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

Executives

Dean Jernigan – Chief Executive Officer and President

Christopher Marr – Chief Financial Officer

Analysts

Paul Adornato - BMO Capital Markets

Craig Melcher - Citi

Michael Knott - Green Street Advisor

Eric Rothman - Urdang Securities

Paula Poskon - Robert W. Baird

David Toti - Lehman Brothers

Chris Pike - Merrill Lynch

Christeen Kim - Deutsche Bank

U-Store-It Trust (YSI) F4Q08 Earnings Call February 29, 2008 11:00 AM ET

Operator

Hello, and welcome to the U-Store-It Trust fourth quarter 2007 earnings release. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions)

Please note, this conference is being recorded. Now I would like to turn the conference over to Dean Jernigan.

Dean Jernigan

Thank you very much. The company’s remarks will include certain forward-looking statements regarding our earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risk factors that could cause our actual results to differ materially from forward-looking statements are provided in the documents the company files with the SEC, specifically, the Form 8-K filed yesterday, together with our earnings release filed with From 8-K, and the Business Risk Factor section of the company’s annual report on Form 10-K.

In addition, the company’s remarks include reference to non-GAAP measures; a reconciliation between GAAP and non-GAAP can be found on the company’s website at ustore.com.

Good morning to you all; thanks for joining us. Chris and I will make the presentation today and I will start off. And I want to talk about this sector, and I will leave the company comments regarding the quarter and the year up to Chris.

But I am reminded by an old story I want to start out with. In 1994, when we were first taking Storage U.S.A. out to public, we were out doing our initial road show. And we had this investment banker who was flying us around, stand up and say, ‘we’ve got a great company here for you today’ − we were making a presentation to about five portfolio managers − ‘with a great story,’ and some young portfolio manager spoke up and said, ‘Sir, if you don’t mind, just give us the facts and we will make that determination.’

So I am going to ask Chris today to just give you the facts on the quarter. I’m biting my tongue to keep from telling you what a great quarter I think we had. We’ll give you the facts and let you make that determination.

But what I want to talk about is the sector, because I think we had a remarkable quarter in the self-storage sector. I think we have a sector that is showing its resilience through a number of different factors that could perhaps be influencing other real estate sectors out there, but not the self-storage sector.

I’ve spoken a number of times about the fact that we are a solution for our customers, not an indulgence. So, if you look at the quarter, a quarter that we all thought that the real estate sky was falling in; the subprime implosion or explosion; all the house foreclosures; all the bad events that you read about in the newspapers and watch on CNBC every day, how could we possibly have a decent sector experience with self-storage in Q4?

But in looking at ourselves and our friends in the sector, Extra Space, Public Storage and Sovran, I just want to point out a few things which just are remarkable to me. If you look at revenue growth, we all experienced positive revenue growth from 2%, 3%, 3.5% for Sovran, 5.5% for us; NOI growth, almost 4% for EXR, 5% for PSA, 5.7 for Sovran, 7.2% for us; remarkable numbers, in my opinion. And so, how can this be?

I’m ready to add another significant life changing event that in the past we really haven’t had on our list of events that could perhaps be helpful to self-storage. But certainly, we’ve determined no negative correlation.

We’ve always known that life changing events like marriage, divorce, death, all of that brings business to the storage sector. But now I’m ready to add home foreclosures as an additional life changing event that brings us business.

If we look at during this quarter, in the last 30 days actually, the top markets in the country have been experiencing the highest foreclosures. And, of course, the poster child, unfortunately, for them, as there seem be a poster child for almost all negative comments like this, is Detroit.

Detroit was ranked number one in the U.S. last year in foreclosures, in fact, it was ranked number one in 2006 as well. But last year, we used the self-storage data service that Ray Wilson provides to our sector every quarter, if you take Ray’s sampling and it is a very broad sampling, I think over 4,000 facilities around the country, and the Detroit market experienced 10.13% year-over-year growth in rental rates. They experienced 8% year-over-year growth in physical occupancy. That was Detroit, and that was ranked number one.

Stockton, California was ranked number two, and I’ll skip that one because we don’t have a presence there, and go to Las Vegas, which is ranked number three in foreclosure rates in 2007. Las Vegas experienced a 5.88% growth in rental rates and a 3% year-over-year growth in occupancy.

Next on the list is Riverside, San Bernardino, the Inland Empire area, ranked number four. It, according to Ray Wilson report, was flat year-over-year in rental rates and down 4% in physical occupancy. Our own experience in Inland Empire is very similar; we were down only 1% in physical occupancy.

The last one I’d like to comment on and we tend to beat this one up on a very regular basis as well, is Cleveland. It’s ranked number six. I’ve left out number five, which is Sacramento; we don’t have stronger presence there either, but in Cleveland we do. Cleveland is ranked number six and we look at year-over-year rental growth plus 7.59% and plus 1% in physical occupancy growth.

To me, that is fairly remarkable in showing that we have no negative correlation in home foreclosures. We’ve always said that intuitively we didn’t feel like home foreclosures were negatively affecting us, but those were some hard facts and figures.

If you want to refer to the website of Ray Wilson, I believe it is ssdata.net, I think you will find all this data on his website and it’s conclusive evidence in my opinion that there is no negative correlation from home foreclosures and demand for our products.

I am not ready to say, there is a positive correlation yet because I don’t think we have enough time under observation and I think we will do a study at the appropriate time to look back and see if we can make a positive correlation, but I think that’s quite possible.

The other potential headwind that’s often talked about out there is construction starts, both in supply and self-storage sector. And you’ve heard me talk about this previously as well, and that is that we’ve got two organizations, the Self Storage Association and also the Self-Storage Almanac, they have been building their databases over the years and they each have their databases up in the 45,000 to 50,000 storage facilities around the country.

The Almanac, in particular, said in their report that came out in January 2007, they discovered 2,000 more facilities in their search for that book, versus the previous year. So a lot of people led to the conclusion that there were 2,000 construction starts and new properties built, when in fact that wasn’t the case. When I met with those folks who put that together, they were just building a database and they just found 2,000 more facilities.

In this year’s report that came out this January, they put a note in that those numbers are not to be used to determine year-over-year new starts. The SSA is doing something similar. The only method that we have, the only organization out there that is actually measuring these starts of course is the F.W. Dodge Company, who has been doing it since 1995.

So, intuitively people have been saying regarding that, ‘they’re not coming up with them all.’ And I think that’s quite possible; they’re not finding everything because they do this with reporters in cities around the country, so certainly in some of the smaller markets they’re not finding them, but I think in the top 50 markets, they’re probably finding most of them because in the top 50 markets, the developers have to apply for building permits and that would show up on the public record.

So, we decided to do a back check of the F.W. Dodge reports for the last two years in 10 markets. We selected just randomly, Atlanta, Charlotte, Cleveland, Denver, Indianapolis, Jacksonville, Phoenix, San Bernardino, Tampa, and Washington DC.

In years 2006 and 2007, in total, 83 building permits were pulled to build self storage in those markets. When we did our back check, we went to each of those addresses; we used Google Earth; we talked to managers in the surrounding areas where these properties either were built or were intended to be built and we are very certain that 42 actually got built out of the 83 building permits. Now the 83 building permits, 13 of those building permits were used for expansions; 28 building permits were not used at all.

We’ve got a lot of work to do here, but I’ve challenged the SSA to do the work. They are forming a special committee now, our trade industry, to do exactly this. But it’s my intuition at this point in time that supply is very much under control; I am not saying Dodge underreports, but I don’t think they necessarily miss that many out there.

I think that the report is fairly consistent with what is actually happening. We will do more study, more back checks, but I would like for all of you to hear from me in that I do not think we have a headwind at all as it relates to growth and supply.

Those are the two big aspects regarding the sector that I think are possibly impacting our rental rate growths, our NOI growth rates and our physical occupancy growth rates. So speaking to the sector again, I think it’s almost like a horse race, if you will; if you take the Kentucky Derby, if you ask people a week after Kentucky Derby, who won the Kentucky Derby, almost everyone remembers the horse, hardly anyone remembers the jockey.

I look at our sector, the public companies in our sector as jockeys. We do a good job from time-to-time of steering through traffic and getting to the rail time-to-time, but just getting to the race, just getting to the Kentucky Derby, you will do well, and being in the race, you will do well.

So Public Storage, Extra Space, Sovran, our company, we’re all in the race together, all of us get to the rail from time-to-time, but at the end we must give credit to the sector. This is a very forgiving sector even when we make big mistakes, the sector does well, the product does well and I’m just pleased to be in the self-storage business at this point in time, looking forward to the race in 2008.

With that, I’ll turn it over to Chris and he will give you specifics about the performance of our company.

Christopher P. Marr

Thanks, Dean. Without a doubt, Q4 was a wonderfully positively quarter for us on all fronts. Yet, I can’t help but to say, don’t doubt that we recognize that we remain actively engaged in the turnaround process. We have work to do in 2008 to grow occupancy, control expenses and shore up our balance sheet. But we are very pleased to be able to roll up our sleeves and dive into that work from a strong platform built over the last two quarters of 2007.

I would also first like to recognize Tim Martin and Ben Carr, all of the accounting and finance team, and Wayne for their strong efforts in assisting the company in achieving a clean 404 opinion on our internal control structure for the year ended December 31, 2007.

Those of you who were shareholders or analysts following the company through 2006 and into early 2007, can feel great comfort that the team that we built during 2007 has created a strong internal control environment and that the issues uncovered as we transitioned to the new team have been addressed and corrected.

Our balance sheet at year-end is in very good shape from a maturity profile and from a match between our sources of capital and our known uses. We have $1.028 billion of debt as of year-end, representing a debt to gross assets ratio of 52.5%.

Of our total debt, 38% or $419 million is unsecured. We have approximately $396 million of debt that floats at spreads to LIBOR, of which $40 million is subject to an interest rate cap. An additional $75 million of floating rate debt is subject to swaps that fixes the rate until November 2009.

Our $555 million of fixed rate debt has an average rate of 5.4%. We only have one 2008 maturity, a $2.4 million mortgage maturing in December of this year.

In November of 2009, we have an $87 million CMBS pool, YSI III that matures. It has a fixed interest rate of 5.09%. We have one year extensions of the company’s option on our credit facility and term loan that can extend their maturities to November 2010. The credit markets are in very difficult shape.

I, and I’m sure as everyone on the call does, read many prognostications that the dislocation may last for another 12 to 18 months. We plan to monitor our opportunities to refinance over the next 20 months and be prepared to access the refinancing market or utilize our extension option when conditions present themselves.

The right-sizing of our dividend to $0.18 per share resulted in a fourth quarter 2007 FFO payout ratio of approximately 86%. Going forward, this will allow us to retain cash instead of borrowing to pay the dividend.

We utilized a significant amount of our dry powder in our acquisition of assets in September of 2007. Fortunately, we are forecasting covering our dividend and capital investments in 2008 from cash flow.

In connection with our previously discussed strategy of disposing of non-core assets, we currently have 12 properties under contract and an additional 10 properties under advanced contract negotiations.

These assets under contract are in due diligence periods and there can be no assurance that the sales will ultimately close. However, we are very encouraged by the process and level of buyer interest.

Based on the current status, the assets under contract would close primarily during the second quarter and generate proceeds to the company of approximately $35 million. Should the assets under advanced contract negotiations actually come to contract, we would expect them to close during the third quarter, generating proceeds of approximately $37 million.

These assets are non-core for us and we are seeing cap rates on their sale in line with our previously articulated expectations. If all of the assets we currently have under contract or under advanced negotiations close, we will sell them at an average cap rate of 7.3% on trailing net operating income. We anticipate balancing the use of proceeds between reducing leverage and executing under our share repurchase authorization.

Moving on to our operating results, we generated a 7.1% increase in same-store rental income, through a 200 basis point increase in average occupancy; an $800,000 reduction in write-offs; a 70 basis point increase in street rates; and the impact of systematic rate increases to existing tenants.

We gave back some of that rent growth as our other property-related income declined about $475,000 from the fourth quarter of 2006. This is primarily related to a discount program we had in place in the month of October of 2007 that waived the admin fee on new rentals. Overall, a 5.5% increase in same-store revenue for Q4 2007 as compared to Q4 2006.

Revenue per occupied square foot grew 4.5% on the same-store pool, and this compares to information you can see in the Self Storage Data Services reports of a national average of 4% fourth quarter of 2007 over fourth quarter of 2006.

Same-store operating expenses grew 3.2% in the fourth quarter of 2007. Increases in personnel costs primarily reflect improved benefit plans designed to make us an employer of choice, particularly at the store level.

Advertising is down, as we eliminated legacy programs to advertise in multiple small Yellow Page directories in many markets and focused our spending on the Internet and other more direct marketing programs.

Repair and maintenance expenses up, reflecting our catching up on deferred maintenance items and investing in our assets to drive occupancy, and the other expense variances largely reflect:

Timing differences on the incurrence of expenditures;

Increased VISA and MasterCard fees, as we have focused on increasing the number of tenants using credit cards to pay their rent to keep our receivables down;

And increased expense of offering free truck rental as an additional incentive to new tenants.

All of that resulted in same-store net operating growth for the quarter of 7.2% over the fourth quarter of 2006.

The gap between physical and economic occupancy on the same-store pool improved 240 basis points from Q4 2006 to Q4 2007. This reflects the reduction in write-offs; the reduction in non-standard rents as we pass along rent increases to existing tenants, offset by an increase in promotional discounting, primarily a continuation of the First Month Free program.

G&A at $5.2 million, in line with where we’ve been running all year, in that $5 to $5.5 million per quarter range; interest expense in line with our expectations, resulting in FFO per share of $0.21 at the high end of our range, driven by the strong core performance of our assets.

We are affirming the 2008 full year guidance and the underlying assumptions we introduced in the December release. Looking forward into the fourth quarter guidance, our same-store pool for 2008 increases by 60 locations to 389 facilities; our G&A should run right around that $5.5 million level and our same-store assumptions on revenue are generally consistent with our full year expectations.

Our January and February rental activity has been in line with our forecast. Our first quarter expense growth forecast is higher than our full year, as we expect to have higher repair and maintenance and marketing costs in Q1 2008 over Q1 2007, driven by our goal of having the properties and their marketing efforts at their peak going into the rental season.

From a market perspective, looking by state at our 10 largest same-store markets, their performance matched the overall same-store results. New Jersey was our biggest challenge, where we had a 40 basis point gain in physical occupancy, but a 0.7% decline in same-store revenue. Rental income there was actually up 1%. We have cleaned up the accounts receivable so well that our fee revenue fell.

We’ve had two stores in New Jersey impacted by new competition. We are adding climate-controlled spaces to these assets and believe we will be more competitive in 2008. We generated a 1% revenue gain in Florida; 1.7% in Connecticut, on a 250 basis point gain in occupancy; and 3.7% revenue gain in California, with an 80 basis points gain in occupancy.

Our best performing markets were in Texas, with 9% revenue growth and 160 basis point growth in occupancy; Ohio with 7.9% revenue growth and 300 basis point increase in occupancy and Illinois with a 7.7% revenue growth and 650 basis point increase in occupancy.

We closed on one acquisition in the first quarter, a property in the Adams Morgan area of Washington D.C. The property is a 2002 conversion to self-storage, containing 597 units and 63,000 net rentable square feet. We purchased it at a 7% cap and the property is currently 83.3% physically occupied and we believe has upside in both physical occupancy and rent increases and this is a market that we really like going forward.

As a recap for all of you, of the quarter from an operating perspective as we experienced it and at this point in time, we would like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christeen Kim - Deutsche Bank.

Christeen Kim - Deutsche Bank

Good morning. Last quarter, you were looking for something along the lines of 1% to 2% NOI growth in the core portfolio and you came in at 7%; that’s a pretty big variance. I’m trying to understand what the biggest differences were versus your expectations a few months ago?

Christopher Marr

Good question. The difference is really across the board. First of all, coming off in the third quarter I think it’s fair to say, and again even going into the first quarter, we’re taking a very cautious approach to how we introduce guidance to begin with.

Secondly, on the top line, I would say everything that we included as a risk, we had in our guidance, and none of those risks came to light. And everything that did happen happened as positive as we could have expected it.

The rental activity continued in a very positive way. The cleanup of accounts receivables is officially complete and we experienced a wonderful reduction in write-offs at the property levels. The burn-off of the discounts, the length of stays grew a little bit longer than we had forecast.

And on the operating expense side, we certainly threw the kitchen sink into the guidance and while we continue to invest in the assets and the high repair and maintenance expense and in a few other areas, generally expenses came in as good as we could have hoped. So I think it’s a balance of quite frankly, nothing bad happened against a very cautious outlook.

Christeen Kim - Deutsche Bank

So is it safe to say you’re taking the same cautious stance on 2008 guidance?

Christopher Marr

I think at this stage in the game, as I tried to say or did say early on, one quarter does not a complete process make. We’ve got a lot of work that we have to do. We’re very comfortable with the guidance on the first quarter and we affirm the guidance for the year. And I think for safety sake, that’s where we are from commenting on that today.

Christeen Kim - Deutsche Bank

Okay. My last question is, could you just comment on where occupancy has been trending following the end of the quarter and how sticky some of your new occupancy is?

Christopher Marr

Sure. As we move into the seasonally slow period of December and January, occupancies, net rentals are negative as you would expect them to be, but they are in line with our expectations and February, particularly the last 15 days of February, has been surprisingly strong.

Christeen Kim - Deutsche Bank

Great, thanks.

Operator

Our next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Good morning. Last year, you had pretty significant turnover at the store level, I believe and so I was wondering if you could comment on the level of turnover now?

Dean Jernigan

Sure, Paul, good morning. That is one of our hot buttons right now as a matter of fact. We still experience more turnover in 2007 than what is acceptable to me. We had about 35% turnover in our general managers in 2007. I would like to bring that down, another 15 percentage points.

I would like to get five-year stay on average out of our general managers and we are just initiating a new process right now for screening. We have a program that we’re developing using testing to screen potential applicants and so as I said, it’s a fairly lengthy process that we’re initiating. I won’t bother to give you all the details, but it’s down substantially from last year, Paul, but we still have some work to do there.

Paul Adornato - BMO Capital Markets

Okay. And at the store level, how’s the productivity of the store level folks? What kind of training do you provide there?

Dean Jernigan

We have I think a very good training program. And again, no need to take everyone’s time with all the details, but we certainly have what we have at Storage U.S.A. putting in place with the bronze, silver and gold level training. It’s an LMS program, which is all done online.

We have our trainers out in the field. We have a training department in Bowie, Maryland. So we’re very pleased and I know one of our peers put out a certain number of hours that they did training in 2007. Training is a very, very important part of our focus in 2007 and 2008, because we were turning over so much of our salespeople, and it’s a major focus for us, going forward. But we feel good about our training programs we have in place.

Paul Adornato - BMO Capital Markets

And switching to bad debt, it was down significantly. Are you at a level that you think is a sustainable level of debt at this point?

Christopher Marr

Yes. I think, as we moved really into October, and as we see it now moving forward in 2008, the issues surrounding our receivables and write-offs is a closed one and behind us, and we are running extraordinarily efficiently at this point at the store level.

Paul Adornato - BMO Capital Markets

And just historically, given your experience in the industry, what happens to receivables during times of economic stress?

Christopher Marr

Yes, again, you don’t normally across the board see a big change there in terms of the overall levels of receivables. As I mentioned, we’ve put in a lot of different programs, not only monitoring, but also from an efficiency perspective, in taking the auction action that you can at each store as quickly as possible, which helps keep down the levels of bad debt, as well as encouraging the customers, both through the rental action as well as through various promotions to utilize credit cards, particularly to allow us to be able to hit their credit card every month on a go forward basis.

Dean Jernigan

The seasonal thing, we have that just as everyone else does, where after the holiday season, it spiked up just a little bit, but I’m happy to report they immediately came right back down in February. So we’re very, very pleased with our focus that we’ve put into place in 2007 on receivables.

Paul Adornato - BMO Capital Markets

Okay, thank you.

Operator

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

Michael Knott - Green Street Advisors

I’m trying to reconcile your fourth quarter guidance with what you actually reported. I’m trying to understand why the actual result wasn’t much higher than the top end of the range, given that the same-store NOI growth was much higher than you expected?

Christopher Marr

Michael, I think it’s fair to say that as we try to reconcile that same-store pool to the overall pool, and the performance, we ended up exceeding our same-store guidance; we ended up from a conservative basis, giving back in a couple other areas.

It’s hard from an art perspective, to do 19%, 21% in the same-store and have everything jive perfectly. I think we were fairly conservative in the same-store guidance that we put out. We ended up doing much better there overall. We ended up coming in $0.02 above the low end of our range. Other than describing it as an art, I’m not sure I have an analytical reconciliation for you.

Michael Knott - Green Street Advisors

Okay. Dean, can you help me understand why you would buy a property at this point instead of buying back stock?

Dean Jernigan

Yes, that’s an art also, Michael. We have about 850 employees out in the field that, in recruiting every day, better folks come to work with us, and we have to keep in front of them the opportunity this company is going to grow and we’re not going to be just focused on reducing expenses and increasing our existing occupancy.

We had an opportunity come along, and you’ve heard me speak in the past about Washington, D.C. closely behind Manhattan as being the best market in the country, in my opinion, for self storage. We had an opportunity that came along that we couldn’t refuse.

So granted, a good use of the funds, the $13 million, would have been to buy back stock as well. It would not have made much of an impact, I don’t think, but I’ll tell you just buying that one asset made a tremendous impact to our esprit de corps for our people in the field.

It’s in the market we want to be in; we want to grow more in that market, and they now understand that this company is going to grow going forward.

Michael Knott - Green Street Advisors

Was that deal not marketed? Was there something more appealing than other marketed transactions?

Dean Jernigan

They did not hire a self-storage broker. It was just a commercial broker in the Washington, D.C. area. We got in very early, and it had limited marketing done on it. So I don’t think anybody else in our sector, public companies, saw it.

Michael Knott - Green Street Advisors

Okay. And then, Chris, can you just reiterate for me again what you said about the properties that you have in different stages of negotiation for sale and then what you intend to do with those proceeds? I thought I heard you mention something about share buybacks. Can you just reiterate the key points again?

Christopher Marr

Sure. We have 12 properties under contract. They are in due diligence, so again, there’s no certainty that they will ultimately move to closing. Assuming that they do and stay on track, they would close primarily during the second quarter, generating proceeds of about $35 million.

We have an additional 10 that are under advanced stages of contract discussion. Assuming they come to contract and then ultimately assuming they close, they would be primarily third quarter and generate proceeds of about $37 million.

And we’ve said all along, we would anticipate balancing the use of proceeds between reducing leverage and executing under our share repurchase authorization.

Michael Knott - Green Street Advisors

And what’s the level of lender interest in these sales? We’ve heard other companies and other product types express difficulties in trying to sell properties because of lenders backing out. What’s the scenario here?

Christopher Marr

If you think about the buyers, we’re actually finding a good level of interest from buyers who are low leverage type individual buyers, who, to some extent, have been shut out of the market over the last few years, because they couldn’t compete with the higher leveraged guys.

So we don’t have financing contingencies associated here, at least on many of these. And it’s a buyer who is anticipating putting a significant amount of equity into these assets and running them either themselves or with a small management company they may have, or buyers who have purchased other assets in these markets and have a relationship with a management company.

They are generally, on the financing side, looking for that 50% loan-to-value, and they’re giving us the feedback that they’re comfortable with the fact that they can close and then ultimately finance them at that level, even in this market we’re in today.

Michael Knott - Green Street Advisors

The 7.3% cap rate you mentioned, is that combining both of those two pools of sales?

Christopher Marr

Yes. That would be for everything, assuming they close.

Michael Knott - Green Street Advisors

Okay. And then are all 22 properties in the same-store pool?

Christopher Marr

All but one is in the same-store pool.

Michael Knott - Green Street Advisors

What’s the rough value per foot approximately?

Dean Jernigan

While he’s looking for that, Michael, I’ll tell you, you noticed we sold two business parks during the quarter also, and those were at a 5.5% cap rate on trailing numbers, so we felt that we had very good execution on those two sales.

Christopher Marr

These are about $65/foot properties.

Michael Knott - Green Street Advisors

Okay, thank you.

Operator

Our next question comes from Chris Pike - Merrill Lynch.

Chris Pike - Merrill Lynch

First, let’s go to Chris. With respect to the leverage profile, you said you have the ability to term out and extend your line. How much would that cost you on the margin to push it out?

Christopher Marr

We would just pay a fee of 15 basis points, an extension fee for one year.

Chris Pike - Merrill Lynch

Okay, so it’s no marginal up in the spread?

Christopher Marr

No. I think it is very fair to say that if you had to go out and replace that line today, it certainly would be at an additional spread to where we are today.

Chris Pike - Merrill Lynch

And how much do you think that would be?

Christopher Marr

I’ll give you a big range, 25 to 45 basis points.

Chris Pike - Merrill Lynch

Okay. You didn’t talk about any joint venture activity perhaps to help provide liquidity into the balance sheet. What are your thoughts there?

Christopher Marr

We’ve been spending some time on that concept of committing some existing assets into a venture and exploring that market. I’m sure as you know it’s a bit of a bouncy time right now for folks to look at things. It is something that we have on the radar screen, and we’ll see how that progresses here in 2008.

Chris Pike - Merrill Lynch

Okay. And lastly, for Dean or and for you. It’s widely thought that this dislocation in the market, and given where some highly levered buyers had acquired assets stemming back over the last 18 to 24 months, that there could be a situation where a good number of assets come back on.

In your conversation with brokers and industry folks, have you speculated as to directionally how much product could possibly come back on to the market over the next 12 to 18 months?

Christopher Marr

I think, Chris, as you look at the various private owners out there, the bulk of the product is owned by folks who, if they’re fortunate, had put five, seven year mortgages on their assets in the last two or three years and are clipping coupons, enjoying very good cash flow, and are very happy with their investment, and to the extent that some of those owners take properties out to the market, they’re doing so with a price that they have in mind, and if they can’t achieve that, are perfectly happy continuing to own the asset.

So we’ve not really seen a distress situation or any distress situations at this point. I think, to the extent that there were owners out there who had acquired properties over the last two years with very high levels of leverage and little to no equity, I think we have to see how that plays out.

Again, I can’t imagine that if that were to also to play out negatively for them, that we’re talking about more than 25 to 75 assets, if I had to guess, that could end up coming on the market.

Chris Pike - Merrill Lynch

Where I’m going with respect to one large levered operator who was really assembling a huge portfolio of assets, and I got to think that that company acquired more than 25 assets over the last 24 months.

Christopher Marr

I don’t have an in-depth knowledge of that situation and what may or may not be going on there.

Chris Pike - Merrill Lynch

Okay, thanks a lot.

Operator

Our next question comes from David Toti - Lehman Brothers.

David Toti - Lehman Brothers

Quick question: you’re, in terms of the portfolio, in a contraction mode. What’s your sense of the platform’s capacity for expansion, when and if you turn around and reverse your strategy?

Christopher Marr

I think we’re in great shape, Dave. I think we have capacity in certain markets, especially at the district manager level. Our DVPs certainly have capacity to take on more asset management. The structure in the training department as Dean talked about, marketing, facility services, et cetera is there.

So the platform is there to absorb additional properties. Again, a lot of it would depend upon the specific submarkets that those assets may be in, as to whether or not we would need to add at the DM level.

But, again, all the improvements we’ve made from a systems perspective in the back office and the control environment on the IT side, I think we would be able to absorb additional properties with minimal frictional cost.

David Toti - Lehman Brothers

What kind of scale are we talking about, in terms of percentages? Is there any way to quantify that?

Christopher Marr

Yes, I think we could pull in 10% to 20% more assets without an appreciable increase in cost.

David Toti - Lehman Brothers

Okay. My next question is have you seen any changes in the last couple of months in customer behavior or expectations, in terms of discounting?

Christopher Marr

No. I think the first month move-in for free or $1 or whatever that discount may be, it continues to be very pervasive, and I would assume on a customer behavior somewhat expected, but the length of stays of those customers, as you would expect, aren’t any different from those customers who would have paid full price for the first month.

If you have a need for the product, you have a need for the product and if you have a need for a set period of time that need doesn’t change just because the first month is free. I think it certainly helps that the margin attracts somebody who may have been thinking about using the product on a discretionary basis and just hadn’t gotten there yet.

Dean Jernigan

What has happened over the years, David, is that the length of stay for our commercial customers are on average, broadening the length of stay for our overall tenant base. So we’re up to 350 day average or something like that now, and as we have more and more commercial customers who know how to use our product to stay long-term, that just keeps extending. So I’m very pleased with the length of stay that we’re seeing.

David Toti - Lehman Brothers

Great, and just along those lines, have you made any changes internally in terms of the level of data that you’re collecting on the customers? I know you were putting in some new systems and I’m just wondering if you’re seeing any results yet from that data collection or you’re sifting through that information?

Christopher Marr

Yes, that’s been extremely helpful for us, as we’ve now had a history of activity since October of 2006 when we got on the current system. So we are now able to track to the lowest level of detail, someone who got a promotion, when they moved in and exactly how long did that customer stay.

We’re able to track patterns in rental and vacate activity. We’re able to really on a very granular level, see the impact of different levels of promotions and how they impact demand. We’re able to look at rental rates on a unit-by-unit basis against occupancy and be able to make much more sophisticated judgments on increasing rents.

We’re able to look at tenant rate increases that are passed along to the existing tenants and see what happens to that specific tenant after the rate increase letter has been received to make sure that that is sticking. So all in all, each month that goes by, the use of the data becomes greater and greater.

David Toti - Lehman Brothers

Great, thank you.

Operator

Our next question comes from Paula Poskon - Robert W. Baird.

Paula Poskon - Robert W. Baird

Thank you. I have a small picture and big picture question for you. Small picture, on page 8 of the supplement, the same-store data, what was the cause of the rise in other expenses? Can you just give us a little characterization of what’s in that category and why was it that much?

Christopher Marr

Sure. That category has 30 things in it, ranging from VISA and MasterCard fees, office supplies, sale items, legal costs associated with auctions and everything else associated with the auction process. And free truck rental would be an expense in there to the extent we offered that to the tenant for moving in.

A lot of that, as I said in my earlier comments, has to do with some of those specific items. There’s an awful lot of timing in there in terms of just when things were incurred; supplies purchased in November, December of this year that may have been purchased in January or February of the prior year.

I think in general, I’m sure you can appreciate, back to my points on internal controls and processes earlier on, as we moved through 2007 the efficiency increased dramatically each month that we go by. So some of it is just also an absolute level of systemization to processing payments, et cetera that has helped, as we moved through this year. So a lot of it timing, is ultimately what it comes down to.

Paula Poskon - Robert W. Baird

Okay, that’s a great segue to my big picture question which is, as you look back on 2007, a lot of things out of the way, the litigation out of the way, staffing, technology, et cetera. In 2008, on which strategic imperative are you most focused? What’s priority one?

Dean Jernigan

I have two hot buttons, as I call them this year and I’ve already addressed one, is turnover. And we’re addressing turnover by screening. And that is a big challenge for us to get our absolute best employees in place and properly trained.

The second one, we have other systems that we’re putting in. I’ve talked to some last quarter about collection; we’re going to be going to an automated collections program. We’re testing out a kiosk at one of our facilities right now to better support our managers on site, when the office is closed after hours, you’d still be able to rent units.

But my other hot button is ancillary income this year. We right now only have a penetration rate of all total about 23% on our insurance program. That can go up dramatically. And so with our insurance program and also our ancillary sales program, we’re rolling out new procedures, I have focused on enhancing our other income category for the year and so, I’m excited about that.

But those two programs, the heavy lifting was done last year. We’re starting to be able to focus on things now at the margin.

Paula Poskon - Robert W. Baird

Thank you very much.

Operator

The next question comes from Eric Rothman - Urdang Securities.

Eric Rothman - Urdang Securities

Good morning. Do you still use auction rate securities as a cash management tool?

Christopher Marr

Great question, Eric. We do not. You know that the company prior to this group arriving had reinvested some of the proceeds from the secondary offering into ARS and those were liquidated in January of 2006 at par and we’ve not had any exposure to ARS since January of 2006.

Eric Rothman - Urdang Securities

Thank you very much.

Operator

Our next question comes from Michael Knott - Green Street Advisor.

Michael Knott - Green Street Advisor

I have two questions for you. Dean, as you get the ship going in the right direction now, can you comment on prior prognostications that you always thought you could get the physical occupancy up to the mid to high 80s? Is that something you still strive for? What’s your current thinking on that part of the business?

Dean Jernigan

I think what I’ve always said Michael, is that our expectations is to be able to compete with our peer group and I think we have no structural vacancy in my opinion in our portfolio. Our average occupancy for our stores for the fourth quarter was 82%; EXR is at 84.7%, Sovran is at 82.2% and of course PSA is out there 88.6%, so we’re making progress.

Michael Knott - Green Street Advisor

Okay. And then, Chris, question for you, on page 8, looks like there’s new disclosure there at the bottom, indirect property overhead. Can you just help us understand what that is and whether that’s attributable to both the same-store and the non-same store pool?

Christopher Marr

Yes, that is new. We’re trying to be helpful based on questions that we got at the end of the third quarter. So the $6.435 million is the direct NOI from the non-same store group and the indirect property overhead would be the costs that we incur to manage all 409 properties, so it’s applicable to both pools.

Michael Knott - Green Street Advisor

So those expenses are not expensable at the property level, but they’re not also G&A?

Christopher Marr

That’s correct.

Michael Knott - Green Street Advisor

Thank you.

Operator

(Operator Instructions). Our next question comes from Craig Melcher - Citi.

Craig Melcher - Citi

When looking at your 2008 revenues guidance of 4.5% to 5.5%, how much of that is attributable to declining in bad debt?

Christopher Marr

I’ll give you the whole picture, and let me just use the mid point of 5%, if I may. Of that 5%, about 1.5% would be street rate increases; about 2.5% would be occupancy; about 1% would be reduced levels of write-offs, and basically tenant rent increases and in anticipation that our other income are relatively flat − net out.

Craig Melcher - Citi

Okay. Also in the 2008 guidance, the LIBOR rate in your initial guidance was quite a bit higher than where it is today. Would you look at revisiting your 2008 guidance as a result of that, or are there other items that may be offsetting that, that are making you hold the range?

Christopher Marr

We would look at revisiting that going forward if things continue to stay at the levels at which they are.

Craig Melcher - Citi

Thank you.

Operator

Our next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Could you comment on the performance of the Florida properties compared to the rest of the portfolio?

Christopher Marr

Yes, I think again I’ll refer you back on a macro perspective to some work that Ray Wilson had done that indicated that had the impact of the hurricane not been there, Florida as a whole would be performing today in line with historical results.

For our portfolio particularly, as I had said, when talking about the markets, we had a 1% gain in revenue in the same-store pool there. We have pockets in Florida with good gains in physical occupancy. We have other pockets that are a little bit more challenging. So I think in general, Florida seems to have stabilized.

You’re starting to see some migration back into the state, which will be helpful and we have been able through again accommodation of everything we talked about, primarily through the discounting, through passing along increases to the existing tenants and the lower levels of bad debt more than pushing street rate, have been able to generate some positive revenue gains there.

Paul Adornato - BMO Capital Markets

Okay. Thanks.

Dean Jernigan

I’ll just comment on the migration patterns just for a second. Florida, historically, have had migration patterns up around 60%. All interstate moves in and out of Florida, 60% they have move-ins, 40% move-outs, and then when Katrina came along, that flipped to down around 47% were move-ins and 53% move-outs.

That’s when everyone was thinking, ‘everyone is leaving Florida, and nobody is moving in’ because they did have a drastic change in their migration pattern there. But United just reported recently their migration trends for 2007 and Florida has nosed ahead again 50.14% of all shipments in and out of Florida were inbound shipments, which is very good for the State of Florida, so we feel like Florida is stabilized.

Any more questions?

Operator

It seems that we have no further questions at this time.

Dean Jernigan

I’ll sign off by thanking you again for your interest in our company, and we look forward to talking to you at the end of next quarter, if not before. Thanks again. Good day.

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

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

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

Source: U-Store-It Trust F4Q08 (Qtr End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts