Life Storage Inc (LSI) 2012 Q2 法說會逐字稿

Greetings and welcome to the Sovran Self Storage second quarter 2012 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, Ms. Diane Piegza, Vice President of Corporate Communications. Thank you, Ms. Piegza, you may begin.

Thank you, Jessy, and good morning. Welcome to our second quarter conference call. Leading today's call will be David Rogers, our Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Ed Killeen, Executive Vice President of Real Estate Management; and Paul Powell, Executive Vice President of Real Estate Investment.

Each of you should have received a copy of our earnings release last evening. If you did not and you wish to be added to our distribution list, please email invest@sovranss.com.

As a reminder, the following discussion and answers to your questions contain 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 directly.

Before I turn the call over to Dave, I'd also like to remind everyone that our Analyst and Investor Day is scheduled for Thursday, October 4. If you'd like to attend, please contact me directly or register using the link provided in the invitation you received.

At this time, I'd like to turn the call over to Dave Rogers.

Thank you, Diane. Good morning, everyone, and welcome to our call. Q2 turned out to be a really nice quarter for us. We continue to grow occupancy. Our right-sized pricing structure is maximizing rates and minimizing discounts. Costs are well under control and our recent acquisitions are performing even better than expected. The investments we're making in our systems and technology, rev marketing, revenue management and the customer care center are giving our folks in the field the tools to sell our spaces and service our customers in an outstanding way. I'll let Andy provide the details on our quarter's operating results in a minute.

We bought some good-looking stores during the quarter. As announced in June, we acquired two large Class A facilities in Chicago and another big one in Miami. Chicago is a place we wanted to be for quite some time and these two stores are great entrees to that market, and the Miami property is a strong addition to our Southeast Florida portfolio. We also added to our Southeast Virginia group with an acquisition in Norfolk and then subsequent to quarter end, we acquired a store in Atlanta and now, we operate 17 stores in that market.

In early July, we sold the remaining four stores we had in Michigan and the one property we had in Eastern Maryland. These are older stores in smaller markets and we sold about 20 such stores over the last three years. We've got another dozen facilities for sale and may look to move on more of these in the coming quarters as part of our ongoing program of pruning markets and recycling capital.

Our expansion and enhancement work is continuing as planned. We are adding premium climate-controlled modernized spaces at about 30 of our stores this year. The third-party management program is active. We're getting a lot of calls and inquiries. We are finding that quality operators don't yet feel the need to make the move and pay the fees, but that many of the owners who want our services own properties that maybe wouldn't be a good fit for us due to either market quality, the condition of the facility, the financial wherewithal of the owner and so on.

We brand our third-party managed stores with our Uncle Bob's flag. So we want to make sure we're contracting with owners whose stores we can be proud of. Just a couple observations on the industry. In our case, 23 of 24 states had positive NOI this Q2 over last year's 2Q. And it seems as if our peers are enjoying similar success. So the strength of the sector is extremely broad based.

Given what we see from due diligence performed on potential acquisitions and management contracts from industry data and from our conversations at industry conventions and trade shows, we think many operators are showing improvement over last year as well. So we've been saying for the past few quarters that most of the same-store gains shown by the large operators have been the result of taking market share. I think we are pretty convinced now that that's only part of the story. We are also taking a big piece of the pie, but the pie is getting bigger.

On the other front, new developments are not unheard of and are still rare. I think the few instances where we see shovels going into the ground is by developers who cashed out big and are starting over again. It still takes a real good chunk of equity and to be a proven operator. And it really isn't very prevalent at all.

So overall, we are in a good place. Demand is strong, our systems are working, costs are manageable, and new competition is constrained. We do have some tough comp story that's coming up and the macro picture kind of trumps everything, but we feel good about our Company and our business for the coming quarters and into next year.

Okay, Andy. I've saved the numbers for the analysis for you.

Thanks, Dave. Regarding operations, total revenues increased $8.6 million, a 17.2% increase over 2011 second quarter. And property operating expenses increased by about $1.7 million, resulting in an overall NOI increase of 21.3%. These total Company results reflect the impact of the 29 stores we acquired in 2011, the four stores we acquired in 2Q of 2012, the one store we opened in Richmond about three years ago, and the increase in same-store NOI I'll get to in a minute.

The net operating income does not include the one Maryland and four Michigan stores we sold in July of 2012, as these have been shown on a separate line as discontinued operations. The same-store results include 345 of our 379 Company-owned stores. We provided some additional detail in the press release regarding our same-store revenues and expense components, but I'll provide some highlights.

Same-store revenues increased by 5.1% over those of the second quarter of 2011. This was primarily the result of a 580 basis point increase in average occupancy driven by a 17.6% increase in same-store move-ins over Q2 of 2011. We also continue to see significant increase in tenant insurance commissions. Total property operating expenses on a same-store basis decreased by 1.2%, as we realized deductions in yellow page cost and credit card fees.

We also continue to see lower utilities as a result of energy-saving initiatives and reduced rates. We expect one more quarter of reduced credit card fees as compared to the prior year since the legislation that lower those fees was effected October 1, 2011. Property taxes, insurance and personnel costs increased modestly as we expected. Overall then, with same-store revenues coming in a plus 5.1% and same-store expenses decreasing by 1.2%. Same-store NOI improved 8.6% over that of 2011 second quarter.

G&A costs were $2 million higher this quarter over that of last year. Aside from the $497,000 increase in Internet advertising, the main reason for the increase is the fact that we operated 33 more Company-owned stores, and 42 more joint venture and third-party managed stores this second quarter than during last year's second quarter. Offsetting this overhead cost is an increase of almost $500,000 in third-party management fees during this quarter.

Regarding properties, Dave mentioned the four stores we purchased during the quarter for approximately $43 million and the one store we purchased in July for $8.5 million. These purchases were funded by proceeds from our ATM issuance, operating cash flow and a $7 million draw on our line of credit.

In addition to the acquisition activity, we continue to look at pruning some of our mature properties from our portfolio. And in July, we sold four stores in Michigan and one store in Salisbury, Maryland for approximately $14 million. We will record a gain from these sales in the third quarter of approximately $2 million.

We currently have 12 additional stores [in our market]. We had interested buyers but nothing is certain at this time. Should we sell any stores, the proceeds will be used to reduce our line of credit balance, as virtually all of our assets are unencumbered by secured debt.

From a balance sheet perspective, we continue to maintain a conservative and flexible strategy by staggering our debt maturities, keeping our assets almost entirely unencumbered, and limiting floating interest rate exposure. At June 30, we had $7.5 million of cash on hand and $105 million available on our line of credit, plus an accordion feature to have another $75 million to our capacity.

During the quarter, we issued 386,000 common shares at an average price of approximately $50 under our previously announced at-the-market program, resulting in net proceeds of $19.2 million. There's $58 million available for future issuance under this ATM. As I noted, we have plenty of capacity in our line of credit to fund acquisitions, but we may use the ATM to fund a portion of the acquisition to maintain a comfortable debt ratio.

With regard to guidance, we remain optimistic concerning demand and pricing in most of our markets. We expect to realize significant benefit from our revenue management platform this year and we'll augment it with more advertising and marketing programs to continue to improve revenue.

We expect an increase in same-store revenues of 4.5% to 5% over that of 2011, driven primarily by occupancy. Property operating costs are projected to increase by 0% to 2%, including a 4% increase in property taxes. We are projecting same-store NOI from our 345 same-store [accruals] to come in at between 6% and 7% ahead of 2011 levels.

Core G&A expenses are projected at $30 million to $31 million for 2012. We've not assumed any additional purchases or sales of properties in our guidance, but we have considered the five stores we sold in July and the acquisitions we've closed to date. As a result of the above assumptions, we're increasing guidance and are forecasting funds from operations for the full-year 2012 at between $3.15 to $3.19 per share and between $0.81 and $0.83 per share for the third quarter of 2012.

With that, I'll turn the call back to Dave.

All right, Andy. Thank you. Jessy, we're ready to take questions if you want to open up the queue.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Christy McElroy, UBS.

Hi. Good morning, everyone.

Hi, Christy.

Good morning, Christy.

I just wanted to talk about the realized rent per occupied square foot, which is down about 3% year-over-year. I realize there's a cost to such an impressive increase in occupancy in the quarter. But given all the moving parts, I just wanted to flush out a bit what's happening with the rents to get a better sense for where you go from here. What was the year-over-year delta industry rents at the end of the quarter and how much were you pushing existing customer rents in Q2?

And then, sort of the third component, how much of that 3% decline in the rents you collected do you think was attributable to the upfront discounting? I mean I know that discounting was down year-over-year, but it's sort of a one-time hit and you talked about how -- you talked about in the past how the customers you're attracting are staying longer. You would think that you had all these move-ins in Q2, a portion of them got free rent or a discount. But then, as they sail through Q3, they'll be paying that full rent, so the realized rents were sort of [dinged] in Q2 but should bounce back in Q3. So you'll have the occupancy, but the year-over-year comp in realized rents shouldn't be as negative. Am I thinking about that in the right way?

Hi, Christy. This is Andy. I'll answer that in a few different pieces. As of June, rents still -- asking rents were still down a little less than 1% over last year. So we've really closed that gap. It was 5% April, 3% May, a little less than -- about 1% in June. So the rates are coming back around, but we still have those customers that we've moved in in the last six months to eight months that are -- were moved in below what they're paying -- what we were charging a year ago. So we still have that to deal with.

Regarding in-place customers, we've pushed in-place increases of 5% of our customers in the quarter. We're still hesitant to push. Our data show that this is not a zero price elastic market. These people are going to move out when we push rate. So the average rate we pushed was 5.5%, but we only pushed it on 5% of our customers.

With regard to the discounting, I don't know if we got your question there with the incentives, I mean, right. Christy, in regards to concessions, the overall concessions are up slightly over 2Q last year, but that's given an increase of 6,600 plus move-ins or just over 17%. 70% of our customers received a concession of some kind during second quarter, both last year and this year, but the average concession this year is only 71% of a single month's rent versus 86% last year of a single month rent and that's roughly about an 18% reduction. So while we still use concessions to attract in-place customers to come store with us, we are down in the value of that concession and I think that's the critical component; it's still there, we need to drive business. It's certainly in place with customers at the customer care level and online, but the value of that concession is down.

Okay. I mean of the 44,000 move-ins you saw in the quarter, how did that traffic actually break out between sort of April, May, June? And I guess what I'm sort of getting at is that it seems like with such a big jump in move-ins in the quarter that the kind of real economic impact of those move-ins will be felt more in Q3, given the discounting that you do.

Hi, Christy, this is Andy again. The move-ins were pretty -- that 17% was spread pretty evenly over April, May, and June.

Okay. Just lastly, with regard to capital raising, given your acquisition activity, is now sort of an opportune time to do a bond deal to shore up the credit line, or are you planning more asset sales?

We do have some asset sales that we are planning and I don't think it's time to go and we love the rates in the public market now, but we like our debt ratios, we like where we're at. We like the use of the ATM to match fund acquisitions. So I don't think this year, you would see a debt offering. Next year, we have probably some debt coming due. Maybe at that time, we'd think about it.

It's sort of constrained a little bit, Christy, in that we've really stretched out our maturities and it's all fixed rate debt that we've either locked in with a hedge or we've -- it's fixed rate and the buyout or the prepays on those are just prohibitive. So what we've got in our [debt back] right now from 2016 to 2021 are pretty much going to be there, because it's so punitive to get out. And other than that, we've only got, what, about $70 million ROI. So it's -- that's the one ticket. It's depending what we do with that in terms of dispositions paying it down and then acquisitions ramping it up, that's the [question], but we don't have a significant amount of debt that we can put into our public offering right at this point.

Okay. Thanks, guys. Sorry for the long-winded question.

Thanks.

Thank you. Gaurav Mehta, Cantor Fitzgerald.

Thank you. Yes. First question on your expense guidance. It came down. So when we think about the expenses in the second half of 2012, what do you think are the biggest risks that could push the expense on the upper end of your guidance?

The biggest risk on the guidance will be the property tax expense. We are budgeting and expecting based on the assessments we are seeing a 4% increase. Now, we are finding the fourth quarter because even if we hit that 4% increase, our fourth quarter property taxes will show a 14% increase because we had quite the benefit if you remember last year fourth quarter.

So our last year fourth quarter property taxes were low. This year, even if we hit the 4%, it's going to show a same-store 14% increase. So that's a little [quirk] in the guidance on the expense side, but that's the biggest risk we see. We see the credit card fees burning off the reduction of the debit card fees and we are already seeing these have pushed some additional fees on. So come 4Q, you're going to see actually credit card fees increase, not to the extent that they decrease, but there will be -- they are finding ways to get back that decrease [and increase the timing from those].

Okay. And secondly, on the G&A, it has been going up for the last couple of years. So when you think about the long-term G&A cost, where do you think it would stabilize?

As we talked about on a couple of the prior calls, our business model has changed a little bit and we are generating an awful lot now in management fees and the margin on the management fees is significantly less than -- it changes our model to the extent that we have now 55 stores on JV contract and another dozen or so on third-party management. So we've got 67 stores to account for with all of the incumbent overhead, accounting reps, IT support supervision, the whole (inaudible). So for those 67 stores that we've added somewhat recently has changed our model and our expenses have gone up. So we're paying more in G&A, the corporate overhead, but we're also generating significantly more management fees. So that's been probably the largest single reason why our G&A has grown pretty significantly from 2010 to 2012. That, plus the fact that we've added about 45 stores of our own since the end of 2010.

Okay. And lastly, can you talk about your ongoing investment in technology and where you are in the process?

Well, we're really proud of the revenue management system that we've put in since February of last year. So that's about a 16-month investment so far ongoing through the end of 2013. Web marketing has just exploded. I'm going to let Ed talk a little bit about the status of our rev man in a second. But web marketing, we've invested in not only the contract and so forth with the provider but also our internal staff managing with both consultants and our own team here.

We've got a really got a [slick] packages the way we do mobile search and online and that's probably the biggest radical change we made in the last three years and then the ongoing improvement to our customer care center, well, we are able to handle so many calls and now the last three years especially dovetailed with web inquiries that come directly to the call center, those operated are capable of handling both the vocal or the voice over and the Internet [career]. So it's ongoing. We'd love to have you come see it at our Investor Day, but probably the one that you're driving at is the revenue management system. So I'm going to let Ed just take a quick update on that.

Okay. I think if you're looking at the primary drivers of our performance, web marketing, revenue management, customer care center, they're all based in technology and we are -- the greatest change right now is in our revenue management system and web marketing. We've had our customer care center up and running and of course, we've been refining it over the years and we add various platforms, various pieces of technology namely our workforce management system and the customer care center. But in regards to the other two areas where I think they are really happening from a technology standpoint, web marketing, revenue management. We are just doing so much more in web marketing.

We continue to refine all of our online concerns, whether it's unclebobs.com, testing and refining the site, mobile marketing. Mobile search now account for 21% of our site business compared to 13% last year 2Q. And additionally, mobile traffic is up 152% and they'll be at the [FDO] whether it's the sponsor placement, a Google Plus local placement, organic search optimization, they are all very critical components to our online success. And 75% of our unique visits come from these major search engines. And web advertising, the very partnership that we have, that of course drives a lot of traffic to our sites, our content strategies, storage aggregators, online directories and then convergence.

We conduct in-depth behavioral studies and competitor analysis and utilize quite a bit of crowd sourcing to develop and redevelop our web pages to deliver greater conversion rates. So just knowing that, this is all that -- all driven by technology and there is -- we've got quite a group in web marketing and also utilizing some outsource -- or excuse me, outside agencies. We require additional human resources and quite a bit of software to bear out all these campaigns and strategies. So looking at technology, it's web marketing and revenue management and those are two major drivers for our performance right now.

Okay. Thank you. That's all I have.

Thank you. Todd Thomas, KeyBanc Capital Markets.

Hi, good morning. Thanks.

Good morning, Todd.

Good morning. First, can you give us an update on occupancy in July and where that was year-over-year? And then, Andy, I think you mentioned that the trend in asking rents year-over-year went from down 5% in April to down 3% in May to down 1% in June. Did that trend continue into July and where do you think that goes from here?

Good morning, Todd. Yes, it did. Let's talk -- occupancy in July pretty much very similar to last year. We were at 88.5% at the end of July. That very similar we spoke 710 basis points above last year. This was a four Saturday July compared to last year's five Saturday July.

So move-ins were up slightly, move-outs were up slightly, but they weren't double digits like we saw in the second quarter, but it was a very good month considering that the four Saturdays we saw. Regarding rates, at the end of July, we hit last year's. So we're just about even at the end of July with asking rates compared to last July.

Okay. And then, just a follow-up on the rent increases that you're passing through to existing customers. Can you update us on what the strategy or what the plans are heading into the off-peak season here?

The revenue management team drives that, Todd, but we are still very cautious. The data is showing us that people move out. So it's really a customer calculation. They look at every customer and calculate, okay, can we replace this customer with a higher-paying customer, they're more likely to push that customer pretty hard if they can. So it's really -- it's granule, they go right down the customer.

Todd, we put increases primarily in customers paying under current asking rates and only on highly occupied, high demand spaces. But just as Andy was saying, there is a great degree of sensitivity with all customers when there is an increase and we are still finding that there are move outs and we do look at it. It's a very -- there is a calculating risk on each of these customers. We have to take a very close look at what we do with them and regardless of whether a customer is eligible for a rent increase, our rate management intelligence really has to signal to us a high degree of confidence (Audio Gap) that we are going to backfill a new customer in at an increased rate. It does not make sense to put in a rent increase in and to have them pay the same or a risk pain less than depending on what happens with the Street rate where we are at currently. So we are very careful with in place. Our typical churn rate is 6% and our move-out rate on customers that receive rent increases are significantly more than that. Now, sometimes, we like to push them out, but other times, we need to keep them.

Okay, that's helpful. And then, regarding the dispositions, what were the range of expected proceeds look like on the 12 assets that are being marketed? And then, just to clarify whether or not there are any asset sales embedded in guidance?

Yes, there is no asset sales embedded in the guidance. The asking price on those is $35 million, $36 million range.

These (inaudible) that we sold in July, Todd, are embedded in guidance, but anything other than that is still a question. So not in guidance.

Okay. All right. And then, just lastly, Dave, in your opening remarks, you mentioned that some of the recent acquisitions were performing better than expected. I was just wondering what you attribute that to for the recent acquisitions. Is it part of the integration process on the Sovran's platform or the locations, what is that exactly?

We did -- as we talked about, we've brought about 75 properties into the fold since the last week of 2010. So, it's been for us pretty busy, especially after a couple of years delay, and we bought a nice property package in the Carolina that got us soon to write in. We bought a package on our own in Texas. I think, it was 19 stores, that's the one I was primarily referring to. That took off from day one and really went.

The (inaudible) that we bought for the joint venture in February likewise went in very well and then just three months later, it's outperforming what we thought for the JV partner. We had a little hiccup or two with the New Jersey portfolio that we brought in for the JV last August. But that now is pretty much -- we've had to learn that market, I guess, and we did and we feel pretty comfortable now. So, we just had a review of the JV Group and we had our own significant number of properties came in and I think we're probably 20 basis points to 25 basis points ahead on the Texas Group, about 100 basis points ahead of where we thought we'd be with the Carolina Group and the JV stuff likewise is drawn.

All right, great. Thank you.

Thank you. Jana Galan, Bank of America Merrill Lynch.

Thank you. Good morning.

Good morning.

It seemed like last year, you experienced lower demand, but more willingness to accept rent increases during the peak leasing season and this year is the opposite. So I was curious if there is this change of strategy and you're kind of re-calibrating the revenue management to seek more occupancy or is it something more of a change in the customer or just different macro events?

Yes, I don't know if it's -- hi, Jana, it's Andy. I don't know if it's different macro events. It's really, I think our revenue management team is just becoming more sophisticated. The data that we have is really questioning the move-out activity from (inaudible). It's not as simple as if someone gets a rent raise, they move out. There is a time period you have to look at and compare that to the status of those who did not get the rent increase and we have a pretty great calculation methodology that shows us that there is move-outs and we were forcing move-outs when we shouldn't have been, when rates were going down. Now, when rates are going up, things can change. But right now and through the end of June, we still had rates below last year. So we had to be very careful about some of those customers we were going to force out and we'll be replacing those customers with someone who wasn't going to paying as much as the original customer before the rent raise.

Thank you. Very much appreciate all the comments on the revenue management. And then, maybe just a quick question on the dispositions. Are you targeting to exit completely some markets similar to what you did in Michigan or are these just kind of one-off or underperforming stores?

Hi, Jana, this is Paul. Yes, we're going to continue to review our portfolio, but at this time, there are no particular markets that we're looking to exit. It's just it'll depend somewhat on our acquisitions in the markets that we buy in and we may look at those markets and maybe recycle some capital out of that into some newer acquisitions. But at this point, we have nothing designated for disposition except for the 12 stores in Texas that Andy and Dave mentioned.

The reason for those, Jana, is pretty much we bought an awful lot of stores the last two years in Texas and we bought some really nice stuff in Dallas and Houston, and some of it's right in the shadow stuff we've owned for 15 years, 18 years, 20 years. And so, we're basically trading out buying in Class A or B++ and selling C type assets right in the same market, right down to [keep some pace] from the others. So it's pretty much a market upgrade I guess in this case.

Great. Thank you very much.

Thank you. Ki Bin Kim, Macquarie.

Thanks. You've answered a lot of my questions, but given that you've been increasing your asking rates step by step over the past few months, is that basically to find that maybe the occupancy gains you're gaining in your portfolio has less to do with cutting rates versus the competitive set versus improved advertising spend or marketing strategy? I mean what is the bigger lever that's been causing the gain in occupancy, I guess?

It is -- we've been trying to say it's a lot of things. The rev man system looks at a lot of different points. Certainly -- I mean, I got to say, to start it off, we attract a lot more customers every month than we did the month before in terms of our reach, in terms of the web base -- the web marketing we do, and that's how -- we've got a real good way of attracting customers. So that helps a lot but once they're in the call center, once they're in the Internet queue, our pricing has really been not at all just the two button approach, occupancy versus price.

As we've been saying, it's [intended], it's how much that unit, that store in that market is trying out for. So it isn't an overall global strategy. As a matter -- it looks that way. I mean admittedly, you've actually been saying it, Ki Bin, that you guys are really ramping up occupancy and the [data where it is found], we had a great run but remarkably, at the granular level, it's every unit, every store has its own pressure points and price -- the decision that's made through the algorithms and the guys working at the [red man desks] are driving a different decision on every unit for every customer, as just happens to be that by right-sizing the prices starting last February, it's given us a great run in occupancy because we were overpriced. Apparently, it's pretty obvious to us now that we were pretty overpriced back a year ago, February, and then it's -- we've got now enough pressure to bring rates up, but it's [bought] unit-by-unit, store-by-store.

Let me ask a similar question in a different way. So your occupancy is up 700 basis points year-over-year. If you -- it's probably a hard question to answer. But you have to split that between the industry pricing figure like you mentioned in the opening remarks versus you just winning more. How does that 700 basis points break out [usually] in your mind?

I would think from what we can see it in the industry and it's hard to tell because in industry data that they posted includes our data. So as best we can tell, there may be 200 basis points, 300 basis points in the industry and the rest would be based on our web man and web marketing.

Okay. And yes, I know you guys gave July updates on rate and occupancy, the last piece of that puzzle I guess is concessions. What I am seeing is that you guys cutting concessions a lot more in July than you've ever had in your Company's history. I was wondering if you could provide a little more color on that in July concession trends.

Well, I think we'll continue to see a reduction in concessions. I mean over the last several quarters, that has been the trend and based on what our revenue management system looks at in the pricing signals and concessions, we're going to continue to see a reduction there. We're seeing it right now and even going into our low season, I think we'll be able to keep concessions -- I'm sorry, continue to reduce concessions a bit. I don't think you're going to see the same reduction that we've seen over the past eight, 12 months, but they will continue to come down.

All right. And just last quick question, you guys mentioned on your opening remarks that you are looking at deals and you're going to match fund it with some [usage of your] ATM. When I look at your leverage ratio across the REIT sector, I mean it's one of the lowest. You can look at it multiple ways, but probably 30% to market at face value for your assets. With such a low leverage, why even fund it at all with the ATM and you guys have gotten more aggressive with operations, excellent growth, why not balance sheet now?

There are times in the cycle where we've been more leveraged and we like -- we think there's going to be opportunity for acquisitions coming down the pike. So we like to have the dry powder handy. So that's one answer. The other answer is, it's a pretty good time to look at our stock and say, well, maybe we should be issuing some equity at this part, or at least not use the leverage at this rate. So it's a balancing act, we're at probably a lower range of where we've been with leverage. But it's not a bad time to be heavy in the equity camp. So it's just something we look at.

We've always been very conservative in this regard. It serviced well through some of the tough times and I think that's -- we're just trying to give you the best idea of where we sit right now. We don't have any big core portfolios in the harbor, but we have a lot of smaller type transactions. So rather than load up our line and come back at the market next year with a couple hundred million dollars of need that everybody knows we need, we just assumed I think match fund.

Okay. Thank you.

Thank you. Eric Wolfe, Citigroup.

Thanks. Hi, guys. I appreciate your comments on not wanting to force paying customers out by giving them rate increases. But I guess your peers would argue that people are just going to move out anyway because once they don't need storage, they're just going to move. So their strategy has always been to just push renewals 7%, 9% across the board. My question is why don't you think this is the right strategy for Sovran? Do you think that maybe the demand for storage is a bit more price elastic than your peers are letting on?

I can't always speak for the peers. I mean especially, we have peers that are -- their prices are higher than last year. So that's a factor that maybe their willingness to have those move outs and right now, we're not at that position where we want to force those move outs. And our data is pretty clear [about selling] us and the revenue management group has been telling us this for a while and the data just keeps pointing to it that we're [gone a fast] move up. There is -- it's tough to say that this is an industry that is not price sensitive.

Eric, with our typical churn at 6%, as I said earlier, and the move-out for in-place rent increase customers in the teens, while it looks like our peers are experiencing something of this difference, that is what's happening in our world and it's just -- again, it doesn't make sense if Joe Smith is paying us $68, Kathy Jones paying $63 isn't going to help us. It might be a different customer, but we need to have an increase or the same rate for these in-place increases or just it doesn't make sense.

Got you. And can you just remind me? I mean where is the average length of stay right now and how much is that for a change over the last couple of years as you I guess adjusted your strategy a bit?

Eric, I don't have that data right on top of me now. Last quarter, we are up. We finished I believe 11.6 months and I believe we're probably up just a bit beyond that. But it's a very, very small change really.

Okay. Started to hop around a little bit. But for your third-party managed properties, do you take 100% of the tenant insurance commissions there or do they take a piece as well?

No, we take 40%, Eric, just the way we put it on our program usually unless the owner has a [quiz] program. But in any event, we don't take nearly as big a piece as some of the other three [TAM] people do.

Okay. And then, last question, you mentioned that your traffic from your Internet sources was I guess up across the board, as you've refined your marketing strategy. Could you just give us a little bit of, I guess, data on that in terms of I think what kind of traffic you're seeing from those sources? And then also, I think you mentioned that you're crowd sourcing changes to your web applications. I'm just wondering how you're doing that as well.

Well, as far as the crowd sourcing goes, I don't know the ins and outs exactly of how that's done. But we do get a great degree of feedback when we do reach out there and crowd stores. We're getting a great cross-section of feedback from all those the various folks that are involved in the whole crowd sourcing fees. Exactly how that happened, Eric, I really -- I can't say.

When it comes to our web customers versus whether it's walk in or a direct dial to customer care, there is just -- there is so much breakage nowadays in that customer and how they reach us. I mean we're certainly an omnichannel provider of a service and when a customer can reach us by a mobile application with a specific phone number or getting a phone number off the side of one of our moving billboards, the trucks or whether they're online and then they drop off and walk in. It's just -- it's very difficult that -- trying to determine that number has -- it's gotten so cloudy that it's really difficult to determine at this point. We -- our data would suggest that we're well over 50% for those customers that come to us and have touched the web at some point or another.

Okay. That's helpful. Thank you.

Welcome.

Thank you. Paula Poskon, Robert W. Baird.

Thank you and good morning, everyone.

Good morning, Paula.

Good morning.

A housekeeping question for you. For the 12 assets that you're currently marketing for sale, have you already reclassified those as discontinued ops?

No, we have not, Paula. And this is Andy. We have not. There is -- they have gone under contract, but there is too many outs from the potential buyer to do that.

Okay, thank you. And what do you think the spread is in the cap rates between what you're buying and what you're selling at?

Paula, hi, this is Paul. We're buying the assets we bought in the second quarter range from averaged about 7%. The range was 6. -- excuse me, 5.8% to 7.7%. These assets we sold in Michigan and Salisbury, Maryland in the second quarter, or subsequent to the end of the second quarter was about 8.5%, but that included closing costs and some deferred expense totaling about $1 million. So it was about 100 basis points spread there.

Thanks, very much. And then, Dave, you mentioned in your prepared remarks that you're continuing to add climate control features to, I think you said, 30 of your communities this year. Is that correct?

Paula, this is Paul again. Yes. We completed seven stores in the second quarter expansions of premium space at seven stores, about 130,000 square feet. We do have another nine stores under contract to complete in 2012, which should be about another 155,000. Again, just expansions in premium climate control space and we have another 19 stores in evaluation that probably will -- some of those will be put under contract this year to be completed in 2013. But that's the pipeline right now. And we're continually reviewing our portfolio and adding into that pipeline. So that's the statistics for this year.

That's helpful. Thank you very much.

Thank you. There are no additional questions at this time. I would like to turn the floor back over to Dave Rodgers, CEO for closing comments.

Thank you, everybody, for your interest and your time. Enjoy the summer, the rest of it and we'll talk to you in the fall. Take care.

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