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Executives

James Overturf – Director, Risk Management

Kenneth M. Woolley - Chairman of the Board & Chief Executive Officer

Spencer F. Kirk – President & Director

Kent W. Christensen - Chief Financial Officer & Executive Vice President

Karl T. Haas - Chief Operating Officer & Executive Vice President

Analysts

Michael Salinsky – RBC Capital Markets

Michael Knott – Green Street Advisors

Jordan Sadler – Keybanc

Lou Taylor – Deutsche Bank

Omatayo Okusanya, II – UBS

Extra Space Storage, Inc. (EXR) Q4 2008 Earnings Call February 19, 2009 1:00 PM ET

Operator

Welcome to the fourth quarter 2008 Extra Space Storage Incorporated earnings conference call. My name is Jeri and I’ll be your operator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Overturf with Extra Space Storage.

James Overturf

With us today are CEO and Chairman of the Board Kenneth Woolley; President Spence Kirk; CFO Kent Christensen; and CEO Karl Haas. In addition to our press release we have also furnished unaudited supplemental financial information on our website. Please remember that managements’ prepared remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements related to Extra Space Storage’s development and acquisition programs, revenues and operating income, FFO and guidance.

We encourage all of our listeners to review more detailed discussion related to these forward-looking statements contained the company’s filings with the SEC. These forward-looking statements represent management’s estimates as of today, Thursday, February 19, 2009. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

I’d now like to turn the call over to our Chairman and CEO, Kenneth Woolley.

Kenneth M. Woolley

Before I begin commenting on the fourth quarter results I want to talk to you about my upcoming departure from Extra Space Storage. As was announced on February 2nd I’ve accepted the opportunity to serve a three year voluntary mission for my church, the Church of Jesus Christ of Latter-day Saints. The mission is located in Moscow Russia and will be a great challenge for me and my family.

The invitation to serve this mission came as somewhat of a surprise. This is an assignment, it is not one that you lobby for or apply for, you’re sort of asked to serve and as a good Latter-day Saint you really feel obligated to do so when you’re asked. Needless to say my departure comes at a challenging time for not only our business but many businesses and this assignment has come after great thought and introspection on my part.

The decision was made a lot easier when I considered the team that we have assembled here at Extra Space. Most of our senior management team has been with us for 10 years now. When we merged with Storage USA three and a half years ago we also brought on our team Buck Brown, Karl Haas and [inaudible] which really has augmented our management team. I will still be involved as a non-executive director and will attend board meetings over the phone, I won’t be there in person and will be an advisor to the company has needed during the coming years.

I hope I can use my knowledge that I’ve gained in the last 30 plus years in this industry to continue to help the company. My partner Spencer Kirk has been appointed as our new CEO. I’d like you to know a little bit about Spence. I first met him 20 years ago when I joined the board of his company, Megahertz Corporation which he was then CEO of. That company grew from a very small base to over $250 million in sales and 1,500 employees.

His business was in the high-tech world marketing modems for notebook computers. It was a very successful company. The company was taken public in 1993 and it was later merged in to US Robotics Company. At the time, 20 years ago I was 42 years old and Spencer was about 27 and I was amazed at the maturity of this young business man and his ability to lead a group of people much older than he was and bring a company from out of sort of nothing in to the big league. He was very successful in growing the company.

In 1998 after Spencer retired from Megahertz, I twisted his arm to go from high-tech to no tech. After taking a look at Storage and realizing that it had a lot of potential he joined me as my partner. He was my partner really all the way through the last 10 years. He also left for three years and served a mission for our church just about the time we went public in 2004 and he’s come back about a year and seven months ago and joined us as our President.

We’re very happy to have him, he’s a great leader, he’s a person who understands this business. He was really the person responsible for assembling our management team and most of our high-tech initiatives . I think as you investors get to know him on road shows and in various investor conferences you’ll have a great deal of respect for his knowledge and his ability. Also, the rest of our management team including Kent and Karl are staying with him and being very supportive of Spencer has he takes the reins.

So, as I leave the company which I will actually be leaving to go to Russia around the end of June, I’ll officially leave being the CEO on April 1st but I’ll be here at the company on and off until the end of June. I feel like I’m leaving the company in great hands with a strengthened management and still many great opportunities in the future. With that I’m going to turn it over to Spencer to tell you more about the results.

Spencer F. Kirk

For the past decade I’ve had the pleasure of being partners with a very capable individual, Ken, as we have sought to build a premier storage company. Ken started this business in 1977 a commitment to excellence. I would say today that tradition continues and as the income CEO leading our very capable management team, we will ensure that Extra Space will have the best properties, the best people and the best processes and technology.

Ken, I speak for all of us, we wish you well in your new assignment. We know you will excel and you will have a great and positive impact on all those with whom you have contact. I personally appreciate the support of our board of directors and our team and I look forward to becoming better acquainted with all of you in the coming months.

Now, let’s take a minute and talk about the fourth quarter. Our stores turned in another positive quarter despite weakening operating fundamentals. We generated $0.37 per diluted share of FFO including a $0.09 gain from our repurchase of $40 million principal amount in exchangeable senior notes. FFO for the quarter included approximately $0.02 of development property lease up dilution and $0.01 in dilution from our sale of common stock in a registered direct placement.

Excluding the one-time gain development drag and offering dilution, FFO was $0.31 per diluted share. That’s in line with our estimate for the quarter and about level with the $0.30 we turned in last quarter. It compares with $0.29 for Q4 ’07. Our stores performed positively showing once again the relative strength of the product type during economic downturns. Same store NOI including tenant insurance income increased 2.5%. Revenues were up 1.4% and our expenses were down .7% compared to last year.

For the same year NOI it came in at 3.4% growth with revenue growth of 2.3% and expense growth of .3%. The same store rentals in Q4 2008 were 1.3% higher than in Q4 2007 and they were essentially flat for the year when compared with 2007. Our team is doing an excellent job of controlling expenses and keeping focused on the efficient operations of our properties.

In addition to focusing on the operations of our properties we are concentrating on our upcoming debt maturities and fortifying our balance sheet. It’s our top priority. We’ve made good progress on the financing front. We have closed a $10 million term loan and a $50 million revolver in the past few days and we are having meaningful discussions with several other banks regarding loans on our unencumbered assets and development projects. We’ll talk about that in greater detail.

As of today, we currently have enough capacity in place to enable us to satisfy all of our debt maturities through September, 2010. Earlier this week our board of directors made the decision to keep the dividend at $0.25 per share for the first quarter. I know this is a hot topic and not a decision we are taking lightly. However, with the progress being made on our debt maturities combined with our current property performance we are comfortable about the level of our dividend at this time. We’re watching this on a quarterly basis and as circumstances change then we’ll certainly put all the options back on the table.

I would now like to turn the call over to Karl Haas our Chief Operating Officer who will give you more detail on our property performance and our operations.

Karl T. Haas

I think the best way to characterize our property performance in the fourth quarter is to say that we’re hanging in there but the going is tough. Competition is fierce in many areas. Including tenant reinsurance income, same store revenue increased 1.4% and net operating income rose 2.5% for the quarter. For the year revenue increased 2.3% and net operating income was up 3.4%.

Excluding tenant reinsurance income same store revenue increased .7% and NOI increased 1.4% for the quarter. For the year revenue was up 1.6% and NOI gained 2.3%. The operations team is doing a great job of keeping a handle on our controllable expenses as our year-over-year growth was minimal. Rentals at our same stores were up 1.3% which is a positive sign considering all the economic distress in the marketplace.

Move outs increased 5.8% compared to last year however, we have not seen a spike in move outs in any particular group of tenants including those receiving rate increases and long term customers. As counterintuitive as it sounds we continued to realize increased rates on in place customers without causing materially higher move out levels. We are monitoring this closely for any sign of deterioration.

Overall our seasonally occupancy dropped between September 30th and December 31st. In prior years it was approximately 3%, in 2008 that drop in the third quarter was 3.5%, an increase of about a half of a percent. Not surprisingly, rates to incoming customers are lower than this time last year. Self storage just like just about any other product or service these days is on sale with rental rates to new customers down approximately 5%.

Our revenue management team continues to implement strategies utilizing learnings from pricing and discounting tests. In 2008 we ran over a dozen separate statistical pricing studies on over 7,500 customers. The knowledge of our revenue management team combined with our technology system gives us a leg up on the vast majority of the operators in this industry and we will continue to be data driven and disciplined when it comes to our pricing and discounting strategy.

We held pricing on our stronger units and properties while lowering our pricing on our lower demand units and in softer markets. Our overall discounting dollars remain at a similar level when compared to last year. Our top performing markets for the year were Chicago, Dallas, Denver, Houston and San Francisco. For the quarter top performers were Albuquerque, Denver, Houston and San Francisco.

Our four largest markets Boston, Las Angeles, New York, New Jersey and Baltimore DC had revenue increases between zero and 3% in the fourth quarter. In addition to our pricing and discounting strategies, our new internal call center is helping us make the most out of each potential sales opportunity. Almost all of our 700 properties now have their sales calls going directly to the call center.

We finished the technology and telecommunications roll out faster than we expected and the call center team is now concentrating on proving the closing percentages of sales opportunities. Our representative’s sales skills are improving rapidly and we are already seeing higher close rates than we experienced with our third party vendor.

The percentage of our customers using the Internet to shop for self storage is steadily increasing and we responded by making the Internet a very high priority in our overall marketing mix. The Internet lets us cast a wider net since the average online customer drives 20% further than those who rent from other sources of advertising. To this end, we recently entered and won a competition sponsored by Google that enabled us access to resources that fully analyzed and assessed our current website. The recommendations and learning we gained will positively impact our overall conversion rates.

When looking out to 2009 we see continued year-on-year erosion in the marketplace and until at least the mid year. At the moment we see that being driven by the supply side. In other words, a continued price competitive environment for new move in customers. As I said, the demand side is hanging in there. That will continue to do so as long as the price is right and that is the budgeting assumption we are using internally.

The best strategy we can adopt is to control what we can control. We’ve done a good job controlling expenses as evident by our sector leading expense control. I’ve already talked about what we’re doing in the marketing sales technology side. Most importantly and something we can’t lose sight of, the operations team is very committed to capturing every sales opportunity providing a quality product at a fair price and giving the best overall service to our customers. In other words the best value in the self storage industry.

With that, I’d like to turn it over to our CFO Kent Christensen.

Kent W. Christensen

As I did in the third quarter let me start out by giving an update of where we are with regards to our balance sheet and spending requirements and then I’ll get in to our fourth quarter earnings and then I’ll get in to our fourth quarter earnings and forward-looking guidance. As of the end 2008 we had approximately $64 million in cash, $93 million in undrawn loan facilities and $73 million of availability on our line of credit with GE for a total capacity of $230 million.

Since the end of the year we have drawn an additional $50 million on our credit line with GE, we successfully closed on one term loan of $9.1 million and a $50 million revolver. We have paid off one of our 2009 loan maturities two months early for a total of $74.4 million. By paying off this particular CMBS loan we freed up an additional 20 properties on which we can place debt.

We were also able to swap one of our variable rate loans of $64.5 million to a fixed rate of 4.2% for four and a half years. With these adjustments considered, as of today we have cash and undrawn loans of $183 million consisting of approximately $66 million in cash, $44 million in undrawn term and construction loans and $23 million availability on our line with GE and then $50 million of availability on our new revolver.

Our additional 2009 funding requirements consist of one $111 million CMBS maturity. We have a $62 million loan due in June which we can extend for five years, we have four single property loans due later this year totaling $13 million which can be extended until late 2010 and we have a $23 million loan which was due at the end of 2008 which can be extended until December 31, 2010. Our 2010 funding requirements are $169 million with most of that coming due in August of 2010.

With our current capacity we have all maturities accounted for through late August 2010 when we have $100 million coming due. At this point we are making progress obtaining additional financing. We are very encouraged that the loan market is opened to us and that our properties are particularly attractive to regional and local banks who know the markets where these properties are situated. However, this is by no means an easy process.

We have contacted banks across the country and are currently having discussions with 40 banks that are interested in self storage product type due to the smaller loan sizes, the consistent cash flow and the reputation and operational [inaudible] of Extra Space Storage. We are currently working through 26 term sheets of which five have been signed totaling $48 million. at this time we believe that we are going to be able to obtain new financing to cover all of our upcoming loan maturities.

To give you an idea of our current financing capability, we have a pool of 54 unencumbered properties on which to place loans. When we use our current cash and undrawn loans to pay off the 2009 and early 2010 maturities totaling $157 million we will have an additional 34 properties for a total of 88 unencumbered properties and a total of approximately $47 million of NOI. Using a 7.5% cap a 70% loan-to-value these properties should be able to garner approximately $440 million in loans. This should be more than adequate to cover our late 2010 and 2011 maturities.

In addition to the stabilized property loans, we are working on financing our development properties. In the fourth quarter we’ve closed two construction loans for a total of $22 million and have signed term sheets for 11 properties for a total of $79 million. we currently have term sheets on all but four of our properties which are under construction or about to start construction.

For the quarter we achieved $0.37 per diluted share of FFO including a $0.09 gain from a repurchase of our $40 million in exchangeable senior notes. The $0.37 includes approximately $0.02 in development property lease up dilution and $0.01 in dilatation from our sale of common stock in a registered direct placement. Excluding the one-time gain, development dilution and our sale of common stock, FFO was $0.31 per diluted share compared to $0.29 in the fourth quarter last year.

For the year we achieved FFO of $1.18 per diluted share including the one-time gain. FFO for the year was reduced by $0.02 by unrecovered acquisition costs, $0.06 related to the carrying cost associated with our company’s development program, $0.02 due to the loss on the sale of our auction rate securities and approximately $0.08 in dilution from our May and October 2008 sales of common stock.

Excluding our development dilution, offering dilution an unrecovered acquisition costs, and a loss on the sale of our auction rate securities and the one-time gain, our FFO would have been $1.26 per share. For the year, our net income rose to $46.9 million from $36.1 in 2007 or an increase of nearly 30%. Net G&A or total G&A less management fees collected from our JV and managed properties was $19.5 million. This overhead and G&A number includes all of the costs for our employees and other overhead costs except for the direct site personnel.

Acquisition activity was much lower this year than in previous years. For the year we acquired 11 properties on a wholly owned basis. Eight of these properties for $57 million were acquired during the fourth quarter. These properties acquired during the fourth quarter were under contract to purchase prior to the bottom falling out of the credit markets. As a management team we believe it is valuable for Extra Space to maintain its reputation as a reputable ethical buyer and so we decided to consummate these acquisitions.

These properties are high quality and well located in our core markets and we purchased them at attractive cap rates. Due to the environment we have not put any acquisitions in to our guidance for 2009. Our development team is scheduled to deliver 14 properties for approximately $155 million in total development costs in 2009.

Self Storage development projects face a longer entitlement process than the majority of other real estate types. These properties scheduled to open in 2009 have already been in the development process between two and three years and stopping them at this point does not make sense. Our 2010 pipeline consists of 12 properties at this time and we are evaluating potentially putting some of them on hold pending improvements in market visibility.

Our annual FFO guidance for 2009 is being impacted heavily by two factors. First, we expect a challenging operating environment and correspondingly flat if not negative revenue and NOI growth. Any trend in correlation between the performance of the overall economy and the performance of the business during 2009 is not currently apparent.

The full year expectations in particularly assume no significant change in the relationship between the overall economy and our business trends that existed in the fourth quarter of 2008 and those apparent in 2009 so far namely a relatively mild flattening of same store revenue growth as many aspects of the economy deteriorate.

Second, we will have a large amount of excess cash that will be earning low returns and therefore will be dilutive. With these factors in mind, we currently estimate that the fully diluted FFO per share will be between $1.01 and $1.06 before losses on our recently opened development properties. After development dilution we expect fully diluted FFO per share to be between $0.96 and $1.01.

These ranges do not include a $0.05 per share non-cash adjustment due to the new APB 14-1 accounting standard relating to our exchangeable senior notes. In addition, we estimate that our lease up properties when stabilized would generate an additional $21 million of FFO or $0.23. For the quarter we estimate fully diluted FFO per share to be between $0.24 and $0.25 before losses on our recently opened projects. After development dilution we estimate our fully diluted FFO per share to be between $0.23 and $0.24.

For further assumptions underlying this outlook please refer to our earnings press release. With that I’d like to turn the call back to Ken.

Kenneth M. Woolley

I appreciate your very in depth discussion of our financing and where we are on our operations. We are living through extraordinary times. Many of our investors have asked me, “Well, how does Self Storage do in a recession?” In my time in this business I’ve really seen the recession of the early 80s, the one in the early 90s and the one last time around 2001, 2002 and this current recession.

This is clearly the most difficult one for the country. It’s not clear it’s the most difficult one for our properties however. In the past recessions particularly the earlier ones the self storage property type was relatively newer and less mature so it had natural growth that was going on as a result of the business of self storage gaining market share from an unknown to a known business.

More recently however, it’s a much more mature industry and therefore, we’re really seeing the affects today of how a downturn can really affect the business. We believe that self storage is less affected than retail and office and industrial and possibly even residential in terms of its strength and its revenue retention strength. Part of that is because self storage demand comes from life changes such as marriage, divorce, birth, death, graduation, job changes, even foreclosures, natural disasters and many of these demand factors have nothing to do with the economy.

You can see by our results that we actually had an increase in the number of rentals slightly in the fourth quarter over a year ago in the fourth quarter. However, what the economy seems to be doing is it is causing a little higher move outs because people are figuring out when they pay that check every month that maybe they can make an adjustment in their lifestyle and get rid of some of that stuff.

So, the initial demand seems to be there but the long term demand seems to be a little bit less and that means in order for us to keep our occupancy and our revenues going we have to be more successful in our marketing efforts. We do believe however that because of the strength of our national platform, our management, our call center, our Internet and frankly our revenue management that we are in a relatively better position to kind of go through this difficult time than some of the smaller companies in our business.

We’re very happy that we have these natural advantages. We think some of our other competitors do as well. So, we expect the business to do reasonably well in a difficult time for many businesses. That doesn’t mean we are confident that we’re going to have a 10% revenue increase on a same store basis next year because we don’t expect that as we said.

You need to remember that American’s continue to be accumulators. We have too much stuff in this country and that stuff doesn’t go away just because the economy goes down, it’s still there. The only place you can go if it’s not in the self storage is in to the landfill dump and we don’t see the demand for dumps going up so we think it’s going to stay in the self storage.

Now, as the economy braces for further mortgage defaults which it’s probably going to have, you ask yourself, “Well how do mortgage defaults affect us?” Well, I think it’s very interesting that we had excellent rental growth in Michigan and Ohio this past year and these are areas that were among the hardest hit for foreclosures, mostly on occupied homes. So, we think that there is a positive demand factor which comes out of the terrible things that are happening due to foreclosures and job losses.

Given the challenges we’re having today people have asked me, “Is it a hard time for you to leave Extra Space Storage?” My answer is definitely yes, it’s very difficult for me personally. I’ve been involved in this industry really for over 32 years. I love the business, I find it fascinating. It gives new challenges daily, I’ve enjoyed working with many of our investors and analysts and interfacing with you in good time and in bad.

I would say that my decision to serve an LDS mission has more to do with my faith and my religious beliefs than it does anything to do with the economy or our ongoing business prospects. I do think that basically as person I’m an optimist. I think that our country will get through these difficult times and our business will as well and that in the future we’ll see a lot of blue skies and sunny skies and lots of opportunity.

Also, our company is really I believe an industry leader with not only its portfolio but the best in class operational and revenue management systems and this will I think continue to put us at the very forefront of our business. We thank you for the support. We don’t like seeing our stock down, we think that’s not a result of our performance but we do recognize it’s hurt a lot of our shareholders including us.

We’re doing our best to perform and to run the business well and to run our balance sheet conservatively and in a way that takes careful note of what’s going on in the credit markets on the overall basis. With that, I’m going to turn the time now to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

First question here, can you talk about the pricing on the fourth quarter transactions? And also, where asset pricing is in the markets right now for things you’re looking at?

KW

For the properties we acquired we acquired at around a seven cap, some of those were a little higher some were a little lower but as I stated those were all things that were put under contract before the credit crisis and so we felt an obligation to close on those transactions. We’ve been pleased with how those properties have performed and they’re adding to our portfolio. Like I said they came in on actual performance on about a seven cap.

Michael Salinsky – RBC Capital Markets

Secondly, in your supplemental it shows a little bit more development drag in 2009 and 2010 than you had shown last quarter. Is that related to mix or are you seeing a little bit of slowing on the lease up times? What was the driver behind that?

KW

The driver is mostly the delaying on some of the properties opening and those openings being pushed in to later years. There has been on a few of our properties a little more slowdown on getting some properties leased up but on some of our other properties they’re on budget or slightly ahead of budget. So, on a total we are not seeing a dramatic slowdown in the lease up of our properties. As I said, there are some a little faster, some a little slower.

Michael Salinsky – RBC Capital Markets

Switching over to operations, Karl what level of renewal increases are you guys pushing along right now? Where is the delta right now between street rates and renewals?

Karl T. Haas

The existing customer increases are running around 7%, they’re slightly down from earlier in the year and last year. I don’t have in front of me the delta – it’s around 10%.

Michael Salinsky – RBC Capital Markets

Going forward here just in terms of the focus for 2009 are you going to continue to push rates or is the focus more on maintaining occupancy at this point?

Karl T. Haas

We’re working on occupancy. Once we have the customers in we feel like we still can do rate increases and we have a chance to bring those customers back up to prices where we want them to be. Like we said earlier, the surprising part is while you do get some – if we didn’t do any rate increases we would probably have some vacates that wouldn’t happen but everything we have looked at has indicated that our existing customer rate increases are netting us a plus and you can’t increase people if you don’t get them in, in the first place. So, our focus right now is being aggressive to get customers in.

Operator

Your next question comes from Michael Knott – Green Street Advisors.

Michael Knott – Green Street Advisors

Kent, could you talk about the terms of the new financing that you secured maybe in the fourth quarter or after subsequent to the end of the year?

KW

I can give you a general indication. As I stated in my prepared speech we’re currently negotiation with these 40 banks that we’re working with so I’m not going to get very detailed on the call as to what the exact terms that we’re discussing with each of these banks. But, what I can say is that the terms are favorable and are comparable to some of the loans that we closed late last year. We’re not seeing any spike or substantial changes in the kinds of terms and conditions we’re getting from the different banks.

Michael Knott – Green Street Advisors

Can you just give a little more color on the level of the dividend discussion and the possibility of stock in lieu of cash for a portion of the dividend?

Spencer F. Kirk

The dividend is one question that we view daily. If I could be honest with you, we just had our board meeting and we had an in depth discussion about it. What it boils down to is our earnings visibility over the next few quarters is difficult to predict as has been proven over the last six months. We do feel that we’re making progress on our financing and we do have the capacity to pay our previously stated annual dividend of $1.

We’re not blinded to the circumstances, we’re trying to take everything in to account. To retain the REIT status we would have to pay out in the range of $45 to $50 million this year. That would allow us to save some cash. However, with that being said we believe in paying a dividend to our investors – if we cut it or eliminate it we would be taking away a positive element for many investors and some future investors as to the appeal of our security.

We’re walking a fine line and we’ll keep you apprised on the situation. If I could just footnote that, this analysis will be done on a quarterly basis and we’re not going to comment or guarantee on any future dividend payout in the future. We will analyze it as is appropriate and as circumstances change within this company.

Michael Knott – Green Street Advisors

Last question and I’ll get back in the queue, Ken, on your last comments before handing it over to Q&A you talked about sort of alluding to the past comments you made about characterizing Americans as having packratitis. Do you feel like despite the fact that there are many live change driven sources of demand do you feel like the discretionary demand is set for potentially a protracted change or reduction just based on the potential for significantly less consumption in this country over the next few years as savings rate increase, consumptions decline, etc.? Can you just talk about how your portfolio would break down between maybe discretionary and non discretionary usage?

Kenneth M. Woolley

First of all the fact that our rentals were up in the first quarter 1.3% is an indication to me that there’s not a slacking of new demand for the use of self storage. So, I don’t want to have you put words in my mouth to say I see a big change in discretionary consumer demand. I don’t think most of self storage usage is discretionary. I think that many analysts who have critiqued our business think it’s more discretionary than it actually seems to be.

Most of it is really need driven, not discretionary. If you look at the stuff that goes in self storage, that stuff is there in our houses, it’s there all over the country and if you say that the consumers are going to buy less stuff at Wal-Mart, well I think they’re buying just as much today as they were a year ago. Obviously, we’re not building so many houses and that will have an affect but I don’t think that it’s a big number.

Also, the businesses that we have right now we’ve seen no fall off whatsoever of our business customers in our self storage business. None at all.

Michael Knott – Green Street Advisors

No change in length of stay? And, can you remind us what that figure is, the average?

Kenneth M. Woolley

It’s in the range of two and a half to three years for the commercial.

Michael Knott – Green Street Advisors

On the whole for your portfolio?

Kenneth M. Woolley

It’s a very difficult number because if you look at our portfolio today and you look at all 350,000 or so customers and you said, “How long have they been there?” The answer is I think about 28 months. That’s how long they’ve been there. If you think ask a different question and that’s the question of if you look over the last five years, every person who moved in and moved out because in order to know their true length of stay you have to have them move out. Then the answer is something like 11 months.

So, there are two different numbers but the average tenant has been there 28 months, so they’ve been there over two years. We think that that length is quite interesting because I think if you look at apartment complexes you wouldn’t find it to be a lot longer even though we’re month-to-month rental.

Operator

Your next question comes from Jordan Sadler – Keybanc.

Jordan Sadler – Keybanc

The first question, just coming back to the dividend question, I guess I’m a little bit – can you maybe reconcile the reasoning behind paying out or returning 35% of your dividend as a return of capital? Can you maybe reconcile that with sort of the need to continue to raise capital which seems a very difficult task and almost a bit of a scramble I would say in this environment?

Kenneth M. Woolley

First of all, we don’t have to raise a whole lot of new capital right now. What we’re doing right now is we’re recycling the capital, we’re paying of CMBS loans with bank loans. We’re not doing a whole lot of new things. So, I think that’s one issue. Secondly, when you look at the return on our stock you need to look at it in light of the stock value and the dividend itself.

The shareholder right now is valuing our stock $6.50 a share which implies they want to earn 15% or something on our company. If they feel like they can earn 15% maybe they’d rather have cash than just use that money to pay off a debt that costs 6%. So, if you think of that as logic you could say it’s better to have the dividend and those shareholders who feel like they like our stock to use that dividend to buy the stock rather than using something that apparently has a value of 15% just on a cash basis to pay off a debt that’s 6%.

That’s sort of the logic. Now, clearly we’ve had differences of opinion as we’ve talked to many of our lead investors. I would say that it’s equally split. Some of our investors have said, “We think you should cut your dividend and use all your cash.” We have other investors who have said, and these are major institutional investors who have said, “Cutting your dividend is like someone signs up to own your company, you’re producing cash flow, your NOI hasn’t gone down, your cash flow hasn’t gone down and you suddenly say I’m going to take a 35% slice out of what we dividend or pay out. It seems like a little bit of a lack of faith with the shareholder.”

We think long run companies who maintain their dividend and who have a policy of being consistent I think are going to win in the long run. Now, I know that many analysts, probably including you would criticize us for that. I guess in the end we’ll have to see how that works out.

Jordan Sadler – Keybanc

The other point of view though I would say is your stock has maybe underperformed your peers and maybe one of the reasons for that may be your balance sheet or your liquidity need as opposed to the quality of your portfolio. You might have the ability to rectify that internally and I guess that would be more of a comment than a criticism to think about.

The other sort of question I had was just maybe coming back to the forward-looking demand, have you guys thought about the impact on demand of Obama’s housing plan? I know you mentioned that you saw in 2008 stronger than anticipated rental rate growth in some markets as a result of maybe foreclosure. It seemed like you had seen big foreclosures in the markets.

Kenneth M. Woolley

I have to tell you I don’t understand Obama’s housing plan. I think that his housing plan is death for banks because to the extent that he [inaudible] banks not to foreclose he’s going to hurt the balance sheets of the banks more than helping them. So, on the one hand he wants to help the consumer by pushing out foreclosures and saying banks can’t foreclose and they’ve got to help these poor people out that aren’t paying their debts and on the other hand he’s beating up the banks and the whole market is because they have problems.

Well, if you want to have more problems then tell people they don’t have to pay their debts when do. So, I frankly don’t know how that’s going to work or how that’s going to affect us. I’m very disappointed in Obama and his housing plan.

Jordan Sadler – Keybanc

I guess my thought is it seems like it would keep more people in their homes, reduce foreclosure rates and then I was just guessing would that –

Kenneth M. Woolley

I don’t know if it’s going to keep more people in their homes or not. But, if the people are better off because they’re in their home, maybe they’ll have more money because the government gave it to them to spend on self storage, that’s the other part. I just don’t know the answer to that.

Jordan Sadler – Keybanc

I was just wondering if you had an occupancy update through January or mid February? Then, also looking at last year the first quarter the quarter end occupancy rate was higher I guess as usual seasonality at the end of March things start to pick up and I was just wondering if you think that will be the case again at the end of this quarter?

Kenneth M. Woolley

The seasonality in our business will remain. I will say this, we did have a positive revenue growth month in the month of January on a same store basis.

Jordan Sadler – Keybanc

Do you have an occupancy figure?

Kenneth M. Woolley

I don’t have the number right now.

Karl T. Haas

We did have a slight dip in the delta to the prior year, our occupancy delta to the prior year, the negative occupancy delta the prior year grew slightly.

Operator

Your next question comes from Lou Taylor – Deutsche Bank.

Lou Taylor – Deutsche Bank

Spencer, can you talk a little bit about maybe development spending for 2009? I know you’ve got the completions coming on this year but you kind of alluded to a dozen or so projects that you may start this year. Can you maybe just give a little bit of your rational in terms of what projects could start and what the development spend could be this year?

KW

Again, our development process or these projects that we’re talking about have been properties that we’ve been working on for two to three years. The properties that are in our pipeline that we’ll be working on until 2012 I think add up to about $130 million. Of those, as long as we can get the financing put in place we would need say 30% or between $30 and $40 million to be able to build those properties.

So as long as we can continue getting our loans refinanced and we can continue getting construction loans on our properties, we think that as we come out of this and two and three years from now when these properties are filling up and the economy is doing better there are going to be very few self storage properties that are going to be opening and leasing up. We will be one of those that have a few of those.

So, we are being very selective and we’re being very careful about this, it’s not something we’re taking lightly similar to our dividend discussion. We are taking each one of them on a case-by-case basis we look at whether or not we think this is something we go forward with and so that’s where our development process is right now.

Kenneth M. Woolley

Let me make a note and that is that all the properties which are going to open this year are already under construction and we actually haven’t started any new construction I don’t believe in the last three months. So, depending on the credit markets and how things are we could slow down and say okay we won’t construction something but right now the commitments we have now – the amount of capital that we have to spend on the construction this year I think has already been mentioned.

Lou Taylor – Deutsche Bank

Ken, you had gone over your unencumbered asset availability if you will, can you just go through that math again, I think I missed some of the numbers.

Kent W. Christensen

As far as the number of properties that we have that are available?

Lou Taylor – Deutsche Bank

I think you mentioned it was $47 million of NOI?

Kent W. Christensen

Today with all of the $183 million of availability on our lines and our cash in addition to that we have 54 properties that are still unencumbered. When we take the $183 million that we have and we pay off loans coming due this year and early next year, so of the $183 million we’ll use $157 million of that to pay off loans this year and next year. Once we do that we’ll have an additional 34 properties or a total of 88 total unencumbered properties and those 88 properties today a backward looking at the end of December generating a $47 million net operating income.

Lou Taylor – Deutsche Bank

You said what a seven cap rate and a 70% LTV?

Kent W. Christensen

I did a 7.5 cap, 70% loan-to-value, that would be $440 million of potential of loans. What we would need to use that $440 million of loans is to pay off the $100 million loan coming due in August next year and then $74 million coming due in 2011. So, we have $170 coming due out of $440 million. Once we pay off the loan coming due next year we have additional properties and additional capacity that would allow us to still have between $400 and $500 million of capacity.

Kenneth M. Woolley

What it boils down to is that at all times right now – because when you pay off the $170 million that you have in 2010 and 2011 that frees up more unencumbered properties which actually increases your capacity above $440 million. So, the reality is you’re sitting on capacity roughly of $450 and $500 million of unencumbered properties at any one time to be able to leverage yourself more if you need to. That’s the financial situation of the company.

Operator

Your next question comes from Omatayo Okusanya, II – UBS.

Omatayo Okusanya, II – UBS

A couple of quick questions, Kent, I just wanted to clarify something with your most recent dealings with the banks, the $48 million number you mentioned, that’s additional financing you’ve gotten on top of the $59.1 million from last quarter, correct?

KW

It’s $48 million of signed term sheets that we have not yet closed on but we’re working through the process of closing on that so that’s not done but, the term sheets have been signed. We go through a pretty detailed process before we sign a term sheet so these are term sheets that have been substantially negotiated with the banks before we sign them so we feel like we put all of the very important terms and conditions on the table before we sign a term sheet. We can’t represent that we will for sure close on these but, a lot of work has already been done with these.

Omatayo Okusanya, II – UBS

The second thing, the deals that were closed on in fourth quarter around 7% cap rates again, you committed to all this stuff pre the credit crunch but now that we’re smack in the middle of the credit crunch what are you seeing in regards to cap rates?

KW

There are still properties that are for sale. We still have not seen any substantial number of distressed properties come to the market. The ones that are for sale, the sellers are still asking in the sevens. They have increased their cap rates from the sixes to the sevens but that’s still what they’re expecting. Not many of them have closed. The only transaction that we’re aware of, of any sizeable amount that closed, it closed in December of last year and it closed in a backward looking in the sixes and a forward looking in the sevens because there were some lease up properties in the portfolio that was acquired.

It was a portfolio we looked at, we bid on but did not close on so that’s how come we know what the data is on that portfolio. So, the one real sizeable portfolio of about $100 million that closed, closed in a forward looking in the low sevens.

Operator

Your next question comes from Jordan Sadler – Keybanc.

Jordan Sadler – Keybanc

I guess this one would be for Karl or maybe Ken. I’m trying to reconcile in the guidance I think you said that self storage is on sale like everything else and rents are down 5% to new customers and I’m just trying to reconcile how that flows through your guidance on rental rate growth, so what the mix is of new customers in 2009 who see a 5% cut versus new customers who stay in place and get an increase, how does that sort of work out?

Karl T. Haas

Other than telling you that the existing customers which is a much larger base is getting in the range of a 7% increase and the customers that are coming in at that 5% sales price are getting after five months a 6% or 7% increase and then we’re increasing again within 9 to 12 months. So, when you blend that all together you offset that 5% decrease in rates. Plus, we’re also anticipating being able to hold and hopefully our goal with being aggressive on rates is that we’re going to gain some occupancy.

Jordan Sadler – Keybanc

So in guidance you’re assuming some occupancy uplift in 2009?

Karl T. Haas

Well, it’s a mix because I’m not sure we budgeted – when we do the budgeting it’s kind of a blend and both the occupancy and the rates we’re shooting kind of for an overall increase in revenue and the breakdown is not quite as sophisticated as having, especially with what the market has changed since we’ve done the budgets in September.

Jordan Sadler – Keybanc

On the discounting, on the 5% cut, did you start at 5% or did you start at 3% and move to 5%? I’m just curious on it.

Karl T. Haas

It’s really all over the place, it depends on the market. We really price based on where we see the demand and we’re going to continue to where we have to get more aggressive get even more aggressive to gain occupancy and hold occupancy.

KW

One point on that is when Karl talks about the number being at 5%, it’s at a point in time. We’re moving the rental rates of our existing customers on a daily basis so at one point in time that would be the number but on any given day it could be higher or lower than that based on what our revenue management system is doing in generating what we think is the proper price to be charged at each one of our different sites and for every different size unit.

Jordan Sadler – Keybanc

But that comment about the 5% was at what point?

Karl T. Haas

That is where we were at the end of December compared to the prior year.

Operator

There are no additional questions at this time.

James Overturf

Thank you very much everybody for participating on this conference call. We appreciate your interest in our company and we hope we do a good job for all of you in the future. Many of you we’ll see at the conference in Naples, Florida coming up here in a few weeks. Thank you.

Operator

Thank you for your participation today in today’s conference. This concludes your presentation. You may now disconnect. Have a good day.

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