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Executives

Kenneth Myszka - President, Chief Operating Officer

David Rogers - Chief Financial Officer

Analysts

Todd Thomas - Keybanc Capital Markets

David Doty - Citigroup

Mark Biffert - Oppenheimer & Co.

Mike Salinsky - RBC Capital Markets

Paul Adornato - BMO Capital Markets

Sovran Self Storage, Inc. (SSS) Q3 2008 Earnings Call November 6, 2008 9:00 AM ET

Operator

Good morning, my name is Samantha and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter earnings release for Sovran Self Storage conference call. (Operator instructions) Mr. Myszka, go ahead and begin your call sir.

Kenneth Myszka

Thanks Samantha. Good morning and welcome to our third quarter conference call. As a reminder the following discussion will include forward-looking statements. Sovran’s actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences is included in our company’s SEC filings. The copies of these filings may be obtained by contacting the company or the SEC.

While our storage turned in a solid third quarter in a very competitive marketplace, same store revenues increased by 0.2%, while the same store expenses impacted by several one-time charges increased by 6.3% resulting in a same store NOI of minus 3.3%.

Although the Florida markets remained a drag on our portfolio’s performance, the numbers there are improving and move in’s for the quarter far outpace those in the third quarter in 2007. In fact, we experienced similar move in activity company wide. This positive trend did not come without of cost spillover. We were quite aggressive in granting concessions to spur this activity and as a result we don’t see the revenues hit our P&L for a while.

On the acquisition front, in July we acquired 21 stores in five states at a total cost of $144 million into our JV with Heitman. With high volatility in the capital markets, our balance sheet remains strong and conservative and we believe that the comfort of having long-term fixed rate debt extending out nearly four years is well worth the substantial hit we’re facing.

With that, I would like to turn it over to Dave Rogers, our Chief Financial Officer, who’ll provide some details of our quarter’s activities.

Dave Rogers

Thanks Ken. With regard to operations for the quarter total revenues increased $1.7 million or 3.4% over 2007 third quarter and property operating expenses increased by $1.5 million. These increases resulting in an overall NOI increase of 80 basis points, were primarily due to the addition of the six stores we purchased since October of last year and the impact of the joint venture properties acquired during the quarter offset by a decline in same store results I’ll get to in a minute.

Average overall occupancy was 83.3% for the quarter ended September 30 and average rent per square foot was $10.48. Same store revenues increased by 10 basis points over those of the third quarter of ‘07 again was rate driven as our same store weighted average occupancy for the quarter declined from that of ‘07 third quarter by 170 basis points to 83.4%. At the quarter end date, same store occupancy was 83.3%, down 100 basis points from last September 30. The rental rates were higher at $10.48 a foot compared to same store rate of $10.39 last year.

Now these results are rather underwhelming. They mask a lot of the effort we put into achieving occupancy. We treated many of our customers to the first months rent free to the tune of over $2.1 million on a same store basis compared to half of that during last year’s third quarter.

Our goal was to capture the traffic of the busy seasons to put customers in our stores ahead of the upcoming seasonal slow time. Costly - yes; beneficial - we think so. Our September 30 occupancy of 83.3%, was only 20 basis points behind at of our June 30 levels. Typically, by the end of the third quarter were 150 to 200 basis points behind as we enter into the slower season.

Operating expenses on a same store basis increased by 6.3% this period, which was an unexpected surprise. Of this almost $300,000 was the insurance deductible portion of the damages sustained at some 20 stores in the Gulf region during Hurricanes Gustav and Ike. Another $300,000 was due to spiked utility costs at our stores in the Houston and Dallas markets.

Unfortunately, there was a lot of disruption to the transmission grade in that area throughout much of the summer and we were paying in the range of $0.15 to $0.16 per kilowatt hour versus our usual $0.07. We consider both the hurricanes damage and the electrical charges one-time items that should not have an impact going forward.

Property taxes increased by 3.6%, payroll by almost 6% and curve of fuel maintenance by about 13%, but we had planned for these. We think that for the most part expenses have been and should continue to be well contained. After the unforeseen hurricane damage costs and the Texas utility cut overages, our same store operating expense growth would have been under 3%. We expect this normalized level of increase in Q4 and into 2009.

Growing the top line by 10 basis points and absorbing a 6.3% increase in operating costs resulted in a same store NOI decrease of 3.3% for the quarter. Taking out the one-time hits our NOI declined by about 1.5%. G&A costs for the period came in at $4.3 million, which is pretty much as expected, the increase of 8% over last year’s amount is primarily due to cost incurred managing and overseeing the joint venture stores.

With regard to capital matters our balance sheet remains pretty much unchanged during the quarter. We contributed $16 million as our 20% share of the previously announced joint venture purchase of the 21 store portfolio. We funded a little over $5 million in construction and process to our expansions and enhancements program and we put another $5 million toward our accelerated lighting, brightening and office renovation program.

This total of $26 million of expenditures was funded with $11 million of cash leftover from our June refinancing, $3 million from the drift program, $3 million borrowed on the line and the balance came from operating cash flow. As mentioned on the last call, we were able to refinance almost all of our short-term and near term obligations via a four year note. As such we have little in the way of debt maturity or commitments through the year 2012. We also arranged for a new $125 million line of credit, which at the company’s options can be expanded to $175 million and can be expanded through 2012.

In 2000 the line of credit slopes at LIBOR plus 1.375% and the company has entered into a interest rate swap contracts, which fixed the rate payable on the full year term loan at 5.97% through 2012. Our total outstanding debt is now $612 million; at September 30 all but the $3 million drawn on line is long-term and fixed rate are hedge to maturity. Approximately 18% of our borrowings are secured.

Our debt service coverage in the third quarter was 2.9 times EBITDA as was, since we don’t have any preferred shares remaining, our fixed charge ratio. Debt to enterprise value was about 38% at September 30, so we remain conservatively capitalized at little underway of debt overhang and have sufficient flexibility and capacity to fund our needs.

With regard to guidance, we’ve encountered some pretty strong headwinds as a result of overall economic conditions and judging by what we’ve seen in the past few months, we expect to continue with leasing incentives and aggressive marketing. We’re curtailing our same store revenue growth expectations for at least the next two quarters and are now looking for increases of between 0.5% and 1.5% for the balance of the year, net of incentives.

We expect expense growth to be relatively contained at about 3%, so our same store NOI growth is now forecast as pretty much flat for Q4 and into early 2009. G&A costs are targeted at between $4.3 million and $4.6 million per quarter, depending on the acquisition pace of the JV. These additional costs incurred to operate joint venture properties are expected to be offset by management fees earned from a JV.

For the coming two quarters and perhaps beyond, we plan to acquire additional properties primarily for the benefit of the recently formed JV. The acquisition environment is pretty much unchanged, is a good group of properties and portfolios either on the market or owned by folks that can be worst in the selling, but for quality stores solid expectations are still pretty bullish.

For the purpose of guidance we’re forecasting a total of $20 million to $25 million of company contributions for the JV in 2008, including the July investment of $16 million. We expect our contributions to earn about 8% on a leverage basis.

Our expansion program continues, although we have reduced our expected total, 2008 expenditures to about $25 million to enhanced revenue capabilities at the existing properties. So far this year we significantly had spent 13 stores at a cost of $16.5 million and had 17 additional projects underway with $14.8 million expended so far on those.

We have continued our program of accelerating the paving, painting and fencing projects at many of our stores in an effort to improve curb appeal sooner. We expect to spend about $12 million on our same store in 2008 and about $5 million more on our 2007 and late 2006 acquisitions. Most of them have been incurred as of September 30.

To give you a better handle on our interest costs, we are now obligated on $610 million of long-term fixed-rate loans. Our annual interest cost to carry this debt including amortization of financing costs is $40.4 million. This is not expected to change materially for the next four years. So the only variable component in our debt structure is related to the line of credit, as just mentioned carries a floating rate of LIBOR plus 137.5 and at September 30 they were $3 million on this line.

Accordingly and primarily because of the ongoing incentive program and it’s effect on our top line we are now projecting our FFO per share in 2008 to come in at between $3.28 and $3.30 and between $0.80 and $0.82 per share for the fourth quarter.

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

Ken Myszka

Okay. Thanks Dave for that explanation and that concludes our prepared remarks. We’ll be pleased to answer any questions that you might have.

Question-and-Answer Session

Operator

Your first question comes from [Inaudible].

Unidentified Participant

Hi good morning guys. I just wanted to ask you, where are you’re street rents right now compared to your average in place rent on the portfolio?

Kenneth Myszka

In most market our street rates are on par with the rates we are charging, say for those tenants who are lagging a bit and haven’t had an increase in the last 10 to 12 months.

Unidentified Participant

I guess as a follow-up to that. What is your general sense on storage fundamentals in ‘09, do you think that you‘re going to have to regain may be easing street rents to actually below your in place portfolio to meantime demand and occupancy in your portfolio?

Kenneth Myszka

No. I don’t think so, what our goal would be we try to have continue with concession as necessary, but keep the street rates where they are and hopefully with a little more increases is the time goes by. Our goal is to try to get the occupancy up, we have a one-time concession as I mentioned, it seems to be working as far as physical occupancy is concerned.

Our customers generally stay at 11 or 12 months, they get one month free and they say that make the time over the long hours, we think what would be a positives for us. So, to get the brief answer to your question is, no, we don’t anticipate softening our asking rates.

Dave Rogers

May be just to elaborate a little bit, if we haven’t had the BUCO in Florida, which has been just a terrible market for us the last 18 months, I don’t think we have to do it anywhere and the reason people are leaving in Florida is we think part of the natural cycle, they are not leaving because of in place rent, the tenants are paying, there is globing rate increases so, as Ken said, we are fighting it out on the new lease ups with incentives, but we are protecting the core of rates and if Florida holds, boy I think anywhere would hold.

Unidentified Participant

Just lastly, what where your management fee for the JV in the quarter and con you just quickly just remind us of the calculation of those fees and what an expected run rate would be?

Kenneth Myszka

Yes, we are entitled to a 6% property management fee based on the rental revenues of the joint venture and 1% call center fee. So, the fees for the quarter, we are really two months, we closed in late July. So August and September were an impacted to this quarter and we earned about a $180,000 in fees for those two months. If we don’t add anymore properties that we would be about $90,000 a month, we’ve had the cost baked in, because we anticipated putting this JV in place, actually we anticipated it at the beginning of the year.

So, we had staff on board and we’ve been absorbing some G&A over the last couple of quarters. So the G&A run rate going forward won’t increase as much as perhaps the management fees will going forward, but our run rate should be in about the $90,000 month range until we add more properties.

Operator

Your next question comes from Jordan Sadler.

Todd Thomas - Keybanc Capital Markets

It’s Todd Thomas on with Jordan. First, does occupancy look through October? Do you have an updated occupancy figure?

Kenneth Myszka

Well, I want be able to give you the exact number. I can tell you the move-in aggressive move-out are very encouraging there, company wide our move-in for ‘08 over ‘07 rough about 15%, out move-out were up a little bit of 2%. So, the response is good to our concessions that were granting. As I said it doesn’t come about of cost, but the trend is good, overall in Florida in particular it’s kind of matches what we see with our portfolio as far as moving 10%.

Todd Thomas - Keybanc Capital Markets

So, you’ve seen that move-ins at this point?

Kenneth Myszka

Yes.

Todd Thomas - Keybanc Capital Markets

Has turnover increase at, or has there been any change also in the duration of the tenant leases, you mentioned that’s typically like 11 to 12 months, does that change it all?

Kenneth Myszka

No. We haven’t seen any appreciable change in length of stay, as I mentioned our move-out for the third quarter company wide were up about 2%, which for the third quarter is pretty good actually compared to prior quarters, because third quarter you didn’t sustain a fair amounts move-outs with [Howard Stevens] so that 2.4% is a little bit less than what we historically get, so that’s another positive.

Jordan Sadler - Keybanc Capital Markets

This is Jordan. That move-ins versus move-out that you talk about plus 16% year-over-year versus plus 2% year-over-year that was for the third quarter Ken?

Kenneth Myszka

Correct.

Jordan Sadler - Keybanc Capital Markets

And that trend you think continued right into October move-ins basically --

Kenneth Myszka

I misspoke, that 16% is October, move-ins for the third quarter were up about 3.2%, move-outs were down 3% for the third quarter. That number I just gave you 16% towards increase move-ins for October and outs were up 2%, little over 2%.

Jordan Sadler - Keybanc Capital Markets

If move-ins are outpacing move-outs, is that purely a function of the increased concession because something cause you guys to get much more aggressive and what you would intuitive think it's an outsider is, that your move-ins were outpacing your move-outs and so you are seeing higher rate of vacancy move-outs that you try to stem that going into the slow season, is that been accurate?

Kenneth Myszka

The reason to moving increased, we believe because of the concessions we wear granting.

Jordan Sadler - Keybanc Capital Markets

So the 3Q numbers move-ins versus move-outs for what?

Kenneth Myszka

3Q move-ins we’re up 3.2% and 3Q move-outs for Q3, ‘08 over ‘07 was down 3%. So it positive on both sides for us.

Jordan Sadler - Keybanc Capital Markets

It’s not necessarily intuitive, but at some point during the quarter that, you guys turn that around, was that reversed at some point during quarter and you guys turn that around by getting aggressive on concessioning?

Kenneth Myszka

One thing we had no control over when people are moving out. So fact that there were fewer move-outs, it really had nothing to do with our concessions that we’re granting, but there is no question that, there was positive response to the concessions, maybe I’m missing your points.

Jordan Sadler - Keybanc Capital Markets

We’ll my point is your saying the concessions don’t have anything to do with it, but the concession to try and accelerate move-ins.

Kenneth Myszka

Right, correct.

Jordan Sadler - Keybanc Capital Markets

And so you’re trying to accelerate move-ins, I assume because you’re concerted about occupancy, and so you would try to accelerate move-ins, because your occupancy was down or weaker versus historical or trend or what you would have expected I would have imagine. Unless you’re taking a different tag then you would have historically?

Kenneth Myszka

No. You right, your prior assumptions are right.

Jordan Sadler - Keybanc Capital Markets

So, basically it’s started to get weak and so you guys responded, it actually turning around?

Kenneth Myszka

Correct, any idea being we got traffic in the summer. You get a pretty good amount of traffic June, July, August even September and that start swing and I though while this traffic is heavy let’s capture tenants, let’s get people on place, we are not any revenue for the first month, but at least we have tenants in place starting October 1, November 1, when things are getting a little bit slower.

We are having a hard time catching up to same store revenue growth in that regard, because every month we are getting, we are not charging compared to last year for those 11,000 or so tenants that move-in every month, but we sure got terms in place. They are starting to pay 30 day after they move-in and we’ve got a base to go from.

Jordan Sadler - Keybanc Capital Markets

Okay. Lastly, in terms of acquisitions can you expand on what you’re seeing and what are your expectations for the fund are this point, will the time rising or the initial investment window have to be extended and also if you could comment a little bit more about pricing?

Kenneth Myszka

We are obviously being careful and selective with what we’re buying on behalf of the fund. We don’t have a lot of competition to buy properties and that has been the case perhaps in prior year, but nonetheless we want to make sure that given all conditions that we are getting good value. We do have some $30 million to $40 million of properties under contract; hopefully it will close before the end of the year.

We are looking at some long due portfolios and some one-off properties. As I mentioned before our investors interested in best in class and very high quality properties and there’s a fair number of those out there. There’s been very little movement on cap rate and solid expectations. I think to get the type of properties we are looking at, we are still talking in the low sevens as our cap rates still on un-stabilized income. There’s a lot of property out there for sale and a lot of it is C+ and lower I think and we haven’t even looked at that, but when you see the volume I think that a lot of the brokers and day sheets are showing, that’s what you’re seeing, either the markets poor or property quality poor.

I think also in the not too distant future we are going to be seeing a lot of properties that were built in’04, ‘05, perhaps to ‘06 that haven’t leased up anywhere near as faster as people though they were and the construction loans and short terms loans around those are maturing; that’s probably not for this joint venture, but I don’t know we gave our investor a nine month exclusive defined properties to come up with a total capital infusion of $125 million between them and us. I don’t know exactly when that expires, but I think we’ll fill it and I hopeful will forward with it.

The acquisition market itself is sort of clouded a little bit with some distressed loan sales by some larger institutions and a lot of one-offs smaller properties of a lesser grade and there is activity in the quality properties, but pricing hasn’t changed much in those sine certainly the last year.

Operator

Your next question comes from Michael Bilerman – Citigroup.

David Doty – Citigroup

It’s David Dotty here. Just going back to the issue of weakness, can you give us a little bit of color as what you think the drivers to that weakness are; is it pullback by consumers, is it supply driven, is it competition from some of your peers?

Kenneth Myszka

I think that more than economy. Florida in particular let’s say boom-bust cycle, construction was ramped up there. In Florida it’s a little bit more competition because during the after math of the hurricanes there were a lot more stores put up there and no hurricanes since 2004 to 2005.

So Florida’s seen a little bit more competition, plus the economy is actually facing problem. Throughout that portfolio though, in areas that we’re having some difficulty it’s more the economy. I’ve been visiting stores out in Denver and Phoenix, and visiting with managers and they’re telling me that people are really shopping, they’re all price sensitive and so our move-in special is the right thing we think to do at the right time.

David Doty – Citigroup

Can you just provide a little bit of color on the state of your business customers and the demand from that pool?

Kenneth Myszka

Well, the only place that we’ve seen some fallback there is really in the construction areas, because where there is a lot of home building, these people, they need a place go out and as there’s less and less of that activity, there is less demand for our product. So, as I would say take them at a industrial rates. From a business standpoint that’s the only area that we are seeing reduction in. In the residential part, its Florida once again, there is less of that home building that’s moving, so that what the scenario is.

David Doty – Citigroup

Okay, are you seeing any change in delinquencies?

Kenneth Myszka

No, as a matter effect, that’s another area when I was talking with managers. Our bad debt experience is historically about 0.5% or less than where we are. So, you got to stay on top of these things as far as receivables and when the day comes at the end of the months our managers follow in with the people who haven’t paid by the first of have got five days to pay it. So, we’re on top of that and knock on wood; we’re still within the kind of things of what we think is a reasonable parameter.

David Doty – Citigroup

Great and my next question is moving over to the pullback in redevelopment. Has there been any capitalization on any of those projects that have been showed?

Kenneth Myszka

No, what we are doing basically is we took a look back; actually not because so much of a little bit of a slowdown in the business, but more because of rising construction cost particularly with concrete and steel at the beginning of the year and we’re cautious with our capital and our liquidity position. So, we took a look and that $48 million budgeted for ‘08 and perhaps another $40 million for ‘09 with the cost of steel as well as in concrete, doesn’t still make sense.

So, our guys basically started back at the beginning before we put any showers in the ground and reevaluated them on a cost basis. Then what happen, basically starting in May, June we got a little bit more concern with some of our markets and perhaps looking out 12 months how are these going to be, it doesn’t make sense. Ironically, as we started doing that the cost of steel as well as concrete started coming down.

So, we’re constantly looking; once we break ground and get going it’s too late to stop; these projects are not that big. So to capitalize anything and let it sit and that’s what I understand your question is, wouldn’t make sense, because on average a smaller project is $400,000, very few crack $1 million, so once we go, we put up the building, we put the sir conditioning in it and we go with this. We don’t strudel once the ground is broken on these things.

David Doty – Citigroup

And then my last question along those lines, is if you are indeed pulling back on some of these projects or thinking about it; do you think there should be an impact to your repair and maintenance spending. Some of the redevelopment projects, will they flow back into the expense line in terms of sort of more miner attempts that.

Kenneth Myszka

No, we are pretty careful with what we call an expansion enhancement and to capitalize. I mention that’s a true new project, so we’ve been pushing more through our expense side on what we call the proto expenses. We’ve been putting some through what we detailed in the press release as renovations and now the CapEx on the expansion and enhancement program are truly new revenue generating projects.

Operator

Your next question comes from Mark Biffert – Oppenheimer & Co.

Mark Biffert – Oppenheimer & Co.

My first question, kind of wanted your view on the economy and that expectation of increased job losses and the impact that potentially have on discretionary spending and I wondering what you’ve seen in past cycles in terms of how that impacted your business?

Kenneth Myszka

Certainly the economy has an impact on the South Sovran industry just as it does on other industries. What we had found though is when the recession or a down term comes in, we begin to feel the effects a little bit later than other types of industry because of the short-term nature of releases, relative to interest expenses. Once the recession begins, we feel the effects along with everybody else.

The positive about our industry is, once again because of the short-term nature of our releases and relatively inexpensive monthly rent and when things start improving a little bit, people will come to us sooner because they’re locked into or committed to a three year, five year, ten year release that go with us on a month-to-month basis.

So what we had found over the 20 some plus years in industry is that our recessions are shorter and shallower and frankly based on what we see of our industry, we think we are now beginning to feel it along with everybody which will tell us that we are in the middle of discussion. Even though our movement in the last quarter went up somewhat, there was a responsive to aggressive compressions.

I think Mark I answered a couple of times ago when the caller asked about the effects on business customers. We are loosing some in regard to construction work and so forth, but also this gives us an opportunity in a lot of our stores or our managers typically belong to the local Chambers of Commerce and Rotary Clubs and we actually have a of proactive marketing program where our managers try to go out and meet with businesses and show the benefits of a $100 a month no commitment, no long-term deal, but here you got a warehouse using it, you got a retail shop that’s excavating, you want to down size; we’re here for you. So in some way be take advantage of this.

Never will we say we do well in bad times. All of us like a rise in time, but I think there are some opportunities and we’re hopefully if the things are bad we want a make sure that we do the best we can here.

Mark Biffert – Oppenheimer & Co.

So, I mean when you’re building into your guidance looking at it in terms of discounting I mean how long does the impact of that discounting last in your proposal. In terms of the number of people you saw come in over the last quarter, what’s a typical retention rate of those people over say the next three months. I mean you’ve said typically on average 12 months they stay. I mean what percentage of the people brought in actually stay the 12 months?

Kenneth Myszka

If they are business, which is about a third its more; if they are residential in normal times it’s about seven or eight months. In these times we are not sure exactly what the reasons are and we are calling these customers residential tenants. If they are loosing their house and have to store their goods to move into an apartment or to move in with their parents or to move in with someone else, that’s a longer term typically. So it’s a little bit different set of circumstances now than we used to measure in.

I’ve explained before I think about the extra room concept that we have. That some of our people live in apartments and use this as an extra room or condos and some homeowners use this as an extra room for the seasonal goods and move in and out. This type of residential customer that’s in distress is probably a little different.

We’re gauging this expenses daily of this first month free type of thing on a six month term, but we don’t know yet with a lot of these distresses; especially Florida and that’s probably our worst market. Our Florida residential tenants are doing. So, we’re playing de-cent now in a big way with regard to this three month rent and we probably will not be able to measure some of the effects for several quarters looking out and put that in our bank of knowledge for the next downturn.

Mark Biffert – Oppenheimer & Co.

Okay and then lastly jumping over to your joint venture, your partners’ appetite for acquisitions. I’m just wondering, why they would one of the out there in the market acquiring and I think you’re building in roughly $20 million to $25 million, which implied I think $9 million of additional equity input from you guys and I’m wondering why you want to be out acquiring. Nobody knows where cap rate should be in this environment and what the cost of capital will be going ahead. So what makes you feel comfortable that you’re actually going to close on these things that are under contract right now?

Kenneth Myszka

Well. We’ve done negotiating these properties for quite a few months. We like the properties and we see that again they are in the best spots in their markets. They are priced with lower replacement costs. I know there’s other factors involved on a macro basis that I can’t really speak to, but these deals are good; we’re comfortable with them, we think we can grow them and at least for this little bit that we’ve been working with for the balance of the year, I feel pretty comfortable.

Mark Biffert – Oppenheimer & Co.

And do you think you could put back to these people and after six months, nine months and comeback and get a better price if you are just away?

Kenneth Myszka

No. I mean, the people that have the quality properties, they’re sitting there. Cash flow I mean we got nipped by a couple of cents this quarter because of some unforeseen items about really on balance the cash flow out of these properties and this is the position a lot of sellers are sitting in and saying “why should I sell? You’re telling me that the markets distressed and you can’t buy anything; that’s your problem, that’s not my problem. I’m sitting here pretty, I’m collecting the rent every month, my NOI is just fine.”

So the seller who’s sitting on good property is by and large happy and just because there is a downturn in capital market; they don’t have a reason to sell for state planning or blooming maturities and even if you could have maturities most of the people are not in the highly leveraged situations They are not going to sell cheaper because there won’t be any point in selling in these peoples minds.

Operator

Your next question comes from Mike Salinsky – RBC Capital Markets.

Mike Salinsky - RBC Capital Markets

Could you talk about your performance Texas. I would have thought it would have been a little bit strong just given the impact from the hurricane in the Huston market there?

Kenneth Myszka

Well unfortunately on an NOI basis Huston didn’t have such a good quarter because of the $600,000 and extra costs were incurred. We did see some hurricane impact primarily as September rolled along, so for the quarter you don’t see a lot. It didn’t come in until probably nine or 10 weeks into the quarter. I think we are looking pretty good in October in Texas and we did get several 100 move-ins because of the hurricane in primarily Huston market so it will be good, but you won’t see much attracted in the third quarter because they didn’t really kick in until after labor day.

Mike Salinsky - RBC Capital Markets

Okay, you talked about the cut back in revenue enhancement expansion spending; given what we’ve seen in just the fundamentals here, where are yields right now on redevelopment projects?

Kenneth Myszka

We were looking before the increase in steel and concrete costs for about 12, that was our goal. We can give 12% cash-on-cash after 18 months lease up time, we would give these things a green light. We were getting pinched pretty hard with the construction costs going up and that’s why we had everybody take a look and they still were able to come up with about $25 million, $30 million work. Then we got a little concerned about the softness in some of the markets and then we pulled back, but that’s still our goal. Our goal is to have a 12% cash-on-cash yield after18 months of turning the keys up.

Mike Salinsky - RBC Capital Markets

On the income statement you should have a pre-substantial jump actually in other property income. I’m assuming a portion of that was a management fee, but was any other one time fees or cash ups or anything in that number that would have drove the substantial increase?

Kenneth Myszka

Yes. We earned an acquisitions fee from the joint venture for the year’s worth of and basically the redevelopment costs and the search cost and so forth for the properties that we bought in July. So it works out to be a joint venture share of $550,000 on time acquisition fee.

Mike Salinsky - RBC Capital Markets

Any thoughts on breaking that out in the future?

Kenneth Myszka

Yes, I won’t be that typical, but we should. Your right; it’s already been suggested to us. I saw it in your write up as well, so we will do that.

Mike Salinsky - RBC Capital Markets

Okay. You talked about street rates and you talked about versus in place rents; what are renewal increases looking like right now versus what your passing along where street rates are right now?

Kenneth Myszka

We’re raising the street rates modestly, kind of that “here we’re raising the rate, but we’re going to give it a first month free and everything” in accordance with what we think we can get from our existing customers. It ranges somewhat between popular units and unpopular units, so there may be some tenants who get on a $100 of units a $1.50 increase and there will be some that’ll get a $7 increase. I think overall through nine months were at about just under 3% for the in place tenant rate increases and accordingly street rate increases.

Mike Salinsky - RBC Capital Markets

You talked about; I’m going to give away the free way to drive people in the door. You a decent amount of smaller markets, maybe not so much as some of the REITS there; what are your competitor doing? What are you seeing from some other smaller operators? Are they offerings substantial discounts to trade it with occupancy; are they holding a fair amount in pricing, what’s the general trends you are seeing right now.

Kenneth Myszka

Most of them if you will, their number one goal is occupancy and so we much rather the competing with the larger companies, because they’re looking to maintain the run rates and then do a one time concession. So it is more difficult in the smaller markets when we’re dealing with the smaller competitors and from the pricing stand point, the obvious benefits we have we think they are more on us. We have the internet that we can go on; the call center which kind of leveled the playing field for us, but it is the struggle and we’ve got to be aggressive at least now until we can get occupancy up to a level that’s a little bit more solid and then we can judiciously fall back on these concession cost.

Dave Rogers

You know Mike, we’ve added some public storage and almost every single market we’re in expect maybe Florida and we’re up against new stores and a bunch in extra space and a fair number. It’s because of primarily public storage that a lot of our customers feel entitled to the free months rent. We’ve been talking about this quarter after quarter after quarter, why are we doing this? Why are we doing this and pretty much four years ago we did this for a quarter and then so we didn’t have to. Just like we are doing it, but mainly it’s because it’s becoming grey through the adverting and through the expectation of the customers that this is what you get. It isn’t so much trying to knock around of the mom and pop; it’s actually this whole thing I think came about primarily because of public stores and some of the other operators.

Mike Salinsky - RBC Capital Markets

So, I mean there are various interesting points. Do you think that just given what you’re seeing in a occupancy, when condition is improved, can you pull back on this or is this going to become norm to offer the one month move in. This is where the industry is moving.

Kenneth Myszka

I don’t think so; that’s not what our plan is. Like I said when we get our occupancy level where we feel comfortable with it, there maybe some situations were you got a high level of vacancies in a particular unit side where you may run some specials, but I don’t see that coming as the norm.

Mike Salinsky - RBC Capital Markets

Okay, then finally David, just given the guidance reduction, can you walk through how much of that was related to interest versus how much of that was related to operation?

Kenneth Myszka

Actually when we modified guidance after the refinancing we has paced in our new interest stock because it was pretty fixed and we put it in joint venture, expenses and costs, we put in the interest, really the whole guidance thing is more prolonged and our deeper incentive program. We will not expect to only be doing in the third and fourth quarter something less than 1% top line growth, that’s the pressure. Everything else is in line I think to what we tried to adjust back in June when we move up. Our new financing is going to be all about it.

Operator

Your next question comes from Paul Adornato – BMO Capital Markets.

Paul Adornato - BMO Capital Markets

I was wondering if you could talk about the level of bad debt in the quarter and the trend throughout the quarter?

Kenneth Myszka

Paul, that was pretty flat. We didn’t really follow that very, very closely and as I said it’s been in the range of certainly less than one half of 1% of sales and its being attributable to controlling receivables.

Paul Adornato - BMO Capital Markets

Okay and was the one month free incentives in place for the entire quarter or did you face that later in the quarter?

Kenneth Myszka

We started that beginning of September I believe it was [inaudible]

Paul Adornato - BMO Capital Markets

And would you expect a higher bad debt level among those that you offer in the free first month typically.

Kenneth Myszka

Well, that’s a tough call. I know we’re going with that and we’re going to have to be stay on top of that. We’re not proving for that and we worked with our mangers and assured that they stayed on top of these people, but there’s a possibility we’re going to do from the management standpoint about that.

What we do Paul by the way is once we get into a situation where we see the tenants not responding or not calling, we stop accruing rent, we stop accruing late fees, so that we don’t run up big receivables. If we got a problem tenant, after the 60 day and we’re in the process of taking it to auction and so forth, that rent does accrue on his clock but not on our books

Paul Adornato - BMO Capital Markets

When you offer a free month, what is the actual cash out of pocket required to moving; do you have admin fee or other fees.

Kenneth Myszka

Yes, generally there will be an admin fee. Many times they’ll buy a lot from us and sometimes they’ll purchase insurance.

Operator

Sir, there are no more question.

Kenneth Myszka

Thank you very much for your participation on the call. I hope you have a nice, happy holiday season. We’ll talk to you next year. Thanks everybody.

Operator

This concludes today’s conference call. You may now disconnect your lines.

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