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Sovran Self Storage, Inc. (NYSE:SSS)

Q1 2010 Earnings Call

May 6, 2010 9:00 am ET

Executives

Kenneth Myszka – President & COO

David Rogers - CFO

Analysts

Christy McElroy – UBS

Todd Thomas - KeyBanc Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Michael Salinsky – RBC Capital Markets

Michael Bilerman - Citigroup

Mark Lutenski - BMO Capital Markets

Bruce Garrison – Unspecified Company

Ki Bin Kim – Macquarie

Operator

Greetings and welcome to the Sovran Self Storage first quarter 2010 earnings release conference call. (Operator Instructions) It is now my pleasure to introduce your host, Kenneth Myszka, President and COO for Sovran Self Storage.

Kenneth Myszka

Good morning and welcome to our first quarter conference call. First, as a reminder, the following discussions will include forward-looking statements. Sovran's actual results may differ materially from projected results.

Additional information concerning the factors that may cause such differences is included in our company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.

The market conditions continue to be challenging. Nonetheless our results of operations were well within our guidance for the quarter. Same store revenues and net operating income decreased by 1.26% and 2.68% respectively. Same store operating expenses would essentially have been flat but for a nearly 4% increase in our accrual for property taxes.

Including those taxes operating expenses increased by 1.1%. Small improvements in many markets were made but they unfortunately were overshadowed by a continuing poor results throughout Florida and much of Houston, Texas.

Poor economic conditions and a weak housing market continued to plague our stores in Florida. On a positive note we resumed increasing rates of some in-place customers on a select basis and fortunately observed very little push back.

Our web optimization efforts are also paying dividends and our total web inquiries in the first quarter this year were more than 50% greater than Q1 2009. Traditional telephone inquiries also increased by 2% essentially proving that there is still demand for our product, at the right price.

We made no acquisitions for our own accounts or the joint venture however we did sell two stores in Holland, Michigan for a sales price of around $2.4 million. And during the quarter we completed three expansions at a total cost of $2.8 million.

And with that I’d like to turn the call over to David Rogers, our Chief Financial Officer, and he’ll provide some details of our quarter’s activities.

David Rogers

Thank you Kenneth, with regard to operation total revenue decreased $558,000 or 1.2% from 2009’s first quarter while operating expenses increased by about $265,000 resulting in an overall NOI decrease of 2.7%.

These overall results reflect the impact of the store we opened in Richmond last fall and the decline in same store results we’ll get to in a minute, net of the operating results of the two stores we booked as sold during the period.

Average overall occupancy was 79% for the quarter ended March 31, and average rent per square foot was $10.36. The overall occupancy rate at the end of the quarter was 78.8% which is about 20 basis points lower then that of last March end.

Same store results now include 353 of our 354 company-owned stores. Only the developments [break in audio] store in Richmond and the 252 Heitman JV stores are excluded from the pool. Same store revenues decreased by 1.3% from those of the first quarter of 2009 and this was primarily the result of same store weighted average occupancy declining from that of 2009’s Q 1 by 40 basis points to 79.2% and the rent on occupied space dropping 10 basis points to $10.39 per square foot.

The quarter end occupancy rate for the same store pool was 79%, about 20 basis points lower than last year’s March 31 level. So we continue to buy occupancy in this hyper competitive environment but for the first time in many quarters our move-in incentives declined on a year over year basis.

Last year’s first quarter saw us granting $3.4 million worth of move-in specials, this year we gave up $3.2 million. And kind of interestingly we granted some sort of incentive to over 1,000 more first time customers this year but the average concession dropped from $114.00 per move-in customer to $104.00.

Operating expenses on a same store basis increased by a total of 1.1% this period, almost all of it as a result of the 3.8% increase in property taxes. Other operating expenses with the exception of $170,000 increase in maintenance and curb appeal costs came in about even with last year’s depressed levels.

So over the same store net operating income dropped 2.7% from that of 2009’s first quarter. G&A costs for the period came in at $5.1 million, a bit higher than we thought, the main reason for the increase over last year was the anticipated ramp up of internet advertising costs and a jump in state and federal income taxes as a result of stronger profits in our taxable REIT subsidiary.

With regard to capital matters, as Kenneth mentioned we didn’t acquire any properties during the quarter for our own portfolio or for that of the joint venture. We did however sell two stores located in Holland, Michigan, and thereby we exited that market. The stores were sold for about $2.4 million.

We also entered into a contract to sell eight more stores, three in Jacksonville, North Carolina, two each in Macon and Augusta, Georgia, and one in Dansville, Virginia. The combined sales price of these eight stores is about $22 million, and we expect to record a gain of a bit over $7 million on the transaction.

Should we successfully close this deal, we’ll have sold 15 of the 17 properties we were looking to divest with only Salisbury, Maryland and Christiansburg, Virginia, remaining on our list. We resumed our program of expanding and enhancing stores. We’re in the process of adding some 500,000 square feet of additional and climate controlled space at 20 properties at an estimated cost of $20 million.

Even in the tough leasing environment we find that premium space sells. At March 31, we had $400 million of unsecured term note debt and $81 million of mortgage debt outstanding. The next significant maturities are not until mid 2012.

Until we draw on our line all of our debt is either fixed rate or hedged to maturity. So our capital position is such that our needs are discretionary. We’ve got no forward commitments concerning JV contributions or buyouts, no construction programs to fund, and no properties to acquire until we decide the time is right to buy them.

A quick review of our certain of our ratios, debt to enterprise value at $36.00 per share is 32.3%, debt to book cost is 34.7%, debt to EBITDA ratio is 4.9x, and debt service coverage is 3.1x.

With regard to guidance since our last call we’ve become a little bit more optimistic about demand and pricing potential in a number of our markets. We anticipate the continued use of leasing incentives, as well as increased advertising and aggressive marketing to improve our occupancy, but we’re nudging our top line expectations up by about 100 basis points and are now guiding to a decline in same store revenue of zero to 1% from that of 2009.

We assume that we’ll gain traction starting in Q3 with regard to some rate push in occupancy so the expected improvement is still somewhat back loaded. Property operating costs are projected to increase by 2% to 3% including a budgeted 6% increase in property taxes.

Accordingly we’re revising to an anticipated decline of 2% to 3% in same store net operating income for 2010. We’ve curtailed our three-year $150 million program of expanding and enhancing our existing properties but we do plan to expend up to $20 million under the revised program. We’ve also set aside $12 million to provide for recurring capitalized expenditures including roofing, painting, paving, and office renovations.

We continue to selectively evaluate acquisition opportunities but at present have no properties under contract and expect to remain prudent while the capital and real estate markets remain unstable. As noted earlier we have sold two properties this year and expect to sell eight more in the coming weeks.

The effect of these dispositions had not been included in previous guidance and because we don’t have a home for the $25 million of expected proceeds, the transactions will be at least for the short-term, dilutive.

G&A expenses are expected to increase by 2% to 3% this year primarily because we have plans to expand our web based marketing programs. At March 31, 2009 all of our debt is either fixed rate or covered by rate swap contracts that essentially fix the rate, subsequent borrowings that may occur will be pursuant to our line of credit agreement at a floating rate of LIBOR plus 1.375.

At March 31, 2010 we had 27.6 million shares of common stock outstanding and 385,000 OP units outstanding. So as a result of the above assumptions, especially considering an expected modest up tick in operating results and offsetting dilution from the sale of the 10 properties, we’re revising our forecast of expected funds from operations for full year 2010 to be approximately $2.44 to $2.48 per share and to be between $0.60 and $.62 for the second quarter of 2010.

At this point Kenneth, I’ll turn things back to you.

Kenneth Myszka

Thanks David, before we begin our question-and-answer period, I’d just like to take a moment to offer a little perspective. David mentioned that after the first quarter we’re a little bit more optimistic and though our results and results of many REITs reporting thus far this quarter show encouraging signs, we do continue to play in choppy waters.

And our same store sales, they’re still negative and it’s a very competitive landscape. In our markets about 75% to 80% of the competition [inaudible] and a lot of them are running scared and they’re competing primarily on price, and it makes it all that much tougher.

Many of our stores won some victories this past quarter showing NOI growth over last year but we still have more work to do to improve operations in other large markets, especially Florida, Houston, Phoenix, and parts of Dallas.

We’re about three weeks into the busy season. The next three to five months will tell how strong any recovery may be. In the meantime we’re sharing with you our best information and judgment in an attempt to give some view into where our industry and our company are going.

Whichever direction the economy, real estate industry, and capital markets may take, I will say this, our stores, our people, our systems, and our company are well suited to grow and to prosper. And now I’ll get off my soapbox and answer any questions you guys might have out there for us.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christy McElroy – UBS

Christy McElroy – UBS

Just looking for a bit more color on rents, can you quantify the change in street rates year over year in Q1 and in April, and by how much and how often are you currently raising rents on existing customers. You made a comment earlier in your prepared remarks.

David Rogers

The street rates were pretty much, its all over the, I think overall we raised our street rates in probably about half the market, the overall impact given that the concessions were about the same, only $200,000 different from Q1 of 2009 versus Q1 of 2010, and the rent per occupied square foot is actually declined about $0.09 so it declined 10 basis points.

I guess that would be pretty much a function of our asking rates across the pool but it varied from some significant decreases in Florida and Phoenix, and some pretty nice bumps in the northeast, New England, and the Mid Atlantic region.

So rates overall are holding but its very market specific.

Kenneth Myszka

And regarding in-place rates, our practice generally is not to increase rates of people who have been with us for less than a year. We did selectively increase rates of those people who would be eligible around 25% to 30% of those and that the rate increase for those people was around 4.5% to 5%.

And fortunately as I mentioned earlier too, there was very little push back on those.

Christy McElroy – UBS

And do you typically do that at a certain point in the year or should we expect more of that throughout sort of the busy season.

Kenneth Myszka

During the busy season as we get to unit sizes that are relatively full or high occupancy we will be applying rate increases for those people in place throughout the year.

Christy McElroy – UBS

And can you provide some specifics on move-ins and move-outs year over year in Q1 and April.

Kenneth Myszka

I can tell you this, the move-ins let’s say the pace of move-outs or versus move-ins is slowing down. In other words there are, move-outs are still greater than move-ins, but the rate has gone down the last several quarters. But as far as the specifics I don’t have that with me right here.

David Rogers

I know April we had a smaller net than we expected. We were positive about 280—

Kenneth Myszka

And the key, this is important, if you take out Florida and the Houston market and I know you can’t do that but we’re seeing some victories in various, in a lot of our markets. You take those out we have a positive stream. So as I mentioned earlier, we’ve got a lot of little victories in some of the smaller markets if you will, but we’ve got to work with Florida very much and when that starts turning around we’ll feel a lot more comfortable with the future.

Christy McElroy – UBS

In terms of what’s driving occupancy near-term its really fewer move-outs, but at what point do you expect move-ins to start really increasing, is that more of a 2011 story. What needs to change in terms of overall demand for storage in your view for that to occur.

Kenneth Myszka

Let’s take a look at Florida in our case, the housing market is huge. If you don’t have construction going on, you don’t have people moving, if people aren’t moving they don’t have a need storage to a great extent down there. Also the construction industry you have a lot of small contractors who have a need for self-storage, the housing industry is suffering, they’re either out of business, there’s no need for us.

So I think that’s a big part of what’s going on. I think the housing industry is key to us and we’re seeing that down in Florida. Having said that we have a lot of markets that as you saw in our press release about 12 or 14 markets we’re positive same store numbers. So it seems to be creeping slowly. We still have this big variable we’ve got to take care of down in Florida.

Christy McElroy – UBS

And then just lastly acquisitions, I know that they’re not in guidance at all, but would you say that acquisitions are a real possibility for this year and are you bidding on anything now, and then just with regard to your dispositions, why is this a good time to sell but not to buy.

David Rogers

I’ll take the second half first, the disposition, it is counterintuitive to be selling at a time when, we’re not thrilled about the cap rates. We averaged overall just about an 8.5 cap on those eight stores that we sold, that we were in contract on. But piece by piece their market set, pretty much we identified a couple of years ago as wanting to get out of.

They’re smaller, they don’t necessarily fit with our management footprint, but for example the North Carolina stores, Jacksonville, North Carolina, we sold those at a bit over an 8.5 cap but the occupancy level on those three stores because they’re so heavily military weighted, is right about 90%.

We’ve owned these stores for quite a number of years, that’s the all time high for this set of properties. So you know what, let’s get out while we’re not thrilled with the cap rate but the NOI is probably never going to be any better. So let’s go on that one.

Macon and Augusta, were just four stores that have probably matured in our eyes. We had the opportunity to perhaps pick up some other stores in that area of Georgia, but weren’t thrilled with the prospects of either the properties that were available, or the overall markets, so we okay, time to go there.

Christiansburg and Danville, Virginia, is just not a good place for us to be. It’s a bit removed from, we’re pretty heavily concentrated in eastern Virginia. These again are out of the footprint and the markets are smaller, so, a variety of factors went into that. Two years ago we said these are markets we should be getting out of and despite the headwinds there was enough positive going on, we’re selling to mostly smaller local folks.

There’s one private REIT that’s buying a couple of these as well, but the financing is there for them, the NOIs were strong enough to say, to tempt us to go. So that’s why we’re exiting those. Its just, it seems like a counterintuitive time to prune, but its working out pretty well.

As far as acquisitions go, there’s a bunch of stuff. There’s a lot more this quarter even than there was all last year and it varies by quality and quantity. There’s several packages of notes, banks looking to move distressed properties. We’ve looked at those, we’ve bid on some of those. We’re not thrilled with the idea of taking notes instead of deeds so we’ve been very, very conservative in our bidding and have not won any of those and we’re probably not too sad about that.

There’s some very nice properties that are available for sale. We saw one from the big guy in our industry, that bought some real nice properties. The cap rate is not bargain but the stores are good. There’s a bunch of other stores that are out there similarly priced, good stores, quality markets, are probably in the low to mid 7 caps.

There’s a lot of stuff out there that’s in the 8.5 to 9.5 range, probably we won’t be bidding on. I’m not sure, many of our public company peers will be either. A lot of that stuff was built and even in good times maybe shouldn’t have been built. Right now they’re in the 20% to 40% occupied level and may have a hard time breaking out of that range so there’s going to be some real pain I think and probably not, you’ll not see the public companies bailing those people out.

So, I don't know if we’re going to actually, we haven’t forecasted an acquisitions. We don’t have anything under contract. We’re looking at a lot, there’s a lot out there, but its no bargain.

Christy McElroy – UBS

So you’ve been losing out on the low 7 cap stuff.

David Rogers

I wouldn’t say we’ve been losing out, there’s one, really there’s only one transaction that I can point to. There’s stuff for sale that nobody has been bidding on but there’s a big one, we didn’t necessarily lose out on, we didn’t bid, but we saw that’s what it went for.

Operator

Your next question comes from the line of Todd Thomas - KeyBanc Capital Markets

Todd Thomas - KeyBanc Capital Markets

Real quick, do you have same store occupancy update through the end of April.

David Rogers

It moved about 30 basis points positive, just a little bit. We didn’t have necessarily a very strong April. The phones have been busy, the activity has been busy, the move-ins have been a plus, but its about 30 basis points higher.

Todd Thomas - KeyBanc Capital Markets

Thirty basis points higher year over year or the quarterly average.

David Rogers

From actually March, from the end of March. I think that put it right on par with last year.

Todd Thomas - KeyBanc Capital Markets

And then with regard to the change in guidance, I was wondering if you can break out some of the pieces so that we can get a sense of how much is attributable to asset sales now that that’s included in the guidance and then the change in the core and so forth.

David Rogers

We figured we’re going to put the $25 million to work at about nothing unfortunately, we’re not going to have, we don’t have any debt to pay down that we can pay down so this is going to sit on our balance sheet until we can find acquisitions to make work.

So assuming a mid second quarter close average for all 10 properties that will probably dilute us about $0.05 per share for the balance of the year if we don’t put it to work, so that’s what we factored in there. The NOI growth picked up about $0.07 all together if you take that 1% at the mid point NOI growth, we’re thinking for operations to contribute $0.07 and dilution to knock off a little under $0.05.

Jordan Sadler - KeyBanc Capital Markets

I just wanted to go through the move-ins, follow-up on Christy’s question, the 12 or 14 markets you showed positive same store NOI are you seeing positive move-ins, or move-ins trumping move-outs in those markets.

Kenneth Myszka

In some we are, yes. Its, I can’t say that all 12 were the case and I don’t have that information directly in front of me, but yes, some of them there were more move-ins than move-outs.

Jordan Sadler - KeyBanc Capital Markets

You’re certainly starting to see demand percolate a little bit in some of these markets that are bouncing back.

Kenneth Myszka

Yes, as David mentioned we’re getting a lot of action, a lot of calls, a lot of inquires on our website but people are very, very, still very cost conscious and concessions are still a bit [ruled] even though we saw a little moderation this last quarter.

Jordan Sadler - KeyBanc Capital Markets

And then just on the underwriting some of the lower cap rate assets are not necessarily attractive but if I look back through history, you seem to be comfortable buying in the 8’s even let’s say three, four years ago that would have been, those would have been good numbers. What is NOI off on those properties, peak to trough and how does that factor into your underwriting.

David Rogers

I think that’s the issue when the seller is holding to a pretty aggressive cap rate, the fact that their NOIs are suppressed, so the opposite of what we did in Jacksonville, North Carolina for example, we saw a peak and that’s why we looked to sell those properties. A lot of the potential sellers that are out there really think they’re in the trough and it may take a halfway decent business season and allowing perspective purchasers to price on that trend of decent second and third quarter before these guys are going to feel comfortable coming off a low 7 for their quality properties.

I think that has as much of an impact as anything is most sellers of good properties are not in trouble with their maturity needs and that maturity needs, so they’re sitting there saying, alright why sell now, I’ve come off the toughest year I’ve had in five years, why would I want to sell off this NOI stream and I think its going to take a little bit of movement to get cap rates to move a little bit north.

Its just these people feeling a little more comfortable. I think they have numbers in mind for their property and you play with the NOI and the cap rates and it doesn’t come out to that right now and we’re really seeing a tough nudge for quality properties in good markets. I think, and I don’t see a lot of activity taking place anywhere private or public, for the quality properties.

You see a lot of the other stuff being offered, but I just don’t see that.

Jordan Sadler - KeyBanc Capital Markets

And where do you see, forgetting the cap rates for a second, where do see the pricing relative to replacement costs of the quality.

David Rogers

Our business has always been higher than replacement costs for decent properties because the rent roll stream is so important. So we’re still there. You get sort of flooded with all the opportunistic stuff that’s really pretty junky, but filtering all that out and looking at good stuff, good markets, you’re still above replacement cost.

Replacement costs being in most of those markets in the $80.00 to $90.00 range I think and the asking price north of that a little bit.

Operator

Your next question comes from the line of Michael Salinsky – RBC Capital Markets

Michael Salinsky – RBC Capital Markets

Quick question just focusing on operations, have you seen any ability to dial back on concessions at this point.

Kenneth Myszka

Well we did, and I think as we mentioned earlier we’re a little bit less, $200,000 less this past quarter than the quarter before. It was interesting though as David mentioned we did it more frequently so what we are doing is, giving away a little less but more often and people are maybe a little less sensitive in some areas but we’re still going to be as aggressive as we need to until we get to the point where we have the occupancy that enables us to be a little bit [inaudible] but more pricing power.

Michael Salinsky – RBC Capital Markets

You talked about move-ins and move-outs, just curious as to what you’re seeing with regards to overall traffic maybe at the internet as well as at the property level, is your closing ratio down or are you just not seeing the traffic coming in the door at this point.

Kenneth Myszka

We’re seeing a lot of inquiries on the web, a lot more than we had before. We’ve improved our web positioning and people are being given access to it but that brings in a lot more shoppers so our close rate on the website is down. A lot of times what people will do is they’ll go on several times looking to see, check on this week and see if there’s a deal.

So the close rate is definitely down on the website. As far as our phone conversion rate though is up because those are people who have really decided they want to rent, they’re calling us, and we’re able to close those. So it’s a mixed bag. We’re pleased that we’re getting more exposure with the website but the closing rate is no where near where it is with our phone calls.

Michael Salinsky – RBC Capital Markets

On dispositions, [inaudible] contract, can you give us a sense of kind how that, what the terms are from a pricing standpoint.

David Rogers

The eight stores, as a pool and it is pretty much the one buyer, it averages, they allocated for their reasons internally, but our overall is just at an 8.5 cap. As I mentioned its about $22 million in proceeds. There’s no debt, so all the cash flows to our bank account and its an 8.5 cap on the last six months of the year, last six months of 2009 annualized.

Michael Salinsky – RBC Capital Markets

Then finally, going back to Jordan’s question maybe looking a little differently, when you’re looking at underwriting new investment today, what kind of growth rates are you kind of assuming as you look out to the recovery over the next couple of years or what kind of IRR are you kind of underwriting to, just in terms of investments there, and how does that compare to last cycle.

David Rogers

I think this time we’re, I think maybe this is what Jordan asked and if you’re still on Jordan I apologize because I think I missed what you said, I think we’re looking now the last year and prospectively I think we’ll be looking at things quality properties in the upper 70’s to mid 80’s range of occupancy right now.

So part of what we’ll be buying is the upside potential for those stores to pick up 300 or 400 basis points in occupancy. Typically when we buy we look at a store, if we put our systems in, if we put our marketing in, and our management, we can typically a year later look back and say that we’ve improved the yield by 100 to 125 basis points without budging occupancy.

We don’t factor that in. We just say systems and improvements, we should be able to get another 100 to 125 basis points yield on it. Now we’re looking at it with that still in place, still have our efficiencies and scale contributing to the yield, but also to some top line potential as the recovery comes. Now we’re having a tough time saying that because if we can’t improve our own stores, if we’re sitting here saying our same store pool is only going to grow by zero at best, its hard to forecast that.

But if you look at a track record of a property, if you’re in a market that’s strong, we can reasonably now think over a three year horizon, 125 basis points first year and then perhaps another 300 to 400 over and above what normally might raise as a result of rent raises. So we’re looking even at mature properties, stabilized properties, as more opportunistic right now.

So that’s why the 7.5 cap doesn’t necessarily scare us at all, its just that we want to make sure that the owner isn’t already pricing in any 85 or 86% occupancy and asking for a 7.25 cap, which has been pretty much the case in a lot of the properties we’ve looked at. We don’t really look at IRR, we pretty much look to buy and hold so we’re looking just at a three and a five year growth plan after we take over the property.

Michael Salinsky – RBC Capital Markets

So it sounds like the first year up 125, 150 basis points, then did you say you’re looking for 3% to 4% growth then.

David Rogers

No, I’m sorry, 300 to 400% increase in occupancy over and above the normal 3% to 4% that we might typically look to get in rate increases and such. So typically over history we’ve been looking to grow our properties at a rate of 3% to 5% per year even though it might be mature in our pool. Now as we’re looking at the acquisition we’re looking at 125 basis points first year, 300 to 400 basis points because of occupancy gains in the next couple of years, along with normal growth of 3% to 4%.

Operator

Your next question comes from the line of Michael Bilerman - Citigroup

Michael Bilerman - Citigroup

Just getting back to the rate increases, when were those passed through in the quarter.

Kenneth Myszka

They were passed throughout, I think we started the end of January and just did it selectively, actually I can’t even say geographically where because it was throughout the country, where ever we had people in place for about a year or so in spaces that had high occupancy we put in the rate increases.

But it was kind of almost spread out throughout the quarter.

Michael Bilerman - Citigroup

And then Houston, is that still due to difficult year over year comps or is there something else that’s changed sequentially.

Kenneth Myszka

No that’s it, its very interesting, southern Houston is the one that was affected by the hurricane back in 2008 and that’s a tough comp. Actually north central and northern Houston we’re doing fine. We have pretty good ins and outs, the revenues are fine. Its really isolated to that area. Our expectation is as this year goes on Houston should probably come back to where it’s a reasonably a profitable market for us.

Michael Bilerman – Citigroup

And then on the property improvement program, what are the returns you’re targeting and [building] for the lease that you’re performing, the lease up in your estimates.

David Rogers

For the last three years we’ve been able to go ahead and pretty much build a standard sized building, either 10,000 or two 10,000 square foot buildings that are climate controlled, air conditioned, humidity controlled, all the bells and whistles.

It takes us about five or six months to put that in place once we have the permits and the zoning lined up. We look for about a 12 yield, cash on cash, after a 12 month lease up period. And the 12 yield seems a little high but if you factor in the fact that we for the most part own the land already and the operating costs associated with, on an incremental basis are pretty negligible. We’re only talking about a little bit more on property taxes and a little bit more on insurance.

So that basically most of the top line drops right to the bottom so we expect the lease up period of a year after we’ve handed the keys over to the manager and we expect a 12% return at the 12 month mark.

Michael Bilerman - Citigroup

And the return dynamics on these assets that you’re improving seems much better than what you’re seeing in the acquisition market, are you looking to expand this program.

David Rogers

Well we put the brakes on, actually right at the beginning of last year, beginning of 2009 because we were building space in markets that were receding away from us, but we, as I mentioned premium space sells almost in any market and any time right now, so, we shut it down completely. It was a three year, $50 million per year program.

We put our foot in the water this year with $20 million. I think we’ll do that and be on the lookout as each market improves a little bit. So yes, the opportunity a year and a half ago was there to do $150 million of this stuff, we really got kind of cautious with the pull back, but I think 20 will grow pretty significantly over the next year or two.

Operator

Your next question comes from the line of Mark Lutenski - BMO Capital Markets

Mark Lutenski - BMO Capital Markets

Just to follow-up on those expansion projects, is there any regional concentration of those or are they scattered throughout your portfolio.

David Rogers

Pretty scattered, not necessarily weighted the same way our portfolio is although there are two in Florida of the 21 projects we have. But for the most part its pretty scattered. I would say the biggest concentration is in New England and the Mid Atlantic right now but there’s a bunch in the queue after this program that we’ll add on to.

So its all over.

Mark Lutenski - BMO Capital Markets

And at this point do you think that discounts have sort of become and expectation for some stores using them.

Kenneth Myszka

Yes, unfortunately I think that’s true and its going to take a while before we can perhaps begin to wean the customers from that and its going to have to come to some extent once the mom and pop’s begin to feel more comfortable with occupancy and then they’ll stop competing primarily on price and hopefully over the next couple of years we get back to where discounting is a little bit more rare than it has been.

So I think for the foreseeable future, its with us.

Operator

Your next question comes from the line of Bruce Garrison – Unspecified Company

Bruce Garrison – Unspecified Company

Here locally in Houston, the Uncle Bob’s site has been on TV all week in conjunction with a police incident, I was just wondering is that type of publicity a plus or a minus to the Uncle Bob franchise here.

Kenneth Myszka

I’m not sure whether it is a plus or a minus but we did what we thought was the right thing to do based on legal advice. The surveillance cameras saw, witnessed an arrest and we submitted the tapes to the proper authorities. We didn’t do it for publicity one way or the other and I guess the chips will fall where they may but we did what we thought was right under the circumstances.

Bruce Garrison – Unspecified Company

Yes, I concur I thought it was the right move. Anyway just was an off the wall question. Thanks a lot Kenneth.

Operator

Your final question comes from the line of Ki Bin Kim – Macquarie

Ki Bin Kim – Macquarie

With regards to your new hirer, how much more investment are you going to make in your infrastructure and your pricing system and what impact would it have in terms of maybe changing your thinking on how to price rate increases going forward.

Kenneth Myszka

I’ll take care of the second question first, David has been with us for about 25 years, and knows our industry, knows our company very well and he’s really been involved in the development of our revenue management system from the start. Has worked jointly with our regional vice presidents to put it together.

We just thought it time that he’s had that department, has spent 100% of his time, not building the system but refining it. We’ve got a really good system, its worked very well for us. We think it can only get better with David’s leadership.

As far as additional investment in the program, we’ll make whatever investments that we need to as far as technology is concerned. David is looking at various things that may be make us a little bit more efficient and effective but we’ll monitor that. At this point we don’t have any significant plans for any significant expenditures there.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Kenneth Myszka

Thank you everybody for your interest in our company. We appreciate the questions and the concerns and we’ll look forward to speaking to you next quarter. Have a good summer.

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Source: Sovran Self Storage, Inc. Q1 2010 Earnings Call Transcript
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