Life Storage, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Greetings. And welcome to Life Storage’s Second Quarter 2017 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. I’d now like to turn the conference over to Diane Piegza, Vice President of Investor Relations. Thank you. Please go ahead.

[Diane Piegza:]

Thank you, Brenda, and good morning. Thank you for joining our second quarter 2017 conference call. Leading today’s call will be Dave Rogers, our Chief Executive Officer; also on the call is Andy Gregoire, our Chief Financial Officer. 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 regarding these factors can be found in the company’s latest SEC filings. In addition to our press release, we have added a financial supplement, which is available on the Investor Relations page at lifestorage.com. During today’s question-and-answer session, we ask that all of our participants limit themselves to two questions to allow time for everyone who wishes to participate. If you need to ask a follow-up question, please re-queue. At this time, I’ll turn the call over to Dave.

[Dave Rogers:]

Thanks, Diane, and welcome, everyone, to our call. Last night we reported adjusted FFO of $1.33 per share for the second quarter against the top year-over-year comparison. This quarter was marked by challenges on the operation front and clear wins on the external growth initiatives. We achieved a record high same-store occupancy of 92.8% at the end of the quarter, grew our joint venture efforts with the acquisition of 20 high quality properties and added 17 new third-party management stores that will carry the Life Storage brand. As we continue to lay the groundwork for our next phase of growth however, we faced pricing pressure in some of our key markets due to well-publicized incremental supply and the protect that need to support our brand transition to Life Storage. The brand change we undertook last August has really enhanced our competitive positioning and is providing us with a great advantage in soliciting third-party management contracts in an attracting commercial accounts. The physical changeover relating to signage, point-of-sale materials, uniforms and so forth, was executed on time and on budget by the end of April. Our web presence under the new name however is growing slower than expected, especially in organic search which is key. We work to offset this reduced exposure on the organic side with increased page spending, temporarily increasing our operating costs. Through 2Q, the additional spend has been completely compensated for the reduced organic exposure and it probably won’t for next several quarters. We know though that the Life Storage brand sales well and that these redouble marketing efforts should result in the direct improvement to operating results. The combination of new supply in select markets, the related pressure on rental rates and the marketing support around Life Storage’s online presence have required an elevated level of moving incentives. As a result, we’re updating guidance to account for the additional marketing investment and the increase rental incentives we see as necessary going into next year. Let me provide a framework of what we are expecting for the remainder of 2017 and discuss our markets and a few industry trends and then talk a little bit about some of our external growth initiatives. The markets in which we face our biggest challenge is continue to be the big four Texas markets, Houston, Dallas, Austin and San Antonio, which comprise 23% of our same-store pool. Austin bounced back at this quarter as some supply got absorbed quicker than expected, but there's another round of building coming. To give some context to our exposure, we have 100 same-store properties in Texas. In the past 12 months 47 stores have open in those market areas and we expect up to 35 more in the next 18 months. This will have an adverse affect and as many as 70 of our Texas stores for the next couple of years. But these are rapidly growing vibrant markets that are ideal for self-storage, this is a cyclical dread at mid-and-long-term we want to be here. The other important markets we have some concerns about upcoming include Denver, parts of Phoenix, Tampa and Miami. The impact to Life Storage resulting from new builds in these cities is nowhere near as strong as it was in Texas, but there will be some pressure on our topline as a result. The markets where we feel optimistic include much of Florida, St. Louis, Cleveland and New England, and while we are seeing some new supply in those markets, it’s not always near us and for the most part the construction in those markets is warranted. So what happens in these oversupply markets? What tactics do we use to combat pricing pressures? While we advertise, especially via mobile search heavily, we use incentives, especially the first month free. We maintain our always high levels of customer service, perfect deal and community involvement. We continually monitor the competing stores for moving in rental rates, although we don't often match. It's usually better to wait it out using the other tools to attract customers at a market stabilized rate. No question, new supply with current revenue growth at some of the more affected stores, but as long as the store remains relevant in terms of its quality, its appearance and the services we provide it will rebound. Concerning demand, we think its fine, high occupancies across the board show there is a need even a growing one. Typically demand for storage space outpaces population growth by bit and we still see that. We hope to increase even from that level via our B2B programs which have been revitalized by the new Life Storage brand. Concerning our external growth initiatives, as we have communicated on prior calls in our meetings with you, the diversification and broadening of our revenue streams through joint ventures and third-party management contracts are important focus for us and our growth here is accelerating. These initiatives improve scale on our operating markets, which helps us leverage the cost of web advertising, other marketing costs and maintenance expenses in those cities. It also provides the greater efficiencies and corporate overhead at the operating platform level. During the quarter we purchased 20 high quality properties with our JV partners, including two stores in Nashville, which is a new market for us. The other 18 fit in well with our existing portfolios in Arizona, California and Las Vegas, affording greater scale for us in those markets. Our third-party management business is also enjoying accelerating success, much of which is due to our new branding. In the quarter we added 17 new agreements to managed stores in our existing markets, as they come online later in 2017, this will have fee income contribute to our advertising spend and allow for the other benefits of increased scale. Our ongoing expansion program should see about $30 million invested this year to add attractive third-generation storage buildings to our existing properties. Not only will these add much needed climate control space, the new buildings usually upgrade the overall appearance and presence of the property. We continue to realize cash on cash deals from these projects in the 10% to 12% range. So just to wrap up here a bit, it’s been just over a year since we completed the Life Storage merger and it’s still under a year since we undertook our company's name change. It’s a year that’s brought a lot of growth to our portfolio and/or platforms. It is also a year that’s brought some sector headwinds, oversupply in some markets and some operational challenges. The headwinds and oversupply are cyclical. We see this numerous times. The operational challenges are temporary and surmountable. Life Storage is better equipped today than it has ever been in its 33-year history. We have 700 high-quality stores in good markets. We have over 100 recently acquired stores that are just now reaping the benefits of our operating and marketing platforms. And additional two dozen stores are in the early stages of lease up and growing fast. Our third-party management division is rapidly ramping up. We have a rock solid balance sheet and $75 million of free cash flow after dividends and our new brand is attractive to both residential customers and our corporate storage clients. We remain certain that our enhanced size, strengths, brand and presence will enable us to create significant value for our shareholders over the long-term and we are confident enough from that and that our board is authorized and has us introduce a $200 million share buyback program. So to talk about that and other matters concerning the quarter, I'll turn the call over to Andy.

[Andy Gregoire:]

Thanks, Dave. Last night we reported adjusted funds from operation of a $1.33 per share, compared to adjusted FFO of a $1.32 per share for the same period in 2016. As we've shared in the past, our same-store growth in the first half of 2016 presented us with challenging comparables. But we were able to increase adjusted FFO based on the performance of our acquisitions. Overall, total revenues grew 24% as we benefited from a higher store count, mainly due to the Life Storage acquisition. With respect to the Life Storage facilities in particular, we were able to grow occupancy nicely during the start of the busy season and as of June 30th the 72 stable stores occupancy was 90.1% up from 85.9% at March 31, 2017. The 11 non-stabilized Life Storage stores continue to increase occupancy ahead of expectations and we are at 85.1% at June 30th. The overall revenue increase also reflected a $1.2 million acquisition fee from our joint venture activities. Same-store revenue grew 1.4% as a result of rental rate growth. Occupancy at June 30th was the second quarter record high of 92.8%, a 10 basis point increase over 2016's June occupancy. The balance of the revenue increase came from growth in tenant insurance and other operating income. Same-store expenses rose 5.6%, but the biggest drivers for the increase in payroll and benefits up 2.8%, real estate taxes up 5.5 and Internet marketing up 42% to $2.5 million from $1.7 million. G&A costs were approximately $5.8 million higher this quarter over the second quarter of 2016, primarily due to a $5 million legal settlement incurred during this quarter and less so by the incremental costs associated with the largest store base. Our balance sheet remains strong, at quarter end we had cash on hand of $8 million and $169 million available on our line of credit, with no maturities until 2019. Our debt service coverage ratio rose to 5.2 times from 5 times and our net debt to recurring EBITDA ratio was 5.6 times. As noted in our release, our board authorized the $200 million share repurchase program. We expect these free cash flow and any proceeds from the sale of properties to fund this program. In addition, we're suspending our dividend reinvestment plan until further notice. Now with regard to guidance, given what we believe to be continued weakness due to new supply, slower than expected brand traction on the Internet, increase incentives, as well as increased marketing expense, we are reducing our same-store and annual FFO outlook. Our revised guidance for the same-store revenue growth for the full year 2017 is 1% to 2% from our previously forecasted 2% to 3%. In addition, as Dave mentioned, due to the additional web advertising we are raising our expectations on same-store expense increases to 5 to 6% from the 3.5% to 4.5%, resulting in forecasted NOI for the year to be down 1% to flat from our previous estimate of up 1.5% to 2.5%. Pressure on the same-store -- on same-store revenues will be offset by increased third-party management fees, which we anticipate in the $2.3 million to $2.4 million range per quarter for the remainder of the year. We also expect our share of FFO from joint ventures to increase to between $2.1 million per quarter and $2.2 million per quarter. Most of our certificate of occupancy deals are filling up well, but those completed over the last year have a slower growth rate and will result in dilution of $0.01 per share to $0.03 per share in the second half of 2017. Taking this all into consideration, our revised adjusted FFO guidance is $5.25 to $5.30 for the full year 2017 and a $1.33 to a $1.38 for the third quarter. I just want to remind you that our guidance does not contemplate acquisitions or additional joint ventures or management contracts. And with that, Brenda, we can open the call for questions.

[Operator:]

Certainly. [Operator Instructions] Our first question comes from the line of Ki Bin Kim with SunTrust. Please go ahead with your question.

[Ki Bin Kim:]

Good morning. Thanks. Could we start-off with, maybe give us some stats on the quarter, street rate changes year-over-year for free rent usage and how that trend into July please?

[Andy Gregoire:]

Sure. Ki Bin Kim, it’s Andy. Street rates, let’s talk about little bit sequentially, what happened from March to June of this year, we saw some nice increases, we went to the busy seasons. So June rates were 7% higher than March’s rates. Pretty typical as you go into the summer season you see an uptick though. Year-over-year as of the end of June street rates for new customers and being at this occupancy, obviously, that’s only the 8% of – sold up the vacant spaces, but 6% below last June, July was 5.5% below last July. So we are seeing that, to bring in those customers in the competitive market, we are seeing out there for pricing, rates aren’t as high they were last year, but those rates that I just mentioned are all higher than our in-placed customer. So, in fact, the rates that we are asking at the end of June were some 5.7% higher than the average rate that our in-place customer was paying. So, roll down that an issue, so rates down year-over-year, up sequentially.

[Dave Rogers:]

On the free rent we saw an uptick $1.2 million of additional free rent this quarter Q2 over Q2 of 2016, that’s about 2.6% of revenue that was our free rent. For the rest of the year that’s probably the delta will see. We expect – we didn't think we’ve that, we thought we’d have easier times, but right now we're projecting that we will have to get more free rent and keep that delta probably $1.2 million a quarter for the next few quarters.

[Ki Bin Kim:]

And I guess I leave my second question, I mean, last time we spoke or last conference call, you guys were hoping for a second half rebound and because mathematical your comps are easier in the second half. But so what were cause the change in kind of tone over…

[Dave Rogers:]

Yeah. I think the competition into those Taxes markets, Huston, Dallas and San Antonio, we’re seeing one of the peers out there with significant reduction in rates and increases in specials, you may know who they are, but when you see it 10-by-10 for $33, when the markets are $120, that’s going to cause us because reduce rate going to match that rate but our reduce rates are little bit and we will have to offer more free rent. On top of that the drag we are seeing from the Internet exposure has caused us to, one, the processes that increase our close ratio on customers that are reaching us, so as we go through the brand transition more free rent to increase that close ratio on those calls coming in.

[Ki Bin Kim:]

Got it. And I'm trying just incorporate a lot of different things you just said and the trends and same-store revenue, does it seem like you guys that this quarter is dropping same-store operating metrics should last for the next few quarters, I mean, maybe into the first half of ’18, all of equal, just because due to customer churn the minus 5% rates are probably not even showing in your same-store revenue yet, is that the right way to think about it?

[Andy Gregoire:]

Yeah. I think the second half year, yes. We would expect some further slight deceleration in revenue growth. On the expense side not a whole lot has changed, it is really the Internet marketing, the only change we made on the expense side in our projections that will have to keep up that additional spend.

[Ki Bin Kim:]

Okay. Thank you.

[Dave Rogers:]

You’re welcome.

[Operator:]

Our next question comes from the line of Gwen Clark with Evercore ISI. Please go ahead with your question.

[Gwen Clark:]

Hi. Good morning.

[Dave Rogers:]

Good morning, Gwen.

[Gwen Clark:]

These results were bit below our expectations, I am hoping to touch upon what are you guys thinking of everything you need to succeed in navigating the downturn. Can you talk about whether you think you have the staffing in RevMan system that will allow you to really to compete going forward?

[Dave Rogers:]

Yes. We do. We think, well, last year was our really big year for us. We grew our company by 30% and after 30 some years ago company by that much it was a digest, no question. So we got this big acquisition and we staff for it and we have the platforms that had been running for especially RevMan and marketing, but the way we do it now for the last four year or five years. So we were pretty confident in that. I think the absorption of the stores went very well, both at the field level and the absorbing amount of the platform. So with regard to the call center, with regard to RevMan, with regard to our marketing teams and our training finds that was -- we ran into some pretty serious headwinds shortly thereafter, I guess, late second quarter last year we were seeing headwinds that we really didn't expect that and I was, I think, I'm not sure the sector did, I know we did not, so we had to buckle down a little bit. And then in the face of that we did the brand change and that's probably where the part of our trouble is. I am going to say, the Texas exposure certainly in our company's case have gone almost a quarter of your stores there, your same-store pool, that's going to show. But it’s – I think what we have -- what we are wrestling with a little bit more than we expected is the organic search for Life Storage is not where the organic search for Uncle Bob’s was. And we are – we knew that. We telegraphed it for couple quarters now that we’re increasing our paid spend, our paid ad spend to get there and it’s working, we are getting it, but not to the extent that we have organics. So it’s coming back. We have actually bolstered that team especially the marketing team both with internal folks and a couple of fairly high powered outside consultants to get that, that's where aside from the Texas exposure I think our issue is, is getting that relevancy of Life Storage back to where we think it should be. When it gets there, it’s a great brand. The penetration for compared to Life Storage versus Uncle Bob’s let say its excellent, Life Storage versus lot of our competitors excellent. So when we get it there, it’s going to be great, this is the part that we didn't expect for the last couple quarters and the couple quarters to come. So long way around on your question, yes. I think we are staffed well. I think we are taking that extra step in the marketing department to really ramped that up because that's where the help is needed.

[Gwen Clark:]

Okay. That’s helpful. Just one quick question on advertising front, it seems like that’s the major headwind. As you think of the last year so is there anything specifically that you guys think you could have done differently or better or is it just a nature of the transition that’s going to be a pretty rough process?

[Dave Rogers:]

I guess, in much respect, we would have understood the degree of difficulty little better. I don't think what we're doing is coming up short. I think our expectation going in. We knew that that the folks in Melbourne had a difficult time of their brand change for a bunch of quarters and we appreciated that and we thought, I think, because we are coming with an already somewhat established brand, nowhere near as big as the Uncle Bob’s or some of the others. But Life Storage had some traction in some markets and we thought that with the changes in marketing strategies and our experience with Google in the five years since the other brand change. We thought we would have an easier time with it. I guess what we would have done is forecast for more difficult than we expected. But I don't know that it would have changed what did.

[Gwen Clark:]

Okay. That is helpful. Thank you so much.

[Dave Rogers:]

Yeah.

[Operator:]

Our next question comes from the line of Nick Yulico with UBS. Please go ahead with your questions.

[Trent Trujillo:]

Hi. Good morning. This is Trent Trujillo on with Nick. Kind of following up on that last line of questioning, recent history hasn't really been great with respect to your adjustments to guidance. So, perhaps, taking a step back and looking at the bigger picture, what inputs are you considering when you state your guidance and what changes -- potential changes to that approach might you be considering to enhance your business projections going forward?

[Andy Gregoire:]

Hi, Trent. We are looking at a lot of data with our RevMan team, with our marketing team, the hits on the Internet, the calls that are coming in or constantly adjusting that and forecasting. It is retail business. It is what happened that month and the busy season really drives the rest of the year and we saw when we were in the busy season what it would take for free rent, we obviously were excited that we can increase occupancy with the investment we made in that Internet spend. But upfront takes a lot of upfront special free month for customers and that was something that not unexpected and now we're going for the next two quarters we expect that special, that upfront one month free to be more prevalent than we had anticipated.

[Trent Trujillo:]

Okay. That’s helpful. And going to the share repurchase authorization, if I caught it right, it's sounded like you're going to be funding out with free cash flow and perhaps some disposition if I caught that right, if that's correct, how are you evaluating the quality of your portfolio and what you may put on the market to be a source of fund?

[Dave Rogers:]

We have presently four stores under consideration. We have them under consideration even before the share buyback. So they don't fit in a couple markets and there is a couple of opportunities we have from other developers. So those are the low hanging fruit. We do every year of course take a look at all of our assets and try to see what’s involved if they are sustainable as is that they require influx of additional capital or expansions and enhancements, how they fit with new stores that we have just acquired or that we perhaps just brought on via JV or a third-party platform. So the low hanging fruit is there on four stores or five stores, the free cash flow is there, there will be a more serious look though in terms of potential growth with an eye toward an alternative use for the funds as we go forward.

[Trent Trujillo:]

Okay. Very helpful. Thanks for additional color.

[Dave Rogers:]

Thanks, Trent.

[Operator:]

Our next question comes from line of George Hoglund with Jefferies. Please go ahead with your questions.

[George Hoglund:]

Hey. Good morning.

[Dave Rogers:]

Hi, George.

[George Hoglund:]

One question in terms of the increase use of free rent, how do you think this may impact overall length of stay and bad debt expense going forward given that you tend to attract the lower quality of customer?

[Andy Gregoire:]

Yeah. Hi, George. We think that is the case that we have a tendency to attract a lower quality customer. The prevalence of the free rent everywhere helps that case, because you are not the only one out there, so you are not just attracting that. Well, we still based on our data that we look at even this morning offer the least one month free and we still think to go to the levels where some of the peers are doesn't make sense and we probably won't be at their level. But it does make sense when it’s prevalent in the market a lot of customers are looking for that now. So when is at prevalent you'll see us in the market with a free month. But we do not expect to be offering as many units for free month as some of our peers do.

[Dave Rogers:]

We should correct that term low quality customer. We think all of our customers are high quality. We should clarify them a shorter stay, perhaps, it will be a better way to put it.

[George Hoglund:]

Okay. And then just in terms of markets that had negative same-store NOI growth. I mean, this quarter 15 of the top 30 had negative same-store NOI growth for seven last quarter, where might this go or when do you think that might trough?

[Dave Rogers:]

As we continue to spend on the Internet, that's what's driving, it's really the only, besides the property taxes, the only driver of expenses is the Internet expense. We had control over the other expenses and we think we are doing a job outside of property taxes and Internet. Our expenses are up 2%. But we can’t really look at that side to keep the expenses. So I think Internet spend continues across the markets. So potentially I don't see big swings in that over the next couple of quarters.

[George Hoglund:]

Okay. Thanks guys.

[Operator:]

Our next question comes from the line of David Corak with FBR. Please go ahead with your questions.

[David Corak:]

Hey. Good morning, guys. I am just going to stick with the expense question line, just thinking about that going forward beyond the next two quarters, not asking you to give guidance for next year, but just theoretically if we think about it, you think we are going to have an easier comp given the expense for this year, but assuming we see comparable kind of mid-to-high single-digit tax growth and inflationary expenses on the majority of the other line items, kind of comes down to your advertising spend, and obviously that's just one of your levers, but do you see that absolute spend level being comparable to 2017 and ‘18 or any of my assumptions kind of off that that might help you contain expense growth next year?

[Andy Gregoire:]

David, I think, the investments we are making in the Internet spend now will drive long-term growth and occupancy staying at these levels we should be able to pull that back, as we get the traction on the web, as our impressions grow an organic search, you would see that pull back. We don't expect that to happen this year, at some point next year we would expect that.

[David Corak:]

Pull back on an absolute level or pull back just from a growth standpoint?

[Andy Gregoire:]

Pull back on an absolute level.

[David Corak:]

Okay. Fair enough. And then I appreciate your comments on the brand’s hotel line, but from our perspective it sort of tough to measure the progress of that. May be internally how are you guys determining whether you're having success with the rebranding? What metrics are looking at? Is it the click through? Is it the organic search, is it relevancy, you said organic search has improved. Maybe you could kind of share with us your goals and timeframes on a metric like that and how to really quantify your success there?

[Andy Gregoire:]

Sure. There is a few different things we look at. Number one is domain authority, which we've seen the Life brand grow tremendously over the last few months. That’s started in the ‘30s. That just really as it compare it’s -- from zero to 100. Life was at 30. Uncle Bob’s was at mid-50s. Life as of last week was in the mid-50s. So we saw tremendous growth there. That's number one. That eventually leads to organic search growth, but not right away. So number one we watch the domain authority, we are going to continue to see that click. We have passed one of that competitors we think we can be in first or second place in that. That is our goal. We are going to continue to work with our SCO specialists, to work with our marketing team to do that. Beside that we are looking at the organic search. We want to grow that organic search and we did see that down pretty significantly in the second quarter, as we switched over them, only March that we shut off the Uncle Bob's brand totally online. So we did see a follow-up in organic search. We are seeing it start to come back but that’s going to be our metric. We are going to watch the domain authority in organic search. The click through which means if that’s presented to a customer, how many people click on that brand is much better than our old brands, so really liking what we are seeing there and we wouldn’t expect that probably to grow any better, and it might get a little better, but it’s better than our old brand and that’s going to drive significant long-term growth in the revenue line.

[David Corak:]

Okay. So what is the time on it and what is the measurement run, you guys look at each other and say, okay, we made it. We are back to where we were before or even better and then what is the time line look like?

[Andy Gregoire:]

The organic search giving -- the organic search per store, because we have put everything in per store, organic search per store we want to see that in the excess of what we saw on our old brand and probably that will be – we definitely need to be there by first Q of next year in advance of the businesses, let's call April through May of 2018 to be back there where we were and better.

[David Corak:]

Perfect. Thanks guys.

[Operator:]

Our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead with your questions.

[Todd Stender:]

Hi. Thanks. Just back to the funding sources when you guys talk about share repurchases. How much in dispositions are you expecting and are these Life Storage properties and what markets could you be targeting?

[Dave Rogers:]

The low hanging fruit I referred to was Salt Lake City, a couple in Austin, and perhaps, one I don’t want to say just yet, but those would be the four low hanging fruit which were generate somewhere in the range of about $50 million. Then we go from there with – and there is a bunch of different things we have been exploring for the last few months, not the least of which is forming a joint venture for a core investor and spinoff a bunch of our properties there to maintain the flags. We – this is still a scale business. We don't want to shrink the company. We don't want to reduce the number of flags. This is important. This is giving us a lot of benefit. And so to sell out right is going to be on a very select basis, but to move assets into different ownership classifications, maintain the brand and the management that's our goal and that’s we hope to generate some funds from in the coming quarters. The cash flow we have been -- the $75 million plus that we have been able to charge has gone to some degree to the brand change and some of those efforts that obviously is done now, so we will be looking a little bit harder at our alternate uses, whether the expansions and enhancements make much sense in some cases of the buyback. Most time they will. But there will be a little bit different priority and a little different, I guess, the sharp pencil used as we go forward with the projects that we want to spend on. So the $75 million free cash flow is now fair gaining inside our company and the sale of assets hopefully retaining some samples of control is one of the other avenues we are looking at.

[Todd Stender:]

That’s helpful. So the $75 million free cash flow investment that’s we have any but no change to that in light of the guidance change?

[Dave Rogers:]

That’s a couple million dollars.

[Todd Stender:]

Okay. Same ballpark. And I have a tapping debt for this, I know, you have – you do have a balance outstanding on your lines but have a tap in the line of credit to fund share repurchase?

[Dave Rogers:]

That would wonders for using the return, but that – we want to stay pretty leverage neutral. We have a hard earn investment grade rating. We are fairly well received by our debt partners. So I think that – I think to leverage up to borrow on the line and it's tempting but it is in the card.

[Todd Stender:]

Okay. Thank you.

[Operator:]

Our next question comes from line of RJ Milligan, Robert W. Baird. Please go ahead with your questions.

[RJ Milligan:]

Hey. Good morning, everyone. Just wanted to go back to Taxes and what the strategies going to be going forward as we see new supply coming into Houston and Dallas, and to a lesser extent Austin, but just curious one of your peers obviously has signaled that they're going to be cutting rates and I'm just trying to figure out a large peer cutting rates and you have new supply coming to the market, what are you anticipate your second half of ‘17 strategy to be in Texas as you navigate some of those headwinds?

[Dave Rogers:]

Well, first of all, that’s pretty big factor in our guidance reduction. We saw that coming. We watch the – we just created the web. We see what they are doing. We watch all of our competitors in all of our markets, but especially Texas pretty heavily. Then the reference we see some pretty drastic moves, not sure they wanted but they are happening. So that’s a, as I mentioned, you do everything you can, you certainly have to match specialty, you don’t get away from that, you certainly have to double down on making sure your stores and you are flowing through process once you get a query. You do everything at – everything you can hang on with that group. So your customer service, a call center level and at the store level we have to be topnotch. Just – you treat every query as golden as it get. So you are fighting for customer. This isn’t something we haven’t done before. It happens, unfortunately its happening in our very, very largest market. I don’t think of any reference that we are going to be dropping rates that significantly, Texas more of an elsewhere, but nonetheless, if somebody is try to $33 for a unit, you are getting at $124, you know that there is only a few left. It’s not something that that we got to fight a battle for 500 units, a lot of the stores that this is happening and it is probably a temporary thing. It’s a difference philosophy than we have. We are not totally sure we even get it and we know we are not onboard with the fund. It’s going to be – it just you got to [inaudible] (36

[RJ Milligan:]

Thanks, Dave. That’s it for me.

[Operator:]

Our next question comes from line of Smedes Rose with Citigroup. Please go ahead with your questions.

[Michael Bilerman:]

Hey. Good morning. It’s Michael Bilerman here with Smedes.

[Dave Rogers:]

Good morning.

[Michael Bilerman:]

Dave you talked about – good morning. Dave you talked previously about being stock well, I guess, at the asset level in the regions, but I'm curious if we step back and think about the board, as well as management and the decision could judgment the estimates that you put out and effectively having a lot of misjudgments and misguidance in that over last year and there is a lot of critical pushback when you bought Life Storage, the price you paid. You have the original initial credit right off and you can misjudge the ramp in that portfolio in terms of how it would grow and the amount of brand, which I think we all agree with Life Storage is better brand, but in think you underestimated the amount of capital it would need to have that penetrated and even you used to reference acute smart and how that was not in your brand and online presence before that Life Storage did so it’s going to minimizing the amount of capital you need to spend. So, I guess, you take all of that at some point do you order the board sit back and say, maybe we have to clear up other things, because it just not working the way it is?

[Dave Rogers:]

Well, I think, if you step back and look at all the activity that went on last year, adding 100 plus stores, mature stores that that haven't yet got the benefit of the platforms. You got two dozen stores now that are in lease up and are growing, 3 PM business, all of these things are pluses that our acquisition did and our brand change business to business model is there. The new name is tested well. It's very strong. You are right we missed on the time. That's probably the single biggest things. The headwinds came Michael. I mean that that was something we bought the properties, fortunately we match funding, we didn't necessarily hurt the company with the way we purchased the properties, they are ours, it’s given us a 700 store platform. We are one of the biggest storage companies in the world. We've got markets with assets bigger than most companies. When you got huge submarkets that we have, we built a really strong big company with a lot of better quality assets than we had. There were a lot of moving parts. I admit we missed on the degree of difficulty on the brand change. I don't think the integrations of the stores, absent a few hiccups has been a problem. The integration of the 120 stores is good. The physical part of the brand at the store, the signs of people we unified is good. We are having trouble and it is an important miss. It’s an important issue to be in front of people and relevant and when they are looking for us, we want to make sure they see us. And that's why what we've had to do when we do get a contract is make sure we treat them, as I said, treat them like gold, make sure we close the sales, it’s costing us in terms of incentives. So, lack of exposure on the web. We think it is temporary. We have got a lot of oil in the fire to get it there, but there are lack of exposure on the web is causing us to do more in terms of incentives. So we have got a double win. We right now investing in brand and we are giving up revenues to capture occupancies. We have got so many benefits yet to harvest and our share price right now isn’t coming close to reflect in the real value and that’s the reason we are doing the buyback. But I think this is a temporary thing. We have been doing this for 33 years. There has been years where we lead the pack. It’s not like we don't know what we are doing. We took on a degree of difficulty that was a couple levels higher maybe than we expected. And but as far as the whole picture goes I -- we all agree here that this platform, the size of this company, the strength of this company and the assets that we have garnered. The markets we went in, markets we were criticized for not being in California, Las Vegas, great markets, big markets. Bigger stores, much bigger stores, much better store. All the things that we had been taken checkmarks against for in the 2012 to 2015, we've addressed considerably and have made a lot of progress on. So, this one is painful in the glare of spotlight that we are in and unfortunately the headwinds that we’re facing in our very biggest markets. But, I think, again, that’s cyclical and the other part is certainly [inaudible] (41

[Michael Bilerman:]

And I guess, obviously, the share repurchase not – was a discussion of board level decision, walk us through sort of the view of doing share repurchase, how they came to that conclusion versus thinking more strategically about the business, right. And you think that if you're sick, right, you can get on medication or if you want to get rid of something you have the full operation and how did the board and what was a debate about – and look over the last year’s you had disappointing earnings for three quarters of the four quarters. I mean, this is not just a one quarter thing, this is three quarter out of last four quarters there's been a material decline or something that wasn't anticipated?

[Dave Rogers:]

That’s right. As we have said that, Texas, as we went out 3Q of last year, Texas is hurting us, that is cyclical, that’s how we approach that. We know that nothing we can do. We like it there. We have been there a long time. It’s now well. It’s not right now. It will again. So cyclical on a quarter the asset is one thing that we considered certainly. The strength of the brand on the near horizon is the other thing that we consider. The value of the assets that are still brewing is a big part. We have got a lot of stuff brewing and it will come. So to talk about an operation at this point as you put it is pretty extreme.

[Michael Bilerman:]

So how does the board come to decision on the share buyback, just walk us through the decision that they came to the evaluation of that the symptoms of treating it?

[Dave Rogers:]

I think when you look at all of the options we had in our share price being where it’s gone. We are not a big fan of share buybacks. We haven’t been our history. We have been able to take a lot of assets and grow them from that. When you take stores under our wing we are able to use those pretty good. So it’s always been non-buyback let’s look to external. But in this case with the share price drop the way it is, the fact that we are a strong company that would get a pretty solid balance sheet and the free cash flow it talks us. We have been talking about since January but as we got into this part of the cycle here where our share price being where it is, it’s a compelling argument.

[Michael Bilerman:]

Okay. I just hope the board is going to be a little more keep it focus so that we will come into recurring problems and think strategically about potential ways to maximize value for shareholders because in the missteps?

[Dave Rogers:]

They know what to do until you wait. Thank you.

[Operator:]

Thank you. Our next question comes from line of Todd Thomas with KeyBanc. Please go ahead with your questions.

[Todd Thomas:]

Thanks. Good morning. Just a couple quick ones here, if I, sorry if I missed it, but, Andy, do you have July occupancy figure and where that is year-over-year for the same-store?

[Andy Gregoire:]

Yeah. We were at 93% at the end – 93.0% same as last July, so it’s very similar to last July actually.

[Todd Thomas:]

Okay. And then, just following up on an earlier question about the balance sheet, the line bounce it did tickup a little bit to $330 million. What are your plans to permanently finance that line balance and what's embedded in guidance?

[Andy Gregoire:]

Yeah. We have run the options there. The market is wide open. There's nothing embedded in guidance. We just -- we look at the market on a weekly basis and if we feel it's the right thing to do we will. We don't have a lot of uses on sort of line right now, so we are comfortable with our free cash flow. What we can do with that. So we don't see a lot of activity on that line and it's not due until the end of 2019. So but we do have options out there in the credit markets wide open and we have been reviewing those.

[Todd Thomas:]

All right. And then just lastly back to the web strategy, can you just help me -- help us understand, will the increase in ad spending help with organic or is that separate and just helping drive incremental demand until organic improves? And also are you working with third-party consultants or are you handling all of this in-house right now?

[Andy Gregoire:]

I’ll ask – answer last question first. We are working with both inside and outside. We have five SCO consultants working with different aspects of the transition right now and then we have all of our marketing group works on it and there is a team that works on that internally up to 13 people. From a spent point of view and we think it's the best use of our money right now to pull in that long-term customer with that spending and it is paid ads, doesn't affect your organic search a whole lot. The organic search is a lot of things we do on social and our other the SCO experts what we’re changing on our website. How it functions, different things like that to increase the organic side really separate from the paid ads. The paid ads for us are showing a return. We are spending a lot of money but those are long-term customers we are bringing in. So than investment make sense to us to bring in that long-term customer and that investment should be relatively short lived as you look over the next few quarters.

[Todd Thomas:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Juan Sanabria with Bank of America. Please go ahead with your questions.

[Juan Sanabria:]

Hi. Thanks for the time. And just following up on that search -- organic search question, so what do you need to do to improve that specifically and why hasn't necessarily work to-date relative to your initial expectations?

[Dave Rogers:]

There is a lot of experts in this. Well, I mean, that’s why we had SCO experts we are working with. There is a lot of things from link building to your social presence. Remember we had a brand for 30 years – some 30 years we've been working through the Uncle Bob's. It was very prevalent on the web. Google we saw was confused, when we did switch over was confused with Uncle Bob's and the new Life Storage. So the Life Storage brand now gaining that traction, obviously working with the social media, new links, all most of our advertising campaigns have some Internet aspect to them to drive the traffic. So there's numerous things you can do and I am not an expert at it, but I know we have experts here and that’s what they are working through, it just going to take some time.

[Juan Sanabria:]

And just follow up on that, like if you saw that there was some confusion by Google, why the decision to pull the plug on the Uncle Bob's brand, it seems to me you have accentuated the pressures on the organic search. And I mean all the stuff you're saying, I think, you knew when you did the deal and you decided to rebrand some still confuse as to why you miss particularly giving you've got all these experts helping you figure it out?

[Dave Rogers:]

I think the confusion was when both brands existed on Google, that’s why Google is getting most confused, so we had to make the cut at some point. We try to do it before the busy season, that's why we did it in March and made the most sense. At some point we had to pull up and that was the best time.

[Juan Sanabria:]

Okay. But what I guess missed relative to, I mean, you knew that you had to go on Facebook or whatever to get to the social media presence to build up the optimization, I am still little confuse as to why it's not where you thought it would be?

[Andy Gregoire:]

It just, as Dave mentioned, we had a brand out there that existed, we just thought the transition would be quicker and we are doing all the right things now and have been since day one, it's just not as quick as we had anticipated.

[Juan Sanabria:]

Okay. And then just on the buyback again, I mean, so your stocks below $70 bucks per share, are you buying back stock today or are you still favoring redevelopment, sounds like you think that that's a good use of capital, how should we think about that, I'm not sure if you've got a range of your NAV, you feel comfortable discussing?

[Dave Rogers:]

We are not buying today, we can’t buy until next week, so that's and we will be selected. It’s a – but it’s a – the overall theme will be to invest back at share prices at this level certainly. The theme would be to buyback in shares. At different points in every quarter we will be looking, but I – depending about the share price is, but certainly where it has been for the past couple months is a compelling buy.

[Juan Sanabria:]

Okay. And then you guys talked about, I think it was slower lease ups in some of your CofO deals kind of having bigger dilution in the second half that you expected? How should we think about that jiving with your comments about demand being strong and no issues on the demand side?

[Andy Gregoire:]

Yeah. Juan, I don't think the dilution any different than we thought before, we just -- what was completed over the last year and I think its industry-wide it’s leasing up slower. So I don't think that was a surprise, it just -- I just want to point out what the dilution would be, we normally had pointed that out, what it would be for the rest of the year. But it’s no different than we had thought.

[Dave Rogers:]

The plan, I think, Andy, was also trying to make is that, the CofO deals we did in 2013 leased-up a lot faster than the deals we did in 2015. So the low handing fruit was kind of gone as a longer lease up time for most CofO deals even ours that have been three year and four years ago. But demand is being diluted by new supply, that’s really what the issue is that – but the customers are there, just that there's more places for them to go and more places for them to see.

[Juan Sanabria:]

If I can just one kind of big picture question, it seems like Texas it was maybe at the forefront of the supply pressures and clearly that that's going to persist, but maybe some other markets, maybe South Florida, just to point the one has more supply kind of in the pipeline that is yet to necessarily hit. And so do you expect what we've seen in Texas to maybe play out in other markets, is that supply comes in then you get the cumulative impact of having a lease up over a couple years?

[Dave Rogers:]

I do. Yeah. That won’t impact us nearly as much, because we are lot more diverse in most other markets, Texas as we said is such a portion, so it's hurting us much more than it is a peer group. But yeah there is markets that are – we said Denver, some parts of Phoenix, that we see, now there is other guys are in areas we are not, but this is will happen. There is some a lot of building going on in a few places that’s going to have an impact.

[Juan Sanabria:]

Do you think 18 suppliers you have…

[Dave Rogers:]

We’ve got to cut you, Juan, so it’s been about four or five, so I am sorry.

[Juan Sanabria:]

Okay.

[Operator:]

Okay. Our next question comes from the line of Ki Bin Kim with SunTrust. Please go ahead with your questions.

[Ki Bin Kim:]

Could you remind us what the existing customer rate increase program profile looks like today and if there's been any changes to it?

[Dave Rogers:]

Ki Bin the profile is pretty much the same. We do once a year anywhere between the 10-month and 12-month, so we do it once a year. Now that’s being said, we increased significantly the number of customers that got it Q2 of ‘17 over Q2 of ‘16 on the same-store basis, last year Q2 of ’16 we did 28,000 customers this Q2 we did 40,000 customers. We are still seeing that customer very sticky. They had – they have this year an 8.4% rate increase. The move out rate didn’t change from a year ago, actually was a little bit better. So we are seeing the customer is still very resilient. Loves Uncle Bob’s and now loves Life Storage and staying with us. So we’re happy what we are seeing from our current customer, so fighting with the new customer is the issue.

[Ki Bin Kim:]

Okay. And that mean if I saying thing correctly but if I think about your program, I remember that you guys generally speaking in a given year don't push a rent increase out if it causes the customer to be above market. So I guess first part if that's correct? And second, if you are seeing this street rate decreases today as we hadn't at winter time you are going to see that dynamic upside down, right. Where may be under that same philosophy you wouldn't send out a rent increase because it will cause them to be above street, is that the case. And if that so, would you expect maybe a change again in winter on that program?

[Dave Rogers:]

Well, Ki Bin, we did test, I think we had talk about this on earlier calls that we did test the couple thousand customers. We like what we saw by pushing those couple thousand customers above the street rate We knew this year would be too late to change and most of rent increase let us in Q1 , Q2 and then obviously you can those move out that do occur you can replace them quicker. So next year the strategy there will be some of that where we push customers above the street rate, so that will be a little change. How many, we are not sure yet, but regarding roll down in the fourth quarter and first quarter, it’s normally do get some roll down, where you move someone out, because your rates do go down in those. But overall for the year last year we didn't have rent roll down. This year Q2 we didn't have rent roll down. We did in Q1, but that's typical in Q1. So we are happy what we are seeing. We still have 60% of our customers today are below the current rates. So and – but they are below 5% to 8% below. So we like what we have there and rent increases most of are going to occur in Q1 and Q2 though.

[Ki Bin Kim:]

Yeah. I mean, I asked that question because I would think that conservative need – that conservative nature of your program in a down or in -- some of the downturn right now would actually help you because you don’t have these math roll downs, so I was thinking maybe next year you might kind of attributable I think maybe get a little more aggressive and allow the rent increases to push the customers above market in more mass scale?

[Andy Gregoire:]

Yeah. I think you will see some of that and we do a long-term, it’s a right thing to do with the customer, how to treat that customer and they tend to be stay longer as our customer lower one in two years show that. We keep our customers and we treat them well and we are going to continue with the program and little bit more aggressive, we're more aggressive this year than last year. We do think we have some have something different than our competitors do by not pushing them above street rate and by doing some of that next year maybe a benefit for us.

[Ki Bin Kim:]

All right. Thank you, guys.

[Dave Rogers:]

Yeah.

[Operator:]

Thank you. This concludes our question-and-answer session, I would like to turn the call back to management for any closing comments.

[Dave Rogers:]

Well, thank you everyone for your time this morning and your confidence in us and we will be looking forward to talking to you over the following sessions. Thank you

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time.