Life Storage, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Greetings, and welcome to the Life Storage First Quarter 2017 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A 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, Diane Piegza, Vice President, Investor Relations for Life Storage. Thank you. You may begin.

[Diane Piegza:]

Thank you, Melissa, and good morning, everyone. Welcome to the first quarter 2017 earnings call. Joining today’s call will be Dave Rogers, our Chief Executive Officer. Also participating are Andy Gregoire; Ed Killeen; and Paul Powell. As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to risks and uncertainties with the company’s business. Additional information concerning these factors can be found in the company’s latest SEC filings. In addition to our press release, we’ve added a financial supplement, which is available on the Investor Relations page at lifestorage.com. At this time, I will the turn the call over to Dave.

[Dave Rogers:]

Thanks, Diane, and welcome, everyone, to our call. We’re calling the first quarter of this year okay. We knew the comparisons to last year’s 9.9% Q1 NOI growth was going to be a challenge, especially given the deceleration that occurred in some of our key markets in the back half of 2016. Andy will have the specifics on the metrics, but the part of the operating story that everyone wants to know about is what lies ahead. So here’s what we see for the upcoming three quarters. Same-store performance is highly market-specific. A number of our markets are strong enough that we won’t be using money incentives in Q2 or Q3, most of Florida, Atlanta, St. Louis, Charlotte. As a matter of fact, some of those properties will most likely be turning customers away during the peak season due to lack of available units. Yet other markets will see almost 100% use of incentives even right through the busy season. All of Texas, the greater New York metro area, Raleigh and the Gulf Coast are specifically in that package. The second quarter should be our toughest year-over-year quarterly comp. Last year at June 30, we recorded our highest ever quarter-end occupancy of 92.7%. Further, during that quarter, we issued only a modest amount of free rent incentives. This year, we’ll be pulling the free rent lever very hard in at least half of our markets to hold as much occupancy as we can. Supply continues to increase and we expect our already softer markets to be impacted the worst, especially Dallas, Houston and San Antonio. By the second half of the year, we also expect some trouble to hit some of our stronger markets, notably Southeast Florida. March and now April saw demand drop slightly as measured by call volume. Again, it’s a tale of markets. The range goes from positive double-digit percentage in the strong areas to minus 6% in the weaker, but the weighted average skewed to the rent. So with these factors facing us, we felt compelled to bump guidance up a bit. Of course, with the busy season underway for less than a week, the actual story of the year is now just unfolding. So that’s the same-store outlook. It’s soft and it’s probably going to be this way for a few quarters. It’s a combination of going up against tough comps, growing supply in some of our largest and most important markets and a touch of a slowdown in demand growth. But fortunately, a lot of what we’ve done in the past year has made the same-store part of our story just that, a part. We’ve positioned our company into a multifaceted owner-operator, providing us with multiple paths to earnings growth, increased value and future growth potential. Here’s that part of the story. Life Storage Solutions; a new name and a reinvigorated marketing effort to our third-party management platform, we’ve added more contracts in this quarter than we have in any single whole year in the past, and there’s more in the queue. As noted on prior calls, this line of business generates fee income, adds to market exposure and scale and creates a pipeline for future acquisitions. We missed an opportunity four years ago to jump on the 3PM bandwagon [ph]. We’re ready to go with this cycle. Increased activity with our JV partner; this allows us to acquire quality properties on existing markets with minimal capital outlay. We expect to add up to 20 properties by midsummer as a result of such transactions and hopefully more later in the year. We have a pool of almost two dozen CMO and early-stage lease-up properties that will provide growth at a significantly greater pace than the same-store pool will. We have another 100 plus stores not in the same-store pool brought on via the Life Storage acquisition and various one-off transactions in 2016. These stores also have the potential for outsized growth in the next coming two years. Our expansion and enhancement program continues. This year, we’re spending $30 million to add premium high-end buildings and units to 18 stores and repositioning their visibility and presence in the process. Our new brand; Life Storage and our new image have been tremendously well received in our markets, on the Web and with our corporate customers. The marketing and advertising campaigns we’ve been able to build around Life Storage are awesome. Check out one of the videos at lifestorage.com/because to get an idea of what we’re talking about. Our company is a lot bigger and better and stronger than it was at this time last year. Some of the benefits of this evolution are currently hidden under a bushel because of the headwinds the industry is experiencing and because some of our biggest markets happen to be on the flipside of the cycle right now. But the improvement to our company is real and our important markets will be coming back. In the meantime, we’re adding a lot of value to our company by applying the benefits of our platforms to the properties in the non-same-store pool. The 3PM and JV acquisition programs allow us to grow our store count and operating scale with a minimal outlay of capital. The Life Storage brand has us all recharged and well-positioned to grow our corporate, small business and residential customer market share. Like Neil Young sings in My My, Hey Hey, there’s more to the picture than meets the eye. There’s a lot of parts to our story and you’re not seeing all of it yet. But it’s coming, and it’s really going to serve us well. Andy?

[Andy Gregoire:]

Thanks, Dave. Last night, we reported adjusted funds from operations of $1.26 per share, a result of same-store revenue and NOI growth of 3.2%, a 26.7% increase in management fee income and the performance of our 2016 acquisitions. The drivers behind the same-store revenue growth included a 20 basis point increase in average occupancy and a 2.7% increase in rental rates. Same-store occupancy at March 31 was 90.9%, tying a record high for this time of year. Same-store property operating expenses increased 3.2% for the quarter. This was the result of increases in real estate taxes, payroll and benefits and increased spending on Internet marketing as we transition to the Life Storage brand. G&A costs were approximately $1 million higher this quarter over that of the previous year’s first quarter. The main reasons for the increase include the fact that we operate in 113 more stores at the end of this quarter as compared to this time last year, the costs associated with our name change and increases in wages in our call center and additional legal fees. In regards to the 72 stable Life Storage properties acquired in July, these properties are ending the busy season poised for growth, with occupancies in the mid-80s and we are putting our platform to work to fill them up. Additionally, the 11 non-stable stores acquired with Life continued to grow occupancy better than expected. Our balance sheet remains solid. At March 31, we had $201 million available on our line of credit. We have no material debt maturities until December 2019 when our line of credit matures. Our debt service coverage was 5 times and our debt to EBITDA was 5.8 times. We were not active with our ATM program during the quarter. We do expect to put a new ATM in place this year since our current plan expires at the end of May, but we have no plans to use that program based on our current stock price. With regard to guidance, although Q1 earnings came in as expected, lack of occupancy growth even with increased incentives gives us pause for the remainder of 2017. However, the company has seen improvements in other areas that we expect will compensate for the lower organic growth, including increases in fees and third-party management contracts, contribution from newly formed joint ventures and the lease-up and NOI improvement at our non-same-store facilities. Same-store revenue growth for Q2 should be in the 1.5% to 2.5% range. Expenses outside our property taxes should increase between 3.5% and 4.5% for the quarter. Property taxes are forecast to increase 5% to 6% over 2016’s Q2. Again, this assumes no additional accretive acquisitions. Guidance does assume $0.01 to $0.03 per share of FFO dilution from the certificate of occupancy deals we have completed to-date, or that have been previously contracted and are expected to be completed this year. Based on the above, we are now forecasting annual funds from operations to be between $5.47 and $5.53 per share. For the second quarter, we are forecasting funds from operations to be between $1.32 and $1.38 per share. And with that, Melissa, we can open the call to questions.

[Operator:]

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Juan Sanabria with Bank of America. Please proceed with your questions.

[Juan Sanabria:]

Hi. Good morning. Thanks for the time. Just a question on guidance. You guys came in at the low end for the first quarter. You talked about the second quarter being kind of the low point of the year, but it seems to be a second half pickup imply. What gives you confidence that you can hit these new numbers?

[Andy Gregoire:]

Hi, Juan. It’s Andy. When we look at the free rent, Q1, our free rent was up about $350,000. So we knew that was a relatively easy comparable compared to what Q2 was. Q2, we would expect that free rent to be up because of last year we were aggressive in reducing free rent in the second quarter. In the second quarter of '17, it’s hard to see that we can reduce as much as we did last year. So that free rent is going to be significantly higher than it was last 2Q. And that hurts you quickly in the quarter. On the back half of the year, we did increase incentives in 2016, so the comp’s easier. So that’s what makes us comfortable. We’re not baking in a whole lot of occupancy growth. In fact, we – right now we don’t expect to see that. But the easier comp with free rent makes us comfortable.

[Juan Sanabria:]

Should you expect free rent to be flat in the second half of '17 versus '16?

[Andy Gregoire:]

It will be similar with Q1. So it’s $350,000 higher in Q1 of '17 versus '16 dollar-wise. I know some people like to put it as a percentage of revenue. So we’re about 2.1% in Q1 of '17 versus 1.8% in Q1 of '16. That number will grow to maybe 2.4% in Q2 versus 1.3% last year second quarter. The remainder of the year should be in that 2% range, which is very similar to last year, a little bit of both.

[Dave Rogers:]

We really ramped it up starting in July last year, Juan. That was the surprise we had to do. Last year increased so much. So we were at pretty high levels really from July right on through December of last year, whereas from April to June, we were really holding back on issuing incentives. So that’s why we’re saying 2Q is going to be really tough. It should get – we’re not saying absolute business is going to be much better at all, but we are saying the comp is easier.

[Juan Sanabria:]

Okay. And then you guys talked about demand and volume. Could you just give us a little bit more color on what you’re seeing across the different channels in terms of traffic? And are you seeing any pickup in bad debt?

[Dave Rogers:]

Well, we’re not seeing any pickup at all in bad debt or at least it’s not a material change. I think we’re up $100,000 in bad debt over last year’s same quarter. Looking at traffic and the metrics in regards to traffic, our call volume is down slightly for the quarter year-over-year, and our reservations are down slightly as well. But on the positive side, traffic to our Web site is actually up year-over-year. Albeit it’s a slight number, it is up and that’s just really – it really speaks a lot to the strength of the brand. Where we did lose some traction and ranking, our traffic to our site remains very positive.

[Juan Sanabria:]

And just one last one for me. How did Street rates trend throughout the first quarter and early into the second quarter?

[Dave Rogers:]

Street rates, end of March, they were 2.9%. We are off 2.9%. And in April, we’re going to be off about 4%.

[Juan Sanabria:]

When you say off, you mean down 4%?

[Dave Rogers:]

Down. Yes, down.

[Andy Gregoire:]

That’s just a tale of markets, Juan – I’m sorry, that is a tale of markets. There is markets – you see Florida market’s up double digits in Street rate growth. You see Houston down 10%. So it is really a tale of markets. There’s some very strong markets; Houston dragging down the overall.

[Juan Sanabria:]

And are those numbers net of concessions or gross?

[Andy Gregoire:]

That’s the Street rate.

[Juan Sanabria:]

Okay. That’s it for me. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Smedes Rose with Citigroup. Please proceed with your question.

[Michael Bilerman:]

Hi. It’s Michael Bilerman here. Dave, I was wondering if you can talk a little bit about sort of Life Storage and how that portfolio is doing. Sequentially, your operating margin came down and so I’m just curious how the more difficult environment that you’re talking about is sort of playing into your targeted yield, and how we should think about where that should be for this year. Annualizing first quarter results, you’re sort of a pretty low 4% yield. So how should we think about how that trends and how it is relative to where you thought it was three months ago?

[Dave Rogers:]

I think we’re – the big part about the story with Life was we were forecasting pretty decent growth in markets like Sacramento and Las Vegas and better than our same-store pool in the other big markets of Chicago and some of the Texas cities. What’s happened in 2017 is – as expected, those revenues were going to be offset pretty mightily by tax increases, property tax increases due to Prop. 13 in the California stores and Chicago being Chicago. So what we’ve done is we’ve started accruing those taxes as of January 1, the whole shot. So we’re taking the big punch for the four quarters of this year, property taxes as expected with the growth to grow. And we’re in the slow season, obviously, right now. So I think we’re happy overall with certainly Las Vegas, with the California properties, Sacramento. Chicago is good. Texas has got the headwinds. We’ve talked about this in the last couple of quarters. So I think overall, as Andy mentioned, we spent the last half of last year getting these properties ready for the busy season. They are ready. The markets I mentioned are doing as planned. I think really the only miss in the story out of a lot of positives is the headwinds that we’re facing in Texas. And that – those stores, the Life stores are doing better than our same-store pool, but they’re caught in the wind as well. So there’s 19 stores to that pool that we’re watching closely. That’s offset a little bit or actually a decent amount by the progress that the 11 lease-up stores are making. So we’re behind a little bit in terms of where we want to be. We want to be about three months faster into this and probably 10 to 20 basis points behind in terms of yields by the time we get through with the third quarter.

[Michael Bilerman:]

So where would yield be by the end of the year. It’s at 4.1% today. Just annualizing first quarter results, where would that yield be?

[Andy Gregoire:]

If we annualize Q4, we expect it to be at 4.7. So the whole year should work out to be about 4.5. That’s both the stable and the lease-up.

[Michael Bilerman:]

You also cut your expense growth, excluding property taxes, and that was down 1.25%. What’s that coming from?

[Andy Gregoire:]

In Q1, we had some better results. Obviously some snow falling and repairs and maintenance came in better than we expected. So some of it was Q1, some of its utilities were coming in under what we expected. So it’s a combination of things. We expected a little bit bigger increase in the insurance side. We will see that, that increase renewed March 1. So we will see that start in Q2 with the full effect of the insurance increase, but it wasn’t as big as we thought. So we had some savings there on the expense side and just are continually putting in more efficient lighting and HVAC systems helping on the utility side.

[Dave Rogers:]

I think something else to keep in mind in regards to the legacy locations is these properties started off with a pretty high occupancy and with sort of a false occupancy. And we cleaned up AR and we really replaced those low-yield customers with high-yield customers. And we’re now at a very clean 86% occupancy and that’s going to give us a great runway throughout the remainder of the year.

[Michael Bilerman:]

And can we just go through the specifics of breaking out the guidance change? So if you’re down $0.03 to $0.07, call it $0.05 at the midpoint, and you noted a number of different things in the press release. It sounds like same-store could be upwards of $0.07 negative. Can you just walk through each of these pieces? And then I don’t know if there was a change in terms of contribution for Life Storage or not. It sounds like they’re certainly – it’s a little bit weaker than you had thought, just so that we can isolate the different items for our model.

[Andy Gregoire:]

Sure. And we can quickly go through a couple of things. Yes, you’re about right with the $0.07 from the same-store, offset by higher management fees. I think you’ll see that number north of $9 million in management fees is what our projections are. So that – really the offset was from the new management contracts, the new joint ventures offsetting some of that same-store change.

[Michael Bilerman:]

Thank you.

[Dave Rogers:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your questions.

[Todd Thomas:]

Hi. Thanks. Good morning. First, are you able to provide occupancy at the end of April for the same-store and what that is on a year-over-year basis?

[Andy Gregoire:]

Hi, Todd. It’s Andy. April, we saw an increase from March – March of '17 to April '17, we saw a 50 basis point increase. Now that compares to an 80 basis points we saw last March to April. So we fell back about 30 basis points. Last April, it was a little bit about a head spike [ph], if you remember. April was very strong last year. So we are comparing to a very strong April. But occupancy was up 50 basis points from quarter-end this March to April versus 80 last March to April.

[Todd Thomas:]

Okay. And then just a follow up on the demand. So it sounds like traffic to the Web site’s up year-over-year, but conversions or reservations are down slightly. Are you able to track or understand why the capture rate is falling? Do you have any sense?

[Ed Killeen:]

Todd, it is difficult to – we track it on a market-by-market basis, but it really is difficult to identify precisely why. There are some – again, as both Dave and Andy suggested, it really is a sort of a tale of markets. There’s many markets where both the closed rate and the reservations that come our way are extremely high, and it seems to be with a strong correlation with the new comps that come into these markets. So it’s – I would say there’s a little bit of rate fatigue. We’ve been pushing rates for 20-some odd quarters now. So I think there’s a bit of that. But demand still remains steady and I think that’s got to be a major takeaway here. This isn’t the same picture as it was maybe years ago. It remains steady. It certainly isn’t through the roof. But again, there are some markets where demand is very strong and inflows are strong and calls are strong as well.

[Todd Thomas:]

Okay. And then in the markets, some of the weaker markets where you’re starting to offer more free rent. Are you seeing that starting to drive demand? And then as you begin to ramp up the free rent offers, are you starting to gauge the competition or are you starting to see some of the competition start to offer more free rent or increase their use of discounts to match your pricing at all?

[Ed Killeen:]

Well, there’s always a bit of price matching. But consumers by and large, they do react favorably to discounting. And as we go into the peak season, depending on where we are with rates and where our true comps are with rates, we do play around with our rates. But certainly customers are reacting to the heavy discounting and we’re able to hold occupancy for that reason.

[Todd Thomas:]

Okay. And then just lastly, moving over to Texas, I guess Houston and Dallas in particular. I was just wondering if you could just talk about those two markets in terms of rent growth and how new supply is trending? And then for Dallas in particular, revenue growth decelerated there. It sounds like you’re expecting some weakness in Dallas. Do you expect that market to go negative? And I was also just wondering with Houston, if you could just provide a guidance update for revenue and NOI growth?

[Andy Gregoire:]

Hi, Todd. Regarding Dallas, many new comps – and we tracked 25 new comps within 5 miles that have opened within the last year. So Dallas is one. It’s been on our watch for a while. We said that after Houston, that would probably be a big market. That could go negative. So it has great demand. The phone’s ringing, but the new supply and the discountings will hurt Dallas until those stores fill up. So a little bit of overbuilding going on in Dallas and hopefully that quiets down next year. But this year, with those 25 stores open within the last, actually 18 months, that’s going to drag that probably over the next two quarters into the negative territory. But it’s a great market. It will come back pretty strong. We’ve just got to absorb that new supply. Demand is doing all right. Houston, it’s a tough read on Houston with rates down 10%. We’re holding occupancy, but we’ve got to get through this busy season. It’s hard to tell where Houston could end up. It’s not going to turn around anytime soon. We would expect another two or three quarters with deceleration on the revenue arm.

[Todd Thomas:]

Any update to the guidance on Houston for the full year?

[Andy Gregoire:]

It’s so fluid. It is tough to update that guidance, so that’s why we didn’t put it in the press release. So it’s hard to tell right now. Again, we’ve got a – the new supply is not too bad right now in Houston. What we’ve had in the past is actually new supplies was – two years ago, it was worse than it was in the last 18 months. So from a supply point of view, I think we’re going to be all right there. We’ve got to absorb what did come on, but the rates need to come back and we need to reduce specials, and we don’t see that anytime soon.

[Todd Thomas:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your questions.

[Ki Bin Kim:]

Thank you. Good morning, everyone.

[Dave Rogers:]

Hi, Ki Bin.

[Ki Bin Kim:]

Hi. So a quick one on Life Storage. When I look at your reported numbers on the stable properties, the 72 properties, it looked like occupancy in the first quarter actually dipped down versus 4Q '16. I understand there’s always a little bit of a seasonal element to this, but I was just curious to know what happened with that because I would think that would still be increasing with kind of this lower number.

[Andy Gregoire:]

Yes, there’s nothing out of the ordinary there, Ki Bin. It’s a normal January, February and March. We expect that to now start coming up nicely. We’ve got a lot of runway in those markets and we would expect those properties now. You’ll see – as you go through the busy season, they’ll start to fill up.

[Ki Bin Kim:]

Okay. And if I look at your proxy and then the Board compensation, two of the founding Board members, Bob Attea and Ken Myszka, they were roughly receiving in the past about $2.5 million of comp. I’m not here to debate the comp number for founders. I’m just – what I did notice is that for Bob Attea two years ago that that level of payment ceased to a more normal level and for Ken Myszka, 2015 was the last year he got that $2.5 million comp number. So I was just curious if you could talk a little bit about what is happening and what caused that?

[Dave Rogers:]

That was part of a program that we put in place actually three years ago when the guys surrendered their gross-ups and some other benefits. And Bob, starting in 2015, went on a three-year plan to have his consulting fee paid through the end of 2017, not eligible for bonuses or incentives. Ken started a plan similar to that in 2016. So Bob’s plan burns off at the end of this year and Ken burns off at the end of next year. And there’s no agreements post that, although they may or may not sit on the Board and – but essentially, it was – there were agreements, sunset agreements three years each at $570,000 per year; '15, '16, '17 for Bob, '16, '17, '18 for Ken.

[Ki Bin Kim:]

Okay. And in terms of where your stock is trading, your NAV is fluid and it’s always in the eye of the beholder, but let’s call the imply cap rate about 7%. How does that configure into your plate of options when it comes to capital deployment in terms of when do you start thinking about buying back stock versus – well I guess you’re not going to do M&A acquisitions, but when do stock repurchases become more realistic? And second, I know you guys sound pretty excited about Life Storage and the things that – the positive aspects of the business that you’re seeing. But at what point do you start to think about if it doesn’t play out to plan and maybe Life Storage continues to yield lower and you don’t get that kind of big uplift in this big deal that you’ve done, when does exploring other possible strategic alternatives come into play?

[Dave Rogers:]

I guess we always have that, the latter, in play and our Board is always – we have an annual planning session and we’re aware of the – we’re not aware of seeing – we did not plan for this. Let me tell you that. I’ll be straight up and say we did not plan for a share price of 76 or 75 or whatever it is, but I would hope that would recover. But that’s something that we’re aware of. We know it is part of the game. The share buybacks we’ve talked about before, we have something in the range of $75 million of free cash flow. We did have some I guess one-time uses this year with regard to the rebranding. But we also are deploying, as I said, some $30 million to E&Es. We’ve got our share of the JV contributions, which range anywhere from – I think we have some in the range of $35 million to $45 million this year to put in play. So we’ve got these for this year. At this price, it’s compelling. But also we are very aware that we get a pretty nice benefit from having a BBB rating on our debt. So we’re cognizant of that. But we’re not going to over-leverage the spend. But the free cash flow and the sale of a couple of properties, we’re always looking at the priority at what to do with our deployable cash. And absent a shift in our [Technical Difficulty] opportunities are not attractive. That’s certainly an arrow we have to boost return.

[Ki Bin Kim:]

Okay. And I’m not trying to belabor the point, but how are you thinking about the business today? Is this kind of just small deceleration in your mind just very temporary? And as supply gets absorbed, you guys will back to normal? So there’s no real sense of urgency to do anything strategic. It’s not nowhere near the prices, or – I’m just trying to get a sense of where is your mental leeway in --?

[Dave Rogers:]

Well, I think as part of the prepared remarks, we talked about what we did with the company in the last couple of years, last year especially. We’ve built an overall owner-operator program where we’ve got a lot of places to go. We can – we’re really ramped up third-party management. We really have the opportunities to use other capital to add to brand, and we’ve always talked about this being a scale game and it certainly is. And we’re knocking on 700 stores now. It’s great. We can do things that even at 400, we couldn’t do. We can do things that 89% of the industry can’t do. So our tools are here. We’ve got this really nice, tight company with now a resurgent brand that I really do think is going to give a lot of benefit to us not seen today in terms of better customer acceptance across all the platforms; the commercial customers, the small business users and certainly the residential owner. So I think we’ve built a company now that the headline is always same-store sales and we’re hurting. It’s been 24 quarters of phenomenal same-store growth. We’re paying the price in a few markets for perhaps having some customer fatigue and a little bit of – a lot of tough comps. But this is after 33 years. We’re in a really good spot right now and the industry is taking a pause, I think. But we’re set to go and grow the next wave.

[Ki Bin Kim:]

Okay. Thanks, Dave.

[Operator:]

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

[David Corak:]

Good morning. I apologize if I missed this, but when we were together in February, Andy, I believe you mentioned that the 40% of customers were below Street rates, 8% were at the Street and 52% were above. Obviously, there’s some seasonality there but would you mind updating those numbers for us at the end of April and then maybe what that was at the end of April last year?

[Andy Gregoire:]

Sure, David. I actually don’t have it at the end of April. I have at the end of March, which is usually the low point. But we had – 46% were below the current rent, the current Street rate as of the end of March. 46% were above and 8% were at compared to last Q1 where 59% were below and 32% were above, 8 or 9 were at. So a little bit of a switch there, but still a significant number of our customers below the current rent and our average paying customers are below our Street rent right now.

[David Corak:]

Okay. And then based on your previous guidance, you guys noted 150 bips or so of revenue growth was going to come from in-place customers kind of baked in the guidance that you gave in February. What do you think that number is today? Is it still around 150 bips?

[Andy Gregoire:]

A little bit less, not much less. That’s customers still sticky, very, very sticky. We only had in the first quarter, 11.7% move-outs. That compares to last first quarter. That was very similar. So the customers are taking those rent increases, a little bit different than fighting for new customers with new comps. Those current customers are happy with us. And the rates we’re adjusting them to, they’re sticking.

[David Corak:]

Okay. So tell me if I’m thinking about this right. So let’s call it 125 or 150 basis points of the new 2.5% revenue guide is going to be driven by in-place, which I guess would mean there’s an increased reliance on renewals relative to new leases in your new guidance. Is that true? And then further, it would seem that there’s now a higher percentage of your tenants that are – or at least a comparable percentage of your tenants that were above Street rates. Is that a fair way to think about it?

[Andy Gregoire:]

I think it’s somewhat fair. I think overall, we still – we expect to have a little more occupancy growth this year in the initial guidance than we think we’re going to see now. But otherwise, very similar. The 100 to 125 from the current customer rent increases, not a whole lot of change there but a little bit of a change.

[David Corak:]

All right, thanks.

[Operator:]

Thank you. Our next question comes from the line of Gwen Clark with Evercore ISI. Please proceed with your question.

[Gwen Clark:]

Hi. Good morning. Can you talk about your –

[Dave Rogers:]

Hi, Gwen

[Gwen Clark:]

…demand. You mentioned possible renter fatigue. Have you seen any uptick in delinquencies or anything on that front?

[Ed Killeen:]

No, Gwen, there hasn’t been any material change in delinquencies. As a matter of fact, it’s been up. I think for the quarter, it was up $100,000. We don’t see – while things are a little bit soft right now, we don’t see any evidence of erosion of consumer confidence at all. As a matter of fact, merchandise sales on a per move-in basis are up as well. So people are continuing to also – not only look for storage but they’re shopping with us as well.

[Gwen Clark:]

Okay. Thanks. On the marketing front, it looks like you’re doing some pretty interesting stuff both in regards to social media and Web site things. And also it looks like you might be doing radio advertising. Can you talk about how that has actually affected demand and do you think those efforts are going well?

[Ed Killeen:]

Well, the social promotion of that content and creating that content, that doesn’t necessarily drive click-through. What it does is it improves our domain authority, our relevancy. So Google just looks at that type of activity whether it’s creating content through video content or any social media campaigns or Facebook campaigns. Google just simply recognizes that our company is doing those things and it looks at us as being more relevant. And when you’re more relevant, you get a boost in ranking. So it doesn’t necessarily translate into click-through for move-ins. It translates into greater relevancy, which therefore translates into ranking.

[Gwen Clark:]

Okay, that’s helpful. And then just one last thing on the third-party business. Can you talk how you’re running business when competing with your peer group? Do you charge the same fee?

[Dave Rogers:]

It’s a pretty commodity-driven business. There’s different ways that different companies capture, for example, insurance premiums, how the insurance programs work, how you pay for some of the upfront capital costs. Part of it has to do with the markets you’re in. Part of it has to do with the relationship building. There are some markets we’re probably never going to get into and then there’s some that we don’t even try to get into. So I’ve got to say that a big part of our changing our name had to do with inroads to both commercial customers, commercial tenants as well as third-party managed prospects. I think you’ve got to change your name to ours if you’re a store owner, and we just had some resistance on the Uncle Bob’s name. But the Life brand has won us some business right out of the chute. So it’s competitive. There’s not only the three REITs who play in the game, but there’s another half a dozen regional guys who do it as well. But as far as compensation goes, I think most of the packages are pretty similar.

[Gwen Clark:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of George Hoglund with Jefferies. Please proceed with your questions.

[George Hoglund:]

Hi. Good morning, guys. I’m not sure if I missed this earlier, but did you mention what existing customer rent increases are?

[Andy Gregoire:]

Sure. Hi, George. This is Andy. The existing rent increase in Q1, they were – they averaged 9.9%. Q1 is pretty light for the number of customers they get at only – 2% of our customers received those in Q1. Q2, we’ve already sent out the rent letters and they were double what they were last year. That average increases 8% to 9%.

[George Hoglund:]

Okay. Thanks. And then also as far as your discounting is concerned, and I guess you’re offering it to more customers, but has the actual discounts themselves changed?

[Andy Gregoire:]

The discounts are still the same. It’s one month free, half a month free and waive the administration fee. So there’s those three different discounts we could offer. The average discount per move-in that – and those who received a discount went up from $62 a month – from $62 upfront to $71 from Q1 of '16 to Q1 of '17. Obviously, the more free rent – there’s more full months out there but the nature of those specials has not changed.

[George Hoglund:]

Okay. And then one last one. There’s one lease-up property in Chattanooga where occupancy went down actually year-over-year from 94.5 to 86.5. What was going on with that property?

[Ed Killeen:]

George, that was a camp [ph] that opened last June, literally a stone throw away from us. And they have just a multitude of very small spaces and they captured some of the student storage business. We’re very close to UTC. And since then, we’ve made up that occupancy. Our current occupancy at that store is 93%. So what they did is they filled up some of their 5 by 5s and we continued to chug along. And they took some of that student business from us. But the higher yield customers are the ones that are taking larger spaces anyway, and it’s already happened. It’s a nonevent.

[George Hoglund:]

Okay. Thanks. I look forward to seeing you guys next week.

[Dave Rogers:]

Yes, George. We – George at Jefferies are bringing a team to run an Investor Day next week in case anybody’s interested. We promised George not to have happened what happened to the team from Evercore, Steve and Gwen and the group that came up. Some got snowbound unfortunately. But it’s May and I think we should be safe. So May 11 should not be a snow day.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your questions.

[Todd Stender:]

Thanks, guys. I just want to look at your underwriting requirements maybe just to get up-to-date. You’ve got the Charlotte CofO deal that’s under contract. Maybe just how that compares to something you would’ve underwritten 12 months ago. If you could just share return requirements, lease-up expectations, stabilized yields, stuff like that.

[Dave Rogers:]

Well, I’ll let Paul talk to it, but we actually wrote it -- underwrote it more than 12 months ago and there’s been some construction delays.

[Paul Powell:]

Yes, Todd. We keep a close eye on those markets, downtown Charlotte. There’s been a lot of new planned competition coming in. So far, based on what we’ve seen, there’s still nothing within a mile. So we’re comfortable with our – how we underwrote it. We still expect it to lease up in three, three and a half years max. So we’re still comfortable with our underwriting. And as I’ve mentioned, we don’t see any new comp coming in that would change our underwriting model at this point.

[Dave Rogers:]

But I think, Todd, what you might be getting at is how are we underwriting CofO now? Is that – compared to how we --?

[Todd Stender:]

Yes. What are your yield expectations and might – how would that change if you underwrote something right now?

[Paul Powell:]

Well, right now we are not looking to doing any CO deals. But of course, depending on which market it’s in, we would – we were looking at 150 basis points over today’s stabilized yields. We would probably still look for that if not 175 basis points. So I haven’t really looked at any recently, so we haven’t done any modeling at this point.

[Dave Rogers:]

We do look at some on behalf of JV partners. And the spread ask is still pretty wide. And I guess that goes for our existing properties as well, the spread ask is pretty wide. But the CO stuff was really great three years ago as we’ve talked about on other calls where we’re looking at, for a little while, 300 basis points spreads. And our pool of a dozen or so CO properties have shown that they’ve leased up very well. They’ve been great contributors to us. To do one today with almost any developer, you don’t see that and that’s why we’re sort of on the sidelines with CO deals.

[Todd Stender:]

Thank you. And can you, just switching gears talk about the JV assets you acquired. Maybe talk about cap rates, occupancies and then just compare LA with Sacramento.

[Paul Powell:]

Okay. As we did in our press release, we purchased five properties in the first quarter with our JV partners, four when we were in California. Our year one cap rate was in the low 5s that we underwrote. The other one was a new development in Long Island City. So that one’s a little bit slow in the initial start-up, but we think that’s going to do well going into the busy season. We do have three properties under contract still with a JV partner. Two of them are in California, another one is in California as well, San Jose. And then also at this time, we are negotiating contracts on another 21 properties for about 370 million that we hope to sign up in the next few weeks. And then there’s another 100 million, 110 million that we’re looking at with JV partners as well that we hope to negotiate the lease – excuse me, PSA over the next month or two.

[Todd Stender:]

Are they going to the JV because of growth expectations might not be as high than sort of wholly-owned stuff, or is the cap rates too low? What defines going into those?

[Dave Rogers:]

I think pretty much our capital position right now and our share price. We are looking for alternative ways to grow the company and to have this many flags with the dollar investment that we’re talking about makes it work. We would not be able to bring down certainly a $300 million deal at this point without – we could, but we’d probably twist our leverage out to a range that we don’t want to be. So we’re more comfortable at this point and it’s like this is more us-driven than it has been in the past. But it’s basically a way to bring flags into the company without deploying as much capital as we ordinarily do.

[Todd Stender:]

Great. Thank you.

[Operator:]

Thank you. Mr. Rogers, there are no further questions at this time. I’ll turn the floor back to you for final remarks.

[Dave Rogers:]

Thanks everyone for your attention to our company and your time. We look forward to seeing you at NAREIT or May 11. Take care.