U-Haul Holding Co (UHAL) 2007 Q4 法說會逐字稿

Good afternoon. My name is Nakesha, and I will be your conference operator today. At this time I would like to welcome everyone to the AMERCO fiscal 2007 year-end investor call. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Ms. Flachman.

Thank you for joining us today, and welcome to the call. Before we begin, I would like to remind everyone that certain of the statements during this call regarding general revenues, income, and general growth of our business constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from those projected. For a brief discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-K for the year ended March 31, 2007, which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, AMERCO's Chairman and CEO. I will now turn the call over to Joe.

Good morning. I am speaking to you from Phoenix, Arizona. Jason Berg will not be on the call today because he is under the weather. However, Rocky Wardrip and Gary Horton are on the line.

I will give a brief operations overview, and then we are all available for questions.

U-Haul truck rental revenue remained behind last year for the quarter. The trend on one-way dollar per transaction was below last year. This is partly a one-way pricing variance. There were some model mix issues in the first two quarters of the year, but those were corrected by year-end. There was additionally softness in overall one-way transaction in the fourth quarter, and that contributed to the one-way truck revenue variance.

In-town truck transactions were flat most of the fiscal year, but I believe they are on the upswing and will show some gross revenue increases in the first quarter, partially offsetting some continued declines in one-way revenues.

We continue to implement measures to address one-way pricing and transaction growth. I do not expect to see results until the August revenue numbers. Expenses for depreciation and lease expense came in where we expected. Repair expense for rental equipment came in above plan for the fourth quarter. This is being addressed with the expectation we are back on plan by the second quarter.

Self storage continued to post good results through the year-end, and I expect this trend to continue. U-Haul launched its Internet-based customer box exchange program, and it began to get some traction in the fourth quarter. This is part of our overall corporate sustainability initiative. You can reach this site from U-Haul.com.

We are continuing with an aggressive fleet replacement program and are committed through the fall. Our purchase contracts have held our acquisition costs fairly level through our present commitments. Our Life Insurance and Casualty Insurance companies finished '07 well, and these trends are continuing in the first quarter.

For the year we invested roughly $648 million in property, plant and equipment, and net debt is up about 300 for the year with actual debt up about $214 million. Our treasury continues to buy back [common]. Through today approximately 1,225,000 shares for an acquisition cost of approximately $83 million of the 115 originally authorized has been purchased. Our cash flows remain strong, and we accomplished some very successful financings over the last six months.

Overall we have a very disappointing trough in earnings that I am working to remedy and have every expectation that I can.

With that, I'm going to go ahead and open the call to questions, and we will just kind of all try to respect each other and not ask too many at a time.

(OPERATOR INSTRUCTIONS). Ian Gilson.

Probably Rocky. Looking at the fourth quarter last year and the fourth quarter of this year, I noticed that the operating expense line as a percent of total rental revenue increased from 83.7 I think it was or 83.8% last year to 90.3% in the quarter just finished. This seems to be a little bit more than just an increase in repair expenses. Are there any other items in that line item that we should be aware of?

I'm going to let Rocky address it, but I want to throw one in before he gets on it. Ian, you are pretty good on utilization. We were over-fleeted in the fourth quarter. There is just -- that hits every single line of the expense statement. It is everything from insurance to repair to license. So you can deduce that because you see our fleet numbers, and I told you our one-way transactions were behind the prior year.

So with that caveat that Rocky won't be able to pull every dollar to make it add up, I will turn it over to Rocky.

I'm sorry. Gary is going to address the question, but Ian, I would say one thing too, is that probably if you look back historically too that we were exceptionally strong last year and that our operating expenses were probably below what we would see on a normal basis for that quarter.

Yes, that is true; however, there is still a big jump. Revenue decline actually was not too bad compared to the third-quarter comparison. So you did seem to make up some ground there.

When you're talking about the operating expenses, which line are you specifically speaking of?

The OpEx line -- (multiple speakers) cost and expenses. It is the first cost line in the fourth quarter. It was 266 to .819 million.

Okay. Most of that was due to the repair in the fourth quarter. It compared -- it was actually up in this fiscal year where it was down last year. That was the primary reason for it being up. There was approximately -- and it also would be on offset on other miscellaneous income, which miscellaneous income was up about $9.9 million. But there is also a $2 million other side.

So what you had is a -- our dealer security plan, which is a program that we have for our dealers. There was what I will call a true-up done in the fourth quarter. It showed a substantial amount of income, which was at 2.5, and then on other expense, it was 2 million. So the combination on other expenses of those two basically made up the bulk of the increase in operating expense.

Jim Barrett.

Joe, could you talk a bit about your free cash flow, which was obviously very strong in '07? I mean how should investors look at that going forward and for '08 and even '09. To say it differently, at what point do you envision the investment in the new fleet possibly subsiding in -- (multiple speakers)?

Jim, I think it is -- in my mind it is going to be driven a lot by what we see by the end of August. If we don't see some topline growth, then we're going to scale back because what we want to do is not sit here with a bunch of extra equipment basically or underutilized equipment. And so if there is a decision to be made, it will be made probably at the end of August. We are committed in our truck purchases through the fall, but we're not committed to the rate at which we accept them just to the total volume of them. So you can vary the rate, and you can substantially change your total amount of acquisitions in a period.

So everything is pretty much cast in place through the end of August, and after the end of August, we have significant flexibility, would be the way I would answer that question.

When you look at in demand, you're now at over 100,000 trucks. How many of the 22,000 new ones that are coming on stream for this upcoming year will simply replace trucks that are being sold as used as opposed to growing the fleet?

Well, if everything lines up correctly, I don't want to add a single unit. I might want to de-fleet. I don't think I can sell them that fast without just having a firesale, Jim. So I'm going to have to see come the fall -- I'm just going to have to kind of make that judgment. So the correct economic thing would be not to grow the fleet, and may be depending on what topline revenue says, maybe shrink it back a couple of thousand.

You have seen us shrink the fleet before, and that has a very -- it affects the profits very handily, but there's more to this, of course, than just our profits. We will be in pretty good position on total fleet really by the end of August. We have been very, very aggressively adding trucks. I think presently we're adding trucks at nearly a rate of 500 a week or putting new units on. Your new units are coming on at about 500 a week right now. They are not all adds. I'm talking van trucks, not pickups.

And so there's a tremendous jolt without hitting the Company, which ordinarily is a good positive thing. I think it was our judgment we could kind of see -- we had some idea how things were going to break out earlier this spring. Just weighing everything, we think that is the prudent thing to do, run real hard until the end of August, and then we have built ourselves several options and will examine them and do the thing that makes the most economic sense at that time.

And then finally, Joe, your truck maintenance expense going forward with 22,000 new trucks, is that almost inevitably going to come down?

Well, I surely believe so, but I got a pop in the fourth quarter, and it was a host of things. The last thing you want to do in this business is give all my subordinates marching orders to cut expenses in maintenance, okay, because that is something ignorant.

So what you have to do is be very, very specific in that direction, which is why I indicated I believe I will have maintenance back on track in the second quarter, but I don't think I'm going to have it on track in the first quarter or back to where I wanted it because it just is extremely specific or you will get people to do something across the board, and you cannot do across the board things. Maintenance is the backbone of the whole company. So you have to have your maintenance up.

And so we did two things. We introduced a whole new computer diagnostic system, and it actually bumped average cost of repair in the near-term. In other words, a truck hits a facility, it actually bumps the total amount of expense on the truck. The theory is that better diagnostics lowers your net cost over a 12-month period. But it bumped it, and it bumped it more than I had anticipated it would bumped it, frankly.

So I would say it should go down. You're exactly right, adding new equipment just ought to be just automatically lower your repair, although that did not happen to us in the fourth quarter.

John Sheehan.

You mentioned that you had seen fairly solid results across your self storage business. I was wondering if you could provide us with your thoughts as to whether the self storage business is being positively or negatively influenced by the slowing single-family home sales that is fairly prevalent across the United States at this point?

I don't have an opinion. We all know that -- we get a lot of storage in conjunction with people changing residences. That is a real good thing for us normally speaking.

On the other hand, I just spoke to someone yesterday and they are selling their home and it is a tough sale, and the first thing the realtor told them was empty everything out of the house. Go buy two storage or go rent two storage rooms. We have got to make this thing look more like a model. It is a tougher market.

My guess is that it negatively impacts it in some marginal way, but not enough that we're seeing it. But at the individual consumer level, I got to believe it negatively impacts it.

If you look at our total occupancy, our total occupancy is down a fraction, and our revenue per square foot is up a couple of cents. Basically our pricing team here runs on more or less a revenue optimization model. And so they are very happy with where we're sitting. I'm kind of an occupancy-driven person. I'm a little more operations driven, and I would have like to seen another 1% or 1.5% in occupancy, frankly. But the people who run that part of our Company have had great success with their revenue optimization. So they just don't see it having hurt us.

Again, we are a small fraction of the total self storage market. I don't know what our market share is, 3% or something like -- some very modest thing. So we could get a result even though someone else might be impacted.

So I don't have an opinion as to what -- and I have not recently studied total market results. The self storage magazines put out some quarterly information by geographic area on what they get reported through their membership as to what total occupancy is doing. The market still is strong in our experience.

Just to add a few numbers to it, for the fourth quarter, we were up 6.2% in our total revenues as compared to 5.6%, and we also were fairly aggressive. We had added approximately 5200 rooms and 490,000 rentable square feet.

Okay. Would it be fair to say that you kind of get people on the way up in terms of their economic movements and also on the way down? So even it is more a function of movement as opposed to strong economic growth. You can get self storage customers in both parts of the economic cycle?

I would sure like to believe it. I don't want to tell you something -- that sounds good to me. How does that go? That sounds good to me. I don't really have definite proof one way or the other on that, and I don't think it is driving us right now.

Right now when I hit our locations, what is driving us is the cleanliness of the facility, the perceived security of the facility and the customer orientation of our staff. And if those are all trending positively, we don't have much problem renting rooms.

Now I have been in markets were where trending all three of those positively did not do anything for us. That is why I would say this is still a reasonably strong market for self storage. Now whether it is people going downsizing or upsizing, I don't have statistics that tell me that for sure.

(OPERATOR INSTRUCTIONS). Ian Gilson.

In the repair diagnostic system, I know that in the past that trucks goes through the independent dealers and should be repaired but not always are repaired until they get to a U-Haul dealer. Is that still the case, or do the independents have access to that diagnostic program? Are there ways to enforce that they do keep those repairs up-to-date?

Yes and we rolled out a computer paced -- I won't say it is computer diagnostics. I think that would be too liberal, but we rolled out a computer paced inspection program to our dealers in May. We, as you probably are aware, every rental location we have is linked essentially real-time to our servers.

So I have a lot of confidence that by computer pacing this we will get higher conformity with our objectives. Basically we have algorithms that read certain indicators on the vehicle, and then as soon as you do it and there is any movement with the vehicle, you receive it in or rent it out or just even inventory it, the computer now prompts you to do certain behavior. And on many programs, we found that to be very successful.

Prior to this, we had a system based on time intervals only, and at this time interval, X, Y or Z was supposed to be done at whatever level in the Company or in the dealership organization the unit was located. This I think is going to get higher participation, and so it is a good thing.

It might cost us a little bit of money. We were actually up significantly in the fourth quarter in what we call third-party repairs. In other words, we were not just up in repairs at our own facilities. We were up in repairs with third parties, which would include dealers, and we were up very substantially there.

So it is kind of a -- you just kind of walk into it, and we're feeling our way around. We don't want to just open ourselves up to endless billing because we're an income opportunity. We want to get the right maintenance done at the right time interval and the right condition of the equipment, and I think our -- well, I'm confident what we have rolled out will improve that a little bit. Just what impact it is going to have on expenses through the end of this quarter, my guess is it is going to be a little bit negative still through the end of this quarter. If our projections hold out and those are extrapolations based on much smaller samples, we will start to maybe see that level out or maybe even get some of the decline that Jim Barrett talked about that we ought to see going into the second half of the year.

There is certainly overall our fleet literally is requiring less maintenance on a miles traveled and age of the vehicle kind of algorithm than it required last year. Yet our expense, our dollars paid out is up.

So yes, I think we're getting better customer service. Long-term better customer service, which is a more reliable piece of equipment or a cleaner piece of equipment, long-term that all accrues to the Company in a positive way in our consumer franchise. So it is not that the money has just been thrown down a garbage disposal, but you can have too much of a good thing too. So we're just having to kind of walk into it.

Okay. Next question. Purchase of real estate?

Yes?

That is -- it's not a sort of smooth expenditure, and it is quite significant when it does occur?

Yes.

What are we looking at going forward for the year?

Gary, do you or Rocky -- do you have that -- I don't have that in the front of my brain?

I think what we have shown is looking going forward, I thought it was about 80, was it 85?

I thought the K had an $80 million number in it.

I think that number is in the ballpark barring we get some big opportunity and some portfolio becomes available. That has been a dream of mine. We got a good portfolio once in the last 20 years, a big one. It is possible to get a big one. I would not hold my breath because that market is pretty overheated still. We continue to look everyday at properties. I think the $80 million is probably pretty reasonable, but it may come all in the third quarter or something like that.

Yes, I think we understand that.

Yes, Ian and Joe, that also includes the construction where we have several projects going right now. So it would not all be acquisition. It would be acquisition and construction of new locations.

Okay. On the eMove website, how are we doing? How many participants do we now have, and is that a positive generator and shall we say significant, or is it still relatively small?

It is not significant in total dollars. It is positive. It continues to grow. It is definitely building our franchise, and we're definitely continuing to bond better with people in the self storage business.

So there is two things on that site. One is what we call the moving help. That is the clearest generator of gross margin where we are actually -- we're making money there. I cannot quote you a number. It is not some big huge sum, but we're positive we're making money very clearly every quarter.

On the eMove site in general, which is where we continue to build alliances with people throughout the self storage business, we see steady growth. The best measure of that in my mind is how many of these people adopt our software to run their facilities, and that number continues to grow. And when they adopt our software is when we can really do the most to cooperate with them in terms of sharing reservations, sharing advertising cost and things of that nature. So that is where there is some economics come in.

So my answer is, yes, it is continuing to grow. At the point it is a relatively decent amount of money I'm sure that Jason and his team will lobby for us to break it out individually. I can tell you for sure that the moving help is contributing and has probably for maybe 20 or 24 months contributed positively to the overall finances of the Company. The moving help is much more effemoral because the costs occur in multiple locations, and it is not as easy to segregate your cost versus your income. But strategically speaking, I remain very, very convinced that that is heading us in the right direction.

Okay, final question. I live fairly close to the Mexican border, and occasionally my wife and I go over there for dinner. I have on a number of occasions seen U-Haul trucks in Mexico. Any plans for a geographical extension?

I do not think so, although you are right. The equipment continues to go South of the border. As you are probably aware, Mexico has really two borders. They have a --

The 35 mile, yes --

Yes, so you will see very few of our trucks penetrate the second border. When they penetrate the second border --

There is a tax to be paid.

Yes, our trucks may not be coming back. So we're not real keen on them going past that second border. At the same time, we sell a tremendous number of trucks in our for sale fleet to go into Mexico. But when you see them, they should not have -- be displaying the U-Haul name. But they will look like a U-Haul truck until you look at them a second time and say, well, the name is not on the truck, you see.

So, as a for sale market, Mexico remains a wonderful place for us to sell trucks. As a rental market, I don't see us going into that in the near-term. Ultimately we will have to go there. I don't think there is a doubt, do you? I mean the border is just becoming more fluid all the time.

Well, yes, and you have got a lot, I say a lot of people -- it used to be everybody used to go from the US into Mexico to buy. But now with people like Wal-Mart and Costco opening up in the border towns, you see a lot of reverse traffic, if you like, of people coming over, and they are carting hand carts and loaded down with things, including small furniture.

Yes, it is a good business opportunity, and I think you can reasonably expect us to do that at a point. I don't see us there in the next 18 to 24 months ago.

Ralph Haberman.

I got on a little late. I was wondering what your prognosis is on the pricing front? Is budget moderating their aggressive stance, or do you see that perpetuating as you get into your busy season now?

They are continuing to perpetuate it, although you can see differences regionally. We don't have any communication with their pricing people. I cannot honestly tell you how they have that organized. So whether some zone has authority or whether it is all done nationally, it appears to be that they are doing it in some sort of a zone pattern, and we're seeing some variances by zone.

Our plans that we have worked on through the fall and are now launching are two basically attempt to make their moves irrelevant, and we will see how we're successful. As we head in through July, I think we're going to get some feedback from the marketplace. We have some different things we're doing that we think will allow us to regain price leadership. The way we would like to function in this marketplace is that we act as the price leader, and if we're at 3% or something above budget, then so be it. The customer will make their decision, and we're confident we will get the vast majority of the business because we just have so many other positives.

So our intent is to be price leaders by the end of July. We've got a whole bunch of very specific things that I don't want to share with the budget organization that I think will allow us to do that by then. And should we be successful, it would be my hope that we would see a positive variance in at least to the present in both transactions and revenue per transaction. But the proof will be in the pudding, and that is kind of where we are at right now.

I know you spoke about in the past possibly shedding the insurance companies. Have you given any additional lot to that option?

Sure. We have set up a property casualty captive in Nevada which gives us some flexibility for three or four different possible scenarios. Both companies are healthy right now, which means should you decide you are going to do something, you're not just going to go get a big haircut.

At the same time, our Casualty Company has some longtail worker's compensation business that there is no satisfactory actuarial consensus, if that makes sense. In other words, everybody kind of wants to hold their cards close to their vest. And so were we to try to sell that today, we would probably get a haircut because of that. We don't believe that a haircut is merited, and so my expectation is that we will continue to run off that business because it is going to get the highest net for the Company on any sort of an analytical view.

I suppose it is taking a big haircut in a possible sale?

Right. It has just really with one line of business, and it is just because while the actuaries are all happy that we have the correct amount of reserves, when you go see a potential buyer, there is enough uncertainty in that. And I think in worker's comp in general because it is kind of a social issue, not just an actuarial issue, that nobody wants to take that risk on unless they build in a heck of a big margin.

And so every year that business becomes more certain as to all insurance products. As time goes on, of course, development comes in, and everyone has greater consensus on the estimate. That and depending on maybe we will find some of these a little bullish on it or trying to build their book of it, if we find the right person, I don't think there's a doubt that we would sell that book of business and maybe more. Because we have an active captive now in Nevada, we would not put ourselves in a big pinch. But, on the other hand, I don't want to mislead you that we're in negotiation or something of that nature, because we are not. We're just securing a lot of options, and then we're just watching how things develop.

Could you just tell us on I guess a unit basis on the self storage, how many of the self storage units are marginal to losing money today?

By location?

Yes, are just you know give me -- it is a general number.

That is a very interesting question. On a cash flow to historic cost, maybe I got 10 of them out of 1000. It would all be the brand-new ones. And the reason is that they are three years -- most of those are three years, honest to god, before they are really cash flowing positive.

On a historic costs basis, of course, the problem is that historic cost is irrelevant, and so everybody is doing some sort of a cap of your present earning capability, and so it is not a straightforward question to answer.

I would say if you, or let's say me, U-Haul has about 1050 storage locations, and I think you very much can interpret occupancy back in because occupancy kind of drives -- occupancy and rate drives caps. Okay. So anything that is probably about 65% occupied that you have had for, let's say, five years is probably cash flowing negative on any fair analysis. Maybe I have 20 stores like that. Maybe I don't have that list in front of me. It is a very modest number of stores. And I would say that anything that is above 85 is without a doubt cash flowing positive.

Now there is kind of I will say a little bit of a gray area between 65 and 85 depending on what assumptions you put in. Our whole portfolio is above 85%, and on historic cost basis, our whole portfolio just looks great. But again, historic cost is kind of irrelevant because it all caps back.

An interesting thing is whenever we do appraisals or we cap in the marketplace, the marketplace discounts any product above 90%, essentially 100% discount. So if I'm running say 92%, today I have about 100 stores running 94% or above.

The market discounts those back to 90% occupancy whenever it values them. So, as we talked about a little earlier, our people who really manage this at the detailed level were kind of on a revenue optimization model, and their point is something South of 90% for occupancy.

And so a long-winded answer, which is maybe I have got 20 stores that you could fairly say are really losing money. I don't think it is more than that. But any store that is much below 85 is a significant disappointment to me. And so if I was working in area and we had, let's say, the whole geographic region was averaging 83% occupancy or something, I would be pretty much up in arms with my area management because I think we're absolutely sub-optimizing. And on the other hand, whenever the local management gets it above 90%, the financial market discounts it. I kind of like them above 90%, but the financial market discounts them. So somewhere in that 85 to 90 is what is really the operating range.

They discounted above 90 because the assumption is that it is an unsustainable level of occupancy and 90 is really what is a long-term sustainable number?

Gary, I will let you answer that question. You have had that discussion. I have not.

Yes, what really happens is they have in their models and everything else that 90% is what they are willing to underwrite. And it is really underwriting criteria has very -- there is not much more reasoning than that they will not. The other part of it is with other income. They will also discount that when they do a financing because they are -- they have underwriting criteria by the rating agencies that say certain things. So that is what really kind of governs the whole refinancing in the finance markets.

Okay. Thank you, guys. I appreciate it.

Thank you. I might put a plug in for Gary and his team while we are waiting for the next question on our refinancings. We have done a number of financing over the last six months, and we recently I believe press released a financing we did on rental trucks as basically an asset-backed financing of them that I think is one of the very first asset-backed financings of trucks. And it is -- it can give us access to a market that is very deep, and the financing went out credit enhanced at a AAA level. So I think it is probably a very good piece of paper in the market and will reflect well on the Company for several years.

Yes, I think from that one, Joe, Rocky is the one who has lived and breathed with that one, and what it has done, and if there is any questions, I'm sure he could answer them, is that gives the Company more flexibility and creates a much higher level of competition for pricing between the debt market, the actual straight loan, the ABS and the lease market, and what it basically does is brings them all in together. So we're able to utilize those different sources to lower our costs of financing their equipment.

David Post.

I got two questions. One, the insurance operations had a real nice turn in profit in the quarter, and I think the combined ratio for the business of [87%] was a very good (inaudible) for the business. It looked as though deferred acquisition cost reduction was the primary driver of that. Can you give me an idea of the extent what is the cause of that and the extent to which that is going to continue?

Well, I think -- and Gary you jump in -- but I think that deferred acquisition costs that they all call DAC, DAC is driven. It is the inverse of how much you sell. So when you have a great year or a great quarter and you sell a lot of policies, it runs up your DAC. When you don't, it brings it down. In fact, Republic Western by intent but really the number I think that you're talking about was really driven by Oxford. Oxford kind of by what the market opportunity was, it was exiting a line of business that did not relate to the senior market, which is kind of where they see their niche. And so they actually had less net new sales, and that is what hits DAC. So it is not necessarily a cause for applause or a cause for grief. It is just kind of the way it rolls out, David.

I would add to that one also, as you have probably read, through different means the insurance company's ratings were very low, which actually had -- gave them a problem on writing new business, which I am happy to say that both of them have been upgraded, and the Life Insurance has been upgraded to where it can really return to writing its form of business.

So you're saying that the DAC number is something you're able to start writing more business because of that credit change will probably return to the levels that they were previously?

Yes, we think it will go up. It's a mathematical relationship. It is not -- it will vary exactly with the business. So yes, if we write more business, you will see DAC go up a little bit, but it should not be a cause for alarm if it goes up a little bit. But for the GAAP treatment, it is a negative GAAP treatment.

I actually think Rocky, who sits on that board, has a couple of good comments on that.

Yes, there are a couple of things to it. Some of that would be associated with the annuity business. With the flatness of the yield curve right now, it is not necessarily a great time to be writing annuity business. So we should not see any impact from that.

Additionally over the last couple of years, that number has probably been somewhat higher than you would normally expect just from surrender activity, which was partly related to the ratings at Oxford at that time, and surrender activity slowed down in the current year.

Okay and one other question.

Go ahead.

One other question, and that is, I don't have the numbers in front me, but I think this is right. Net interest and other income for the quarter was up fairly substantially versus the prior year as well as the prior quarter. There was something in the K that was just released about a change in accounting policies for residual values of trucks that was kind of a onetime truck, and as a result, you did not restate prior financials. Is that the reason for the large increase there, or is there some other reason? And again, same question. Is that something that is going to be sustainable or decrease in finished and other income?

Gary or Rocky, why don't you take that?

Could you clarify for me the specific line you're referring to relative to your increase?

I apologize. I'm traveling right now, so I'm just going from memory. But I think the number was -- net interest and other income I think was $18 million in the quarter versus I think about 14 or $14.5 million in the year ago quarter and about $13 million in the prior quarter. I think that is the number.

One of the things that you look at is we did have higher borrowings in the fourth quarter this year versus last year. Income? Did you say income? Excuse me. Did you say income or expense?

Income.

Okay. Bear with us a little bit.

It sounds to me, Gary, like David is looking at net investment and interest income, which is (multiple speakers) 18.3 in '07 and 14.2 in '06.

Roughly it looks like about $2.8 million of that was tied into Republican Western, which is due to an increase in the short-term rates and the sale of real estate.

They received -- some of their notes got paid off, and they received kind of like a onetime pop where they had cash. They have been able to get higher returns on their investments.

Okay. So you're saying $2.8 million of that increase was essentially a onetime item?

I think that that -- I think that that was the case.

And then the last question is, the depreciation was up to I think 56 million in the quarter. Can you give us any idea of how that is going to change from here? Does it kind of stay at that level? Does it rise or -- I understand that it will fall over time, but when does it peak?

Well, during the first year that we add vehicles and we added a tremendous amount that we purchased for our own account this year, at least from the first accounting year perspective, the depreciation is roughly about 16% of its original cost of the equipment. That number falls to roughly 13% in year two, 11% in year one.

Now the financing program that we just completed with the securitization, all of those units will be acquired. Of the box trucks that we are scheduled or aware of right now, roughly 10.4 or 10,400 of 13,400 will be acquired. So we will see some depreciation on those units. And the pickup in cargo van program really won't be impacted significantly as far as their depreciation goes. But we will see more units coming on that will be depreciable units.

Rocky, this is Joe. I kind of see that a little more graphically. You correct me if I'm wrong, but for about the first 18 months, this is going to post higher expenses than if the same truck had been leased.

That is correct.

And going out 18 and beyond, it will go flat for a little bit, and then it will decline a little bit. So it is really a combination of the curve on an individual truck and then how many trucks we acquire in each year.

So if we continue to acquire at this same aggressive pace, this number will not normalize for maybe three years if we continued at this aggressive pace, which we won't. But in the year we are in, can we give David an indication of we expect to see this continue to ramp up through the third quarter or into the fourth quarter? Can we be more specific at all?

I would expect particularly maybe during the first two quarters of the year that we will be at a higher level, and then it should moderate.

Mike Nichols.

To touch on I guess a few other questions that people had alluded to before, and this is related to the self storage segment, we have conducted a lot of appraisals here to the extent possible and can probably say with a high degree of confidence that the self storage segment itself is probably worth roughly your market cap today. I guess from your perspective, I just wanted to get an idea of what the long-term strategy was for that segment? And how are you going to get the market to recognize the actual value there, whether it is through any partial monetization or are any other sort of spinoff or structure in the future?

Well, I will poke at it, Gary, and then maybe you jump in. In the very near-term what Gary has done is used it to enter into a series of asset-backed financings to just basically put us in a less risky position I guess. I don't know there may be a positive way to state that, but put us in a position where we're able to ride out a trough. And so that is one way. But that does not drive to the share price, which I think is closer to what you are alluding to.

Right, and really just the actual intrinsic value of that self storage segment and what you guys plan to do to actually have the market recognize the value that you have there?

Ian alluded to it. We have been driving now for over three years on what we call our storage affiliate program, our eMove. We believe for anybody to get real recognition out in the marketplace and particularly with a portfolio like we do, that each site is mixed. Mike, if you were actually at our site, you would see trucks, trailers, self storage, boxes all at the same site. It is common management. So it does not just segment off like you could peel it off or it's just departmental it out and cap it out. It does not exactly do that.

What our strategy has been is to drive towards increased consumer awareness, attempt to continue to treat this like a consumer branded product, and hopefully create the support in the marketplace for the higher values, and of course, at the same time, we have to make the earnings come through. So I mean it is not -- it is not totally a selling job; it is partially a performance job. And I told people last year at this time that my objective and we have set our standard at 90% occupancy, not at 85 which is really what most of the industry is, and we don't quote numbers like you know on normalized stores or we quote an all-in number when we quote an occupancy number. It is everything including the kitchen sink. Because that is what our investors are paying for. They are not paying for same-store numbers. They want to know what is their total situation.

So we are experiencing better occupancies than any major player in the business, and I believe it is the combination of the truck rental driving occupancy that will ultimately allow us to in a sense overcome the disability of that we are also in the truck rental business, if that makes sense.

Yes.

And so we're going to have to realize that. I think we are going to have to run above market occupancies. And I believe, as I mentioned earlier, I have 100 stores above 94% today. I know why they are running better occupancies, and that leaves me to believe I can do that at more locations, and that is what I'm driving on. My yield management people continually throw rate increases at me, and I accept that. But at the same time, I think even with rate increases, we should be able to drive at that 90% occupancy across the portfolio. And when we do that, we will realize I think you will see it kind of flow through in a way that is recognizable by investors. I don't think you're going to see investors just say, well, gosh, they have X number of rooms and X square feet and that would cap out as -- if you compare the straight-up to a REIT, that is ex dollars, and therefore, we support that valuation of their stock because they have to see some sort of an income or performance behind it. And the way I intend to do it is through brand awareness and then driving overall occupancies.

The other one is just a follow-through. As we are able to accomplish this over a period of time, when we go through and refinance, we will pull out a fairly substantial amount of nontaxable cash. We won't pull it out per se. But then what we're able to do is take that and reinvest it into the business and leverage off of that.

So the key thing about it is what you do, is you basically go through -- you will get close to the same valuation cap rate when you refinance. Now they have other things which haircuts it, debt service coverage and (multiple speakers).

But what you are able to do is pull out a substantial amount of cash and then basically take that and acquire more storage. So there are ways that internally that you can grow the business from that standpoint. So I think that that is kind of the combined strategy at least from my side of the desk on the financing side is to take the improvements that we have, add -- see, because we do get a fairly substantial portion of the moving and box sales now into our valuation, which allows us to grow the business further and add more trucks, trailers and everything else.

You know, if you take a look at it, we added $648 million worth of assets, and our debt went up $214 million. So the rest of it has come through the business.

Yes, and even monetizing select parcels of the self storage base, I know you guys hold some very, very valuable land in some very Metropolitan areas that I think could be obviously carried on the books while south of what the fair market value would be and would obviously free up cash and allow you to buy self storage in I guess various adjacent markets as well. So would that be an area that you guys would consider as well?

Outages, what you can do is you can kind of have your cake and eat it too, where you can actually take and finance some of that value and still ride the upward wave of (multiple speakers). So it is one of those that gives you a great deal of comfort going forward that you have the ability to finance and refinance and be able to cover those. So there are some good parcels out there, but we're able to do that.

Right. And I want to congratulate you guys too on what I think is the best use of your cash throughout the quarter, and that was the share repurchase itself. Thanks and that's all my questions.

This concludes the allotted time for the Q&A session. Do you have any closing remarks, sir?

Yes, again, this is Joe. I want to thank everybody for their support. We are going to continue to do our best to run the Company. I remain very positive towards the team we have in place. We have a highly motivated group of people. Every single person who has been with the Company more than a year is a participant in ownership to our employee stock plan, and as some of you know, we have a tremendous amount of 10-year people, and by the time they have been here 10 years, that is a significant thing to them. And it factors I think positive in their decision-making which benefits all of us.

So thank you again, and I look forward to talking to you next quarter.

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