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Sovran Self Storage, Inc. (NYSE:SSS)

Q2 2010 Earnings Call Transcript

August 5, 2010 9:00 am ET

Executives

Ken Myszka – President and COO

Dave Rogers – CFO

Analysts

Todd Thomas – KeyBanc Capital Markets

David Toti – FBR Capital Markets

Eric Wolfe – Citi

Christy McElroy – UBS

Ki Bin Kim – Macquarie

Michael Salinsky – RBC

Ross Nussbaum – UBS

Operator

Greetings. And welcome to the Sovran Self Storage second quarter 2010 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Myszka, president and chief operating officer for Sovran Self Storage. Thank you. Mr. Myszka, you may begin.

Ken Myszka

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

Well, although market conditions continue to be challenging, we do see some positive trends developing in many of our markets. And I think that's an important point to keep in mind, especially during these difficult economic times. We shouldn't lose sight of the big picture. The question I think we need to keep in mind there as a whole, "Where is this industry headed, up or down," and, "Who is in that industry house, any particular company performed over the last four to six quarters? And is the trend up or down for that company?"

For the first time in five quarters, our portfolio generated positive same store revenue growth. Now, through most of our 26 years in the business, our same store revenue growth of less than 1% would not be much cause for celebration, honestly. However, this continued positive trend, which began in the third quarter of last year, unfortunately, we were unable to match the 3.6% decrease in same store operating expenses of last year's second quarter.

We initiated intense costs into our leverage as far back as Q4 of 2008. In fact, each quarter last year reflected negative same store operating expenses year-over-year. And now, it's impossible to maintain a quality portfolio without spending the dollars necessary to keep the stores in A1 condition. Thankfully, we're up again from difficult times on the operating expense side of the ledger.

So summarizing the results of our quarter, we generated half of the same store revenue growth of 22.4%, operating expense growth of 3.8%, and negative NOI of 1.8%.

Now for just a couple of specifics for the quarter, although we had fewer traditional telephone inquiries year-over-year, total inquiries to our company increased by 7% as our Web optimization efforts continue to be successful with 66% more Web inquiries this quarter of 2010 versus last year's second quarter. We also continued our practice of selectively increasing rates on an increasing number of in-place customers, and observe little pushback.

In other matters, we've made no acquisitions for our accounts or in behalf of our joint venture. However, we do see some more candidates on the market than the prior periods. Unfortunately, overall sellers are still regarding the value of their properties at numbers probably more reflective of two or three years ago. We sold eight properties in May at a total price of $22.1 million, realizing the gain of $7.5 million on net sales.

And with that, let me now turn the call over to Dave Rogers, our chief financial officer, who will provide some more details on our quarter's activities.

Dave Rogers

Thank you, Ken. With regard to operations for the quarter, total revenues increased $182,000, up 40 basis points from 2009 second quarter; while property operating expenses increased by about $700,000, resulting in an overall NOI increase of 1.7%. These overall results reflect the impact of the store we opened in Richmond last fall and the decline in same store NOI, that I'll get to in a minute, net of the operating results of the eight stores we sold in the period.

Average overall occupancy was 18.5% for the quarter ended June 30th. And average rent per square foot was $10.16. The overall occupancy rate at the end of the quarter was 81.8%, 90 basis points lower than that of last June's end. This level was less than we anticipated at the end of first busy season quarter. It was negatively impacted by an aggressive pricing strategy we put in place beginning Memorial Day weekend.

Same store results now include 353 of our 354 company-owned stores. Only the development store in Richmond and the 25 JV stores are excluded from the pool. As Ken mentioned, same store revenues increased by 20 basis points over those of the second quarter of 2009. This was primarily the result of same store rent and occupied space improving by 40 basis points, offset by a decline in the weighted average of 20 basis points at 80.7%.

Other income, especially commissions on tenant insurance, increased by over $200,000. The quarter end occupancy rate for the same store pool was 82%, about 50 basis points lower than last June 30th's level. We continue to buy occupancy in this highly competitive environment. But for the second quarter in a row, our move-in incentives declined on a year-over-year basis. Last year's second quarter saw us granting $4.9 million worth of move-in specials. This year we gave up $4.1 million, primarily as a result of June's aggressive pricing push. Our frequency of incentives offered declined to less than 89% of move-in costumers as opposed to more that 95% in 2009's second quarter.

Operating expenses on a same store basis increased by a total of 3.8%, primarily as a result of increased worker's comp, healthcare, and curb appeal costs. Other than the 2.4% increase in property taxes, most other cost remained in line with 2009 suppressed levels. Overall then, same store net operating income dropped 1.8% from that of 2009's second quarter.

G&A costs for the period came in at $5 million, about as expected. The main reasons for the increase over last year's rates were the anticipated ramp-up of Internet advertising costs and a jump in state in federal income taxes as a result of stronger profits in our taxable REIT subsidiary.

With regard to capital matters, we didn't acquire any properties during the quarter for our own portfolio or for that of the joint ventures. We did, however, sell eight 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 was $22 million. And we recorded a gain of about $7.5 million.

Of the 17 properties we were looking to divest at the beginning of 2009, only the Salisbury, Maryland and Christiansburg, Virginia properties remain. We continue to expand and enhance our 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 a tough leasing environment, we find that premium space sells. We're also priming the pump for $3 million-plus worth of projects to get going early into next year.

At June 30th, we had $400 million of unsecured term note debt and $80 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. We have almost $30 million in cash on hand and up to $175 million of credit available as of June 30th. Our capital position is such that our needs are discretionary. We have no forward commitments concerning JV contributions or buyouts, no construction programs to fund, and no properties to acquire until we decide that the time is right to buy them.

And a quick snapshot of our key debt ratios at June 30th, debt to enterprise value, assuming a $36.00 share price, was 32.3%; debt to book costs, 34.9%; debt to EBITDA ratio, 4.9 times; and, debt service coverage, 3.1 times.

Concerning guidance, we're feeling that as the busy season grinds on, we're remaining fairly optimistic concerning demand and pricing potential in many of our markets. We anticipate the continued use of leasing incentives as well as the advertising and aggressive marketing to improve occupancy. But we remain comfortable with the guidance increases presented last quarter. As we said then, we expect a decline in same store revenue of 0% to 1% from that of 2009. Property operating costs are projected to increase by 2% to 3%, including a budgeted 6% increase in property taxes. Accordingly, we anticipate a 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're expanding up to $20 million this year under the revised program and timing the pump for $30 million next year. 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 10 properties this year. Because we don't have a home for the $25 million-plus of proceeds, the transactions will be, for the short term, dilutive, but the impact has been included in the guidance.

General and administrative expenses are expected to increase by about $1.5 million this year, primarily as a result of increased Web advertising and the effective income taxes on our TRS activities.

At June 30th, all of our debt is either fixed rate or covered by swap contracts. Subsequent borrowings that may occur will be pursuant to our line of credit agreement at a floating rate of LIBOR plus 1.375. At June 30th, we had 27.6 million shares of common stock outstanding and 342,000 OP units outstanding.

So as a result of the above facts and assumptions, we're reiterating our forecast of expected funds from operations for the full year of 2010 of approximately $2.44 to $2.48 per share, and between $0.62 and $.64 per share for the third quarter of 2010.

And Ken, at this point, I'll turn it back to you.

Ken Myszka

Okay. Thanks, Dave. Well, that concludes our prepared remarks and we'd be pleased to field any questions that you might have out there.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) One moment please, while we poll for questions. Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas – KeyBanc Capital Markets

Hi. Good morning. I'm on with Jordan Sadler as well.

Ken Myszka

Good morning, Todd.

Todd Thomas – KeyBanc Capital Markets

Hi. Do you guys have an occupancy update as of the end of July for the same store?

Dave Rogers

Yes, we bought this – we're at 83.2% same store occupancy at the end of July. So we had increased about 120 basis points from the end of June number.

Todd Thomas – KeyBanc Capital Markets

Okay. And how does that stack up historically to what you see on a seasonal basis?

Ken Myszka

Well, July was a really good month for us. Maybe I'll give you a little bit of background how this whole thing unfolded. The second quarter we had pretty good performance in the first take – particularly in May as far as move-ins were concerned. And as Dave mentioned in his prepared remarks, at the end of May, we started the offering Less Aggressive Specials into June. And by the end of June, we saw that the number of move-in was down considerably for – compared to the year before. So we immediately reinstituted the More Aggressive Specials. And in July, we had a little over 1,000 more move-ins on a same store basis this July than we did the last July.

And frankly, it's – what we're trying to do is we saw things moving pretty well with our revenue management system. We're going to be testing the market to see what the pricing potential is. And we saw that we still need to have the – Some Aggressive Specials in some of the markets.

Todd Thomas – KeyBanc Capital Markets

Okay. So you saw 1,000 – you saw net absorption of 1,000 units in July. Is that correct?

Ken Myszka

Right, over last year.

Todd Thomas – KeyBanc Capital Markets

What do you attribute the strengths that you saw in the back half of the quarter and in July, too?

Ken Myszka

Well actually, it's really – what's in the back end of the quarter was the poor part for us, the earlier part when we took away the specials that was less movement activity. And frankly, I think people are still shopping very vigorously. We don't have as much pricing power as we'd like at this point, even though, as Dave alluded to, we had about $800,000 less of concessions. We're easing off slowly. People, I think, are still accustomed to the special that we've been offering. And it's going to be a while before we cease being aggressive as we have.

Todd Thomas – KeyBanc Capital Markets

Okay. And then, on your existing customers, the rate increases that you implemented throughout the quarter, it sounded like last quarter you were still going to be cautious and selective. Did that change at all throughout the quarter and into July as you saw an increase in move-in demand here?

Ken Myszka

Yes. We were more aggressive this quarter – this past quarter as far as rating rates. I would say we probably raised maybe rates on probably two to three times more people than we did in the first quarter. The amount of the raise was a little bit less. This quarter was around 5%. I think the first quarter was maybe in the 6% to 7% rate increase. But the good thing is we haven't had much pushback as far as people moving out and challenging us on that.

Todd Thomas – KeyBanc Capital Markets

Okay. Great. Thank you.

Ken Myszka

Welcome.

Operator

Thank you. Our next question comes from the line of David Toti with FBR Capital Markets. Please proceed with your question.

David Toti – FBR Capital Markets

Hi. Good morning, guys.

Ken Myszka

Hi, David.

David Toti – FBR Capital Markets

Question, relative to – you're basically saying that you still have to offer concessions even in a seasonally strong period. What are your expectations for the fall and the winter? If conditions don't really change, do you think concessions would have to tip back up? Do you think there's some risk to occupancy in the demand side? How do you see the rest of year shaping up?

Ken Myszka

Well, I think it'd be still – if things don't get better, it's going to be similar to what we had in the third and fourth quarter of last year. We'll be fighting for every cushion that we can get. And what we tried to do is we'll have a price on the online. And that'll be a lower price than if somebody walks into the store.

So we just – we have to work very, very hard. Salesmanship is very important. Everybody knows that every call that we get, we have to do our best to convert them to a customer. And really, I think we're in no different position than any other businessperson. If the general economy begins to improve, we're going to show some strength. I think we're on the same boat.

David Toti – FBR Capital Markets

Okay. And then relative to the portfolio, could you just give us a little bit of up update as to what you're seeing in Florida in the last couple of months, if (inaudible) could be generalized?

Ken Myszka

Yes. Actually, if I were to say towards – probably the strongest of the weak is the Tampa-St. Petersburg area. Southwest Florida is the weakest for us there. And the other ones, they are just – they're still stagnant as to where they've been for last four to six quarters. We don't see any increase in appointments, still a lot of businesses that were there before aren't opening. Right now, it's still a battle down in Florida.

If the housing market – and ultimately, we think it's going to be a strong market. I mean with baby boomers, they are looking for places that they retire – go where it's going to be warm and sunny. And so ultimately, over a period of time, it's going to rebound. It's just now – right now, I can't say that I see light at the end of the tunnel there.

David Toti – FBR Capital Markets

Okay. Thank you. And then on disposition, could you mention the aggregate cap rate on the sales that you completed?

Dave Rogers

Yes. We talked about it on the last call a little bit, but we – the contracts that we went into, and then basically closed, was for about just under 8.5% cap, and 10% and 12% for the eight stores we sold in mid-May. Basically, it was a cap rate that we weren't thrilled with. But a lot of those stores needed a significant model repair. And more importantly, they were just at markets that weren't fitting with us – we don't have additional stores in any of those markets.

We gave up a little yield. But I think it was a good move to move them off the balance sheet, and made our operations to guide was a lot easier. And also, this gave us upward of a couple of million dollars in some serious improvements that we're going to have to make due to the configurations on roads and so forth with these properties. So we weren't thrilled, but it was about 8.5%.

David Toti – FBR Capital Markets

Okay. Thanks. And then, my last question is relative to concessions, have you changed the mix of concessions you were doing the second month in your price, the first month for you? Have you shifted the way you're concessing [ph]?

Ken Myszka

Well, we still have the name the price in the second month. A lot will vary as far as occupancy as to what we'll be charging the first month. Depending upon occupancy, say, if you pay the prorate the first month in, if occupancy is low, we may have to be a little bit more aggrieve there. We may not charge the administrative fee. So it really is – there are so many different facets of it. We've got five different specials that managers and the call center people are able to offer depending upon what the demand is and what the – how sensitive the shopper is to the pricing. So it is – there's just a lot of different types of concessions, and all very based on store, and also on the unit size.

David Toti – FBR Capital Markets

Okay. That's helpful. Thanks for the detail today.

Ken Myszka

Sure.

Operator

Thank you. Our next question comes from the line of Eric Wolfe with Citi. Please proceed with you question.

Eric Wolfe – Citi

Thanks. Good morning, guys.

Ken Myszka

Good morning.

Dave Rogers

Good morning, Eric.

Eric Wolfe – Citi

You mentioned in your earnings release last night that the peak season got off in a bit of bumpy start. I'm just wondering what specifically fell short of your expectations earlier in the quarter, and what made this up potentially later in the quarter in July to allow you to keep your guidance the same.

Ken Myszka

Well, maybe it's a little bit of misnomer. April and May – April – maybe beginning of the busy season, we – actually, we're doing okay in April and most of May as far as movement activity. And what happened then is we got a little aggressive as far as reducing the amount of specials or maybe we were less aggressive with those specials, and we saw the drop off in movements in June. So as we measure that, we went back to the most aggressive specials. And the result was astounding.

In fact, I'm just – I'll give you a little context. For the year so far, we've got about 2,900 fewer move-ins for the year on a same store basis. During that period of time, which I just mentioned, the end of May through June, we have about 2s500 fewer move-ins during that time period than the year before. When we went back to the more aggressive specials, we realized over 1,000 more move-ins in July than what we did the year before. So what it told us is we – they're still going to be challenging as we go along. We're going to still be testing the market. But at this point, even in the busy season, we still have to resort to fairly aggressive specials to attract the move-in.

Eric Wolfe – Citi

Yes. It sounds like your – I guess the consumer's pretty price sensitive right now in the strong elasticity of demand. Have you actually thought about maybe increasing your discounts more? It sounds like July really saw a ramp in occupancies. So I'm just wondering if you can increase your discounts and push up occupancy that – with the benefits of revenue, why not continue to do that? Or do you just not want to give away too much rate at this point?

Ken Myszka

Keep in mind even though we had fewer move-ins, the top line was a positive same store revenue growth. So it's not just discounts. You got to make sure to manage the pricing on top as well. And that's where the art comes in as far as how high to go, how low to go. We did have positive same store revenue growth, even though we had fewer move-ins than we did in the month – or the quarter before in 2009. So it'll be going back and forth between concessions – aggressive concessions, different types of concession.

Dave Rogers

And Eric, we should point out that we're still trying, and pretty well succeeding for the most part, in keeping the rate structure pretty much the same. It's still the key. And then, we learn about that again for about the hundredth time in our career that customers don't like that part with money moving in. It is not (inaudible). So the idea is we want to get them in at less cost.

And the incentive that we dropped off in June required some of our customers – more of – a lot more of our customers could pay some dollars on the move-in. If you can keep it that low – and that's the reason for the Dollar Move-In Special. That's the reason for the "name your own price" type of thing. They move-in for practically nothing or nothing, unless we go, "I'm going," we can get the rates I think. It seems like we can. But that's where we fell back in June, was we looked for more dollars upfront. And we got rebuffed.

Eric Wolfe – Citi

Got you. And along the same lines, your revenue went down by about $1.1 million from the first quarter to the second. Could you just break out how much was lost from the $22 million in dispositions versus what you maybe lost from the sequential rate decline?

Dave Rogers

We didn't lose anything I don't think in the sequential rate decline. I thought we were pretty – yes, it was all–

Eric Wolfe – Citi

Okay. It's all from the $22 million dispositions?

Dave Rogers

Correct

Eric Wolfe – Citi

And then you would expect, I guess, maybe about another half of that to hit the third quarter since you sold in early May?

Dave Rogers

Yes, we did have a little bit of a miss there. When we were in the conference call last time, we were expecting a mid-June disposition of those assets. And shortly after the call, we got calls from the buyers. There are two groups that wanted to accelerate the pace. So we actually sold I think – by May 16th, I think everything was gone. I really didn't expect that to happen until mid to later June.

So essentially, we got amiss for about – for that quarter based on the quick disposition of those properties. That's why we thought we were pretty good at – I didn't talk to anybody guidance at $0.62 [ph]. I felt okay about it. And then all of a sudden, we dumped all of that just real quick. So it's a meaningful amount to us. I figured there was about six weeks of activity in the period. But it's all taken true the gain on disposition and the part on the P&L statement that talked about the disposition of properties. But we did – we owned them for six weeks this quarter. And we didn't have them for seven.

Eric Wolfe – Citi

Got you. And then last question, you mentioned that you're planning to spend about $20 million to expand and enhance your properties. And then, you also said that there's about $30 million earmarked for next year. Do you think we could see you expand upon this given that the acquisition market really isn't picking up too much right now? And what type of returns are you targeting on this investment?

Dave Rogers

We may go further – be more aggressive with it as we see some markets come up. Primarily, we're still looking for an 11% to 12% return a year after we turn the key on these properties. And again, the small buys, a lot of the projects are $500,000 and $700,000 a piece. It's adding a building. It's adding climate control over many, many properties.

The reason the return is so good is in many cases, we own the land already. And the revenues that we achieved on this, which is about 20% higher than our average rate per square foot for then our dry storage rate per square foot, number one. Number two, most of the expenses on the property are already accounted for, expect for maybe a little of extra insurance and a little bit of a kick in property taxes. We're looking for about an 11%, 12% yield. We're hoping to have $50 million in the ground by the end of next year, and then maybe more than that.

Eric Wolfe – Citi

Got you. And I apologize if you mentioned this in the pat. But is there a regional focus of all to the investment? Or is it just spread across your portfolio?

Dave Rogers

Yes, it's pretty much every region has some. I think right now, at this moment, the Mid-Atlantic has a little bit more than anywhere else, but it's pretty much across the board.

Eric Wolfe – Citi

Okay. Thank you.

Dave Rogers

You're welcome.

Operator

Thank you. Our next question comes from the line of Christy McElroy with UBS. Please proceed with your question.

Christy McElroy – UBS

Hi. Good morning, guys. I just wanted to be clear. Would you attribute the changes in your move-ins throughout the quarter – the move-in activity strictly to the changes in your specials? Or do you think that there were any broader economic factors that play as well, such as some of the lower housing transactions that we saw lower moving activity.

Ken Myszka

I'd say a good part of it was the change in the concessions. The Houston market has gone down a fair amount over the past, let's say, three to five quarters for us. I think unemployment is tough there, not all of Houston. Northern Houston is looking – is fairly strong, but the central and southern Houston markets. And one other thing, even though the hurricane occurred back in the end of '08, we still have some tough comps from last year where some people have moved out, we used the – for those reason and not having people come in to replace it. So I will say it was probably two-thirds was the specials and the other part various market, particularly Houston.

Christy McElroy – UBS

And then, just following up on Florida and maybe including Phoenix in there as well because I know it's been a tough market for you, what were the differences in move-out trends in Florida, specifically following any in-place rent increases that you had implemented?

Ken Myszka

Well, first of all in Florida, there weren't too many in-place rate increases. And the area managers were instructed. The only time you're going to be doing it down there is if you've got relatively full unit sizes. And the person – the people who have that – those – occupy those are well on the street rates. So we didn't really see much in the way of pushback in the Florida markets because we weren't that aggressive there. Other markets, we were much more aggressive. And frankly, we've – we were pretty successful.

Christy McElroy – UBS

Okay. And then, can you expand on your comments on the acquisition environment and what you're seeing in the market, how you're thinking about underwriting potential deals? And just elaborate a little bit on what gives you any encouragement, if at all, that acquisition opportunities will begin to surface over the next year

Dave Rogers

Two things. We've talked before about different category of sales. There's some that – a lot of properties that were built in the 2005-2007 range that shouldn't have been built. And here we are three to five years later, and those properties are still in the 30% to 40% occupancy range. From our standpoint, I think those are pretty much off the table. And I would assume most of the larger play is stable.

What we have been seeing over the past five to eight weeks has been a lot of lenders who had brought to us packages or individual notes, either in default or about to go into default or that the bank has wanted to unload. There was a – I would say somewhere in the order of about $700 million of notes and self-storage properties that different lenders put up for sale. Most of them were connected to borrowers that even if you were able to take the deed and start foreclosure proceedings, you wouldn't want to deal with. We passed and we looked at a lot – we passed on all of them, primarily because it's a pretty sticky situation, in most cases, to take the notes. And we're not in the business of foreclosing to begin with. But also, the borrowers in those cases were just going to be tough people.

Well now, we're seeing a lot of those lenders do the foreclosure actions on themselves. I don't know – except for one-note package, I don't if any of that sold. I think a lot of them want up for bid. And a lot of them got hold back. Now those lenders are working through to take the properties in the portfolio and actually get the deeds. So those properties will come up. And some of them are pretty good. And I think they'll be – I mean there's going to be some competition for them, obviously. But they are things that as of note, we didn't want. But as a deed, we did.

And now, more importantly and probably more likely is a lot of the properties that we've looked at – and we're a little early on the curve in the 50% to 60% occupancy range that a lot of owners wanted to price at 80% or 90% occupancy are now being more realistic. So I think if – we're certainly not going to play to the tune of $200 million on our balance sheet.

But I think we will selectively buy some and use some firepower to hopefully partner up with somebody to buy some of these opportune properties that are in the 60%, 65%, 70% occupancy range. And we can get comfortable with some room to grow in the next couple of years. And the cap rates are in the $7s [ph], let say. But we're not having to pay for that increase in value that the – what we've been seeing a lot is a lot of owners are seeing 70% occupancy and actual pricing the property at a $7.5 GAAP, assuming a pro-forma 85%. That's the stuff that was driving us crazy.

We're seeing some – a lot of sellers come off that a bit. And that's what gives us some optimism for – certainly, not this quarter, maybe not next. But some deals are working through into the later half or later – much later part of this year or early part of next.

Christy McElroy – UBS

Okay. And then, just one final question if I could, you've spoken about expectations for higher taxes this year. I think you have a 6% expected increase in your guidance. It seems like taxes are running up about 3% year-to-date. Do you expect to start seeing higher tax yields between now and year-end? Or is it possible that the 6% could end up being conservative?

Dave Rogers

It could be conservative. But the main reason for the disparity is we had a real low number last year that came in, in the fourth quarter. So we're going to make up a lot of that, and report to you. And then, there's already a guidance in everything. I think we had a net benefit last year of about 2.5% negative increase in taxes. So if we flow the whole 6% through the way we should, it'll catch itself up in the fourth quarter. And if it's 5%, we'll get a little bit of benefit. If it's 6%, it'll work out just right.

Christy McElroy – UBS

That's it. Thank you.

Dave Rogers

Okay.

Operator

Thank you. Our next question comes from the line of Ki Bin Kim with Macquarie. Please proceed with your question.

Ki Bin Kim – Macquarie

Thanks. This is Ki Bin. To follow-up on the previous question on expenses, could you give a little bit more breakdown on your expense line item and to what extent are these more controllable?

Dave Rogers

The operating expenses?

Ki Bin Kim – Macquarie

Yes.

Dave Rogers

We did mention that we're – we were up, unfortunately, this quarter about 9% in healthcare costs. And we had some worker's comp premium increase that bumped us about 5%. Our curb appeal, summertime busy season maintenance was up about 4%. And property taxes were up 2.4%. The rest were pretty much in line with last year. And payroll was flat. G&A costs were pretty much flat. A little bit of an increase in credit card costs, but that's negligible. Our insurance was a tad down. And most other operating expenses were right on with last year.

And last year, we have done a pretty good job of paring expenses. Most of the larger operators – I think most REITs did good job with expenses last year. So the comp, as Ken mentioned, on meeting last year's expenses are a little tough because we really cut them back pretty severely last – especially starting in the beginning of the second quarter through the third.

Ki Bin Kim – Macquarie

And how much are you spending on Internet advertising this quarter compared to last year? And also, what are your thoughts behind putting that – those expenses in the corporate G&A line item versus operating expense?

Dave Rogers

With us, it's always been – we put more to the corporate G&A line item because our stores have all been holding on. It's a pain to allocate over 358 stores of the various Internet bills that we paid. So I don't know. It's just the way we do it. I'm not sure if it's the best way, but it's the way we do it. And it works for us. We're spending about $450,000 a quarter on Internet advertising. That's up about 22%, I believe, from last year at this time.

Ki Bin Kim – Macquarie

Okay. Thank you.

Dave Rogers

Okay.

Operator

Thank you. Our next question comes from Michael Salinsky with RBC. Please proceed with your question.

Michael Salinksky – RBC

It's Salinsky, but close enough. Good morning, guys.

Dave Rogers

Good morning, Mike.

Michael Salinksky – RBC

First question, guys, just – you gave some good detail on the renewals. Just on new leases, how does that compare on a year-over-year basis at this point in terms of rate?

Ken Myszka

Our rate as far as year-over-year, the asking price is about 3% less than what it was the end of last – second quarter last year, up a little bit sequentially from the end of this past quarter, like maybe 1% or little less than 1% end of first quarter this year.

Michael Salinksky – RBC

Okay. That's helpful. Second question, in terms – if you look at the same store numbers you guys gave, there was a nice spike there in other operating income. What was the driver of that?

Ken Myszka

Primarily, insurance to the people coming in. We're really pursuing that. We had really good increase in that. I think the new customers coming in we've got about 70% success rate for those people. And for existing customers, I think the average is right around 40%. So that's primarily the biggest reason for the increase.

Michael Salinksky – RBC

Okay. How much of other income is insurance there?

Ken Myszka

Well, I would say–

Dave Rogers

That's about 60%. And the rest is truck income and the sale of locked-in boxes and such.

Michael Salinksky – RBC

Okay, helpful. Third, since your same store includes all but one property, I'm just curious what the performance of the joint venture portfolio was this quarter and how that compared to your existing portfolio.

Dave Rogers

It was a tad better. The Denver market was pretty good. I think our same store revenues actually grew about almost 2% for the second quarter. Those properties are still benefiting – they're not quite in our system two years. So they're benefiting from our ability to go in and pop those, offset tremendously. By the overall, it can have – they're not performing as we had planned them to two years ago. But they are performing pretty well in light of or in comparison to the broader self-storage market. I think there're a couple Florida stores that are giving us the tough time there as they are in the portfolio. But for the most part, the Columbia stores, the Denver stores and – are doing a little bit better. And the Texas stores are about at par.

Michael Salinksky – RBC

Okay, helpful again. With the two remaining asset sales, I mean is that something that you expect in the third quarter? Or is that a little further out at this point?

Dave Rogers

We've had two misfires. So I'd like to say – I would have liked to have said they were all done this quarter. But the borrower – or the lenders gave our potential buyers some trouble. So we reloaded, but we don't have anything firm right now. And we're hoping to get this done this year. I'm not positive it'll work that way, but we're pushing for it.

Michael Salinksky – RBC

Okay. Finally, a bigger picture question, you've seen – we've seen two of your peers jump into third party management pretty aggressively here in the past couple of quarters. I'm just curious what your thoughts are on third party management, and whether that's an area you expect to get into going forward?

Ken Myszka

Well, yes. We're looking at it. The point of the fact is we've been in the business now for almost nine years because we've had two joint ventures that we did for about 40 properties, and more recently with the Heitman people. So we've got experience with it. We're studying it. We may go into it. At this point, it's not a 100% sure, but we are studying it very carefully.

Michael Salinksky – RBC

Great. Thanks, guys.

Operator

Our next question comes from the line of Ross Nussbaum with UBS. Please proceed with your question.

Ross Nussbaum – UBS

Hi, guys. Good morning. We're tag teaming here at UBS.

Ken Myszka

Good morning.

Dave Rogers

Hi, Ross.

Ross Nussbaum – UBS

A couple of follow-up questions, Dave, I know you talked about marketing and Internet costs as one of the reasons why G&A was up year-over-year. I think you said Internet is about $450,000 per quarter. What are the marketing costs within G&A?

Dave Rogers

(inaudible) Other than that, none. We used to have more involvement with our corporate sales, but we've now pushed that up to the stores. That's about it.

Ross Nussbaum – UBS

Okay. So really, $450,000 is the amount of G&A that you would ascribe to marketing and Internet?

Dave Rogers

Yes, the rest of the telephone advertising, the point of sale advertising, billboards, and all that are directly charged to the stores.

Ross Nussbaum – UBS

Got it. Okay. And then, I saw one of the other reasons you mentioned G&A was up was – was it taxes in the TRS?

Dave Rogers

Yes, we've been pretty fortunate in years past with our other income. In terms of truck rental income, insurance sales, and so forth, we have not had to pay much, if anything, in the way of taxes because all the activity in our TRS – the income was sheltered by the depreciation on the trucks. We've got close to 300 trucks on the fleet. And the depreciation on those covered most of our operating profits in the tax or REIT subsidiary. Unfortunately, they're old enough now that virtually all the depreciation has burned off on the trucks. So we're paying a corporate rate on some of that bad income.

Ross Nussbaum – UBS

So how much was the TRS tax in the quarter?

Dave Rogers

This quarter, I think it's about $290,000.

Ross Nussbaum – UBS

All right. And you would expect that that would be a recurring number then?

Dave Rogers

Correct.

Ross Nussbaum – UBS

Okay. Can you remind me, at what point did you begin passing through rent increases on existing customers, I guess was it last year? Or had you never stopped?

Ken Myszka

We never really stopped. It was done very, very carefully and not many times last year. We were a little bit more aggressive this first quarter because we did start doing it towards the end of January. And we became more aggressive – much more aggressive this quarter. I would say we probably raised rates on about 20% of the people who were eligible just in this quarter alone.

Ross Nussbaum – UBS

Yes, but what I'm trying to get at is I'm trying to figure out, as you get into the second half of this year and hopefully in the first half of next year, you'll be showing, knock on wood, positive occupancy comps. And now that you've got rental rate growth, both on existing and new customers, I'm just trying to get a sense of how quickly that same store revenue number is going to ramp here.

Ken Myszka

We are, too.

Ross Nussbaum – UBS

Okay. On the real estate taxes, do you specifically have any personnel, Dave, that spend a 100% of their time fighting those?

Dave Rogers

We have two people here who do a lot with it. And then, we use a service out of Maryland who protests, virtually, all of our tax. And then, I've got to say, it was a tough job in '07 and '08 when we go to protest properties that we had just bought. But it's getting a little easier now. We're having more success. And I'm hoping that we'll be doing better on assessments.

But I think we've talked about this before is that with most REITs, we're probably going to be successful in the coming years knocking down assessed valuations because of the performance of the properties is declining. But I think what's going to happen in a lot of municipalities is their total spend isn't going to go down. So you're going to see increases in mid rates. So whatever you gain in the reduced assessment, you're going to get back in the payment.

But yes, we do have a fairly involved process about – we look at all of our properties every year and the performance. We get the assessments. And then, we fight some on our own. And the more challenging ones are the ones that we think have a little bit more convoluted story we worked with the tax service on. And they're pretty renowned. And they do a job for us.

As I said lately, we're getting more success. It was almost impossible three years ago to win. But now, with declining prices and so forth, we're winning assessment battles. But I bet, maybe this year we'll keep to win. But in '11 and '12 – 2012, I think we'll be – I'm really nervous about property taxes.

Ross Nussbaum – UBS

Okay. And then finally, I'm going to try to ask this question as delicately and respectfully as I can because I don't think you're going to like it. I'm trying to really figure out what Bob Attea does at Sovran Self Storage. He's not on the conference calls. He doesn't come to conferences. So we know what he doesn't do. I'm just trying to figure out what Bob does do to earn a $1.1 million total salary.

Dave Rogers

I think he's the guy who drives the properties. He's the guy who has always been a real estate guy. He's had, I don't know, 20-plus years at Forest City Enterprises before he came to us as a developer, and operator of properties. He's the one who sets the management company in place, who put together the whole strategy of how we do acquisitions. And basically, he's the guy who works with and signs off the property takings, the – about first $150 million wave of expansions and enhancements that we backed off on the properties with regard to the joint venture. We haven't had a lot of acquisition opportunities. But on the disposition side, he was there on the negotiations. So he's basically the property guy and always have been.

Ken Myszka

And on top of that, Ross, the expansion and enhancement program, the repairs and maintenance people, those are people that – they all report to Bob. And as Dave was saying earlier, the return that we get on those things is in the range of 11% to 12%, 11%, 13%. So there's no question on our minds or there should be any question on anybody's mind how valuable Bob is to the success of our company.

Ross Nussbaum – UBS

Yes. I think that's the disconnect because obviously, we've been supportive of you. But when we speak to investors, one of the big push backs we get is Sovran is the only company they know of where they don't know who the CEO is because he is not on the phone and he is not meeting with investors at conferences or going around and meeting with them. So one thing I would strongly suggest is I think the market needs to see Bob because they're struggling to understand who the missing third member of this management team is.

Dave Rogers

So noted.

Ross Nussbaum – UBS

Thanks, guys.

Operator

Our next question is a follow-up question from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas – KeyBanc Capital Markets

Hi. Just one quick follow-up, on the expansion and enhancement projects, the $20 million for this year and $30 million you mentioned for 2011, what's the lag time for completion, I guess? When will the units start renting the $20 million, for example, that you are starting this year? When will those units start renting?

Dave Rogers

The goal there, Todd, is to get them ready for the busy season next year. They'll be probably renting in December and January. But we want to be well ahead of the busy season. And hopefully, a little bit of that $30 million will kick in there, too. But certainly the $20 million we're putting together this year has to be ready for next April. And I mean they'll be ready, but they won't be leasing much in December, January, and February.

Todd Thomas – KeyBanc Capital Markets

Okay. All right. Thank you.

Operator

We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Ken Myszka

Thank you. Well, just want to thank everybody for their participation and their interest in our company. We look forward to a good quarter and discussing the results with you next – at the end of next quarter. Have a good day, guys. Thank you.

Dave Rogers

Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Sovran Self Storage, Inc. Q2 2010 Earnings Call Transcript
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