Life Storage Inc (LSI) 2013 Q2 法說會逐字稿

Greetings and welcome to the Sovran Self Storage second quarter 2013 earnings release conference call. At this time all the participants are in a listen-only mode 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, Diane Piegza, vice president, corporate communications for Sovran Self Storage. Thank you, Ms. Piegza. You may begin.

Thank you, Melissa, and good morning everyone. Welcome to our second quarter 2013 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.

As a reminder, the following discussion and answers to your questions contain forward-looking statements, and Sovran's actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences are included in our Company's SEC filings. Copies of these filings may be obtained by contacting the Company directly or the SEC. At this time I'd like to turn the call over to Dave Rogers.

Thanks, Diane. Good morning, everyone.

This was a good quarter. I'll let Andy give the details on our operating performance, but the big picture is customer queries are up, customer closing rates are up, occupancy is up, in place and asking rates are up, and our top line is up almost 9%. And now that we're pretty deep into the busy season, we've developed a sense for what the two or three quarters will bring and they're looking very good.

We didn't acquire any properties in the quarter but we've been busy on the acquisition front. A couple of bigger portfolios came on the scene recently; one's been sold to a company other than ours and the other one is still in play, and we've been active in both of those transactions.

Aside from that, we have three Class A properties under contract. Two of them are on Long Island, one's in Colorado Springs, Colorado, and they total about $28 million purchase price. Even though these are stabilized stores with occupancies in the low to mid-80s, we see pretty significant upside in all three of them; and pending successful completion of due diligence we're expecting a late third quarter closing. And as is typical, the second half of the year brings more deals to market. And while this is certainly a seller's time we're hoping and expecting to be acquiring more stores in the fourth quarter.

As we reported about a month ago, we completed a successful refinancing in June. With this we've provided for funding of a $100 million note that matures in September, and we got reductions on the rates associated with our bank notes and line of credit. So this takes care of all of our maturities through 2016, and it saves us a little over $4 million a year in interest cost. Our balance sheet is now stronger than ever and we've got plenty of capacity on our line of credit.

In case you missed it, on July 1st we increased our dividend by $0.05 a share, which now puts us at $0.53 per share per quarter. We've increased guidance by almost $0.25 a share since the beginning of the year and we're feeling pretty confident in the strength of our business, so this dividend pop was well-warranted.

And Andy, I'll let you now talk about the details of the quarter.

Thanks, David.

Regarding operations, same-store revenues were strong again, increasing 8.9% over those of the second quarter of 2012. This was our fourth consecutive quarter of 8% or greater same-store revenue growth and a record for Uncle Bob's. The growth was primarily the result of a 380 basis point-increase in average occupancy and a 3.6% increase in rates, as we saw pricing power begin to show up in the rents collected.

Same-store occupancy at June 30th, 2013, was 91%, another record for our company for the month of June. We also continued to see a meaningful 30% increase in tenant insurance income on a year over year basis.

Total property operating expenses on a same-store basis increased a modest 2.4% as a result of expected increases in real estate taxes and insurance. Partially offsetting these increases was the continued decrease in yellow page spending and our control of personnel cost and utilities. As a result of the continued strong revenues gains and controlled expenses, same-store net operating income increased a very nice 12.2%. This was also our fourth consecutive quarter with same-store NOI increases of 10% or more.

G&A costs were $1 million higher this quarter over that of the previous year. Aside from a $300,000 increase in Internet advertising, the main reason for the increase is the fact that we operated 25 more stores at the end of this quarter as compared to April 1st, 2012; also, the continuing investment in our revenue management system and incentive compensation related to our improved results. Offsetting a portion of the overhead cost was an increase of over $190,000 in third-party management fees earned this quarter.

Regarding properties, Dave mentioned the three stores we have under contract for approximately $28 million. On the disposition front we may look to prune a few properties in 2013, although none are under contract or for sale at this time.

From a balance sheet perspective, in June we announced an amendment to our existing credit facility that will reduce interest costs by an annualized $4.1 million, extends our maturity on the line of credit to June of 2018, and the bank term of notes to June of 2020. The amendment also includes a $100 million delayed draw term note that will be drawn in September of this year to replace the maturing private placement notes. The refinancing is part of our strategy to continue to maintain our conservative and flexible balance sheet by pushing out our maturities, limiting floating interest rate exposure, and keeping our assets almost entirely unencumbered.

At June 30th we had $9.6 million cash on hand and $186 million available on our line of credit, including the accordion feature.

With regard to guidance we have included in our release the expected range of revenues and expenses for the third quarter and the entire year. Same-store revenues for Q3 should be in the 7% to 8% range and NOI growth around 8.5% to 9.5% for the quarter. For the year we have increased our same-store revenue estimate to between 7% and 8% and increased our NOI growth to 8.5% to 9.5%.

Core G&A are projected at $36 million for 2013, including over $5 million of Internet advertising. We have not assumed any additional purchases or sales of properties in our guidance; nor have we included the related acquisition costs incurred to date or that could occur in the future. Our guidance assumes a weighted average diluted share count of 31.5 million common shares for the remainder of 2013.

As a result of the above assumptions we are increasing guidance and are forecasting funds from operations for the full year 2013 at between $3.70 and $3.74 per share, and between $0.96 and $0.98 per share for the third quarter of 2013.

And with that I'll turn it back to Dave.

Okay. So before we open it to Q&A I'd like you to see how we're viewing the self-storage environment. Certainly the macro picture comes into play here. Demand is growing across the sector as a result of a somewhat healthier economy and an uptick in housing markets.

You know, for almost 30 years we've been saying that when tough times hit, self-storage suffers the effect later and less severely than other property types and recovers more quickly, and this has certainly been borne out with the events of recent years. Even with the anemic recovery that we're experiencing so far, storage has come around really well. And of course, the dearth of new supply coming on board has allowed a lot of space to get absorbed.

But the macro impact is only part of the story. Probably more than any other sector, storage benefits from scale. And with almost 500 stores flying the Uncle Bob's banner we have the capacity to invest heavily in the platforms most critical to running our business. We're driving record traffic to our stores as a result of our Web-based marketing team. The folks in our state of the art customer care center are providing terrific service and they're achieving high closing rates in the process.

Our revenue management group is managing big data. We're able to parlay information on hundreds of thousands of units in close to real-time to match rates and incentives to current market conditions, even predicting what demand will be, and that's giving us unprecedented pricing power. Our other initiatives, Uncle Bob's third-party management, the corporate alliance program, our online training program, these are all possible because of our scale.

So we have an immeasurable advantage over most of the industry, and I think it's setting us up for outside growth in the quarters and year to come. We really like where we are right now.

And with that, Melissa, we'll entertain questions.

Thank you. (Operator instructions.) One moment please when we poll for questions.

Our first question comes from the line of Christy McElroy with UBS. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

Clearly you've been pushing more in rents in recent quarters. Given that your move-ins are down about 5% year over year and your move-outs are up about the same amount, what kind of impact do you think that your efforts to (inaudible) has had on move-ins? And sort of the same question on existing customer rent hikes and the impact on move-outs.

Hi, Christy, it's Andy. When you look at the move-ins being down year over year, that's expected. With this occupancy where we're at, we turn away people every day. So we expect that. Our pricing is set so that we turn away a certain number of people so we maximize revenue. So we're fine with what we're seeing with occupancy growth from an ins point of view.

From an outs point of view, if you look at our outs compared to our total population of customers, those move-outs are identical. Twenty percent of our customers move out in a quarter, that's consistent year over year. So the increase in outs, it sort of doesn't compare apples to apples. You have to look at your customer base. So the outs increase doesn't surprise us at all. It's exactly what's expected at 20% of our occupied spaces.

Okay. And can you disclose year over year change in asking rents in Q2? I think in April you mentioned it was up 7%. And when you talk about asking rents, is this an average of the rents that you're quoting to new customers, or is this the rent that they're actually moving in at?

It's the average we're quoting the customers when we show the increase. And they were 7.5 --

Seven-point-five percent and 5.7% over the previous quarter.

And if I were to look at the move-in rents, is that something that you track? And if so, is that any different?

No. That would be the same. The rates are up that much, obviously the move-ins is 43,000 for the quarter.

The quota is the paid in our world. I mean, there's concessions in the form of a pre-lock or what have you, but the price is the price. The customer care route, there's no negotiating. So that is the move-in price.

And where are your asking rents today versus where they were sort of at the bottom and then versus where they were at the peak?

They are -- the peak last year was 1148, so it's about 7% above the peak today.

Well, I guess I'm thinking peak in terms of sort of pre-recession and then bottom kind of where you were in the last couple of years.

I don't have it in front of me.

Yeah. The bottom of '09, that'd be a big number percentagewise.

We could certainly get that number and get back to you, Christy.

Okay. We can -- I just have really one quick last follow-up question. Dave, I just wanted to kind of follow up on your macro comment on the subject of market share. Clearly the larger operators have been doing better than the smaller operators, and that's also helped to drive some growth in the property management platforms. Can you give us a sense for how smaller operators are performing today?

They're performing pretty well, actually. I think from the end of 2011, beginning of 2012, they started to see a turn from the three years of negative same-store -- at least top line. You know, we came out of that right away in 2010; it took those folks at least a couple years more.

But from what we see on our acquisition due diligence, the properties we're looking at, on the Uncle Bob's management due diligence, it's not a proper scientific sample because it'll probably be about 400 to 600 stores this year that we look at of the smaller variety. And we're definitely seeing uptick in occupancy, a little bit of rates. So driving high is certainly helping all of us, but not to the degree I don't think that it's helping the public companies, by any stretch.

Okay. That's helpful. Thanks, guys. Sorry for all the questions.

Thank you. Our next question comes from the line of Todd Thomas with Keybanc Capital Markets. Please proceed with your question.

Good morning, Todd.

Good morning. I'm on with Jordan Sadler as well.

First question, in terms of acquisitions, Dave, you commented about the slow start to the year but sounds like you're expecting that to ramp up a bit. I know you've talked loosely about $100 to $150 million of acquisitions being a target, though nothing's baked in the guidance. I was just wondering if you still feel comfortable with that range for the full year.

Hi, Todd. This is Paul. Yes, we're still saying we're looking at probably over $500 million worth of property, and we expect to still do maybe $100 to $150 million this year.

We are seeing quite a bit more activity as far as opportunities. We're working off-market with some sellers, so we are expecting the fourth quarter to be fairly active for us.

And how would you characterize the product that you're seeing in terms of occupancy and pricing, and have you changed your return thresholds at all, just given the recent rise in interest rates?

No, we have not. I mean, the cap rates still are compressing a little bit, especially with some of the transactions that have taken place over the last month or two. We are targeting opportunistic deals in the low 5 cap, hoping to grow those 100 to 150 basis points in the first year. Stabilized assets, we're targeting low 6s, so that really hasn't changed.

Todd, we've had a bit of a sea change in the way that we evaluate properties over the last probably year, year and a half. Heretofore what we used to look at as a stabilized property was 85%, 86%. And now we're seeing that if it's in the right market and it's the right kind of store, that stabilization for a company like ours might be 91% or 92%, at least in peak season, and have an average of 88% or 89%.

So in that sense we've looked at a lot of the acquisitions we've done over the last two and a half, three years and saw that we've popped them more than we've really expected to and it's basically because we can do it with our platform. So in that sense, I think we've looked at acquisitions a little more aggressively because we know we can wring more out of a property than we thought we could in the past.

Okay. That's helpful. And then just shifting over to some leasing, can you just talk about or kind of quantify what the concessions were in the quarter and how much you gave away in free rent? I was just wondering how that was relative to the second quarter of last year.

Todd, this is Ed. We continue to reduce our concessions. Forty-eight percent of our customers received a concession versus 70% last year, year over year 2Q, and 73% the previous quarter. And the value of those concessions offered are also down 25% from $73 a month to $55 a month, 2Q year over year.

Okay. And the $55 a month, I'm just wondering if you could help us understand how much more upside there is to that over the next couple of quarters. So in 2012 you had the large spike in occupancy, the big occupancy gains. That led to an increase in new rentals, which tends to come alongside concessions, one or more months maybe of free rent. So essentially your tenant acquisition cost increased significantly in 2012; now there's a normalizing. Can you just help us understand what that impact might be going forward to rental income growth and how we should sort of think about the customer acquisition costs?

Well, it is getting a bit tighter, but we do see this trend continuing. I mean, demand is up. All the metrics in regards to Web marketing and anywhere else where we measure demand, it's up. And we continue to rent and we continue to increase occupancy, and therefore the concessions we will continue to be able to drive those down a bit. To the same degree that we've been at over the last several quarters, doubtful. But we see the next couple quarters we should see those reducing a bit.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of David Toti with Cantor Fitzgerald. Please proceed with your question.

Hey, guys. Good morning.

Good morning, David.

Dave, can you give any detail on that large portfolio that you mentioned? Are you able to talk about that at all?

You know, it's still in play, so --

Yeah. The Morningstar portfolio is the one that's still in play at the moment. We're actively finalizing our underwriting and we hope to get our final offer out in the next week or two. Where it's going to transact is anybody's guess at this moment.

Is that the only whale out there? Is there a little bit of a dislodging happening with some of the bigger portfolios?

That's the biggest one out there now, David. There's a few other smaller portfolios that are being marketed by some brokers. But we're looking at those as well. But this is the big one that I think everybody's taking a close look at.

Okay. And then I just want to go back to Christy's question on the move-ins and move-outs and sort of a squeeze given lower vacancy. At a certain point, does that lack of empty product really start to crimp your rent growth potential, just because you don't have the inventory, you can't really capture the street rate pricing power?

Well, David, we take a look at that pricing power from a couple different ways, both from a very granular perspective and through quite a wide lens. But if you look at where we're at right now, the story now for sort of filling that gap between where we are now in occupancy and 100% occupancy, it's all about sort of employing and refining the processes that we have. The smaller the gap -- that gap between the current occupancy and 100% -- the more challenging it really is to manage.

Really, putting aside any of the external drivers that impact demand, when you're at 85% occupancy or less, and you have effective management tools, which of course we have, there's abundant space available for customers. And in most cases it's relatively simple to retain and grow occupancy a bit. Now, at 86% to 89%, where we've been playing over the last couple years, it's certainly more of a challenge and it really does require a higher level of expertise to balance the in place rates, the asking rents, and manage the concessions properly, all in an effort to maximize revenues.

And for this, you really need to deploy the proper systems and the people. Now, we're at now at 90%-plus occupancy; it's a whole different beast. You need to be fully engaged and committed to utilizing the very best and most sophisticated systems and management expertise -- which we have, of course -- to effectively manage that gap and of course maximize the revenues.

So really, as Dave has said before, the feeling that exists, the 88% to 89% feeling, for us for many years that's moving, and that's maybe moving to the mid-90s. And we've been working the last couple years even coming out of the recession, preparing for this and refining all of our systems, our processes, and properly positioning all the great people that we have here so that we have the know-how to manage that gap; and again, only manage it in a way that maximizes revenue.

You know, it really isn't rocket science, but we do believe that our efforts in this respect, they separate us from our competitors -- large, small, REIT, no REIT.

That's a great answer. I just have one more follow-up on that topic. I guess doesn't that phenomena, as you move into the second half of next year with a higher occupancy level, does that really open up the landscape on the acquisition side to find vacancy, to potentially doing development just so you have that new product on hand?

Yeah. It's something we talk about seriously all the time here, to the extent that we've racheted up our own expansion and enhancement program, hopefully to double it next year, to hit some 50 or 60 stores and improve those with adding 10,000 to 15,000 or 18,000 feet per.

But you're right. Now we're looking at stores, we have people that are developing stores, coming to us looking to manage with perhaps buying at CO and looking at stores that are in the 50% occupancy range, perhaps, and taking our platforms and running those up. But I think a lot of what Paul and Bob see are a lot of 50% occupied stores that are going to stay 50% occupied.

Also we're still in some discussions with smaller developers, possibly JVing with them on development. But Sovran will not be developing on its own at this point.

Okay. Maybe you have to add a second story to some of your space. Thanks for the details today.

Okay, David.

Thank you. Our next question comes from the line of Jana Galan with Bank of America. Please proceed with your question.

Thank you. Good morning.

Good morning, Jana.

I was curious if the uptick in the housing market, is that bringing in some more commercial tenants? And I don't know if maybe you're seeing that in larger unit sizes getting rented or just longer lengths of stay?

You know, we've always tried to make the marriage between -- or at least find the link between housing and us. All I can say is when housing goes down, we go down; when housing comes up, we go up. It's for such a host of reasons, though; people who are moving, people who are remodeling, people who are building. Then you have the contractors who are in the housing trade. There's so many facets you can look at and it's tough to put it together.

But I would say that -- I can say that housing in any particular regard, we are such a broad-based supplier of space. Everybody is our customer. And when it picks up, it's commercial, it's students, it's professional, it's residential; people who are moving, people who are getting a divorce, a death in the family. So I don't see how we can correlate it.

Well, looking at our commercial business, whether it's our corporate customers or small business customers, that's always been very difficult to quantify. As much as we try to capture that customer profile information at the store level, it's all dependent on how that incoming customer presents the use of storage to us. Typically when it's small business they don't even mention to us that it's for small business; they come in and they rent it personally.

But anecdotally, when we're out there, when the area managers are working with their managers out in the field, the feeling is that there is an uptick in our small business/commercial business customer.

Great. Thank you.

Thank you. Our next question comes from the line of Ki Bin Kim with SunTrust. Please proceed with your question.

Thank you. Dave, I'm not sure if I heard an actual street rate number. Could you guys quickly -- did you guys mention that overall street rate?

As of the end of July, Ki Bin?

I guess both, at the end of the quarter and of July.

The end of quarter we were at 1124, and end of July, 1148.

Okay. And have you guys done a study of looking at your street rate compared to your competitors, whether they be private or public, surrounding your assets? And how that -- I guess may be more appropriate for private -- how your street rates compare to your private market operator competition and what that spread looks like and how that's changed over time? And at what point does that spread become too wide where, even though you guys do a better job on Internet and advertising and pricing, where that gap becomes wide enough where it would start to offset customers' behavior patterns in terms of coming into your stores versus someone who's 20% cheaper?

Well, Ki Bin, the figure that maybe you're looking for is so very fluid and it's based on so many systematic factors from a revenue management standpoint, that that in itself it's real difficult to quantify. Because in one store you might have a spread of 10%, 15% in one particular space from a nearby comp to 3%. And that changes throughout the month from month to month, from quarter to quarter.

It certainly does impact what we do from a revenue management standpoint. I mean, that is one of the triggers, looking at the competition and seeing where they are. But it is not a significant trigger for us. We look at the comps but it isn't a big driver for the decision making when it comes to asking rates.

Right. I guess my concern is that it becomes a bigger driver as that spread might potentially widen, right? But with that, maybe I can ask that question in a slightly different way. What does your system say on that tangled variable about how that has trended?

It's tough to --

The old revenue management used to be, we mapped everybody around us in a 5-mile radius; all the stores we could find in a 5-mile radius, graded them on amenities and said this is what their rates were. And we pretty much followed their rates. It was all based on price because the shopping was done via the phone book or driving around, and it was pretty tight even as recently as probably 2007, 2008.

But in the past few years especially -- I don't think we're -- I mean, there's markets where we're more than 20% over mom and pop, but there's other reasons than besides just the fact that we have visibility. We have better stores; we have better service; we have longer hours. You know, there's a host of reasons. So it's hard to just put it on price like it used to be.

You know, somebody's algorithm said store your car here for $70 a month and we're charging $150, we still get a lot of people at $150. I'm not going to say $80 is typical or 50% is typical, but it's certainly possible and not that unusual.

And when you guys check your rates from your competition, do you also incorporate promotions that are being offered by your competition into that equation?

That number is difficult to quantify. We certainly look at the comp rates on the Web. I mean, we all scrape the Web for comp rates. From there you can see the concessions that are offered. But the smaller operators, the mom and pops, you never really know for sure what concessions are being offered until you walk through the door. So it is pretty tricky to quantify that. And frankly, we really don't look at that. We look at the REITs and their concessions but not the smaller operators.

Right. It is difficult to quantify, I guess.

And one last question. Since you already talked about July, I was wondering if you could just go ahead and maybe give some operating status up to July on occupancy or overall revenues.

Sure. Yeah. We don't have the revenues today but occupancy was 91.7% at the end of July on the same-store pool. It was 88.7% last year at the end of July. And we talked about rates. They were 11.48 at the end of the month of July; last year they were 10.63.

Okay. Thank you, guys.

Thank you. Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed with your question.

Hi. Good morning.

Good morning, Paul.

Was wondering if you could tell us what percent of the same-store revenue increase is attributable to greater insurance penetration?

Very minimal. The penetration was about the same. We had a change in our share of those commissions. So the penetration uptick was very minimal, less than 1%, but there was a change in our commission structure with the insurance company.

Okay. Could you elaborate on that?

We cannot disclose our sharing arrangement. Sorry about that.

Okay. Can we assume that that increased to your benefit?

Correct.

Okay. And talking about acquisitions on that discussion of digging a little bit deeper to some more value-add type properties and even development properties, what type of volume might you see in that category as opposed to fully stabilized acquisitions?

Hi, Paul. This is Paul. We're seeing with the uptick in occupancy even that the private operators, the occupancies are up there. What we're seeing, we're looking at some deals that actually are fairly new. They have some quick lease-ups, but they did that by discounting or special, so the spread between physical and economic occupancy is quite wide.

I mean, those I consider somewhat opportunistic just because they're high-occupancy but there's a lot of money left on the table for us to be able to get through our platform. So the Morningstar portfolio, that occupancy's in the low 80s, so that's certainly got some growth opportunity there. Some other deals, the three that we have under contract, two properties on Long Island, those are just coming out of lease-up. They have some occupancy room plus some economic growth. And then the one in Colorado is more of a stable.

So other off-market deals that we're looking at that we hope to close later this year, those are mostly stable properties but we still feel there's some room to grow rates and in place rates as well.

Okay. And just looking back to the insurance question, could you tell us when that agreement was renegotiated?

It went into effect first quarter of this year.

Okay. Thanks very much.

Thanks, Paul.

Thank you. Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Thanks. Good morning, everyone.

Good morning.

Dave, could you talk a little about the trends you're seeing in inbound calls from private owners in the third-party business?

Yeah. It's not changed much from the past couple quarters, Paula. You know, there's a lot of troubled stores out there that we -- for what we think pretty good reason -- probably don't want to get involved with. We're working with some who are pretty established and need some help with their lender, perhaps, or just are sort of turning.

But the quality store right now, with the uptick in business and the cost of sector, I think we're having a harder time getting people who are scared right at this point. We saw a little wave of that at the end of 2011 where people were saying, boy, these guys are crushing us, we've got to find a way to join their team or get their flag in our store. We're not seeing as much of that because a little bit of success is making a lot of these guys content, I would say.

One of the things we're seeing a lot of is the potential developer coming in, wanting to build a store, and have us manage it from day one. That's probably, if I had to guess, Paul, the biggest uptick?

That's what we've been seeing a lot. Yeah, not only that; I get calls daily now for people wanting to sell parcels. But yeah, our third-party management team, especially at the trade shows, the majority of the traffic through their booth is people who are in the process of building a property and they're looking for third-party management. And they're also looking for an exit strategy, either possibly buying at CO or some other occupancy level. So that is the majority of what we're seeing right now.

That's helpful. Thanks. And just finally, any differences you're seeing in real estate trends or insurance trends across the different markets you operate in?

Paula, this is Andy. I think it's pretty widespread, the trends. I don't think there's any markets that are jumping out at me. When you look at our revenue growth we still see that fire in New Jersey hurt us. New Jersey's not as bad as it shows in our numbers. We had a fire at one of the stores; the other store is doing 6% growth. So they're doing all right.

But other trends regarding insurances, we're not seeing anything exciting.

Great. That's all I have. Thanks.

Thank you. (Operator instructions.) Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

Hi. Good morning, everybody.

Good morning, Todd.

Just kind of looking at your sources of capital right now, how are you thinking about that, the various types? Your balance sheet's obviously low-levered; stock price is up. You've raised the dividend twice this year, so the OP units are probably attractive to a private seller. How you do kind of think about what you're going to attack for new acquisitions?

Hi, Todd. It's Andy. You know, I think we're going to maintain our strategy, use the ATM on the smaller acquisitions to match funds. So I think we'll be consistent there. We'll mix in some debt. Obviously on any larger portfolios like a Morningstar we would want to tell that story and do a traditional offering. But a similar mix, probably 70% equity.

It's kind of wishful thinking, Todd, with regard to the OP units, I think. We're still having a tough time. We bring a lot of potential sellers in with the idea of the OP units, but at the end of the day it's usually a cash transaction. We'd love to use that as our currency, but it's been tougher to do.

Okay. That's helpful. And with the quick move in interest rates since May, we've heard this in other subgroups of the world, it's impacting the pace of deal flow. Are you guys seeing any stall in sales activity or acquisition opportunities because of the rise in interest rates?

Todd, no. This is Paul. We are not; actually we've seen the reverse. Just a lot of people -- again, we're pretty active with off-market discussions with quite a few sellers, so we're really not seeing a decline. It's actually picked up some over the last 3 months.

Historically we've seen a pretty big lag between interest rate rises.

Yeah. It takes a while.

Yeah, to impact the idea that the owners have in their mind of what their price is, what their property's worth. So I'm not sure, even though it was a pretty big jump and I'm really glad we did our financing before it happened. The big jump hasn't translated into deal flow or pricing changes.

Okay. Thank you. And then some of your strongest markets, like Texas, Florida, and New York, are also your largest markets. Do you have a feel of what the supply picture looks like in some of the key areas where you're driving occupancies?

We're seeing -- you know, there's definitely an uptick in planning new developments. But in our last survey of our markets there are about 30 properties within our trade area that have either just opened or in construction or in the planning stage. And then in the markets in general there's about another 29 stores that we found. So close to 60 we've seen within our portfolio of new developments either in the planning or in construction or just opened. So again, it's really negligent. It's not going to affect us in the foreseeable future.

Okay. Just as a reminder, how long would it take for a property that's newly developed to get to a stabilized occupancy? What kind of runway are they looking like?

In some of the third-party deals that we've looked at, that we'll be managing, we're projecting -- or that the owners are projecting -- a four-year stabilization.

Okay. Thank you.

Thank you. Our next question comes from the line of Ki Bin Kim with SunTrust. Please proceed with your question.

Thanks. Just a couple quick follow-ups.

On development, (inaudible) partner up with, third parties, why not take it on yourself? You can handle the dilution, given your capital position. Why not do it yourself versus teaming up with a partner?

You know, you're right. The dilution on doing a few would be negligible. But I think it's more the idea that we want to make -- if we do this it would be with a guy that has local market expertise; guys that have been right there on the ground.

You know, when we say potential developers, we're not talking about guys who want to get into this because they hear it's a good business. It's people who have experience in both the construction, site selection, working it through the zoning and entitlement process. So it's a whole host of things. We know the storage business; I'm not sure we know the storage development business. And to ramp up to do that would be -- on the scale we would do it on our own would be probably foolish. But a lot of it has to do with market knowledge and market contacts.

Okay. And maybe it's a little early to say, but once you have this business running, what would the ideal or maybe minimum run rate we should expect on development?

For us to basically JV and go forward?

Yeah.

Oh, it would be pretty minimal.

Okay.

It's not a game where -- we've always -- for 30 years we've said we are not really comfortable with the risk-reward ratio on development. And Paul just mentioned four years, and I think recent experience with even very good developers -- admittedly in tough times -- have been worse than that.

We still think there's a lot more pop we can get from stores that we have that are established and well-built and grow those from, say, 80% or 85% than we would from zero to 80%. It's just not our bag.

Okay. And I guess the bigger concern for self-storage is the development with PSA and developers coming back online is still minimal as a return on stock, but that potentially growing. If it starts to become a bigger issue, however incrementally for the sector, how does that change your view on portfolio quality? Because most of the self-storage operators haven't really sold any assets, whether it be in bad markets, good markets. They've been accumulators. But if development becomes a bigger issue, especially in markets where you can build, where I guess would be the secondary/tertiary markets, how does that change your view on maybe pruning the portfolio and getting out of those markets where you might be longer-term more exposed to competing supply?

You know, we look at all of our stores every year and we have sold about 30 stores over the last -- not this year, but over the last three or four years. There's a few more maybe to go.

But in markets with a million people -- the overall market, not the trade area; markets with a million people -- and your store is located in a good 5-mile ring, I don't think your threat of new competition is as bad as you might be thinking. You know, if you've got a good store, good location, decent size market, you're going to be fine, especially if you have the platforms that we have.

So we don't -- and again, we talked in the early 2000s, there were some 3,000 and 4,000 properties per year being built on a smaller base. On a base of about 40,000 existing facilities the pot was growing by 10% a year. Here we're talking 60 in our trade area, probably a couple hundred nationally. I think even 500 to 1000, especially in this point in time, per year for the next couple of years wouldn't impact most markets.

So down the road, five years from now, if everybody decides the only place to go is self-storage and they're getting out of apartments and out of strip centers and building storage, maybe then there's concern. But I think it's a long way off. And I think -- you know, we learned. We learned you don't want to be in small towns, but the moderate-sized towns, you've got a million people in a town, you build a couple facilities in that town it's not going to hurt if yours are the ones that are top dogs.

Okay. Thanks, Dave.

Thank you. Our next question is a follow-up from Todd Thomas from Keybanc Capital Markets. Please proceed with your question.

Hi, thanks. Just a couple quick follow-ups.

I was wondering on the Morningstar portfolio, if you could just give us a sense for what the price tag looks like, whether it's a $200 million portfolio or a $400 million, $500 million portfolio.

Hi, Todd. It's Paul again. Just some guidance we've heard, we expect this to transact somewhere around $300 million.

Okay. And then just to follow up, you had mentioned that rates at the end of July were 11.48, and that compared to 10.63 at the end of July in 2012. Were those street rates? And if so, are you able to provide what the rent per occupied square foot rates were at the end of July '13 versus '12?

Those are asking rates. I do not have the collected rents as of this morning.

Would the spread be somewhat comparable, though, or would we expect that to be a little bit more narrow?

It would be more narrow.

It would be. Okay. All right. Great. That's all. Thank you.

You're welcome.

Thank you. Mr. Rogers, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you, Melissa, and thanks everyone who's on the call for your support. We look forward to a good summer and talking 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.