're actually going to close on these things that are under contract right now?

We've been negotiating these properties for quite a few months. We like the properties; we see that, again, they're in the best spots in their market, they're priced below replacement cost. There are other factors involved on a macro basis that I can't really speak to. But these deals are good. We're comfortable with them. We think we can grow them. And at least for this little bit that we've been working with the balance of the year I feel pretty comfortable.

Do you think you could put back to these people after six months, nine months and come back and get a better price if you were just to wait?

No. I mean, the people that have the quality properties, they're sitting there -- cash flow, I mean we got nicked by a couple cents this quarter because of some unforeseen items. But really, on balance the cash flow out of these properties, and this is a position a lot of sellers are sitting in is, why should I sell? You're telling me that the market is distressed and you can't get financing. That's your problem, that's not my problem.

I'm sitting here pretty, I'm collecting the rent every month, my NOI is just fine. So the sellers sitting on good properties by and large are happy and just because there's a downturn in the capital market, if they don't have a reason to sell for estate planning or blooming maturities, and even if they do have maturities, most of these people are not in a highly leveraged situation. They're not going to sell cheaper because there won't be any point in selling in these people's minds.

Okay, thanks.

Mike Salinsky.

Good morning. Could you talk about your performance in Texas? I would have thought it would have been a little bit stronger just given the impact from the hurricane in the Houston market there?

Unfortunately on an NOI basis Houston didn't have such a good quarter just because of the $600,000 in extra costs that we incurred. We did see some hurricane impact primarily as September rolled along. So for the quarter you don't see a lot. It didn't come in until probably nine or 10 weeks into the quarter. I think we're looking pretty good in October in Texas and we did get several hundred move-ins because of the hurricanes in primarily Houston markets, Beaumont markets. So it will be good, but you really didn't see much effect in the third quarter because they didn't really kick in until after Labor Day.

Okay. You talked about the cutback in revenue enhancement expansion spending. Given what we've seen just in fundamentals here, where are yields right now on redevelopment projects?

We were looking before the increase in steel and concrete cost for about a 12, that was our goal. If we can do 12% cash on cash after a year -- or I'm sorry, after 18 months lease up time we would give these things a green light. We were getting pinched pretty hard with the construction costs going up and that's why we had everybody take a look see and they still were able to come up with about $25 million, $30 million worth of (inaudible). Then we got a little concerned about softness in some of the markets and we pulled that. But that's still our goal. Our goal is to have a 12% cash-on-cash yield after 18 months of turning the keys over.

On the income statement you showed a pretty substantial jump actually in other property income. I'm assuming a portion of that was a management fee. But was there any other one-time fees or catch-ups or anything in that number that would have drove the substantial increase?

We earned an acquisition fee from the joint venture for the year's worth of -- basically the cost -- the due diligence cost and the search cost and so forth for the properties that we brought in in July. So it works out to be a joint venture share of $550,000 one-time acquisition fee.

Okay. Any thoughts on breaking that out in the future?

Yes, it won't be that typical, but we should, you're right. We've already been -- it's already been suggested to us so, yes. I saw it in your write up as well so we will do that.

Okay. You talked about street rates, you talked about verses in place rents. What are renewal increases looking like right now versus what you're passing along on increases where street rates are right now?

We're raising the street rates modestly kind of here. We're raising the rate but we're going to give you the first month free kind of thing. In accordance with what we think we can get from our existing customers. It ranges so much between popular units and unpopular units. So there may be some tenants who get on a $100 unit a $1.50 increase and there are even some that get a seven dollar increase. I think overall through nine months were at about -- just under 3% for the in-place tenant rate increases and accordingly the street rate increases.

You talked about having to give away the free right to drive people in the door you operate a decent amount of smaller markets maybe not so much as some of the other reits there. What are your competitors doing, what are you seeing from some of the smaller operators? Are they offering substantial discounts to try to drive occupancy or are they holding firm on pricing? What is the general trend you are seeing right now?

Most of the -- the amount of [talks], if you will, their number one goal is occupancy. And so we'd much rather be competing with the larger companies because they're looking to maintain their rental rates and maybe do a one -- maybe a one-time concession. So it is more difficult in the smaller markets when we're dealing with the smaller competitors from a pricing standpoint.

The obvious benefits we have, we can put more bells and whistles on us, we have the Internet that we can rely in the call center which kind of levels the playing field for us. But it is a struggle and in order for us to get these rentals we've got to be aggressive, at least now until we can get occupancy up to a level that is a little bit more solid, and then we can judiciously fall back from these concessions.

Mike, we bat against Public Storage in almost every single market we're in except maybe Tallahassee, Florida. And we're up against U Stor It in a bunch and Xtra Space in a fair number. And it's because of primarily Public Storage that a lot of our customers feel entitled to the free month rent. And you know, [Dean Journeyman] has talked about this quarter after quarter after quarter -- why are we doing this, why are we doing this?

And pretty much four years ago we did this for a quarter and then saw we didn't have to. This cycle we're doing it, but mainly it's because it's become engrained through the advertising and through the expectations of the customers that this is what you get. It isn't so much trying to knock around the mom and pop, it's actually this whole thing I think came about primarily because of Public Storage and some of the other larger operators.

That brings up an interesting point. Do you think that, just given what you're seeing, everybody trying to drive occupancy, (inaudible) condition has improved can you pull back on this or is this going to become the norm to buffer the one-month move in, is that the way the industry is moving?

I don't think so. That's not what our plan is. Like I said, when we get our occupancy level where we feel comfortable with it there may be some situations where you've got a high level of vacancies in a particular unit size where you may run some specials, but I don't see that coming as the norm.

Okay. Then finally, Dave, just given the guidance reduction, can you walk through how much of that was related to interest versus how much of that was related to operations?

Actually when we modified guidance after the refinancing we had baked in our new interest cost because it was pretty fixed. And we put in joint venture expenses in costs, we put in interest -- really the whole guidance thing is a more prolonged and deeper incentive program. We did not expect to only be doing in the third and fourth quarter something less than 1% topline growth. That's the crusher. Everything else is in line I think to what we tried to adjust back in June when we knew what our new financing was going to be all about.

Okay, thank you.

Paul Adornato.

Good morning. I was wondering if you could talk about the level of bad debt in the quarter and the trend throughout the quarter.

Paul, it was pretty flat. We really follow that very, very closely. And as I said, it's been in the range of certainly less than 0.5% of 1% of sales and it's directly attributable to controlling receivables.

Okay. And was the one-month free incentive in place for the entire quarter or did you phase that in later in the quarter?

We started that, it was the beginning of September I believe it was, first week of September. August? First week of August.

And would you expect a higher bad debt level among those that you offer a free first month typically?

That's a tough call. I know where you're going with that. We're going to have to stay on top of that. We're not providing for that and we work with our managers to make sure that they stay on top of these people. But if that's a possibility we're going to do whatever we can from a management standpoint to prevent that.

What we do, Paul, by the way, once we get into a situation where we see the tenants not responding or not calling we stop accruing rent and stop accruing late fees so that we don't run up big receivables. If we've got a problem tenet after the 60th day and we're in the process of taking the option and so forth, that rent does accrue on his clock, but not on our books.

Okay. And when you offer a free month, what is the actual cash out of pocket required to move in? Do you have an admin fee or other fees?

Yes, generally there will be an admin fee. Many times they'll buy a [lock] from us and sometimes they'll purchase insurance.

Okay, thank you.

Sir, there are no more questions.

Thank you very much for your participation on our call. I hope you have a nice and happy holiday season. We'll talk to you next year.

Thanks, everybody.

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