Life Storage Inc (LSI) 2010 Q1 法說會逐字稿

Greetings and welcome to the Sovran Self Storage first-quarter 2010 earnings release conference call.

At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ken Myszka, President and COO for Sovran Self Storage. Thank you, Mr. Myszka. You may begin.

Good morning and welcome to our first-quarter conference call.

First though, 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.

Though market conditions continue to be challenging, nonetheless our results of operations were well within our guidance for the quarter. Same-store revenues and net operating income decreased by 1.26% and 2.68%, respectively. Same-store operating expenses would essentially have been flat but for a nearly 4% increase in our accrual for property taxes. Including those taxes operating expenses increased by 1.1%.

Small improvements in many markets were made but they, unfortunately, were overshadowed by continuing poor results throughout Florida and much of Houston, Texas. Poor economic conditions and a weak housing market continue to plague our stores in Florida. On a positive note we resumed increasing rates of some in-place customers on a select basis and fortunately observed very little pushback.

Our Web optimization efforts are also paying dividends in that our total web inquiries in the first quarter this year were more than 50% greater than Q1 2009. Traditional telephone inquiries also increased by 2%, essentially proving that there is still demand for our product at the right price.

We made no acquisitions for our own account or the joint venture; however, we did sell two stores in Holland, Michigan, for a sales price of around $2.4 million. During the quarter we completed three expansions at a total cost of $2.8 million.

With that I would like to turn the call over to Dave Rogers, our Chief Financial Officer, and he will provide some details of our quarter's activities.

Thank you, Ken. With regard to operations total revenue decreased $558,000 or 1.2% from 2009's first quarter while operating expenses increased by about $265,000 resulting in an overall NOI decrease of 2.7%. These overall results reflect the impact of the store we opened in Richmond last fall and the decline in same-store results we will get to in a minute net of the operating results of the two stores we booked as sold during the period.

Average overall occupancy was 79% for the quarter ended March 31 and average rent per square foot was $10.36. The overall occupancy rate at the end of the quarter was 78.8%, which is about 20 basis points lower than that of last March end. Same-store results now include 353 of our 354 company-owned stores. Only the development store in Richmond and the 25 Heitman JV stores are excluded from the pool.

Same-store revenues decreased by 1.3% from those of the first quarter of 2009 and this was primarily the result of same-store weighted average occupancy declining from that of 2009's Q1 by 40 basis points to 79.2% and the rent on occupied space dropping 10 basis points to $10.39 per square foot. The quarter-end occupancy rate for the same-store pool was 79%, about 20 basis points lower than last year's March 31 level.

So we continue to buy occupancy in this hyper-competitive environment but for the current first time in many quarters our move-in incentives declined on a year-over-year basis. Last year's first quarter saw us granting $3.4 million worth of move-in specials. This year we gave up $3.2 million.

Kind of interestingly, we granted some sort of incentive to over 1,000 more first-time customers this year but the average concession dropped from $114 per move-in customer to $104.

Operating expenses on a same-store basis increased by a total of 1.1% this period, almost all of it as a result of the 3.8% increase in property taxes. Other operating expenses, with the exception of $170,000 increase in maintenance and curb appeal costs, came in about even with last year's suppressed levels. So overall same-store net operating income dropped 2.7% from that of 2009's first quarter.

G&A costs for the period came in at $5.1 million, a bit higher than we thought. The main reasons for the increase over last year was the anticipated ramp up of Internet advertising costs and a jump in state and federal income taxes as a result of stronger profits in our taxable REIT subsidiary.

With regard to capital matters, as Ken mentioned, we didn't acquire any properties during the quarter for our own portfolio or for that of the joint venture. We did, however, sell two stores located in Holland, Michigan, and thereby we exited that market. The stores were sold for about $2.4 million.

We also entered into a contract to sell eight more stores -- three in Jacksonville, North Carolina; two each in Macon and Augusta, Georgia, and one in Danville, Virginia. The combined sales price of these eight stores is about $22 million and we expect to record a gain of a bit over $7 million on the transaction.

Should we successfully close this deal we will have sold 15 of the 17 properties we were looking to divest with only Salisbury, Maryland, and Christiansburg, Virginia, remaining on our list.

We resumed our program of expanding and enhancing stores. We are in the process of adding some 500,000 square feet of additional and climate-controlled space at 20 properties at an estimated cost of $20 million. Even in the tough leasing environment we find that premium space sells.

At March 31 we had $400 million of unsecured term note debt and $81 million of mortgage debt outstanding. The next significant maturities are not until mid-2012. Until we draw on our line all of our debt is either fixed rate or hedged to maturity so our capital position is such that our needs are discretionary. We have got no forward commitments concerning JV contributions or buyouts, no construction programs to fund, and no properties to acquire until we decide the time is right to buy them.

A quick review of certain of our ratios. Debt to enterprise value at $36 per share is 32.3%, debt to book cost 34.7%, debt to EBITDA ratio 4.9 times, and debt service coverage 3.1 times.

With regard to guidance, since our last call we have become a little bit more optimistic about demand and pricing potential in a number of our markets. We anticipate the continued use of leasing incentives as well as increased advertising and aggressive marketing to improve occupancy but we are nudging our top-line expectations up by about 100 basis points and are now guiding to a decline in same-store revenue of 0% to 1% from that of 2009.

We assume that we will gain traction starting in Q3 with regard to some rate push in occupancy so the expected improvement is still somewhat backloaded.

Property operating costs are projected to increase by 2% to 3% including a budgeted 6% increase in property taxes. Accordingly, we are revising to an anticipated decline of 2% to 3% in same-store net operating income for 2010. We have curtailed our three-year, $150 million program of expanding and enhancing our existing properties but we do plan to expend up to $20 million under the revised program. We have also set aside $12 million to provide for recurring capitalized expenditures including roofing, painting, paving, and office renovations.

We continue to selectively evaluate acquisition opportunities but at present have no properties under contract and expect to remain prudent while the capital and real estate markets remain unstable. As noted earlier, we have sold two properties this year and expect to sell eight more in the coming weeks. The effect of these dispositions had not been included in previous guidance and because we don't have a home for the $25 million of expected proceeds the transactions will be, at least for the short term, dilutive.

G&A expenses are expected to increase by 2% to 3% this year, primarily because we have plans to expand our web-based marketing programs. At March 31, 2009, all of our debt is either fixed rate or covered by rate swap contracts that essentially fix the rate. Subsequent borrowings that may occur will be pursuant to our line of credit agreement at a floating rate of LIBOR plus 1.375.

At March 31, 2010, we had 27.6 million shares of common stock outstanding and 385,000 OP units outstanding.

So as a result of the above assumptions, especially considering an expected modest uptick in operating results and offsetting dilution from the sale of the 10 properties, we are revising our forecast of expected funds from operations for full-year 2010 to be approximately $2.44 to $2.48 per share and to be between $0.60 and $0.62 for the second quarter of 2010.

At this point, Ken, I will turn things back to you.

Thanks, Dave. Before we begin our question-and-answer period I would just like to take a moment to offer a little perspective.

Dave mentioned that after the first quarter we are a little bit more optimistic and though our results and the results of many REITs reporting thus far this quarter show encouraging signs we do continue to play in choppy waters. Our same-store sales they are still negative and it's a very competitive landscape. In our markets about 75% to 80% of our competition they are mom-and-pops and a lot of them are running scared and they are competing primarily on price. And it makes it all that much tougher.

Many of our stores won some victories this past quarter showing NOI growth over last year but we still have more work to do to improve operations in other large markets especially Florida, Houston, Phoenix, and parts of Dallas. We are about three weeks into the busy season. The next three to five months will tell how strong any recovery may be. In the meantime we are sharing with you our best information and judgment in an attempt to give some view into where our industry and our company are going.

Whichever direction the economy, the real estate industry, and capital markets may take I will say this, our stores, our people, our systems, and our company are well suited to grow and to prosper.

Now I will get off my soapbox and we would be pleased to answer any questions you guys might have out there for us. Rob?

(Operator Instructions) Christine McElroy, UBS.

Good morning. Just looking for a bit more color on rents. Can you quantify the change in street rates year-over-year in Q1 and in April? And by how much and how often are you currently raising rents on existing customers? You made a comment earlier in your prepared remarks.

The street rates were pretty much -- boy, it's all over the market. I think overall we raised our street rates in probably about half the markets. The overall impact, given that the concessions were about the same, only $200,000 different from Q1 of 2009 versus Q1 of 2010, and the rent per occupied square foot actually declined about $0.09, so it declined 10 basis points, I guess that would be pretty much a function of our asking rates across the pool.

But it varied from some significant decreases in Florida and Phoenix and some pretty nice bumps in the Northeast, New England, and the mid-Atlantic region. So rates overall are holding but it's very market specific.

Christie, regarding in-place rates, our practice generally is not to increase rates on people who have been with us for less than a year. We did selectively increase rates of those people who would be eligible, around 25% to 30% of those, and the rate increase for those people was around 4.5% to 5%. And, fortunately, as I mentioned earlier, too, was very little pushback on those.

Do you typically do that at a certain point in the year or should we expect more of that throughout the busy season?

During the busy season as we get to unit sizes that are relatively full or high occupancy we will be applying rate increases for those people in place, yes, throughout the year.

Sorry if I missed this, can you provide some specifics on move ins and move outs year-over-year in Q1 and April?

Well, I can tell you this, the move ins -- [let's say] the pace of move outs versus move ins is slowing down. In other words, there are -- move outs are still greater than move ins but the rate has gone down the last several quarters. But as far as the specifics, I don't have that with me right here.

I know April we had a smaller net than we expected. We were positive about 280.

Something like that, yes. (multiple speakers) And the key, this is important, if you take out Florida and the Houston market -- I mean you can't do that but we are seeing some victories in various, in a lot of our markets. You take those out we have a positive stream.

So as I mentioned earlier we have got a lot of little victories in some of the smaller markets, if you will, but we have got to work with Florida very much. When that starts turning around we will feel a lot more comfortable with the future prognostication.

So in terms of what is driving occupancy nearer term it's really fewer move outs, but at what point do you expect move ins to start really increasing? Is that more of a 2011 story? What needs to change in terms of overall demand for storage in your view for that to occur?

Well, let's take a look at Florida in our case. The housing market is huge. If you don't have construction going on, if you don't have people moving, if people aren't moving they don't have a need for storage to a great extent down there.

Also the construction industry, you have a lot of small contractors who have a use, a need for self storage. The housing industry is suffering; they are either out of business, there is no need for us. So I think that is a big part of what is going on. I think the housing industry is key to us and we are seeing that down in Florida.

Having said that we have a lot of markets that, as you saw in our press release, about 12 or 14 markets were positive same-store numbers. So it seems to be creeping slowly. We still have this big bear that we have got to take care of down in Florida.

Okay. Then just lastly on acquisitions, I know that they are not in guidance at all but would you say that acquisitions are a real possibility for this year and are you bidding on anything now? Then with regard to your dispositions why is this a good time to sell but not to buy?

I will take the second half first. The dispositions, it is counterintuitive to be selling at a time when -- we are not thrilled about the cap rates. We averaged overall just about an 8.5 cap on those eight stores that we sold that we are in contract on. But piece by piece they are markets that pretty much we identified a couple of years ago as wanting to get out of. They are smaller; they don't necessarily fit with our management footprint.

But for example, the North Carolina stores, Jacksonville, North Carolina, we sold those at a bit over an 8.5 cap but the occupancy level on those three stores because they are so heavily military weighted is right around 90%. That is -- we have owned these stores for quite a number of years. That is the all-time high for this set of properties so let's get out while -- we are not thrilled with the cap rate, but the NOI is probably never going to be any better so let's go on that one.

Macon, Augusta, were just four stores that have probably matured in our eyes. We had the opportunity to perhaps pick up some other stores in that area of Georgia but weren't thrilled with the prospect of either the properties that were available or the overall market so we said, okay, time to go there.

Christiansburg and Danville, Virginia, is just not a good place for us to be. It's a bit removed from -- we are pretty heavily concentrated in Eastern Virginia. These, again, are out of the footprint and the markets are smaller. So a variety of factors went into the fact that two years ago we said these are markets we should be getting out of.

And despite the headwinds there was enough positive going on. We are selling to mostly smaller local folks. There is one private REIT that is buying a couple of these as well. But the financing is there for them, the NOIs were strong enough to tempt us to go. So that is why we are exiting those. It seems like a counterintuitive time to prune but it's working out pretty well.

As far as acquisitions go, there is a bunch of stuff. There is a lot more this quarter even than there was all last year and it varies by quality and quantity. There is several packages of notes, banks looking to move distressed properties.

We have looked at those, we have bid on some of those. We are not thrilled with the idea of taking notes instead of deeds so we have been very, very conservative in our bidding and have not won any of those. And we are probably not too sad about that.

There is some very nice properties that are available for sale. We saw one from the big guy in our industry that bought some real nice properties. The cap rate is no bargain but the stores are good. There is a bunch of other stores that are out there similarly priced. Good stores, quality markets are probably in the low to mid 7 caps.

There is a lot of stuff out there that is in the 8.5 to 9.5 range, probably we won't be bidding on. I am not sure many of our public company peers will be either. A lot of that stuff was built and even in good times maybe shouldn't have been built. Right now they are in the 20% to 40% occupied level and may have a hard time breaking out of that range. So there is going to be some real pain I think and probably you will not see the public companies bailing those people out.

I don't know if we are going to actually -- we haven't forecasted any acquisitions. We don't have anything under contract. We are looking at a lot; there is a lot out there but it's no bargain.

So you have been losing out on the low 7 cap stuff?

I wouldn't say we have been losing out. There is one -- really there is only one transaction that I can point to. There is stuff for sale that nobody has been bidding on but the big one we didn't necessarily lose out on. We didn't bid but we saw that is what it went for.

Got you. Thank you.

Todd Thomas, KeyBanc Capital Markets.

I am on with Jordan Sadler as well. Real quick, do you have a same-store occupancy update through the end of April?

It moved about 30 basis points positive, just a little bit. We didn't have necessarily a very strong April. The phones have been busy, the activity has been busy, the move ins have been to the plus but it's about 30 basis points higher.

30 basis points higher year-over-year or 30 basis points higher from the quarterly average?

From actually March.

From the end of March?

Right, and I think that put it right on par with last year.

Okay. Then with regard to the change in guidance, I was wondering if you can break out some of the pieces so that we can get a sense of how much is attributable to asset sales now that that is included in the guidance and then the change in the core and so forth?

Sure. We figured we are going to put the $25 million to work at about nothing, unfortunately. We are not going to have -- we don't have any debt to pay down that we can pay down so this is going to sit on our balance sheet until we can find acquisitions to make work.

Assuming a mid-second quarter close average for all 10 properties it will probably dilute us about $0.05 per share for the balance of the year if we don't put it to work. So that is what we factored in there. The NOI growth picked up about $0.07 altogether. If you take that 1% at the midpoint NOI growth, we are looking for operations to contribute $0.07 and dilution to knock off a little under $0.05.

Okay, that is helpful.

It's Jordan here. I just wanted to go through the movements, follow-up on Christie's question. The 12 or 14 markets you show positive same-store NOI are you seeing positive move ins? Are move ins trumping move outs in those markets?

In some we are, yes. I can't say that all 12 were the case and I don't have that information directly in front of me but, yes, some of them there were more move ins than move outs.

You are certainly starting to see demand percolate a little bit in some of these markets that are bouncing back.

Yes, as Dave mentioned, we are getting a lot of action, a lot of calls, a lot of inquiries on our website. But people are still very cost conscious and concessions are still the rule even though we saw a little moderation this last quarter.

And then, Dave, just on the underwriting some of the lower cap rate assets are not necessarily attractive but if I look back through history you guys seem to be comfortable buying in the 8s, even let's say three, four years ago those would have been good numbers.

What is NOI off on those properties peak to trough and how does that factor into your underwriting?

I think that that is the issue with the sellers holding to a pretty aggressive cap rate is the fact that their NOIs are suppressed. The opposite of what we did in Jacksonville, North Carolina, for example. We saw a peak and that is why we looked to sell those properties.

A lot of the potential sellers that are out there really think they are in the trough and it may take a halfway decent busy season and allowing prospective purchasers to price on that trend of a decent second and third quarter before these guys are going to feel comfortable coming off of a low 7 for their quality properties. I think that has as much of an impact as anything.

Most sellers of good properties are not in trouble with their maturity need, their debt maturity needs so they are sitting there saying, why sell now? I come off the toughest year I have had in five years, why would I want to sell off this NOI stream? And I think it's going to take a little bit of movement to get cap rates to move a little bit north with just these people feeling a little more comfortable.

I think they have numbers in mind for their property and you play with the NOI and the cap rates and it doesn't come out to that right now. We are really seeing a tough nudge for quality properties in good markets. I don't see a lot of activity taking place anywhere private or public for the quality properties. You see a lot of the other stuff being offered but I just don't see that.

And where do you see -- forgetting about cap rates for a second, where do you see the pricing relative to replacement cost of the quality?

Oh, it's high. Our business has always been higher than replacement cost for decent properties because the rent roll stream is so important. So we are still there. You get sort of flooded with all the opportunistic stuff that is really pretty junky but filtering all that out and looking at good stuff, good markets you are still above replacement costs.

Replacement costs being in most of those markets in the $80 to $90 range I think and the asking price is north of that a little bit.

Okay, thank you.

Michael Salinsky, RBC Capital Markets.

A quick question just focusing on operations, have you seen any ability to dial back on concessions at this point?

Well, I think as we mentioned earlier they were a little bit less, about $200,000 less this past quarter than the quarter before. It was interesting though, as Dave mentioned, we did it more frequently. So what we are doing is giving away a little less but more often.

People are maybe a little less sensitive in some areas but we are still going to be as aggressive as we need to until we get to the point where we have the occupancy that enables us to be a little bit -- give us a little bit more pricing power.

Okay. You talked about move ins and move outs. Just curious as to what you are seeing with regards to overall traffic maybe at the Internet as well as at the property level. Is your closing ratio down or are you just not seeing the traffic coming in the door at this point?

We are seeing a lot of inquiries on the web, a lot more than we had before. We have improved our web positioning and the people have to be getting access to it, but that brings in a lot more shoppers so our close rate on the website is down. A lot of times what people will do is they will go on several times looking to see -- check on this week and the following week to see if there is a deal. So the close rate is definitely down on the website.

As far as our own conversion rate though it's up because those are people who have really decided they want to rent. They are calling us and we are able to close those. So it's a mixed bag. We are pleased that we are getting more exposure with the website but the closing rate is nowhere near what it is with our phone calls.

Okay, that is helpful. Third, on the dispositions, the one that is under contract, can you kind of give us a sense of how that, what the terms are from a pricing standpoint?

The eight stores as a pool, and it is pretty much the one buyer, it averages -- they allocated for their reasons internally, but our overall is just at an 8.5 cap as I mentioned. It's about $22 million in proceeds; there is no debt so all the cash flows to our bank account. It's an 8.5 cap on the last six months of the year, last six months of 2009 annualized.

Okay, that is helpful. And finally going to back to Jordan's question maybe looking at it a little differently, when you are looking at underwriting a new investment today what kind of growth rates are you kind of assuming as you look out to the recovery over the next couple of years? Or what kind of IRR are you underwriting to just in terms of investments there? How does that compare to the last cycle?

I think this time we are -- I think [maybe] this is what Jordan asked and if you are still on Jordan, I apologize, because I think I missed what you said. Mike clarified it here for me. I think we are looking now -- the last year and prospectively I think we will be looking at things, quality properties in the upper 70%s to the mid-80%s range of occupancy right now. So part of what we will be buying is the upside potential for those stores to pick up 300 or 400 basis points in occupancy.

Typically when we buy we look at a store, [we say, all right], if we put our systems in, if we put our marketing in and our management, we can typically a year later look back and say that we have improved the yield by 100 to 125 basis points without budging occupancy. We don't factor that in. We just say systems and improvements we should be able to get another 100 to 125 basis points yield on it.

Now we are looking at it with that still in place, still have our efficiencies of scale contributing to the yield but also to some top-line potential as the recovery comes. Now we are having a tough time saying that because we can't improve our own stores if we are sitting here saying that our same-store pool is only going to grow by zero at best. It's hard to forecast that.

But if you look at a track record of a property, if you are in a market that strong, we can reasonably now take over a three-year horizon, 125 basis points first year and then perhaps another 300 to 400 basis points over and above what normally might raise as a result of rent raises. So we are looking even at mature properties, stabilized properties as more opportunistic right now.

That is why the 7.5 cap doesn't necessarily scare us at all. It's just that we want to make sure that the owner isn't already pricing in an 85% or 86% occupancy and asking for a 7.25 cap, which is then pretty much the case in a lot of the properties we have looked at.

We don't really look at IRR, Mike. We pretty much look to buy and hold, so we are looking just at a three- and a five-year growth plan after we take over the property.

Okay. So it sounds like the first year is up 125, 150 basis points then you are -- did you say you are looking for 3% to 4% growth then? I am trying to make sure I understand the numbers.

I am sorry, no; 300% to 400% (sic) increase in occupancy over and above the normal 3% to 4% that we might typically look to get in rate increases and such. So typically over history we have been looking to grow our properties at a rate of 3% to 5% per year, even though it might be mature in our pool.

Now as we are looking at the acquisition we are looking at 125 basis points first year, 300 to 400 basis points because of occupancy gains the next couple years along with normal growth of 3% to 4%.

Okay, that makes sense. Thanks, guys.

Michael Bilerman, Citigroup.

Good morning. It's [Mark Montana] in here with Michael and [Eric]. Just getting back to the rate increases, when were those passed-through in the quarter?

They were passed throughout -- I think we started at the end of January and just did it selectively. Actually it was I can't even say geographically where, because it was throughout the country wherever we had people in place for about a year or so and spaces that had high occupancy we put in the rate increases. But it was almost spread out throughout the quarter.

Thanks. And then Houston is that still due to difficult year-over-year comps or is there something else that has changed sequentially?

No, that is it. It's very interesting, southern Houston is the one that was affected by the hurricane back in 2008 and that is a tough comp. Actually north central and northern Houston we are doing fine. We have pretty good ins and outs, the revenues are fine. It's really isolated to that area.

Our expectation is as the year goes on Houston should probably come back to where it's a reasonably profitable market for us.

Okay, thank you. Then on the property improvement program, what are the returns you are targeting and the length of lease that you are pro forma-ing the lease-up in your estimates?

For the last three years we have been able to go ahead and pretty much build a standard-sized building, either 10,000 or two 10,000 square foot buildings that are climate controlled, air-conditioned -- humidity controlled, all the bells and whistles. It takes us about five or six months to put that in place once we have the permits and the zoning lined up.

We look for about a 12% yield cash on cash after a 12-month lease-up period. The 12% yield seems a little high but if you factor in the fact that we, for the most part, own the land already and the operating costs associated with this on an incremental basis are pretty negligible. We are only talking about a little bit more in property taxes and a little bit more in insurance so that basically most of the top line drops right to the bottom.

So we expect a lease-up period of a year after we have handed the keys over to the manager and we expect 12% return at the 12-month mark.

Okay. The return dynamics on these assets that you are improving seems much better than what you are seeing in the acquisition market. Are you looking to expand this program?

Well, we put the brakes on this time or actually right at the beginning of last year, beginning of 2009 because we were building space in markets that were receding away from us. But we -- as I mentioned, premium space sells almost in any market in any time right now.

So we shut it down completely. It was a three-year $50 million per year program. We put our foot in the water this year with $20 million. I think we will do that and be on the lookout as each market improves a little bit.

So, yes, the opportunity a year and a half ago was there to do $150 million of this stuff. We really got kind of cautious with the pullback but I think $20 million will grow pretty significantly over the next year or two.

Okay, great. Thank you.

Mark Lutenski, BMO Capital Markets.

Just a follow-up on the expansion projects. Is there any regional concentration to those or are they scattered throughout your portfolio?

Pretty scattered. Not necessarily weighted the same way our portfolio is, although there are two in Florida of the 21 projects we have. But for the most part it's pretty scattered. I would say the biggest concentration is in New England and the Mid-Atlantic right now but there is a bunch in the queue after this program that we will add on to. So it's all over.

Okay. At this point do you think that discount has sort of become an expectation for self-storage users?

Unfortunately, I think that is true. It's going to take a while before we can perhaps begin to wean prospective customers from that. It's going to have to come to some extent once the mom-and-pops begin to feel more comfortable with occupancy.

Then they will stop competing primarily on price and hopefully over the next couple of years we get back to where discounting is a little bit more rare than it has been. But I think for the foreseeable future it's with us.

Okay, thank you.

Ki Bin Kim, Macquarie. Excuse me, Mr. Bruce Garrison, your line is live for questions.

David, it's Bruce Garrison. Here locally in Houston the Uncle Bob's site has been on TV all week in conjunction with a police incident. I was just wondering is that type of publicity a plus or a minus to the Uncle Bob's franchise here.

Well, I am not sure whether it is a plus or minus but we did what we thought was the right thing to do based on legal advice. The surveillance cameras saw, witnessed an arrest and we submitted the tapes to the proper authorities.

We didn't do it for publicity one way or the other and I guess the chips will fall where they may. But we did what we thought was right under the circumstances.

I concur. I thought it was the right move. Anyway it was an off-the-wall question. Thanks a lot, Ken.

Okay. Thanks, Bruce.

Ki Bin Kim, Macquarie.

Thank you. Apologize if you guys already answered this, but in regards to your new hire, David Paolini, how much more investment are you going to make in your infrastructure and your pricing systems and what impact would he have in terms of maybe changing your thinking on how to price rate increases going forward?

I will take care of the second question first. Dave has been with us for about 25 years and knows our industry, knows our company very well. He has really been involved in the development of the rate revenue management system from its start, has worked jointly with our regional vice presidents to put it together.

We just thought it was time that he head that department and spend 100% of his time not building the system but refining it. We have got a really good system. It has worked very well for us. We think it can only get better with Dave's leadership.

As far as additional investment in the program, we will make whatever investments we need to as far as technology is concerned. Dave is looking at various things that maybe make us a little bit more efficient and effective, but we will monitor that. At this point we don't have any significant plans for any significant expenditures there.

All right. Thank you, guys.

There are no further questions at this time.

Thank you everybody for your interest in our company. We appreciate the questions and the concerns and we will look forward to speaking to you next quarter. Have a good summer.

So long.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.