Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Dean Jernigan - President, CEO

Chris Marr - CFO and Treasurer

Tim Martin - SVP and CAO

Analysts

Christy McElroy - Banc of America

Jordan Sadler - KeyBanc Capital Markets

David Toti - Citi

Jeff Donnelly - Wachovia Securities

Paul Adornato - BMO Capital Markets

Chris Pike - Merrill Lynch

Michael Knott - Green Street Advisors

Lindsey Yal - Robert W. Baird

U-Store-It Trust (YSI) Q3 2008 Earnings Call November 7, 2008 11:00 AM ET

Operator

Hello and welcome to U-Store-It Third Quarter 2008 Earnings Call. (Operator Instruction). Please note the conference is being recorded.

Now, I would like to turn the conference over to Mr. Dean Jernigan.

Dean Jernigan

Good morning to all. Today's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risk factors could cause our actual results to differ materially from these statements are provided in the documents the company files with the SEC, specifically the 8-K with our earnings release filed with Form 8-K and the Business Risk Factor section of the company's annual report on Form 10-K. In addition, the company's remarks include reference to non-GAAP measures, reconciliation between GAAP and non-GAAP can be found on the company's website.

Again, good morning to all, I have with me this morning also Chris Marr and Tim Martin, who will be speaking. We will start with Chris; I believe will make some comments followed by Tim. I'll come back around and wrap-up our comments before we go into Q&A. Chris?

Chris Marr

Thanks, Dean. Thanks everybody for joining us this morning. An objective going into 2008 was to establish realistic expectations, communicate those expectations clearly and then consistently meet or exceed our expectations.

The third quarter was another very successful one for us on all accounts. We perform consistent with or an excess of our financial and operational expectations and we perform very strongly compared to the industry as a whole. Our same-store growth and rental income of 3.7% was driven by a 2.1% reduction in the dollar amount of discounts and a 2.6% reduction in the gap between in-place and asking rents both as compared to the third quarter of last year and when we combine with an increase of 1.6%, our asking rents and our receivables remaining well below prior year levels, which resulted in lower credit write-offs when we had a year ago. We produced very strong top line results.

Other property level income, fees and ancillary sales increased to 11.9% over the third quarter of last year, so our total same-store revenue increase was 4.3%. On our second quarter earnings call we outlined our expectations for the second half of the year of relatively flat to negative same-store expense growth as compared to the second half of '07. We've delivered on that expectation in this quarter with our same-store operating expenses up 0.9% over the third quarter of '07 with reductions in personnel, R&M and insurance.

As a result of strong revenue growth across the bulk of our same-store markets, combined with the impact of our focus on operating expenses, we produced a very powerful 6.5% increase in same-store net operating income. The result is a 130 basis point improvement in our same-store operating margin. A $0.26 per share of FFO exceeded the upper end of our $0.23 to $0.25 per share expectation and represents 18.2% FFO per share growth over the adjusted FFO per share of $0.22 for the third quarter of '07.

Our payout ratio of FFO at 70% permits us to meet all of our fixed charges in property level, capital investments from cash flow. Our previous annual guidance was a range of FFO per share of $0.93 to $0.97. We are raising the midpoint of our FFO guidance by $0.015 and guiding to the upper end of our previous range, introducing new full year guidance of $0.96 to $0.97 per share and we are maintaining our full year revenue, expense and net operating growth income expectations on same-store basis.

We continue to be very focused on leveraging liquidity. As Tim Martin will walk you through next, assuming a conservative scenario, we believe we have the capacity to address all of our maturities over the next 26 months. We have always focused on being good stewards of our shareholders’ capital. 12 months ago, we outlined a plan to begin with the right sizing of the dividend and continued with our disposition program in the use of a 100% of the proceeds to delever. We did not startup a development program and have not been active in the acquisition market this year. We have made steady progress in our JV discussions and we continue to explore all capital raising alternatives.

As an update to our disposition program, year-to-date through the end of the third quarter, we closed on 16 dispositions for proceeds of approximately $45.1 million. These dispositions represent a 7.3 cap rate on trailing 12 month net operating income and $53 per foot. At the end of the quarter, we had seven properties under contract for estimated proceeds of 21.1 million and closing expected during the fourth quarter. These seven assets at those proceeds or sale price represented a 7.2 cap, $53 a foot.

Subsequent to the end of the quarter, we have closed on three of the sales, so cumulatively as of this date; we have closed on 19 dispositions for proceeds of approximately $52.3 million, representing a cap rate on trailing and net operating income of 7.15. We expect to close on three additional dispositions before the end of the year for $9.8 million of proceeds. So, in total for 2008, we expect to generate $62.1 million of sales at a 7.27 cap rate, $53 a foot.

As an update to our JV process, we have made solid progress in documentation, property level due diligence and preparing all of the information that goes along with an application to a service to transfer existing YSI debt to a new venture entity.

The extreme volatility in the capital market has both the company and our partner analyzing all aspects of our proposed deal on a daily basis. Given these unusual times progress is moving along at a very measured pace. We do not expect to be able to have a transaction finalized and closed in 2008. As we have cautioned on previous calls, this is an usual period in the real estate capital markets and we continue to work diligently towards the ultimate goal of creating the right transaction for our shareholders and our partner.

Moving on to operating results. Our same-store increase and net rental income was attributable to 1.7% quarter-over-quarter increase in street rents and our rate increases being passed along to existing tenants and lower write-offs. As I mentioned, discounts in whole dollars declined 2.1% compared to the third quarter of '07. Benchmarking that against the SSDs third quarter national data, rent per square foot in occupied square foot in that report declined 3% or same-store portfolio improved 3.7%, average asking rents declined in that report 1.3%, while our same-store portfolio increased 1.7%.

We are making great progress and are focus on improving our other income and that focus translated this quarter to an 11.9% increase over the same-store pool results for the third quarter of '07. One of our points of focus is then to increase the penetration rate on the sale of tenant insurance to new customers; our penetration rate to new renters has increased from 34% in January of this year to 84% in September of this year.

Same-store operating expenses grew 191,000 in the third quarter of '08, 0.9% inline with our expectations at the second half of the year, which showed flat to negative expense growth. Personnel costs are down due to better control over store level hours and pay roll and reductions in workers compensation premiums. R&M is down due to a significant amount of work that was done in the third quarter of '07. We have returned to more normalized levels of $0.15 per square foot and other expenses, which consist of items such as credit card fees, landscaping, mileage reimbursement, uniforms supplies etcetera. These small property level expenditures are up 200,000 over the same period of last year.

Same-store NOI, as I mentioned grew 6.5%, from the submarket perspective looking on a square foot basis that our 10 largest submarkets. Our same-store net operating income grew over the third quarter of '07 in everyone of these markets. Same-store revenue grew in each of our top 10 markets with the exceptional of West Palm Beach was declined $71,000 or 2.5%.

Our best performing markets from the submarket perspective and an overall perspective the San Bernardino Riverside area with 3% gain in average physical occupancy, a 5.7% gain in revenue and 12.1% gain in net operating income over the third quarter of 2007.

Other particularly strong markets included Chicago with the 3.8% increase in average physical occupancy and a 9.9% increase in net operating income and Dallas with the 2.5% increase in average physical occupancy and a 13.6% increase in NOI.

The 46 Florida same-store assets were down $106,000 or 1.1% on total revenues comparing Q3 '08 to Q3 '07. Miami and Jacksonville both had positive same-store revenue growth at 7.3% and 5.7% respectively. The gap between physical and economic occupancy on the same-store pool improved to 130 basis points from the third quarter of '07 to the third quarter of '08, again reflecting the reduction in write-offs and reduction in non-standard rents, as we passed along rate increases to existing tenants.

D&A continues to run inline with our four year guidance. We are increase in the midpoint of our full year guidance from $0.95 to $96.5 and guiding to the upper end of our full year range, introducing revised guidance at $0.96 to $0.97 per share. And we are firming our underlying assumption laid in our second quarter release.

Our fourth quarter FFO per share, we are forecasting in the range of $0.23 to $0.24, factoring in approximately $0.01 of dilution from our asset sales as well as the normal seasonality of the business. As I mentioned earlier we are focused on improving our liquidity, continue to focus on disposing non-core assets and our guidance reflects asset sales of #62 million for the year.

In summary, a very good quarter, we are making excellent progress in all of our initiatives and we are optimistic about the opportunities, we see for the fourth quarter and into 2009.

At this point, I'd like to turn it over to Tim Martin, who will provide analysis of our balance sheet.

Tim Martin

Thanks, Chris and good morning everyone. I am going to take just a few minutes and review some key pieces of information to consider and looking at our upcoming debt maturities through 2010. Then I'll provide roadmap as to how management is looking at liquidity over the next two years. We have a credit facility that consists of $200 million unsecured term loan and $250 million revolving line of credit. We had $182.7 million outstanding on the revolver as of September 30th. Additionally we have a $57.4 million secured term loan. Each of these loans has a stated maturity of November 2009 at the company's option for a 15 basis point extension fee each of the loans can be extended by one year, bringing the loan maturities to November 2010.

The only condition we must meet to extend the loans is that we continue to be in compliance with the loan covenants. For reference, we provided our financial covenant calculations as of September 30th, as part of our October 24th investor presentation, which was posted on our website and filed in our Form 8-K. These financial covenants govern both the unsecured credit facility and our secured term loan.

From a conservative perspective, here is how we look at 2009, assuming we closed on the property dispositions on contract as of September 30th of approximately $21 million of which $7.2 million is closed till today and we generate $4 million of expected free cash flow during 2009. We can repay the 87.2 million of secured mortgage and maturities coming due in 2009 by utilizing availability under our revolver.

So, while we anticipate working diligently throughout 2009 to delever our balance sheet and extend maturities to the extent possible. We believe we are position to satisfy all of our 2009 obligations without any access to capital markets. We intend to continue our property disposition program and pursue joint venture relationships and expect to be able to generate proceeds ranging from $50 million to $100 million in each of 2009 and 2010.

Assuming the midpoint of that range were $75 million of proceeds in each of 2009 and 2010. We have adequate capacity to repay the $91.7 million of secured mortgage maturities, coming due in May and July 2010. Which brings us to the latter half of 2010, when under these assumptions; we would have approximately $450 million of maturity to address, including the secured and unsecured term loans and approximately $193 million under the revolver on a pro forma basis.

To this point, the only assumption I made for external sources of capital, our $21 million of sales under contract as of September 30th, $75 million of sales during 2009 and $75 million of sales during 2010. Illustration, I am assuming a fair way to broadly look at the asset value of our portfolio they apply the methodology used in our bank covenants. The covenants value our assets by applying an (inaudible) cap to annualize trailing six month NOI after deduction a 5% management fee and $0.15 per square foot capital reserve.

So with our pro forma assumptions of asset sales and JV proceeds running the secured maturities through 2009 and mid 2010, we would have unencumbered assets worth approximately $939 million to address the remaining $450 million of maturities.

We currently expect that the combination of secured and unsecured debt will be available to fund these maturities as even with the conservative 50% loan to value our unencumbered properties would support more than the $450 million coming due. While our current equity evaluations are an extremely attractive, we expect to have access to that source of capital over the next two years to supplement our de-leveraging efforts.

Before turning the call over to Dean, I'll wrap up with this. While we have work to do over the next 18 months to execute our business plan, it's important to focus on the fact that we have no impending need for external capital until May 2010 to address our maturities. We believe we can successfully execute our property disposition program within the ranges provided and that debt financing will be available between now and November of 2010 on a secured and unsecured basis it turns no worse than 50% loan to value.

With that I'll turn the call over to Dean.

Dean Jernigan

Okay, thanks Tim. Thanks for that roadmap. I would like to go back to Chris' comments primarily and address those because I am sure the first question out of the box today would been, should been, could have been somewhat good quarter, how did you do it? And quite frankly, I asked that same question two weeks ago and I have been spending a lot of my personal time researching that and I have come up with some very interesting answers for you.

Point one, look at Q3 '08 over Q2 '08, I am looking for trends and so most of my comparisons I am looking within the calendar year of '08. I am looking for something that tells me, why we performing, when the rest of the world is struggling. We all turn the TV in the morning and CNBC is telling us how things are coming down around us and when we turn our screen off in the evening, all the red numbers on our screen following our stock prices indicate that CNBC was probably right that morning.

So, what is going on at U-Store-It that allowed us to put up the numbers that we were able to put during this quarter? Back to point one, Q3 '08 over Q2 '08, our average occupancy increased a 150 basis points. So, we gained occupancy during this year. Point number two, realize rent. If you look year-over-year for realize rent, we were up 3.6%. If you look at revenue per available square foot, we are up 4.3%. So, we are getting occupancy and we are also able to raise rents, raise rents to existing customers and raise our street rates at a modest amount. So, we are getting occupancy and increasing rents.

So then, I said to myself, okay all we giving away too much in the way of concession and discounts, but I didn’t study of that. And we have consistently throughout 2008 and giving discounts on a monthly basis to between 22,000 and 23,000 customers. And at Q3 '07, those customers will receiving on average $80.51 in a discount promise and this is trend down nicely throughout all of '08 to October '08, where that average has come down to $60.30 for discount.

So again, occupancies up, rate increase rates up, discounts down, so then I said, oh, are we collecting this rent. Is one thing to rent the units, but how are the receivables and I can tell you that over I had done this study, I did and it was July through October. And are consistent, our receivables over 30 days have consistently been running at 2.5% in the range of 2.4% to 2.6% running on the average of 2.5%.

So we are collecting the rent, we’re pushing rates, we’re giving fewer discounts and fewer concessions and our average occupancy up Q3 over Q2 of ’08 is up 150 basis points. So, the next question is really those are the numbers, how are we doing this. What’s causing this performance, and as I think I mentioned last quarter. I do think we are outperforming the market a little bit, if you look at [very] well since quarterly report as [SSDs] as we can survey, it clearly would indicate that we’re outperforming this all entrepreneurs around the country.

But we had another interesting survey that’s completed this past month. Our annual October survey and as I’ve told you in previous quarters I had a hunch that the housing market turmoil was actually a benefit to us and I couldn’t quantify it and now I have to quantify it. We did a sampling, around the country, according to the sampling is 44,600 people and these were people who rented from us during the month of October and they rented at the same-stores that we have surveyed over the last three years to keep our numbers consistent.

The numbers and I'll highlight a few them that are interesting. 50% of our renters during the month of October at these stores tell us that they are previously used was self storage. 49.4% said that they have never used self storage. So this is consistent with my history of doing this now for about 14 years. About half of our customers are first time users.

Also consistent is 50.4% of our respondents this time said, that they are using self storage because they are moving. That's been consistent over the years, its always been in that 50% to 55% range. We asked a question in this year that we've never asked before. And the specific question was, has the recent housing market decline caused you to downsize.

We have 2,664 people saying no, 458 people didn't answer, 1,485 people said yes or 32.2%. That's very, very interesting to me, because I would guess and this is only a guess, because we never asked the question before. But I guess, then years past had you asked the question, you would virtually have no one, says that they're ruining from bizarre downsizing or less than 1%, some very immaterial number.

So, clearly we are benefiting, unfortunately from the housing dislocation -- for people moving back home, moving in with roommates, downsizing from houses to apartments. And it's interesting and that we get that same customers when people are moving up the property ladder, but they are typically staying, whether its for a rather short period of time, because their houses isn't ready. There is some problem where they need temporary storage and our guess says that looks more like a 90 day customer.

This time, with people are moving down the property ladder its clear to me that they are probably going to stay longer, unfortunately with the economy the way it is and with the prospects of the economy on into '09. I would suspect that these people who are storing with us, their priced possessions if you will, you're moving from a house to an apartment. You have your furniture and you don’t expect to be in that apartment forever, you do expect to do move back to that house.

And of course we all know that used furniture is probably no more than $0.10 on the dollar if you try to sell it. So these people are storing there their possessions whether its, and I think they are going to be staying longer as they are moving as they have moved down the property ladder.

So, all that sounds good but always I would like to talk about the bad as well, where is the concern going forward. I've always said for years now that I thought our sector is recession resistant for a short period of time and normally I've said two to three quarters down in GDP. And he knows where we are today, but I think most people are guessing we're probably at least one quarter down.

And I would say if we have a prolonged period of a recessionary times all that's a kind of -- all from my perspective as in the 25 years I've been in the business we never had more than two quarters down. But if we do have only two or three quarters down, I think we're going to compete just fine going forward.

But if you look at the markets around the country and we've all booked [stone] quarter in the last couple of years as we, we don’t have to go back through it, but as we build up with the hurricanes down there and as people started moving out, what happened is water turned into an out migration state. From historically being a strong immigration state,

Historically about almost 60% of all moves in our Florida were in migration moves that dropped to about 46%, 47% in migration and year before last and this past year we are about 50-50. So, we have suffered from out migration in Florida and we are also suffering from low expectations because we have always been accustomed to Florida being a strong migration state.

And unfortunately we continued to build storage facilities, we have speaking of the sector, the sector, self storage sectors continued to grow storage facilities in Florida, more based on the trends of previous years, when Florida was a strong migration state. So, we have, I think all of us have struggled in Florida, but I am happy to say now that it looks like those days are maybe behind us and I do that with fair amount of caution. But and looking at EXR's numbers, they've now had two quarters where they've had occupancies, where they gained occupancy in Florida and we now have had our first quarter, Q3, we were 6/10th of a basis point.

I mean 6/10th of a percentage point, on a same-store basis up over Q2. If we look at it market-by-market, which I have done in last few days, we are good in Jacksonville, coming down the East Coast, what's possibly been a challenge, but that's been primarily for two reasons. One is that there been a little bit of overwhelming in West Palm, but also we've had a kind of a spiraling downturn and wait there, as people tried to counteract their occupancy with rate. We've tried not to do that. We've tried to hold our rates and we've gained from that now.

So, West Palm is performing on a satisfactory note for us. Wyoming continues to be fairly resistant or resilient for us and so we are having good games there. So its just only Wyoming and Orlando this time with our gains in Orlando. So it's a really the corridor for from Tampa to Naples that we can tend to be to struggle some. But we do have the right people in place to Florida now and I am convinced that even that Naples to Tampa quarter will come along for us.

So, what can go wrong, we talked about the economy. I have always been concerned about supply, I am always been concerned about supply and here historically we do a quarterly supply such just for this call and we look at our 40 markets around the country that we operating. And our folks are trained and require to know of course what is happening in their markets. And as we, we pull together this data for you and it appears that in the third quarter, we can only find 10 stories facilities around the market, around the country that open during the third quarter.

That would probably be about 600,000 square feet and my guess is that's only about three-tens or one percentage point in supply growth. (inaudible) more quickly, one in Cleveland, one in Chicago, one in Massachusetts just north of Boston area. One in Denver, one in Southern California, Nevada, one in the Washington DC up toward Baltimore actually, One in West Palm, one in Orlando and two in Naples. So, that's kind of an update on supply and it is intuitively we know this going to got the case, know one building storage facilities out there, doing a great extend today.

With that, I will just going to wrap up by saying that, we are pleased, we are cautiously optimistic on the future. We are working hard on expenses. I am getting very, very involved on the operation side the house now. With Stephen Nichols and our Board Divisional Vice Presidents were in the budgeting process right now. And we are looking forward to controlling expenses in 2009. We are looking forward to still being able to pass along some rate increases at least our existing customers. We are optimistic that we don’t lose occupancy. Chris will in appropriate time providing more guidance for '09, but again I am cautiously optimistic.

And with that Amie I will stop and we'll start taking the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Christy McElroy at Banc of America.

Christy McElroy - Banc of America

Hi. Good morning, guys. I know you don’t have to deal with the credit line or the term loan until the 2010. But you've considered preliminary doing that raise using a portion of your unencumbered pool to pay down your line and do you have the option of paying off the term loan early just to term out your debt a little bit better?

Chris Marr

Hi. Hey Christy, it's Chris. How are you this morning? We answer your second question first. We have the ability to repay either term loan as the $57 million term loan, which is the bank lead term loan or the $200 million term loan early. The only difference between those two instruments in the revolving credit facility is once we pay them down, we cannot re-borrow.

In the market, as I said in my comments, when I said we're exploring everything. We are exploring everything and have been for the last several months in terms of once available out there. To be realistic for the next month and half, the life company is, who have been doing balance sheet deals with term at on a relative basis the most attractive rates that are really out there other than what's available within the bank term market. They are not doing anything new for the balance of this year, so as we get into January and they start to focus on their ’09 book, that’s an avenue that we absolutely we’ll explore.

Christy McElroy - Banc of America

Okay, and then just looking at your unencumbered pool, assuming that you have 800 million of assets in that pool, but according to one of your covenants, as you outlined in your October presentation, which was great by the way, thank you for that. The pool needs to be greater than 400 million. Does this mean at 50% LTV's you’d be able to generate roughly 200 million from that pool to pay down debt, or am I looking at that the wrong way?

Chris Marr

Now, I don’t think you’re looking at that right. The unencumbered pool, the unsecured indebtedness cannot be more than 65% of that pool. I’m not sure where the 400 million came from, but the 815 million that was in our presentation in terms of unencumbered asset value as defined, the leverage can't be more that 65%.

Christy McElroy - Banc of America

Okay. I’m just looking at page 8. It says, minimum unencumbered property pool value, you have the value at 815 million, and then there’s a note that says it must be greater than 400 million.

Chris Marr

That’s correct.

Christy McElroy - Banc of America

Okay. So that means that you need to have a balance of 400 million. So you can’t use more than 415 million of that pool to generate excess proceeds to hit on debt?

Chris Marr

That’s correct.

Christy McElroy - Banc of America

Okay, great. And then just lastly, with regard to the line of credit and the unsecured term loan, I’m assuming that you plan to extend both. I’m assuming you haven’t found another option before next year. Would you then have to book the 15 basis point of extension fee in Q4 '09?

Chris Marr

Well, it will be amortized over the one year extension, so that's 15 basis points fee would be amortized one-twelfth per month between November of '09 and November '10.

Christy McElroy - Banc of America

Okay.

Chris Marr

Yeah. Technically we'd be amortize radically from the time we exercise the extension through maturity.

Christy McElroy - Banc of America

When can you exercise the extension?

Chris Marr

We could exercise it now, if we choose to.

Christy McElroy - Banc of America

Okay. Thank you.

Chris Marr

You're welcome.

Operator

Our next question comes from Jordan Sadler at KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thanks. Good morning guys. I am here with Todd Thomas as well. I just was trying to get a sense of what happen to your occupancy sequentially versus what you would ordinarily expect to happen. And it looks although -- as though it was essentially flat, is that accurate rather than total portfolio?

Dean Jernigan

Yeah, essentially flat. We were even on the average and we were down from 81.9 to 81.7 at the last day of the month.

Jordan Sadler - KeyBanc Capital Markets

Okay. And ordinarily, this time a year Dean, what would you expect to happen. Isn't the third quarter usually a little bit seasonally better and I am just trying to gain a sense of what you think is happening sort of a sequentially and maybe real time as we even head into October. What's happening in the portfolio with tenants, how tenants are responding?

Dean Jernigan

Well now actually, your seasonality trend is down for Q3 over Q2, July will be a slight moving month, August is a big move out month, especially if you have many students and September is move out months. So, generally you start trending down after July and you move out -- your net move outs and August and September will be greater than the move-ins you have in July.

Jordan Sadler - KeyBanc Capital Markets

So what did you guys see in October?

Dean Jernigan

Yes, so you want me to answer the question regarding Q3, we performed better than historically from seasonality standpoint in Q3 then I expected us to or would have expected us to. As far as trends on into October we see nothing more than normal seasonality trends.

Jordan Sadler - KeyBanc Capital Markets

Okay. And you started to talk about moves-ins versus moves-outs. The paces the exchange is pretty much the same and you're concessioning less you said?

Dean Jernigan

We're concessionsing less, exactly. We are doing something that are interesting with our discounting. The first month for you -- we've all have been kind of pushed into over the last few years, we are trying to get away from. We're testing other caused action if you will, in fact one the [tranche] in first month grade free as we find about 12.50% of those people move out in the first 30 days never pay you anything and so we're testing some others and once more interesting is half of first three months, which looks like a little bit more of a discount in the first month free. But that assumes that the person is going to stay for three months. Half of the first three months is actually working quite nicely for us.

Jordan Sadler - KeyBanc Capital Markets

When did that start?

Dean Jernigan

We tested it back in September and we've put that into place many places around the country in October. But again we're trying to find a way to keep giving license as per your rent. You heard me talking about before its just ridiculous unless you were in this sector gives away and we're doing our best to bring that down and as I read of the discount numbers going from Q3 '07 last year from over $80 down to $62 for the month of October we're encouraged just by the progress.

Jordan Sadler - KeyBanc Capital Markets

Well, how come you guys changed it? And I mean that's -- is that the same discount or is that a little bit more, right?

Dean Jernigan

We've different kinds of discount. But your concession discount is historically--

Jordan Sadler - KeyBanc Capital Markets

That's a one and a half month rather than one month, alright?

Dean Jernigan

That's my point. You're assuming with the first month, yes it is one and a half month over a three month period. If you give away first month free 2.5% your people move out in first month and don't pay you anything, you get another 15% move out the next month. We are buying a better off to offer a concession to keep people there longer.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Dean Jernigan

Than just giving them the pre month free, the free month upfront and then moving out within the first two months. It's probably two time to go, but can not do--

Jordan Sadler - KeyBanc Capital Markets

No. I understand. I mean it makes sense to me. I mean just than the another way of sort of managing kind of behavior right.

Dean Jernigan

We're trying to extend stays and bring down discounts, which is exactly right, and get away from just giving it to them when they walking in the front door. Half of them never used storage before. Many of them aren't even expecting it.

Jordan Sadler - KeyBanc Capital Markets

Understood and then on the occupancies on the stuff that was sold during and after the quarter. Chris, do you have that?

Chris Marr

They were right inline with the same-store average. So, the difference in occupancy is driven by that is not impacting the overall same-store pool.

Dean Jernigan

We actually did that. It was one-tenth of one percentage point impact. So, it's a same, Jordon.

Jordan Sadler - KeyBanc Capital Markets

Now is a $53 great that stuff.

Chris Marr

That's right.

Jordan Sadler - KeyBanc Capital Markets

I got it one. Yes, I just wanted to factor the concessions real quick. I understand sort of new programs you just started in September, but they are down year-over-year, but can you talk about the trend in concessioning sort of on a quarter-over-quarter basis and how that trended through the third quarter and into October and I guess maybe even like the need to decide on this new program in September?

Tim Martin

Yes. It’s a lot of detail, but I'll just read out some quick numbers for you, if you like and I'll give you July through October. July 43.6% of our people were selecting first month for you were getting first month free that’s over 11,000 customers. That trended down to 10,000 in August, 7,000 in September, down to 5,305 in October and down to 21%. And so with the other discount that we are giving, which we think is a better value for us not for the customer. We are getting longer stay, so we are trending down dramatically on giving the way the first month free.

Jordan Sadler - KeyBanc Capital Markets

Okay, thanks. I'll be queue back in. Thank you.

Tim Martin

Okay. Thanks.

Operator

Our next question comes from Michael Bilerman at Citi.

David Toti - Citi

Good morning, guys. It’s David Toti here with Michael.

Dean Jernigan

Good morning.

David Toti - Citi

Just along those lines of the longest thing are you, in the context of people staying because of the housing turmoil and the changed discounting. Are you actually seeing a material changing your length of stay the 12 to 13 months for the residential customer and the longer stay for the business customer?

Dean Jernigan

Not, yet Dave. We are still on that 11 to 12 month range as far as average stay, but is really just kind of happening as we speak if you think about it, it would be 32% of your people, who are moving (inaudible) because they’re downsizing, you know, they're going to say longer. And as far as our discount is concerned, that will push our average length of stay up just a little bit, because we have don't that 12.5% flip in the first month as we call it. So, but it’s too early to see any kind of change really, but we will bugs on it and give to you as we go forward in the quarters.

David Toti - Citi

Okay. And then just moving over to some of the debt issues in the balance sheet, what kind of rates are you seeing on some of the debt options that you're exploring for next year?

Chris Marr

This is Chris. If you think about life company height debt at 55%, 60% loan to values you're seeing coupons in 6 to 6.50 range, generally amortizing. If you look in the bank market for our type of credit profile arguably a notch below a BBB minus kind of profile. We are seeing LIBOR plus 300 type spreads with upfronts 25 basis points a year.

David Toti - Citi

Okay. And then along the same lines, will the cap rate used in evaluation in the terms and the covenants be renegotiated, when you exercise the expansion?

Chris Marr

No, the covenants stay exactly the same.

David Toti - Citi

Okay, great. And then just moving on to the operational side, what's your projection I know you are not giving '09 guidance, but what's your projection for repair and maintenance spending going forward. Do you expect that is going to stay at lower levels given the big push you made last year?

Chris Marr

Yes. I think lower than the big push of last year along, back along more historical lines, which would be in that $0.15 of foot range.

David Toti - Citi

Okay, great. Thank you.

Operator

The next question comes from Jeff Donnelly at Wachovia Securities.

Jeff Donnelly - Wachovia Securities

Hi, good morning guys. Thank you very much for laying out the roadmap that was very helpful. I’m curious that's sounds much of your de-leveraging plan is based upon asset sales. What sort of pricing are you anticipating on assets in the plan that you had outlined to come up with those proceeds, and how does that compare today to the pricing that you’re seeing in the market?

Chris Marr

Hey Jeff its Chris, great question. As we looked and you go back and look at commentary we made going into this year, we laid out a fairly broad range, because of the different types and markets of assets that we’re selling of a seven to eight cap on trailing NOI. And really, we’ve been at the lower end of that as I described in my comments, and we’ll come in at the lower end of that for everything that will close this year. We’re selling unencumbered assets, so the proceeds to us generally absent the cost that we incur on the brokerage side are in line with our sales prices.

So we’re going to get 62 million in that low seven cap range. And so, as we go into ’09, rather our expectation would be that we would continue to see that 7% to 8% cap rate on trailing on what we will be focused on disposing off in 2009. I guess exactly we are at a 727 for 2008 and I think that seven to eight range, again depending upon the asset and the sub-market, continues to hold.

We haven’t experienced really movement at all. And our expectations, asset by asset as we look at the beginning of the year versus where we’ve been able to close deals throughout the year, the thing that has evolved throughout the year is the time period is clearly elongated, and the depth is clearly much more shallower than it was at least heading into the beginning of the year.

Jeff Donnelly - Wachovia Securities

I frankly wasn’t able to keep track of all the figures in the plan that you had laid out, but what's the aggregate volume of asset sales that you are projecting in 2009 and 2010, and were all of those anticipated to be unencumbered asset sales or were some of those encumbered assets sales?

Chris Marr

The roadmap that we laid out assumes a range of dispositions of $50 million to $100 million in each year of 2009 and 2010. So for illustration purposes we choose the midpoint of that range at $75 million. We also chose in that roadmap along that pro forma that I walk through to assume that all of those assets were unencumbered, because that is the most stressful to the roadmap.

So if you assume that some portion of the $75 million were unencumbered that would actually give us a little bit more of an unencumbered property value by the time we got to the end of 2010.

Jeff Donnelly - Wachovia Securities

What is your most restrictive covenant today?

Chris Marr

Our most restrictive covenant is the combination of the consolidated leverage ratio, which we put in our October 24, Investor Presentation at 57.8%. That has a limit of 65%. If you stress that on the debt side, that would mean that to get up to the 65% we could incur approximately $123 million of debt without benefit of it adding anything to the asset value.

So we can incur $123 million worth of debt to do and what we are going to do by assets, but that's the stress on the top part of that ratio. On the bottom part the asset valuation that I walk through, which is in the covenant is based on an eight cap on trailing six month NOI. The denominator of that leverage ratio would have to reduce by approximately $189 million, which translates into an annual reduction and NOI about $15.1 million. So, our NOIs would have to go down $15.1 million to push us up against that covenant, all other things been equal.

Jeff Donnelly - Wachovia Securities

That’s helpful. One last question its in there as an eight cap. How are lenders are underwriting today in the marketplace if you were to go out and go and seek leverage. Are they using eight caps are they using more or less of that?

Chris Marr

Again, having had conversations, but obviously no need to be in the market with a specific transaction. I can just tell you from discussion, so I don’t have a term sheet but some discussions things are generally staying in that eight cap.

Jeff Donnelly - Wachovia Securities

Okay, thank you.

Operator

The next question comes from Paul Adornato at BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Hi, good morning. I was wondering if you could talk about what you believe to be a long-term goal for your operating margin. I know, you said that you experienced a nice decrease this quarter.

Chris Marr

Hey, Paul its Chris. As you know, having focused on this product for quite a long time between adjusting revenues to where ultimately they can get to and then continuing to have good top line growth and having your expenses as well where they need to be on a property-by-property basis to be able to get those margins up closer to that 65% range for this portfolio in the markets that we are in is ultimately a long-term objective.

Paul Adornato - BMO Capital Markets

And what do you think is the reasonable expectation for 2009 as it relates to margin?

Chris Marr

Yeah I think we’ll provide all of that rather than do a piece meal. We’ll get that as part of obviously our overall ‘09 outlook.

Paul Adornato - BMO Capital Markets

Okay.

Dean Jernigan

Hey Paul, that is a big focus of mine you’re really hitting on our hard button among there, when you do compare across the landscape where you have to be careful to make sure we have all got the same expenses and at property level versus at the G&A level. But I am very focused on expenses at the property level and as Chris said, we do have a goal in mind and we will be bringing those margins inline.

Paul Adornato - BMO Capital Markets

Okay. And just to clarify, do you include non-rental revenue sources in your margin account.

Chris Marr

Yes, when you look at margins its total revenues at the property, everything that's delivered at the property. So, it includes locks and boxes, etcetera.

Paul Adornato - BMO Capital Markets

Okay. And with respect to your property sales, could you characterize the buyers of your properties. Were they entrepreneurs, pre-public entities, institutions?

Tim Martin

(inaudible) do not, more of the first two, not so much the last one you mentioned. It is generally been folks primarily entrepreneurs, who have had positive experiences in the storage sector and who have relationships with financial institutions, whether they be national or regional, who continue to have healthy balance sheets and are willing to lend at that 50 to 55 some cases 60% loan to value. They are good to work with because they know what they are doing. They understand the property type. They underwrite to levels that are comfortable and we can understand so we can have good communication with them and they have generally been able to deliver on the debt. They have the equity whether it would be friends and family or other sources. But it's been pretty broad group, although we have had repeat transactions with two or three of our buyers.

Paul Adornato - BMO Capital Markets

Okay. Thank you.

Operator

The next question comes from Chris Pike at Merrill Lynch.

Chris Pike - Merrill Lynch

Good morning, everybody. I guess I'll start with Dean. I guess based on your comments and your expectations for the storage sector in general. I guess you are expecting, if you have a shorter duration of a recession, thing should be relatively okay, right. But I know back in 2001, one of the operators in business at that point that's Suze and you posted negative year-over-year revenue comps. So, is it possible for the sector in general to appose from flat or even negative comp as you see things going forward?

Dean Jernigan

Well, hi good morning Chris. Let me go back to 2001 for a minute and it’s my position that 2001 the two quarters that we had down in 2001 did not drive by itself. The one or two quarters of negative I believe it’s on one quarter of negative NOI growth in the sector. I think that was driven by the 9/11 event, because when we are operating Suze say at the time and as I have mentioned on this call, before I think that we dropped a 1000 net rentals that first month, October 2001 after 9/11 and that was what I call our discretionary customer.

Everyone realize at that point in time that whoever somebody didn’t know who, everybody started to revaluate their household budgets, started canceling their Disney trips, one of the cruise line trips. And so, that's the customer we launched immediately and it trended down from there.

I go back to the two quarters, we had down in 1991. We had another aberration in my opinion then and that is we had so much over building as a result of the S&L Debacle. And so we were finding massive overbuilding in 1991 and then we had in 11 event in 2001. This time and we are doing quiet a bit of research on this time, real time research to document how this product is doing through this presumed to recessionary period.

And so I’m not expecting again I’m answering your question now, I am not expecting any kind of sector negative NOI rates during ‘09, if we and then I realized that we had one of the public companies actual report a quarter with negative NOI this quarter. But if we all do our job and do it well, we should be able to get through two or three quarters of a downturn and come back just fine on the other side without any kind of NOI growth rates.

Chris Pike - Merrill Lynch

I understand and I don’t think anyone nor do I ever question your abilities especially given your experience just seems that we run in rather unprecedented times from an economic and capital market backdrop and similar to what happened in 9/11 in the terrorist attack, I don’t think anybody quiet was prepared and will be prepared for even some of the situations that you guys outlined early in your call, but thanks for that.

I guess, on a similar note, do you guys in anyway shape or form, can you provide us how you guys think about the effective change in earnings or a given change in either same-store revenue, there is block into your NOI. In other words for every 100 basis point increase and decrease or decreased in physical occupancy, due you see a commensurate change in your same-store revenue?

Chris Marr

Well, I think I understand the question Chris. This is Chris, but it’s got so many different components to it. I’m not quite sure, how to go about answering it that simplistically, because you are going to have a decline in physical occupancy seasonally or year-over-year, and as long as you still have the ability to increase rents to your existing tenants, increase street rents, you can still maintain receivable, as you can still produce a positive revenue growth. And then as you trickle that down in that operating income, obviously I think all the public companies have demonstrated this quarter the ability to very quickly control certain expenditures and over time maintain very modest to low growth than others, which obviously has an impact on NOIs. So…

Chris Pike - Merrill Lynch

I understand that Chris. I am just knowing from like other sectors, these things hold other things equal for every 100 basis points in occupancy or rental rate changed or it may be commensurate change in NOI.

Chris Marr

I think one way to play with it would be to take the 23.6 million square feet we have in the same-store pool, play with the average occupancy, and then use the realized rent per square foot and drop that assuming everything else is equal. And I think that gives you a proxy for what the change would be to the revenue line, assuming all your other components stay the same.

Chris Pike - Merrill Lynch

You guys talked about pushing rates on both new and renewals, especially on the renewal side. How do you guys think about that right now? When do you book the push rates and by how much do you, I know some of your other public brethren have different approaches in doing that. I’m just wondering how you guys think about it?

Chris Marr

Historically, since we improved the systems and began the establishment of our revenue management function through today looked at customers who have been with us for six months and they get a rate increase at that six month mark and then thereafter on an annual basis.

The rate increase varies tenant-by-tenant, property-by-property, but I think it’s fair to say through today we’ve been in a range of 6% to 8% to those tenants and we track very, very carefully tenant-by-tenant. In our systems the duration of state following the receipt of that rate increase letter and we do not see any change in the length of stay for folks who are getting a rate increase versus length of stays across the portfolio.

Chris Pike - Merrill Lynch

And I don’t know if this question may hold [what are] here, but on the same note there is there some type of mark-to-market if you will. So if you just looked at all the plots that you’re pushing rate on. Is there some type of statistics that you can say well even though we pushed rate by 5% relative to asking rate there is still 2% below rack?

Chris Marr

Yeah, that's where we would look at, what we would call non-standard rents which is the difference between you’re asking and your street rate. Again as you’re moving street rates on a regular basis that number obviously changes because you are changing both parts of the equation. But for the quarter for the third quarter on the same-store pool that difference was 2.4%.

Chris Pike - Merrill Lynch

Meaning 2.4% below street or 2.4% above?

Chris Marr

Below.

Dean Jernigan

You are right Chris, many times at you know per customer and it’s like a location many, many times we will have existing customers paying higher then referring. And just to follow up on one other thing I think the way you were going with your question, you can't pass along rate increases regardless of how little or how large you cant pass along rate increases too often, because its my theory you wake them up.

If you want to pass along a 6% rate increase my theory is you don’t do it in 2%, 3% increments, because you have to send them a letter and the decision they have to make, its only 3% I not moving out because of that but I do really need that storage. And so I think our practice is really quite good and they know they are going to get a rate increase after six months that's saying whether its within a year rate increase is reasonable and we don’t wait too many people up.

Chris Pike - Merrill Lynch

But the only reason I am pushing this point is, I guess with your portfolio I think that's a positive I can just tell you from personal experience when I pulled out of my storage, you know I found I was paying, you know a hell of lot higher than what the street rates were when I went in. So I guess given where we are in the economic cycle and given where you guys are in rebuilding your rental rate growth I just wanted to better understand where it is. And I guess finally, are there any one-time charges impacting G&A or somewhere else on the P&L in Q4 that may not have been highlighted on the call?

Chris Marr

No, the G&A run rate that we articulated in our guidance obviously going back into our fourth quarter expectation from our full year range and we don’t expect to have anything that will alter that range obviously.

Dean Jernigan

We did have, but everyone had hurricanes and tornados during the quarter. And I don’t think we highlighted that, but we did heavy deductibles associated that, but that's helpful.

Chris Pike - Merrill Lynch

No, I guess.

Chris Marr

That's not in G&A that actually hit the property operating margin.

Chris Pike - Merrill Lynch

Well, I'm just trying to get, I mean no severance or depositors like that will impact the ‘09 G&A run rates what I'm getting.

Chris Marr

And are able to be absorbed within our $23 million to $24 million annual number.

Chris Pike - Merrill Lynch

Yes, okay.

Tim Martin

Hey, Chris, this is Tim. Just a double back on the Chris suggested a methodology to answer your question on what a 1% change in same-store occupancy will be. If you actually do the math, but he suggested by taking 23 million 569 square feet of same-store space, 1% occupancy dropped times the $10.87 realized rent per square foot and compare that versus an annualized same-store revenue number, would represent a 1.1% decrease in same-store revenues, obviously all other things been equal.

Chris Pike - Merrill Lynch

Okay, great. That's very helpful. Thanks a lot.

Tim Martin

You're welcome.

Operator

Our next question comes from Michael Knott at Green Street Advisors.

Michael Knott - Green Street Advisors

Hi, guys. Just a quick question on maybe if you can just give us some color on what you're selling, what types of assets you're selling and how you are going to think about what you sell in '09 and '10 is it similar in quality and price point compared to where you have been selling and just if you can put a little color behind recent sales and as the price per foot seems relatively low even though the cap rate is low as well. But can you just help us better understand the quality of what you've been selling compared to what you still have in your portfolio?

Tim Martin

Yes, Michael. Thanks for that question. We have focused in this year on assets primarily in that belt between the Gulf Coast of Florida across through to Baton Rouge, Louisiana and they are smaller assets albeit occupied within the realm of the same-store pool in those smaller markets and that I think translates into the $53 per square foot range. As we look out into 2009 there is still some opportunities in that part of the country to sell a few in encumbered assets in those markets, which will allow us to from managerial perspective exit, some of those smaller markets entirely speaking about parts of Alabama, Mississippi etcetera.

And then we are currently going through the process of finalizing the '09 list, but it will be a focus on, again markets, where we look at from a long-term perspective. The growth that we can get out of those markets versus, where ultimately we may be able to deploy capital more effectively will be a focus on smaller pools of assets versus each one being sold as an individual asset. But it’s again, trying to cull that bottom 25% of our portfolio from a quality perspective.

Dean Jernigan

Bottom line, Michael, the assets that we sell in 2009 will be better than once we sold in 2008 and once we sold in 2010 will be better than once in 2009.

Michael Knott - Green Street Advisors

I know, you probably can’t comment too much on the pending joint venture, but what would be your reasonable price per foot to be implied by that transaction ballpark compared to the $50 foot type numbers, for what you've been selling outright?

Chris Marr

I think you're in the range of call it, $65 to $75 a foot.

Michael Knott - Green Street Advisors

Okay. Thank you.

Operator

(Operator Instructions). Our next question comes from [Lindsey Yal] at Robert W. Baird.

Lindsey Yal - Robert W. Baird

Hi, just to expand on some of the trends you've been seeing. You mentioned the 32% demand from the people that have downsized you in the market. Have you seen any trends emerging with the small business or commercial tenants?

Dean Jernigan

We have not yet and quite frankly I haven't gone out looking for it. It appears to me at this point of time we're getting about the same kind of usage from our small commercial customers as we've gotten in the past.

Lindsey Yal - Robert W. Baird

Okay, and so what's the average length of say for the commercial tenants?

Dean Jernigan

Well, historically it's been little over two years, 26 months down and about six to seven months for the residential customer.

Lindsey Yal - Robert W. Baird

Okay. And you gave an update on the tenant insurance penetration. Are there any indications that that might change going forward as people’s budgets become more constrained and they choose to opt out or opt into the service.

Dean Jernigan

No it's just a sale I mean its just how well we sell it I mean those numbers that Chris gave are quite impressive to me and were up to 84%, 85% of all of our customers coming in. We're now selling insurance in all that's developed over this year and almost that 50% of that's developed over this year. So we think we will do just fine going forward with our insurance program.

Lindsey Yal - Robert W. Baird

Okay. And the finally just have you seen any changes in the use of credit cards of the AutoPay system?

Dean Jernigan

We have emphasize AutoPay, going forward we will start to try to emphasize maybe some direct debits to get away from the credit card charges, but no we really haven't seen, I mean, it's gone up some we've really been emphasizing it.

Lindsey Yal - Robert W. Baird

And you haven't been impacted by anybody hitting their credit limit or anything when they are on this credit card system?

Dean Jernigan

Nothing extraordinary.

Lindsey Yal - Robert W. Baird

Okay. Great, thank you.

Dean Jernigan

That’s it, is there is any?

Operator

Yes, at this time we show no further questions. Would you like to make any closing remarks?

Dean Jernigan

Sure. Thanks for your attention. Thanks for your interest in our company. Look forward to talking to you, some of you at NAREIT, some of you next quarter. Good day.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: U-Store-It Trust. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts