Nov 3, 2007
Executives
Dean Jernigan - President and Chief Executive Officer Chris Marr - Chief Financial Officer
Analysts
Christine McElroy - Banc of America Sadler Jordan - Citigroup Kristine Kim - Deutsche Bank Paul Adornato - BMO Capital Markets Michael Knott - Green Street Advisors David Toti - Lehman Brother Chris Pike - Merrill Lynch Jeff Donnelly - Wachovia Securities Buck Horne - Raymond James
Operator
Greetings, ladies and gentlemen, and welcome to the U-Store-It Trust third quarter 2007 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, Mr. Dean Jernigan, President and CEO for U-Store-It Trust.
Thank you, Mr. Jernigan.
You may begin.
Dean Jernigan
Good morning to all of you. I'll start with the cautionary statement.
The Company's remarks will include certain forward-looking statements regarding earnings and strategies that involve risks, uncertainties and other factors that may cause the actual results to differ materially from those forward-looking statements. These risk factors that could cause our actual results to differ materially from forward-looking statements are provided in documents that the Company files with the SEC, specifically Form 8-K filed this morning, together with our earnings release with Form 8-K in the "Business Risk Factors" section of the Company's Annual Report on Form 10-K.
Additionally, the Company's remarks will include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found on the Company's website, at http://www.cubesmart.com.
This morning, I'll let Chris Marr, our CFO, start and talk about the quarter. And then after Chris, I will come back and make some comments.
And then we'll go to Q&A. Chris?
Chris Marr
Thanks, Dean. And as Dean mentioned, he'll proving an overview of the operational achievements for the quarter.
I'll touch briefly on that and then focus on the balance sheet and P&L points of focus for the third quarter of 2007. We are pleased with the occupancy gains that we were able to make during the quarter, a sequential gain of 220 basis points over -- on our average occupancy, over what we were able to achieve in the second quarter of 2007 and as compared to the third quarter of last year a 130-basis-point improvement.
We've addressed and resolved our issues that we had with accounts receivable, which when you think about the fact that moving most of those tenants out and auctioning of the units actually creates, obviously, a vacancy. The occupancy achievements that we were able to realize during the quarter are even that much more satisfying to us.
From a balance sheet point of view, we did close in mid-September on the 14-property acquisition for a $121 million. To finance that acquisition, we entered into a $50 million financing, which we were able to do with spreads equal to our existing credit facility, which when you think back to the market turmoil in mid-September was execution that we are pleased with.
We drew down actually on that facility $47.4 million and when we used our revolver to fund the remaining capital needed for that acquisition. We also paired back our floating rate exposure late in the third quarter by entering into $75 million of swaps and $40 million of caps, and those are outlined in our supplemental material, which is available on our website.
We currently have approximately $58.5 million of capacity under the existing credit facility. We were impacted by the sharp rise in LIBOR during the quarter.
And then on the acquisition that I just spoke about, we actually lapped into 30-day LIBOR on the day it spiked up to 5.8%. So the combination of the higher 30-day LIBOR on the various tranches in our revolver and term loan and the impact of the time period in which we owned those 14 assets and the related borrowing impacted our quarterly expectations to the negative by about $0.01.
Looking at the P&L. rental revenues came in line with our expectations.
As we noted in the release, we moved even more aggressively during the quarter on our discounting program and waived the admin fee on our lower occupied unit types. This impacted our sequential FFO growth by about $0.01, and our same-store total revenue growth would have been about 3.2% before the impact of the lower fee income.
G&A at $5.2 million came in line with our expectations. We had previously provided an estimate of the charge to move out of the office space in suburban Cleveland and the impact of our subleasing that space to another tenant, and that charge came in line with our guidance.
We had not provided an estimate of the write-off of the undepreciated TI, etcetera, and that charge in the quarter was approximately $500,000. The rise in our operating expenses correlated with the continued strategy of investing to gain physical occupancy.
Repair and maintenance, promotional material, and personnel costs were up both sequentially and year-over-year. These costs reflect repairing and placing in service-damaged units sprucing up the assets and taking advantage of the warmer weather to accelerate our capital improvements into the quarter.
We look at the gains and physical occupancy as a measure of the near-term success from these investments. Our fourth quarter expectations assume continued investment in the assets through discounting and making as many improvements as weather will permit with the objective of limiting the seasonal decline in physical occupancy as much as possible in order to make 2008 a more profitable year.
With that, I'll turn it back over to Dean.
Dean Jernigan
Okay. Thanks, Chris.
The quarter is a good example of what I've thought for many years is a difficult environment for a real estate company who owns and manages and operates long-lived assets to be measured on a quarter-by-quarter basis. We played a very good gain during the third quarter.
However, the final score did not result. The final score did not represent, I think, the gains that we achieved during the quarter.
And I want to talk about some of those. When we started the heavy discounting in June 15, we talked about their last quarter's call.
We obviously enter into a rebuilding year, as far as I'm concerned for '07. We knew '07 was going to be a rebuilding year to begin with.
Going into the year that became an even more important rebuilding year, as we met the market with discounts and started to add occupancy, which Chris spoke about and it's, of course, in our new release during the third quarter. We also, as Chris mentioned, invested in our assets during the third quarter.
We have added, at each division -- four divisions across the country. Some very important people to us are called facility service managers.
And these are construction guys who are responsible for bringing our product up to a certain level of acceptance as far as we are concerned from a management standpoint and as far as we are concerned from a management standpoint and as far as our customers are concerned. For example, so far this year, we've repainted 100 properties.
We have about another 60 to go. So during the quarter, as you would think, considering the climate across 26 states in which we operate, we got a lot of work done in the third quarter -- in the second quarter.
So we weren't too concerned about going through budgets, because we're managing these assets for the long-term. We knew we were doing a lot of discounting.
But we wanted to concern about the short-term effect of that because, again, we are managing these assets for the long-term. We have, in fact, provided discounts of over $13 million on all stores, so far this year.
And we think, in the third quarter, we're $5.383 million in discounts. As Chris mentioned, we also waived about $500,000 in an admin fees for Q3.
We're very pleased with the results, as you have seen in industry reports and other -- our two other friends who have reported -- public companies who have reported to this point that as it is typical in the third quarter, occupancy does drop off from a seasonality standpoint. And we are able to buck the trend, if you will, and gain substantial occupancy points in the third quarter.
So that is good from an occupancy number standpoint. But what does that do for us on the bottomline or on the top revenue line, if you will?
We have a unit of measure we call projected rent, which is basically just adding up all the leases. It does not take in consideration the discount on the front-end nor any dollars you may write-off in bad debt.
Q1 to Q2 to Q3, we've run that projected rent just over 8%. And the drop-through is about 50%.
It was 61% Q2 over Q1 and 51% Q3 over Q2. So what is that?
And a question that I'm sure many of you might have and I'll answer on the front-end is so you give away a month's free rent; did that customer just stay for a month and leave? What -- how does the turnover differ from a customer who pays full rate day one?
And we have done this study, and we had concluded that there is no material difference between a customer who pays full rent day one versus the customer who gets a month free. And intuitively, that should make some sense because if you put yourself in the shoes of a potential customer, who wants to go out on a Saturday morning and rent a storage unit just because it might be free for 30 days, you cannot really have a need for it.
So our customers are staying on an average, as of yesterday afternoon, 349 days. Almost 12 months now our customers are staying with us on average.
To move out 0 to 30, whether it's with the month free or whether paying full rate, is about 18% in the first month. It drops to about 14.5%, 31 to 60, and down to 10.5%, 60 to 90.
That's just normal turnover. That's just normal churn, normal vacates.
And so it's kind of like having the paper cup with a whole in the bottom of it. As long as you put more water in at the top and it's leaking at the bottom, eventually, that cup is going to fill up.
And that's exactly where we are with our U-Store portfolio. We're putting in far more water at the top than we had leakage at the bottom.
So I'm very pleased with the leasing results. The turnover and the vacates are normal.
So we accomplished a lot in Q3, as it relates to filling up the cup. And we know from our good CenterShift (ph) data exactly who was staying and who was departing and how long they're staying.
The maintenance CapEx in the R&M Chris spoke about, we are investing heavily in our properties to bring them to what I'll consider market standards. At this point in time, I've seen the vast majority of our properties.
And I can tell you that they are competitive properties. Some are not the prettiest, some are not the best located, but generally, by and large, we have competitive properties.
They have not been maintained as well as we planned to maintain them on a go forward basis. Prior to me joining this company and as you would expect what a new public company with a new management team who had no previous public company experience, they were very much driven by expectations in the market.
And somewhere along the line, it was determined that $0.20 per square foot for maintenance CapEx was the absolute maximum this company could afford to spend. And of course, we developed some NOLs and (inaudible) measures out of that.
I can't tell you how many times I have pulled up to a property. It looks good as I pull it into the parking lot.
But then as I go in and meet the manager and start walking the property, I'd notice that only the front part of the property has been repainted. Something ran out of maintenance CapEx dollars and they bumped up against the $0.20 a square foot.
Let me tell you we had no limit -- no arbitrary limit on maintaining our assets by $0.20 a square foot. In fact, we've spent $7.344 million, so far this year, in maintenance CapEx, which is about $0.29 a square foot.
And we'll spend more in the fourth quarter. We're investing in these properties for the future, not for a year top, not for year 2007.
Our maintenance CapEx -- correction -- our repairs and maintenance, we spent $2.640 million year-to-date, about $0.11 a square foot, and we'll spend more in the fourth quarter. I would tell you by the end of the fourth quarter, it will not all be complete.
We will still have some work to do on the maintenance CapEx standpoint for year 2008. As I mentioned, we still have 60 properties to paint.
We have invested heavily in landscaping this summer to bring up our curve appeal. And I can tell you without hesitation that no potential customer drives up to one of our property now and fails to get out the car because of the appearance of the property.
So we've cleared that hurdle. And obviously, with the rental achievements we've had in the third quarter, it's very clear to me that our customer has accepted our product.
So those of you who have asked me the question over the last 12 months, is there a structural vacancy in the U-Store portfolio that needs to be addressed, needs to be talked about, and I can tell there is no structural vacancy. These properties are acceptable to the consumer.
And I think our rental reserves indicate that. We just completed our October survey.
This is a survey that I've been doing, I think, since 1995 that I've been in the business. And it really amazes me, because this result is very similar each year and the one that just is striking is that 47.3% of our customers are still first-time users.
To me, it speaks to the vast pool of potential users we still have out there as a sector. I'm going to talk some more about this sector, and I'll give you some results -- a little bit more about the results of the survey.
55% of the people renting from us in the month of October -- this is a short survey conducted all the way across the United States. The sampling is large.
It is very, very close to being very accurate. Plus or minus 2%, I think, is probably the factor.
55% of our customers living in with this in October were people moving. So then you'll ask the question, "Well, what is the subprime bull-up doing to us?"
And it appears to be doing nothing to us. I think it's neutral.
There has been quite a bit said about it recently, with other players in the sector and with what's written, and no one can fine a correlation to subprimeness to any type of downturn in demand for our product. As far as how people are finding us, this has changed over the year, changed dramatically, and this impacts how we plan to invest our marketing dollars, going forward.
48% of our customers found us by drive-by. In other words, we live and we have our facility very close to where they live or between where they live and where they work, well located properties -- very important, location, location, location.
Only 17% of our customers are now finding us through the Yellow Pages. And this, of course, is the death nail of the Yellow Page book, I think, within next few years, as we know it today.
We will be spending fewer dollars, going forward, on Yellow Pages and more dollars on Internet advertising. We still yet are at a lowly (ph) low number, with 5% of our customers coming through the Internet.
We are renting 7.1 units per day through our website, about 1,289 visitors per day. That 7.1 rentals per day should build next year or at least over the next 18 months, two rental seasons, to about a 125 rentals per day coming through our website on our existing portfolio.
So we're doing well in referrals. We've got 12% of our customers coming from referrals, 16% repeat customers, which also speaks to the quality of our asset, and 2% other.
So the reasons -- and this one is also always striking to me, and I think it speaks to my frustration with having to give away so much free rent -- the top three reasons for people selecting U-Store, first one is location. 45% of our customers tell us that that is the main reason they select our property.
The second group, 23%, is our good managers out there. They find our managers to be very helpful.
That's the second most compelling reason why they rent from U-Store. The third is always price.
Only 10% of our customers enrolling in our survey tell us that the compelling reason to rent from us is price. So as I get on my shelve box and continued to preach, why are we giving away so much free rent?
Why do this company have to have $13 million of discounts over the first three quarters this year? It's beyond me, except for the fact, this company is the only meeting the market.
Only meeting what the market demands, because we have other folks out there giving away free rent when there is not necessary in my opinion. So 10% of our customers coming to us on price obviously, the free rent.
As far as our managers built enthusiasm with their telephone calls, waiving the discount or waiving the admin fee gives even more. Down to the step, if you will in the presentation look you can move in here for free.
There's still only 10% of our customers who are telling us that is a compelling reason. I'll speak to markets just for a minute.
And then turn it over for questions. But, listening to the two conference call and readings reports, I think we are all right on the same pages.
It appears to us as if Florida has stabilized. I don't see any significant vacate movement in Florida, as a result of the hurricanes two years ago.
So, I think we are at normal levels in Florida, although our level is not acceptable as far as being normal. We are at 83.5% at the end of the quarter, and I would expect that to be about 5 percentage points higher.
That of course, is our whole portfolio. I expect to be about 5 percentage points higher as we have this call hopefully come down toward the end of winter season next year.
But the all other markets across the country are stable, are growing many of which are growing, especially Colorado, Illinois, Ohio, New York, Indiana, Atlanta is doing well. Salt Lake City is best ever seeing it, Denver is the best I have seen it, doing exceptionally 12 properties there.
So, we have no headwinds that we're really facing except those that we are creating ourselves. As far as I'm concerned about all is to discounting.
We have, just to finish up on the markets, Hartford Connecticut is the only market that I have right now on the watch list as there is some softness in that market, but we don't have that much invested around Hartford, but as far as all the market plots in country varies in spite do in fact have a tailwind. As we move forward, I mentioned earlier I think at that we there we started in November collecting admin fee again and we do except on the go forward basis to be trimming our discounts.
We will just by nature having few loans over Q4 and Q1 at a discount number will be down in whole dollars. But as we continue to fill up our properties, because we do offer a discounts to people on a unit-by-unit basis, in other words if we have certain units tight that's below the certain level that we are not satisfied what we will give a discounts.
As those properties fill up the discounts will start to burn off and we'll start to enjoy much more rough through to the bottom line There was a difficult quarter and that we changed our recent strategy mid-year to mid-market demands. 2007 has been definitely a rebuilding and we are without question, as you can see in our numbers, investing in our property, investing in our people to build this company into a very successful operator self-storage facilities in 2008.
With that, I will stop and we'll then go to questions. Operator?
Operator
Thank you. We'll now be conducting question-and-answer session (Operator Instruction).
Our first question comes from Christine Mcelroy with Banc of America.
Christine McElroy - Banc of America
Hi, good morning. In the past you guys have talked about the portfolio is being in different buckets, some of which are good assets, some of which either need to be proven or need work.
Can you give us a sense, as you look at portfolio today? What's your strategy for non-core assets sales?
Chris Marr
Hi. Christy, it's Chris.
As we come to the close here in this year we are also bringing to a close a process that we've been working through for the last several months and looking at all of the assets in the portfolio and developing a ranking with your best asset all the way down to the assets that falls through to the bottom of the list. It's a process that we did at storage USA and it was repeated.
Thereafter, the company was sold and we basically replicated that process here. And it gives us a fabulous amount of data on each asset and allows us to eventually look at things from really a hold IRR type approach to say, if an asset may in fact to be well occupied, but is in a lower rent part of the country, and the upside to that asset is fairly muted to perform an analysis to say we better off on all things relative, taking in to account cap rates in those markets etcetera.
Looking to exit that asset and redeployed that capital in to markets that have higher growth potential, even if in the near term, it's at a lower cap rate. That process is drawn to close, out of that will come a disposition effort, which will begin later this year, or at the beginning of next year.
And we do anticipate having as a source of capital in 2008, proceeds from the sales of those assets that don't fit long-term into the growth strategy of the portfolio.
Christine McElroy - Banc of America
And then, what about assets that are in a non-great shape, but on really good real estate, is there any redevelopment in our expansion potential within your portfolio? And you -- would you ever consider bringing -- potentially bringing in a partner to help provide investment capital?
Chris Marr
Well, Christy, I'll let Chris to speak to the capital part out. As far as the assay is concerned, I mean we certainly have ongoing programs as it relates to income producing capital expenditure programs, where we are converting some stage decline withdrawal.
We've had an addition going and we will have some, I'd recall, an early model product, maybe one that's build in the 80s who have a situation where we will redo the office completely. Maybe chop-up the officer and build a new storey building.
So, those are going to speak the capital and I'll be surprise when you look partner for that.
Dean Jernigan
A partner for that given the dollar volume is probably, not necessary nor the right answer. In general, we've spoken before, we have had great experiences with the joint venture concept in the past.
We had several in places at storage USA. And so, again as we work through the assets and our ability to move forward growing the NOI.
The idea of potentially bringing in a partner given where the equity capital markets are today to help provide some growth capital is something that we will continue to look at.
Christine McElroy - Banc of America
Okay. And then just lastly in terms of the incremental repair and maintenance and housekeeping cost, I just want to make sure I understand your comments earlier.
How much of that increase will be recurring going forward? And how much was one time in nature?
Is this basically the new run rate for operating expenses?
Dean Jernigan
I think our R&M will settle down for next year. And in other words, we're getting everything fixed this year that would be expenses in R&M item.
As far as the maintenance CapEx item is concerned, we still do have some paining. And I'll Chris speak to that, but we do still have some work to do next year.
Chris Marr
And right now as we are looking at the capital per square foot for next year that number is coming in on the entire portfolio around $0.30 a foot.
Christine McElroy - Banc of America
Okay. So, the expense part of that should settle down, but the capitalize cost should stay?
Dean Jernigan
They are consistent right. And I think just given all the work that was able to get done in the warm October, the way we've reflected the guidance, we've assumed the continuation into the fourth quarter of heavier R&M and then that will stabilize in '08.
Christine McElroy - Banc of America
Okay. Thanks guys.
Operator
Thank you. Our next question comes from Jonathan Litt with Citigroup.
Sadler Jordan - Citigroup
Hi, this is Sadler Jordan with Jonathan Litt. Given that cash flow excluding one timers was around $0.20 and the dividend is $0.29 what would be a recognition of the quarter?
Dean Jernigan
Yeah, good question. We've been very consistent in our response to that question.
In mid December, we have an annual board planning session, at which point we will have the 2008 budget process completed. We will have our capital expenditure budget another $0.30 number as I spoke as if today finalized and we will go through a process rooted in data in facts to identify our '08 expectations.
And then the ultimate decision on the dividend will come out of that process. It is Board decision as to what the dividend policy is for next year, and we've said all long we'll have all the facts that you would expect we would have and would need to make a decision on that.
It will be made in December. And we will provide both the dividend as well as the FFO guidance at that time.
Sadler Jordan - Citigroup
Okay. And on asset sales of I guess non-core asset sales, do you have any idea of the expected range of proceeds in 2008?
Dean Jernigan
Now at this point in time as I said, we are coming to the end of the process and we'll have more information for you and an ability to quick dollars around that in an accurate way as we talk after the fourth quarter.
Sadler Jordan - Citigroup
And my final question is, when did, I guess which was the decision to spend the money to or spend the money now to improve if we look at the assets, as suppose to I guess starting on this earlier or later?
Chris Marr
As far as early is concerned, as far as earliest we could do it. As I said there are facility service managers in place in the second quarter and I mean its not like that we wont investing in the obvious step, but being in 26 states and many on Northern state's is very difficult to get things done in the first quarter and even into most of the summer second quarter.
So that lot of work just does fall in the summer time, but we are investing when and where appropriate adequate numbers of dollars to make this portfolio competitive and or getting there.
Sadler Jordan - Citigroup
Okay. Thank you.
Operator
Thank you. Our next question comes from Kristine Kim (ph) with Deutsche Bank.
Kristine Kim - Deutsche Bank
Hi, good morning. Just in terms of the expense this quarter and it looks like drivers, there was a primary driver for the reduction in guidance, I mean when do we changed from last quarter that you didn't know then in terms of how much you are going to spend on this properties?
Chris Marr
Well it's not the fact to being out there, but it's basically everything that we've talked about. We have brought the people on board to go out and make sure that the asset is as presentable as it needs to be.
There are things that can get done that we were able to get done during the quarter that came at a cost. The continuation of having Sunday hours, the adding of personnel at the sites to make sure that we always had our Manager, President, that we were stepped up to meet customer demand.
All things driven towards making sure that we're able to capture more than our share of the customers, who drove by or picked up the phone and called So it became just a continued investment in both people and assets to gain the physical occupancy and that ended up paying-off, we think in terms of the gains we're able to make versus what the industry, national data shows and what we've seen reported from the other public companies.
Kristine Kim - Deutsche Bank
Does that all make sense, but and it was skill for the program just not as big when you gave your guidance last quarter?
Chris Marr
I think it's the skill for the program, its the pace that which things were able to be accomplished, it was the collaboration of the whether which allowed for a lot of the patching and painting and things like that to get done. It was culturally a push to say, we want to be in a position on January 1 that we've got this work complete.
We've got the people in place to rent the units. We've got the facilities looking as good as they can.
And less gain as much occupancy as we can between now and then. So that we hit 1-1 on a much higher basis than where we started 1/1/07 and then built for mat occupancy objectives as we got to July 31 of next year.
Kristine Kim - Deutsche Bank
And could you just touch upon how the occupancy is been trending following the end of the quarter and what sort of occupancy pick up you have in your new guidance assumptions?
Chris Marr
We're now moving into a seasonal mode where you would expect to see net vacates as we remove through toward the end of the year, so our same store occupancy assumption for Q4 is an average occupancy of 82% and that compares to the average occupancy during the quarter of 83.6. So you can see the seasonal trends, as things slowdown in September, you have less move-inn and October, November, December.
The flip side of that is, you also have less move-outs. But generally speaking we would expect net vacates during the final three months of the year.
Kristine Kim - Deutsche Bank
Great. Thank you.
Operator
Thank you. Our next question comes from Paul Adornato with BMO Capital Markets.
Paul Adornato - BMO Capital Markets
Thanks. I was wondering, if you could just give us an example of some capitalized items that you spent on during the quarter.
Chris Marr
Items that get ended up being hunk up on the balance sheet or items that ended up getting expensed?
Paul Adornato - BMO Capital Markets
On, the balance sheet.
Chris Marr
That would be painting an entire facility, re-roofing, replacing all of the light fixtures those type of cost.
Paul Adornato - BMO Capital Markets
Okay. How much do you expect to spend on those items going forward.
Chris Marr
That would be the $0.30 per foot that we talked about in 2008.
Paul Adornato - BMO Capital Markets
Okay. And finally on the rising type portfolio, what economics did you achieve on bringing those in-house.
Chris Marr
Yeah. The integration now, obviously was very easy as we were managing those asset, those facilities, it's a great question, and let me make one point.
Our total portfolio occupancy, as we have laid out in the earnings release at 81.5% at September 30. That does include the rising tight assets in that figure.
So those asset at the end of September were 70.6% physically occupied. So absent those, the entire portfolio was 82% physically occupied, I think that's a point that I'm glad you brought about, it's important for folks to look at.
The cap rate, that we're looking at as we look at Q4 guidance for those asset is they'll yield about 5% in the fourth quarter, and as we said on the last earning call our expectation for all of 2008 is those move up closer to 6% as we lease them up, but clearly there will be dilution not only in Q4, but in the first two quarters of next year until we really get in to court of rental season.
Paul Adornato - BMO Capital Markets
Okay. And looking at bad debt, is that 2.4%, does that have any kind of hang over clean up from earlier in the year.
Chris Marr
Yeah, I would say the third quarter as we expected, we still had some clean up in the early parts of the quarter, but as we have said the problem has been fixed, it's not something that we would find it necessary to dwell on going forward, and again I think as we move in the 2008 the year-over-year compression will be much to are benefit.
Paul Adornato - BMO Capital Markets
Okay. And so what should we assume as a percentage of bad debt going forward?
Chris Marr
The 2.4 -- just also make sure, we are all here on the same page. That's the AOR, that's actually greater than 30 days old as a percentage of our projected rent.
Bad debt as a percentage of revenues have been running right around 3%, coming down from as much as 5% in the fourth quarter of '06. And you would think both revenue growth and that number comes down in Q4 going forward that 3% will just trend down.
Paul Adornato - BMO Capital Markets
Okay, thank you.
Operator
Thank you. Our next question comes from Michael Knott with Green Street Advisors.
Michael Knott - Green Street Advisors
Hi, guys. Can you talk for a minute about the performance of the non-same store pool?
I think it's about fixed in 6 million square feet or so. It looks like the NOI actually came down a lot compared to second quarter even though you added the Rising Tide at some point during the quarter.
Can you just talk about the performance of that pool?
Chris Marr
Sure. That would be mostly the assets that were purchased in 2006.
From a yield perspective, while the net operating income across the board would have been negative, those assets -- it's a tough comp, because you're going to have them coming in obviously on a staggered basis during the first few quarters of 2006, and then we've got them for the whole period. The other thing that tends to impact those assets negatively, when we talk about the prior question on bad debts, now those are some assets where we would have had slightly heavier write-offs, as we brought in receivables and then had to go through the integration of making sure the managers that are there either stay and if they don't stay bringing in replacement managers etcetera.
So those are an area. We are on the integration of those properties into the portfolio.
There is usually some slippage there. And we ended up paying for that a little bit more heavily in that pool as we clean that up.
Michael Knott - Green Street Advisors
If I look at the 2Q supplemental and compare it to the 3Q supplemental, it look like the NOI from that pool fell by 40% or so, is that bigger variance explained by all those sectors?
Chris Marr
No, I also think that you have got that as kind of a bit of a bucket that's the catchall for operating expenses that don't really hit, that are not property specific to some extent. So there is clearly some -- by looking at the way you're looking at it, you are taking a lump of non-direct property operating expenses that in the data that you have right now is hitting those and you're going to look at it that way.
So it would be, I think as we get the filing the Q, I think the tables in there will be a little bit more self-explanatory to break those out without those costs.
Michael Knott - Green Street Advisors
And what's the aggregate cost of this non-same store pool?
Chris Marr
The actual investments are in those assets?
Michael Knott - Green Street Advisors
Yes.
Chris Marr
Well, I don't have that number of top of my head.
Michael Knott - Green Street Advisors
Okay.
Dean Jernigan
Hi Mike, it's Dean. When I am out there looking at properties, when I am out there talking to managers and our DMs and whatnot, I really don't see a lot of difference between the non-same store and the same store.
I mean, we're just liking to see numbers pretty close, we're operating them saying. So I am not sure what the accounting perspective is on this and what you're -- the answer, that Chris has gave you, but I mean, I think its pretty safe to say debt arising type coming in at 70% as I see, during quarter that our non-same store properties tend to look like our same store properties of this point in time.
Michael Knott - Green Street Advisors
Thanks.
Operator
Thank you. Our next question comes from David Toti with Lehman Brothers.
David Toti - Lehman Brother
Good morning guys.
Chris Marr
Good morning.
Dean Jernigan
Good morning David.
David Toti - Lehman Brother
Couple of question maybe I missed this. Could you talk about your, if there is any strategy around 2009 debt explorations?
Chris Marr
The majority, we did not. Good question.
The majority of the debt that comes due in 2009 is the term loan and the credit facility both of which have one-year extension options that can be pushed back into 2010. So that is all our floating rate debt.
And at this stage we're still looking at, what the various strategies are to, either term that out or pay that down as we go forward whether that proceeds from dispositions, whether that's proceeds from a joint venture as we talked about earlier whether that's simply terming that debt out or re hoping on the revolver.
David Toti - Lehman Brother
Okay. Second question will be different, are you seeing any change in the dynamics between the mix of residential, private customers and business customers?
And with regard to the business customers is there any change in the length of stay for those customers on average?
Dean Jernigan
We're not seeing change David and that really surprises me because the numbers that I am looking at know and in the October surveys, basically the same as we saw on the September surveys that we did back in 1995 and 1996, about 40% of your first time, -- I mean the customers walking up during the months of October, 20% said that were restoring for commercial reasons. And what happens as your, 10 years ago 12 years ago, our average length of stay or our length of stay was about 11 months and you heard me say that we're now up to almost 12 months, which would state to the commercial customer staying a little bit longer.
It has been 26 months average length of stay for the commercial customer and about and about 6 months, 6.5 months for the residential customer. We're refining those number right now obviously our September our October surveys we just over with couple of days ago.
But it doesn't appear at first glance that it's changing much. When you say 20% in your customers are commercial customers then if you do the math and you say the other 80% change turned on a 6 to 6.5 months basis and the 20% you keep to adding and they stay 26 months.
If you take snapshot of your facility, each facility should look, like it has about 30%, I mean, one point of time -- between 30 to 35% commercial customer usage, but those are kind of the numbers away they are now and as we refine our survey results we'll write off some more bad debts as we go forward.
David Toti - Lehman Brother
Okay. Thanks just and then just one last question.
Can you give us a quick update as to the state of your internal systems in terms of the integration with the facilities, if there is any dynamic pricing capacity that you integrated from these systems recently, I am just wondering what the progress is there?
Chris Marr
Yes, we integrated this CenterShift system. All the properties were up on that in October of last year.
So we are quite happy having October of this year come upon us because we now have the ability to analyze information on a year-over-year basis coming out of the same system and presented in the same fashion, so that will make our lives much more productive here going forward. Within the capabilities of that system, there are revenue management components to it that impact pricing.
We do have two-person revenue management department, which analyzes all of the data available to us on a daily basis and helps make decisions on increasing rents to existing customers, changing street lamps etcetera. So we are about 12 months under our belt now with that system.
We now have a full 12 months worth of historical data, which is very important to be able to build off of going forward. And so I think our revenue management capabilities are going to be sequentially improving as we move forward now that we have good historical data.
David Toti - Lehman Brother
Great. Thank you, guys.
Operator: Thank you. Our next question comes from Chris Pike with Merrill Lynch.
Chris Pike - Merrill Lynch
Hi. Good morning, everybody.
Dean Jernigan
Hi. Chris.
Chris Pike - Merrill Lynch
Real quick, just to follow-up back upon that, who is doing your revenue management?
Chris Marr
Within the company?
Chris Pike - Merrill Lynch
Yeah. Are there any new hires either regionally, back at home office specifically for this job, I mean who is doing that?
Dean Jernigan
Well, what's the -- as far as the particular people are concerned, one is the former Storage USA employed and the other one was a U-Store-It regional manager when we got here, You know it was that MBA-type that is very keen on this particular job, and he was a natural fit for us. And they have been at the job now for about a year, but the fact is that we have -- the data that they had worked with is been -- we have been refining that data for the past year.
And as Chris said, now that we have year-over-year numbers, we expect to have even better forecasting models and the opportunity for these folks to do their job in a little bit better fashion.
Chris Pike - Merrill Lynch
So Dean, I guess, is the staffing both at the regional and their new headquarters, is everything complete? Should we expect any new hires in the next three, six, nine months?
Are you lacking in any capacity in any format?
Dean Jernigan
Yes. I will tell you as we go forward, there is a key hire that I have online was for 2008.
And that is someone who has real estate development experience in self-storage as we moved into a development stage in 2008. Right now, I'm the developer in the company and I'd be looking for some support.
So, there would be -- that's my only key hire. Everything else is done, in place, but I am looking to add one person in 2008.
Chris Pike - Merrill Lynch
Okay. And I guess back to your comments regarding the disposition strategy.
Are there any assets out in the marketplace right now or is that going to happen later on in '07, early '08?
Chris Marr
You would expect to see things come out in later in this year, in the early next year.
Chris Pike - Merrill Lynch
That means announced sales or you guys are putting assets out in the market?
Chris Marr
Putting assets out in the market.
Chris Pike - Merrill Lynch
Okay. And the proceeds of those assets -- I am sorry -- I got on a little late -- what would be the ultimate proceeds of those assets?
Chris Marr
Yes. We have not put a dollar parameter around that yet.
We're getting close to finalizing that whole program and so we would have more information on that as we release the report?
Chris Pike - Merrill Lynch
No, no. Where would they be if recycle bin too--?
Chris Marr
I am sorry, Chris. I didn't understand the question.
Chris Pike - Merrill Lynch
I'm sorry about that.
Chris Marr
We would look at a combination of bringing down the leverage that was put on to acquire the 14 assets we closed on in September. And than as we always have, take a look at where the shares are trading and the relative accretion, both FFO and NAV from a buyback and always look at -- have the acquisition markets here move in 2008 and see if there is any compelling opportunity there on top of what we could get by, by buying back our shares.
Chris Pike - Merrill Lynch
Good. That was my next question, Chris.
I guess the Form-IV showed some relatively modest and sober buying display to where the shares were trading this quarter and can you just remind me if your current authorization and I guess, Dean, can you talk about how you feel about buying back stock, with the ten handle on it right now?
Chris Marr
The current authorization is $3 million. Given the capital constraints following our closing of our acquisition, we have not yet utilized that capacity.
And again, as you would expect, we look at it by saying what's the relative NAV accretion, how does it impact FFO? And consistent with what we said last quarter, to the extent we have proceeds that would allow us to buy back stock without continuing to increase our leverage, that is certainly something we find attractive.
Chris Pike - Merrill Lynch
What kind of NAV accretion do you guys think you have better in that proposition?
Chris Marr
I mean that kind of comes back to where do we think our own internal NAV is and that's something that we've never been comfortable putting out there.
Chris Pike - Merrill Lynch
Okay. I guess you're pretty pragmatic on your forecasting, Chris.
I guess as we stand today here and when we look at over '08, '09, when do you think the dividend will be covered by AFFO given your upsize CapEx assumptions?
Dean Jernigan
Yeah. I mean, that comes to the question that was asked earlier on how do we look at dividend and the answer was we have a Broad strategic planning meeting in mid December when will have the 2008.internal budgets and be able to look at our AFFO.
We've talked a lot about what are CapEx requirements are and the mode at that point armed with the facts will make a dividend policy decisions for 2008. And I think the outcome of that will make answering your question a lot you hear in the next call.
Chris Pike - Merrill Lynch
Well, I guess I didn't ask, what the board, what you're recommendation for the board will be, with their ultimate decision would be I guess, the question was, where we stand right now, when is the dividend covered?
Dean Jernigan
From an AFFO prospective.
Chris Pike - Merrill Lynch
Yes.
Dean Jernigan
It's hard for me that answer because again will be jumping the gun on what our outlook is for 2008 even on a run rate basis so I prefer to maybe able to answer that afterwards.
Chris Pike - Merrill Lynch
I guess for Dean, I guess you indicated that your assets are competitive and everything is market based in terms of where the demand is. But I guess, if you were to put your assets into let say three buckets, where you would consider one bucket being B plus, A minus assets or A assets, another bucket being institutional quality, but let say little order, a little more tired with C plus B minus assets.
And then if there are any outliers, which, could be some of these, disposition candidates. What percentages of your total portfolio would fall to each of those three buckets?
Dean Jernigan
Brian (ph) I think there's even a little bit more then to it. So I think, as I've said before ideally you locked on this many properties as you can in the best markets in the United States.
And I have a goal of maybe having more then 50% of our AFFO coming out of, half of those markets, five or six markets. So, not only are you, it also gets back to markets and sub markets forgiving about the quality of the assets.
And right now we are in 26 states and we're spread across in a lot of states with not much representations in those states and even though the quality is good, the location might have been good from a growth potential stand point you'd be better off moving those dollars out of Mississippi to California, Florida for a example. And so, we are as Chris said, we have over the last, probably four months now, would help us on outside consultants survey, all 400 plus assets and we put them into Court House.
And so, that is almost finished and we have not grown the line there what you are asking about, where is the line, where is the bottom whatever you're ready to just spin out. And I don't think it will be a clear distinct line because I think it will be really as I said some driven more market driven than property, quality or location driven.
But in a round about way I'm trying to answer your question without giving you a number, but I tell you that we do expect to re position this portfolio on a substantial basis as we go forward, moving assets, moving investment dollars out of lower quality assets, out of lower growth potential markets into higher quality assets and higher growth markets.
Chris Pike - Merrill Lynch
Okay. Thanks a lot guys.
Operator
Thank you. Next is a follow up question from Michael Knott with Green Street Advisors.
Michael Knott - Green Street Advisors
Hey, guys. I know the former management team, some of the family members have been on public record before saying they were supporting the board to consider strategic alternative that are sale.
What do you think the boards outlook will be with respect to the operating turnaround going with an outlook have gone into '08?
Dean Jernigan
Well, we have a very important meeting coming out in Czech (ph) December where we will lay out the operating plan for 2008 and beyond for that matter. And that is appropriate time, that is a strategic plan and meeting.
That is appropriate time to look at all alternatives not only internal but external alternatives. And so it would be quite a guess on my part to venture out to answer you question right now Michael.
But we clearly, had that on the docket for December and as we get by that meeting. I'm sure you'll here more and more as to, how this company will be positioning itself on a go forward basis.
Michael Knott - Green Street Advisors
Okay. And then as to your last comment about repositioning the company should we take that to mean as you sort of higher cap rate markets and maybe eventually reallocate capital to lower cap rate markets.
But that could have a negative impact on the earnings profile but it should be at least neutral from a shareholder value perspective if not positive?
Dean Jernigan
Yeah. That's where I cannot, Chris do it sometimes because I'm looking five years out as far as the growth potential for a market is concerned.
For example, to plan we got a lots of examples. But I'll be looking and it could be you might so at a higher cap rate on a short-term basis and move in something on a lower cap rate where you've got a negative arbitrage if you will.
On cap rates and it could hurt little bit short-term but long-term it's the right decision. And then it just comes back to kind of what I was talking about earlier.
As far as maintaining these assets for the long-term that's short term. And same thing there, you want to -- you want to be in the markets in the sub markets where you has a greatest opportunity for growth going forward on a long-term basis.
We're not going to manage this company for short-term for the third quarter results.
Michael Knott - Green Street Advisors
Okay.
Operator
Thank you. Our next question comes from Jeff Donnelly with Wachovia Securities.
Jeff Donnelly - Wachovia Securities
Hey guys, I guess my first question, have to with. How do we keep the management and the employees and motivate it.
You know since, you guys have joined another people who have hired there and I believe most of the subject either stock or option grants. You know the price is down about 50% and I guess I'm wondering how do we keep that team focused to execute upon this turnaround.
Should we be expecting sort of a new complaint in '08 to address that?
Dean Jernigan
Well, I think that's my job. And I don't consider that to be such a huge job right now, we've got to motivated to the people who understand the long-term prospects of this company and we put a complaint in place, this past February.
That is working, and I think on a go-forward basis, we will continue to look at our folks and how motivated they are. But, they are not short-term motivated, they are long-term motivated and we have a comp plan in place, which I think works.
And I don't think that will be such a big issue on a go-forward basis.
Jeff Donnelly- Wachovia Securities
That's helpful. And considering the (Inaudible), I believe they are no longer insiders.
Does that make them, I guess, subject to maybe ownership waivers that you might see for so called, traditional institutional investors, when they own reeds. And that's what they have to make their intentions known to you until they themselves buy or sell shares.
Chris Marr
Yeah. I'm not a lawyer, but I do believe they have filing requirements to the extent they buy or sell shares given the percentage of the stock that they own.
And I also believe that the IPO, there were provisions put in place to address the five and fewer rule that I believe, allow them to own up to the high 20% range. I know I can't quite tell you facts whether it's 28 or 29, but they do have that ability.
Dean Jernigan
Yeah, I think it's just over 29. It's in the chart.
Jeff Donnelly- Wachovia Securities
Was it conceived when you guys were working on the rising tide, I guess purchase from them that they would use their proceeds to reinvest it back into the stock. Was that, I guess, part of the negotiation or was that something that they did after the…?
Dean Jernigan
They did not ask us how we thought they should use their proceeds. You wanted to ask them whether that was not part of the negotiations, as to what they were going to do with the proceeds.
Jeff Donnelly- Wachovia Securities
Okay. Thanks, guys.
Operator
Thank you. Our next question comes from Buck Horne with Raymond James.
Buck Horne - Raymond James
Good morning, guys. Just wanted to get a little bit more specific on some markets here, and particularly California.
And just -- maybe you can talk about what the market is like out there, why the occupancy doesn't seem to be moving dramatically or what is it going to take to move the needle in California and any other additional color you can give me on the competitive environment out there?
Dean Jernigan
I mean California, it's a big state, and so let's break it out. You can't even break it into three components.
You really need to break it into multiple components. Right now, I guess, the Sacramento, that valley area up there is a little bit weak.
The Bay Area is strong. Orange County is always strong.
San Bernardino is weak, and I'll come back to that one. San Diego County always manages to do well.
And so our concern right now is San Bernardino, where we have I think 16, 17 properties, and one market. We own the market to an extent and we have a good upside opportunity, and you heard me speaking in the past about the fact that on my trip out there, on two different occasions, I discovered that we had no Spanish-speaking managers, and about 75% of the market is Hispanic.
And so, we are almost ready, in fact, I am suppose to see it this week, today, I guess, the results of the marketing program that we have hired to specifically market to the Hispanic folks, not only in San Bernardino, but also Southern California, Southern Texas and Southern -- South Florida. So I think the 76% occupancy you see right now has tied to California, mainly is brought down by San Bernardino and we have marketing getting ready to in place that we will hopefully be able to address that in a positive way for 2008.
Buck Horne - Raymond James
Thanks, guys.
Operator
Thank you. Our next question comes from Chris Pike, with Merrill Lynch.
Chris Pike - Merrill Lynch
Hey, guys I just had a follow up, to the Green Street question regarding the MSTEL (ph). I guess part of the settlement was that, they have to see some to assist.
Is there a time limit on that or is it possible that in 6, 9, 12 months we start getting rumbling from these guys again?
Dean Jernigan
On Atlantic the set of filings that we do have standstill with them through XGN (ph).
Chris Pike - Merrill Lynch
Okay. Thank you.
Dean Jernigan
Okay.
Operator
(Operator Instructions) There are no further questions. I'd like to now turn the floor back over to management for closing comments.
Dean Jernigan
Okay. Thanks.
Again top result for the quarter, made a lot of gains during the quarter. The company is poised to do much, much better on go-forward basis.
As it relates to our systems in place and people in place we appreciate those of you who continue to supporters of the company as we continue to manage this company for long-term growth and success. Thanks.
We'll be looking forward to, speaking to you again next quarter.
Operator
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation