Life Storage Inc (LSI) 2011 Q2 法說會逐字稿

Greetings and welcome to the Sovran Self Storage second-quarter 2011 earnings release conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Myszka, President and COO of Sovran Self Storage. Thank you, Mr. Myszka. You may begin.

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

We had an excellent quarter, and we are optimistic this positive trend will continue. Same-store revenues were up by 5.2% over second quarter of last year. Expenses decreased by 0.4%, resulting in an increase of 8.5% in same-store net operating income. Further, for the second consecutive quarter, our FFO per share exceeded consensus estimates.

We acquired one store during the quarter at a cost of $4.2 million, and subsequent to the quarter's end, we acquired three additional stores for $17 million. Further, we closed on 19 more stores on behalf of our joint venture for a purchase price of $164 million. This closing occurred after the end of the second quarter. And we also are currently in negotiations and/or contract to acquire about $129 million of stores in existing markets.

In addition, with an improving business environment, we are continuing our expansion and enhancement program with approximately 530,000 square feet of construction either already underway or to begin before the end of the year.

Regarding operations, we are encouraged by the performance in just about all of our markets, including Florida and Texas. Although occupancy has not increased as much as we would like, with the use of less aggressive specials and discounts, we have attracted better quality customers who stay longer and are better able to absorb rent increases.

In addition, despite continuing the process of assessing substantial rent increases in a large number of current customers, our moveouts were once again down considerably year over year. Overall, as I mentioned earlier, we are optimistic about our ability to continue to grow our business both internally and externally.

And with that, now let me turn the call over to Dave Rogers, our Chief Financial Officer, who will provide some more details of our quarter's activities.

Thanks, Ken. With regard to operations, total revenues increased $3.4 million, a 7.2% increase over 2010's second quarter, and property operating expenses increased by about $250,000 resulting in an overall NOI increase of 10.6%. These total Company results reflect the impact of the store we opened in Richmond a year and a half ago, the seven North Carolina stores we acquired late in 2010, and the increase in same-store NOI we will get to in a minute. Overall weighted average occupancy was 80% for the quarter ended June 30th, and average rent per square foot was $10.56. The overall occupancy rate at the end of the quarter was 80.5%.

Same-store results include 344 of our 353 company-owned stores. As Ken mentioned, same-store revenues increased by 5.2% over those of the second quarter of 2010. This was primarily the result of raising rates to [in-place] customers, slightly higher street rates in some markets, and increasing commissions received on premiums charged for tenant insurance and a decrease in upfront incentives given to new tenants. 61% of our second-quarter move-ins were given incentives this year as opposed to 89% of move-ins last Q2. The average incentive to those 61% of the customers who received them was $90 per instance, which is down from $111 per instance last Q2. Lower incentives to fewer tenants generated revenues of about $2 million this quarter.

Property operating costs on a same-store basis increased by a pretty negligible 80 basis points with modest increases in personnel costs and curb appeal expenses leading the way. These were more than offset by a decrease in our property tax expense. Even though we are accruing taxes at a projected 4% increase this year, we over-accrued last year to such an extent that we have had to record a net benefit in the first three quarters of this year. So overall then with same store revenues coming in at plus 5% and a slight decrease in same-store expenses, same-store net operating income improved 8.5% over that of 2010's second quarter.

G&A costs for the period came in at $6 million, about $1 million higher than those of last year. The main reasons for the increase were higher Internet advertising costs; increased personnel costs, which are primarily due to the rampup required for the 19 JV stores we just put online; and the 28 stores we are in the process of acquiring right now.

With regard to capital matters, we only executed a couple of transactions before June 30. We acquired the limited partners interest in the consolidated Locke Sovran II joint venture at a cost of $17 million. This will eliminate the preferred distribution we paid to those folks in the amount of $1.3 million annually.

We also acquired a property in West Deptford, New Jersey at a cost of $4.2 million, and we put another $4 million to work on our expansion projects. All of these were paid for with cash flow and borrowings on our line of credit.

Subsequent to quarter's end, we funded our portion of the New Jersey joint venture, expanding about $11 million for our 15% equity share. We also acquired three additional properties for our own portfolio, two near Newark, New Jersey and one in St. Louis for a total of $21 million. These were all funded with draws on the line of credit.

At June 30 we had $400 million of unsecured term note debt, $35 million of line debt, and $78 million of mortgage debt outstanding. Except for the draw on the line, all of our debt is either fixed rate or hedged to maturity. At present we have about $8 million in cash on hand and $90 million of credit available on our line. We have got some opportunities coming up on which to deploy this capacity, and I will talk about those shortly. But just now we will take a moment to review a quick summary of our key debt ratios at June 30.

Debt to enterprise value at $39.55 a share is 31.1%, debt to book costs 35.7%, debt to EBITDA ratio 4.9 times, and debt service coverage 3.4 times. We're working with a group of private placement investors and commercial banks to recast our notes that are maturing in late 2011 in the first half of 2012, which is a total of about $225 million. Our goal is to push the maturities on new financing out as far as we can because we feel the environment is a good one in which to be doing this. We are also negotiating a new credit facility.

Regarding guidance, we remain pretty optimistic concerning demand and pricing potential in most of our markets. We anticipate the continued use of leasing incentives, as well as significant advertising and aggressive marketing to improve occupancy. For the remainder of the year, we expect an increase in same-store revenue of 2% to 4% over that of the second half of 2010. Property operating costs are projected to increase by 2% to 3%, including a budgeted 4% increase in property taxes. So accordingly we have anticipated an increase of 2% to 4% in same-store NOI for the balance of the year.

We are putting some $30 million to work this year, expanding and enhancing our existing portfolio, and we have also set aside $12 million total for the year to provide for recurring capitalized expenditures, primarily roofing, painting, paving and office renovations.

We are continuing to evaluate acquisition opportunities and have, as we mentioned, quite a bit in the works. We are not expecting a significant impact to core 2011 FFO as a result of the acquisition activity because most of these closings remaining will be very late 3Q or early 4Q, and some will be of the lease-up variety.

G&A costs are expected to remain at about $21 million for the total year. This could increase significantly if we are successful in acquiring the properties because, if that occurs, we will have to expense the associated third-party acquisition closing costs.

At June 30 we had 27.7 million shares of common stock outstanding and 339,000 OP units outstanding. We are expecting some clutter in our 3Q results, primarily due to some significant acquisition costs, but also because of costs associated with our projected refinancing, including swap breakage fees. The effects of these potential charges are not included in our guidance, but we will provide notice should anything of significance be finalized regarding these transactions between quarters.

So having put that on the table and as a result of the above assumptions, we are forecasting funds from operations for the full year of 2011 of between $2.64 and $2.68 per share and between $0.69 and $0.71 for the third quarter of 2011.

And Ken, with that, I will turn it back to you.

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

(Operator Instructions). Christy McElroy, UBS.

Dave, I just wanted to follow up on some of your opening comments. In looking at the 4% increase that you saw in rent per occupied square foot or net effective rents basically, you talked about improving pricing power but also substantially reducing move-in concessions. What I'm trying to get a sense for is, how much of the increase in rent per occupied foot is a function of the prior concessions burning off versus pushing street rents and in-place rents? And if you could just quantify how much street rates changed year over year, how much they increased year over year, and how much you have been raising rents on existing customers?

Okay. Well, the simple answer on the incentives is it is half. We did about $4 million last year in the second quarter, and this year we did just over $2 million. As I mentioned, we went from 89% hit. 89% of our customers last year received an incentive averaging somewhere in the range of $111. This year 61% of our customers in the second quarter moving in got incentives averaging $90 million -- or $90. So that turned into about -- it dropped our incentives granted from $4 million to $2 million in this quarter.

With regard to the in-place rents, we have been able to push -- I think we pushed about 16% of our portfolio last quarter, about 15% of our portfolio this quarter. It averages a little over about 6%, about 6% all-in so far for that group. So that has been a big part of it.

Street rates on the portfolio are almost -- asking rates are almost even with last year. That is on the total of the 344 same stores. But if you look at the different regions --.

If I may, Christy, there is a huge difference in a lot of our markets. The Northeast, the street rates are up probably 2%, 3% over what they were last year, and our weaker markets they are down a little bit. So, as a result, it is maybe a couple of basis points higher this year -- or this year's quarter than it was last quarter. So it is very market specific.

So, if I look at the 4% increase, if you had not changed concessions, your strategy and concessions, you are saying it would probably be more like 2%?

No, not necessarily because what probably would have happened, we probably would have had a little bit more move-ins. You don't know how much more money you are going to get from there. So it is really an art not a science as far as predicting what would have happened. What we have done is we are managing to raise revenues as opposed to managing rates or occupancy, and we think we have done a good job with respect to that for the last three quarters or so.

Okay. And then just in terms of your occupancy, you had a much more subdued Q1 to Q2 uptick versus historical trends, and obviously that is a function of the reduced concessions. Can you just talk about the year-over-year changes in your move-ins and moveouts in Q2? And with regard to reducing concessions, are you thinking about potentially increasing them again to get occupancy back on an upward path, or are you happy with the way Q2 played out?

Yes, you raised a very good question of what we have been going through. For this entire year, we have been a lot less aggressive in our specials. Our goal has been to attract better quality customers who are going to stay longer and absorb rates -- rate increases better. And just about everybody who has moved in, most of the people moved in this year counter to what happened the last couple of years, they are paying something when they come in.

As a result, we have seen occupancy less than what it normally is, despite the fact we have had strong operating results. So in response to that, what we are doing after we started it last month, in some of our markets in some of our stores, we are offering a little bit more aggressive specials not where we were a couple of years ago, but we began offering that about a month or so ago. In our stronger markets, we are not doing it. And we have already seen since the end of the last quarter an uptick of a little over 1%, 1.5% in our occupancy portfolio-wide. So it is push and pull, but, like I said before, our number one goal is managing to maximize revenues whether through occupancy gains or rate increases.

Just following up on the move-ins and moveouts and maybe getting your comments, it is relevant to maybe look at July as well if you said that there was, in fact, a change in your occupancy.

Yes, as I said, we have seen a change in occupancy of about 1% to almost 1.5% since the end of the second quarter.

What was the year-over-year change in move-ins and the year-over-year change in moveouts?

For the second quarter, our move-ins were down a little over 9%. Our moveouts were down a little over 5%.

And then in July?

I don't have that handy here, but I can get it for you.

Okay. And then just lastly, sorry, in terms of the $129 million of acquisitions that you have under contract, how much debt would you be assuming with those assets, and how would you finance the equity portion? If I am sort of thinking about this right, you had $90 million available on your credit line at the end of the quarter, I believe, and that would have been reduced to about I think $66 million following your equity contribution to the Heitman JV and then other acquisitions in July.

Yes, you do the math well. We are not looking -- we don't have room on our present line. We are negotiating a new line. We will not be assuming any debt with these products. I think there is one very tiny mortgage, but essentially we will not be assuming any debt. But we will be funding this with the proceeds from our new line and new financing package.

Okay. So this is really the driver behind renewing your line early is increasing the capacity?

Yes, part of it. Right.

Any early indications on potential spread?

I don't want to talk about it yet, but we are pretty favorably inclined, and hopefully we will be able to talk about it in the not-too-distant future.

Eric Wolfe, Citi.

I know you guys have given us information in the past about what cap rates you have been buying these assets and portfolios at, but could you give us a sense for the entire $350 million you bought thus far this year? What is the aggregate yield you bought at, and when you think about where you can issue unsecured today, how you think about the accretion we could see over the next couple of years from these acquisitions?

Yes, as we have talked about, you are talking about the whole $350 million. There's a couple of baskets there. I don't think it is really right to talk about the JV portion because that is funded separately and really does not have anything to do with our debt. But that was a sub-7% cap. It was about [6.8%] cap, and we were able to secure secured financing on that portfolio at sub-5%. So that worked out real well in terms of the JV.

In terms of the corporate package, the roughly $180 million or so that we are doing on our own balance sheet this year, the average cap rate will be somewhere just around 7.1%, 7.15%, blending in a couple of opportunistic as well as some of the mature properties. We think we can see 10-year unsecured debt in the mid-5%s. We can see seven-year unsecured debt in the high 4%s. So there is some pretty good spread activity there, especially if we can term it out.

If we do all of it, and we plan to, with debt that pretty much ramps us up pretty good by the end of the year. So we always take a look at our total capital costs, including equity. But if we are just talking about this basket of properties that we are buying this year and the way we are planning the financing of it long-term, there is going to be somewhere in the range of 150 to 200 basis points accretion without moving the needle on the performance of the properties on the going in cap.

And I guess that would bring me to my next question, where do you see that yield going over time? Maybe if you could give us a sense for what percentage of those assets are a little bit more low occupied turnaround assets versus stabilized just so we can get a sense of where that yield might go? Is it going to go to an 8%, 8.5% over the next two years?

Well, the best example we have are the properties we bought the last week of last year, the seven stores in Charlotte and Raleigh, North Carolina, that we bought at about a 5.5% cap. We would hope and expect and we are on track that by the end of 2012, about 24 months after acquisition, we would be at about an 8% cap and still only be at about -- we would be at sub-80% occupancy. So there would still be some more vigorous to get out of that.

Some of the stuff that we are buying this year, the four that we have closed in New Jersey and Missouri, were all in the low 7% cap. A couple of them were very well-run. Those are going to see maybe over the course of the next 18 months by year-end 2012 about 100 to 125 basis point increase primarily because of our marketing. I don't think we had much to squeeze out of there in terms of costs to operating efficiencies.

We are looking to buy some properties in Texas later on this year. Those are a little bit better off in terms of going in cap, 7.4%, 7.45%, let's say. Those have a little bit more potential again to see 150 basis points pop in the next 18 months. That is pretty much our target when we go in to stabilize properties in better markets to get 125 to 150 basis points over the first year and a half.

Great. That is very helpful. And I know you are purchasing all this initially on your line, but I mean how comfortable do you feel with later on terming this out just on security? Do you think you are going to need some equity at some point in time just given what you have announced thus far?

This we can do. If we want to grow into next year or we put much more under than we get to our -- and we have a pretty conservative bias, I guess, as you probably well know. But so this we can do, and if we were to stop here, we would be fine, and we would be comfortable with that. But I think we will be looking towards something if the acquisition pace continues like it has.

David Toti, FBR.

I know you talked a little bit about this in your prepared remarks, but I'm still struggling to reconcile first-half performance with your guidance ranges. It seems to me that the performance in the first half of the year has been quite strong at every line. It would imply that there is either some pretty significant ramp-up in expenses or maybe some tapering in revenues built into the second half. Can you give us any more information to connect those two?

Well, part of it is we have rode this benefit of property taxes for the -- and it was a little choppy because we really did over accrue last year, and quarter by quarter we had high property cap expenses last year, and even though we are accruing 4% this year, it still looks like a benefit. In the fourth quarter, that is not going to happen. If you go back and look, there was a whopping benefit that we got the benefit of in Q4 last year. That will not be there.

Also, we are expecting -- I think we are going to push to get occupancy up a little bit. We are going to try backing off a little bit on incentives, so we will be -- I am sorry, adding to incentives, backing off our aggressiveness. So I think we will see some of that $2 million benefit burn off, especially as we get into late September, early October and then for the balance of the year.

There are some cost pressures, not a lot, but we do see some. So it's a hodgepodge of things, I guess. We do have a tougher fourth-quarter comp for sure. Third quarter is not too bad, but fourth quarter last year we turned it and started going.

And I guess part of it is the fact that we have been doing a lot of things right, and we have not seen the needle move occupancy wise. So that is giving us some pause to just step back and say, well, this quarter was fine, but to stay with the 2% to 4% revenue growth for Q3 and especially Q4 seems to make more sense. So it is a combination of things, and I guess we are blending it altogether on the side of caution a little bit.

Okay. That is very helpful. Were you surprised by the lack of movement in the occupancy level in the quarter? One of your peers that has reported to date posted pretty big occupancy increases. I was just curious as to why we did not see it reflected in your performance as well.

You know, it is really regional. In some parts of the country where we have our stores, we enjoyed some really nice increases in occupancy, and in others it is still not building the way we would like to. So I guess a big part of it is just the economy. We have quite a number of stores, as you know, in Florida in the South and in Texas, which has not grown or recovered as nicely as, say, the Northeast where we don't have the concentration. So we are working now, as we mentioned earlier, to try to rectify that by offering a little bit more aggressive incentives. But it is really a very market-specific industry, and we are working hard to get the occupancy up. But, once again, revenues are what really count.

Okay. That is helpful. And then my last question just has to do with technology. I was wondering if you can update us on any initiatives underway or that you have accomplished in the period relative to the RMS system in particular? I know some of that was started at the beginning of the year.

Yes, we do have a team in place that we brought over, as we announced late last year, David Paolini as head of Revenue Management. We have brought on some pretty sophisticated staff for him. We also are working with a software provider to integrate our quick store and proprietary tracking system with that. So we have taken it to the next level where we are basically building the histories, and some of the algorithms have been put in place. We talked to Dave a bit before the call and obviously ongoing month to month, and his attitude is, well, we can drive occupancy pretty good if we can give it away. And we are real pleased with the way this worked in terms of targeting our in-place customers, looking at the various markets and seeing what kind of pricing we can get. We always knew that this is pretty much a demand and elastic type situation, but he is driving that point over and over.

Now we are just going to refine it, give it seasonality, and going into the somewhat slower leasing season and refining it store by store, market by market.

I might want to add one other thing to it. This may not be technology, but our call center representatives, we have quite a number of them with us for a while. And what we have been working on is what we call customer segmentation where if you have an experienced call representative and they have the proper training, many times they can determine whether a person is going to be willing to absorb a certain price or if they are going to be really price conscious, if they are on their cell phone or mobile device and they are working on it, they are pretty sure the representative is going to be a little less generous with the incentive they are going to be offering. So it is high-tech, as well as the person-to-person contact that we rely upon, to try to generate as much revenue as we can with every customer we are dealing with.

Thank you for the detail.

Todd Thomas, KeyBanc Capital Markets.

I'm on with Jordan Sadler as well. You mentioned that you gained about 1% to 1.5% of occupancy since the end of the quarter. That would put the same-store at about 82% or 82.5%. Can you just tell us where that year-over-year delta is?

Yes, we had a slower July last year. I think we gained 70 basis points from June to July. So we picked up 80, ramped up in July, if that is what you're asking.

Okay, yes. And then just sticking with occupancy, you mentioned that moveouts were down overall, but move-ins were just down a little bit more. I was just wondering if you had any thoughts on the move-in demand, in particular why that was light in the quarter, particularly during the peak leasing season?

Well, I think the simple answer is that unlike the last couple of years where we were very aggressive in our discounts in concessions, we were not this year. And what we're finding is the last couple of years you would offer people big concessions to move in, and many times they would be moving out within three months or so when they had to start making payments.

What is happening now with our discretion as far as trying to get better quality customers, you don't have as many, but those people you get they start paying right away. We know they will be absorbing the rent increases better, and we generate the revenues immediately.

So it is kind of a push and pull, and we do have a little bit lower occupancy as you point out than normal. So, at the beginning of last month, we started offering some concessions at some stores in some markets to try to generate the move-in activity, especially if you take into consideration the slower months in October and November we want to build occupancy for those months.

So, once again, it is managing maximization of revenues and whether it comes with occupancies, rate increases, we are studying those on a case-by-case basis.

Okay. Related to the rent increases that you implemented to existing customers, did you notice any uptick in moveouts related to those?

No. That is what is encouraging. We have got good quality customers in there. What happened in the last couple of years, the economy was as bad as it was, people -- nondiscretionary or discretionary users, they were moving out. Plus, if you try to put in rent increases, people were moving out. We are being -- I think they mentioned we increased about 15% or 16% of our customers at about a 6% rate, and no big backlog or moveout of those people. So we are very encouraged with that.

We think this move -- people are going to be staying a little bit longer than they have before because the people who are with us now they need self storage.

Okay, great. Then just regarding the acquisitions that you are looking to acquire, I guess, before the end of the year, I was just wondering -- I just wanted to confirm that you do expect to acquire those on a wholly-owned basis, and then I was just wondering if you did speak with your partner about those properties as well?

Yes and yes. They basically have -- we did it mainly because they are good partners, so we thought it was only right. But we are very happy to take these on our own, and I think it had more to do with geography perhaps than anything else, that we are in for the most part Texas and the Midwest, a couple of Jersey stores. But while we were buying the joint venture stores, there were others that came along. So we sort of jumped into Jersey with both feet. But yes, and I do think we will do more with this partner but on just specialized assets.

Great. Actually just one last question, what was the occupancy for the Locke Sovran properties that you acquired the remaining partnership interest in this quarter?

They have been consolidated and wholly owned for years now. I don't know what those 27 stores were. Basically that was just a vehicle. We termed them out essentially a long time ago because what we wanted to do was add some improvements to those stores. They did not have the wherewithal to come up with the cash. So we essentially pegged them on a preferred basis back in, jeez, I think, it was 2005 or 2006, and just said, okay, henceforth you will get a straight 8% on your equity.

So we did not really look at the value of the property when we determined this price. We set that priced years ago, and this is sort of like retiring a preferred stock issuance. But I would say that the properties that that venture owned are a couple in Michigan, quite a few in Texas, a few in New England. Actually the core that they contributed were New England. So I would have to believe that it is close to our portfolio average.

Mark Lutenski, BMO Capital Markets.

Sorry if I missed it, did you mention what the occupancy was for the $129 million under contract?

It is just under 80%. I'm sorry -- actually for a 100, a pool it was 110. It is just under 80%. And then there is a couple of more that are in the high 60s. Two of the smaller ones are in the high 60s.

Okay. And you made the comment about the JV acquisitionsfrom the last call that they were very efficiently managed. I'm wondering if you can characterize the assets under contract. Were they also similarly efficiently managed, or do you think you can get a little bit more yield out of those properties?

Yes, we do think there is more to be had in terms of just basic -- these are not necessarily -- they don't have scale on their own like the Jersey stores had scale on their own. These are in several markets, and they are all in markets where we are. So we will be able to join them to our pools in those cities and get scale there.

We also think the other guys had a quasi-call-center. These properties are not part of that. So our call center should add right off the bat a lot to it. And then, of course, the Web presence and Internet advertising should help a lot. So we do expect more pop out of these, indeed. As I mentioned before, some are in the range of 120 to 150 basis points by Q4, the end of Q4 of 2012.

Okay. And just a broader acquisition question, what do you think is the biggest factor in motivating sellers right now? Do you think they are looking to harvest value, or are there more distressed sellers out there?

Yes, there is a lot of distressed sellers out there, but I don't know that they are candidates for -- I think all of the folks that you will be talking to this week and last week have looked at many, many properties, and we have all come to the conclusion that they are pretty hurt. They are not going to go anywhere.

You know what I think we are seeing a lot of is smaller operators who are seeing the future, seeing the fact that they are putting a lot of money into advertising channels that are not working. And I've said this before and we all have, 40% to 45% of your customers come through the door because they know your property, they know where it is, and it has got presence and visibility, and they are going to that store whether you spend $1 million in the phonebook or on the Web or no dollars. That is everybody's jump ball, that 40% to 45%.

The other 55% to 60% have to get to you by some way of looking it up. It used to be the phonebook, and that allowed for a level playing field, big guys, small guys, everybody in between. If you are willing to put up $10,000 or $12,000 for a decent phonebook ad in a decent-sized market, you could have your fair share of the phone calls.

But now that small price of entry has gone away, and now you need to spend in the millions of dollars to get significant Web traffic initiated, and that is where the mom-and-pops are saying, my phone is not ringing like it used to. Why is that? And they are either coming to the big guys for management services or for outright sales.

So I think more and more that may be the biggest driver of the sale of quality properties. Not that the owners are suffering maturity defaults or threat of maturity defaults or distressed properties. I just think they are seeing a bigger tide coming and saying, I have got to do something. My phone is not going to ring unless I get somebody -- unless I join up with somebody or I sell out.

That's helpful. One last question for you. You added three properties to your management platform. I was wondering if you could discuss the marketing effort there and how you have been able to source those agreements?

Well, there is a lot of -- Dave was just saying there is a lot of people, a lot of whom own the stores mom-and-pops, one or two stores, and there is a big market out there for our types of services. The biggest (inaudible) many times is the name change. They own the property, they have this feeling that they built it, and so you have got to convince them that, hey, forget the ego, making more money is more important in the long haul.

But we are finding an awful lot of people interested. In fact, we had a gentleman here just the other day who is interested in quite a number of properties. I have a feeling that over the next three to six months you will hear a lot of contracts that we will be announcing.

Currently we manage about 47 properties both joint venture, as well as this third-party management program. So we think we have laid the groundwork we started in earnest in the first quarter, and I think by the end of the year we will be very pleased with what we have.

Jana Galan, Bank of America/Merrill Lynch.

Thank you for all the detail. I was just following up on that last question. How do you balance the growth of the management business with future acquisitions? How does that conversation go when you are approached by potential sellers or someone wanting to outsource the management portion?

Well, first, I guess from our standpoint, we are only interested in managing properties that we might be interested in owning at some point. But it is not part of the discussion when we are talking to them about possibly utilizing our services. We do believe that there is a good potential for us to acquire those properties perhaps down the road. You establish a relationship. You know the market. You already have your name on the property. So it can be a win-win situation. But it is, as I said, number one we will not manage properties unless it is something we would be proud to have our name on, and it is a discussion hopefully down the line that we would have with the owners when the time is right for them.

If I can just throw in a little quick story, though. Property we have under contract now started with the management group. The management guys brought it in. We were going to operate the store for many other reasons that I mentioned earlier about the owner having concerns about his advertising efforts not working. He wanted to join our chain. We have a number of stores in his market. He typed in self storage for his market, and it came up Uncle Bob's all over the place.

So he came to us, and we worked with him for about three weeks. He came and saw our call center capabilities, revenue management capabilities so on and so forth, and was all set to sign the management contract, thought about it over the weekend with his wife and said, you know what, why don't you guys just make me an offer? So that was a case where the management company brought in day one acquisition. And I think we will see a blend of that.

Michael Salinsky, RBC Capital Markets.

Dave, first question for you. Can you break out tenant reinsurance out of other income for the quarter, the commissions you guys earned, and also can you break out tax expense out of the G&A?

Yes, the tax expense this quarter was $511,000 for the TRS compared to $390,000 second quarter of last year. So there was about $140,000 $0.05 jump there.

With regard to the tenant insurance, overall we had $989,000 of tenant insurance this second quarter versus $589,000 last quarter. So just over $400,000 difference in insurance premiums we collected this second quarter over last year's second quarter.

Okay. That is helpful. Second of all, just in G&A can you break out what the acquisition costs were for the second quarter and also kind of what you are thinking in terms of costs there for the third quarter?

Yes, this second quarter we had only $90,000, so we did not even break it out. It was only $90,000 versus zero last year for the second quarter.

The third quarter is going to be interesting. I don't -- depending on how many we close, but it's pretty significant. There is a lot of them. We have done a lot of work just this month, and we have to have an audit done because we are going to tip ourselves over the top of the 10% level. We are going to buy more than 10% of December 31, 2010, assets this year. So it is going to be significant, but I don't know -- somewhere probably -- I don't want to -- it is going to be a couple of million dollars I'm sure for the $129 million.

Okay. And the nonrecurring fee income next quarter as well related to the joint venture formation?

Nonrecurring no. We started collecting management fees. We closed on it just the other day. So August we will have -- in September we will have some management fees. And also quite a bit -- we don't really do too much, and that is why I did not want to add to our FFO guidance. I did not want to add to our earnings this year because ongoing it's a great revenue stream. It is a nice annuity, but upfront there is a lot of cost that we put into it, getting our people on the ground. We have had people there around the clock, and it takes about three weeks times 19 stores. So whatever fees we earn this year will pretty much be gobbled up, but it sets the stage to have our systems in place for the ongoing life of the venture. But 2011 impact on FFO will be just a little bit north of neutral.

Okay. You added three properties to the management platform. What is the size you want to grow that business to? How much scale can you go -- how much can you add to that without having to add additional people?

Well, we have the platform to accommodate that. For every approximately 20 to 25 stores, we maybe add one call center representative. Once again, for every, say, 20, 22 stores, we add an account rep.

So it is we have the platform. We really don't have a limit, we don't think. It is just people in space that we need. We have -- if you have -- add a significant number of people, you have to add some supervisory staff. But it really does appeal to our size, and we've got a great reputation. We have got a lot of people talking to us. So I see a large number of properties that we will be adding to the platform.

Predictions are very difficult, especially with this economy. We could wind up talking to somebody who's got 20 properties or five people who own two each. It is all over the board. I wish I could give you more guidance on that, though.

I appreciate that. Then can you talk a little -- the occupancy dropped during the quarter. What is the long-term occupancy for the portfolio? I know you acquired some properties in the past that were fairly large, that you never thought were going to get above 80% or 90% occupancy. But I'm just curious as to when you're thinking about long-term strategy, what is the long-term normalized occupancy you guys are targeting?

I think with this portfolio even taking into account some that we bought, we are horrifically overbuilt, and we did not pay for a lot of space that we have anyway. But I think we have talked about this quite a bit here. We have shed some stores last year. We plan to shed a few this year. With that culling of about a total of 30 stores by the time we are done and adding the stuff we are adding, we feel pretty comfortable that this is an 85%, 87% portfolio in relatively good times.

So we are short of that goal, and we have got room to get there and work to get there. But I think that is pretty much the portfolio we had in the early 2000s and we went public, and that is pretty much where this should be. We have got some -- we have added a lot over the last four years of very high quality assets and have shed some of those smaller markets and older stores. And then we are investing in those stores that we think deserve it. So I think this is an 85% to 87% portfolio.

And finally, Dave, just as you're working through the line, working through the term loan, any color you can provide in terms of size, pricing, you know, just to give us kind of -- as you look to the second half of the year, just if you could give a little color around that if you would.

We are in it now. As I promised, you will hear as soon as we close something, but right now it is just -- it is better than we are -- let's put it that way, better and a lot longer than we are and bigger.

Better, a lot longer than we are and bigger? Okay. I will leave it at that. Thank you, guys.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

I just want to thank everybody for their interest in our Company and the good questions you have asked. I look forward to speaking to you three months hence. Have a great fall. Take care.

Thanks, everybody.

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