Life Storage, Inc.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Greetings and welcome to the Life Storage Third Quarter 2016 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 would now like to turn the conference over to your host, Ms. Diane Piegza, Vice President, Investor Relations, for Life Storage. Thank you. You may begin.

[Diane Piegza:]

Thank you, Melissa, and good morning everyone. Thank you for joining our third quarter conference call. Participating in today’s call are Dave Rogers, our Chief Executive Officer; Andy Gregoire, CFO; Ed Killeen, COO; and Paul Powell, Chief Investment 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 concerning these factors is included in the company’s latest SEC filings. For your reference and in addition to our press release, we have added a financial supplement which is available on the Investor Relations page at lifestorage.com. At this time, I will turn the call over to Andy.

[Andy Gregoire:]

Thanks, Diane. Last night we’ve reported adjusted funds from operations of $1.34 per share as a result of same-store revenue growth of 4.5% and same-store NOI growth of 5.8%. The drivers behind the revenue growth included a 30 basis points increase in average occupancy, and a 3.7% increase in rental rates. Same-store occupancy as of September 30 was 91.9%, a 50 basis points increase over last year, an all-time high for that quarter end. The increased occupancy came at a price with pre-rents increasing significantly for the first time in many years. Same-store property operating expenses increased to modest 1.8% for the quarter. This was a result of increase in repairs and maintenance, and real estate taxes, offset partially by decreases in marketing and insurance. G&A costs were approximately $1.5 million higher this quarter over that of the previous year. The main reasons for the increase were the fact that we operated 118 more stores at the end of this quarter as compared to the last year's third quarter and additional legal fees. The legal fees relate to a previously disclosed CapEx in lawsuit in New Jersey. And we now expect these elevated fees to continue into next year. The big story for thisquarter was the acquisition of Life Storage portfolio of 83 stores. On balance when this planned, we've acquired the company as oppose to the deeds. So there were some acquisition risks in terms of how the balance sheet fluctuated between signing the agreement and closing of the deal. We're happy to state that there were minimal strives and the transaction came together as we expected on July 15. We bought the stores onto our platform during the week of August 8, so that within the few days, all 83 Life Stores were integrated into our call center, web marketing and RevMan platforms. We incurred some temporary change over cost associated with our decision to maintain dual platforms and accounting an HR, but we've been migrating away from these, and by year end any duplication will be eliminated. However, these and some unexpected startup costs put us over budget by about $350,000. Further we encountered some unexpected issues pertaining to the existing rentals that most of the stores requiring a bigger than usual clean up of delinquent tenants. This resulted in lost opportunities to free up space for new RevMan customers. This is temporary. We will be cooled up by year end, but the estimated cost us about 300,000 products 2.5 months that we operate at the properties. Overall though the Life Stores are as advertised. You will see the progress as we have and we'll continue to dispose the activity of these stores in our supplemental information quarterly, suppose to clean the material stores and those leasing up. The detail is shown on page 17 in the supplement. Outside of the Life acquisition we did have some unusual activity this quarter. We had severe quoting that impacted a number of our markets and we had to temporarily close two stores in Lafayette, Louisiana and one in St. Louis, Missouri. Although we are insurance, the detectables on our casualty policy and law severance coverage, resulted in unexpected charge of $275,000. Our balance sheet remains in great shape. During the quarter we entered into a 12-year $200 million term note maturing July of 2028, bearing interest at a fixed rate of 3.67%. At September 30 we had approximately $16.1 million cash on hand and $260 million available on our line of credit. We were not active with our ECM program this quarter and we have no plans to be active with that program based on our current stock price. Looking ahead at 4Q, we guided down on few fronts. Huston has decelerated faster than we projected and we are forecasting negative things to our growth in that market as we push incentives to maintain occupancy. Same-store property tax expense is expected to be high in fourth quarter due to the unfavorable comp at last 4Q. We are seeing significant property tax increases at our San Antonio stores as well, which appear to be coming in $700,000 higher than planned. Although some of that is expected to be offset by lower taxes in other markets. We're expecting same-store revenue growth for 4Q to be between 4% to 4.5% and then NOI growth around 3% to 4% due to the large quarterly property tax expense. Property taxes are forecasted to increase 11.5% to 12.5% over 2015 levels for 4Q because of the benefit that we had last year in 4Q. This fourth quarter bump in property taxes was mostly anticipated and the annual property tax increased ticked up only slightly to 6.5% to 7.5%. Expenses outside of property taxes should increase between 2.5% to 3.5% for the quarter. Our guidance assumes an additional $10 million of accretive acquisitions are completed over the remainder of year. We have not included in guidance the related acquisition costs incurred to-date or as if that could occur in the future. As a result of the above assumptions and other items noted in the press release, our revised adjusted FFO guidance for the full year 2016 is expected to be between $5.19 and $5.21 per share, and between $1.30 and $1.32 per share for the fourth quarter of 2016. And with that I'll turn the call over to Dave.

[Dave Rogers:]

Thank you, Andy. The focus on us for the quarter to rest of the year and into next year is on our Texas exposure and on our ability to generate the expected returns from the Life Storage deal. We want to make sure we address these today. So I’ll take the easy one first. The 83 Life Stores are a great addition to our portfolio and are going to be fine. As Andy described, we’ve had a couple of hiccups as we brought them off the launch pad, but they are hearable, and short-term, and they’ll be put to bed by year end. As for the properties themselves, we love Sacramento, Los Angeles, Las Vegas, the three markets we underwrote 10% growth for. We’ll get that. The Life Storage in Chicago, Florida, Denver, they’re doing fine, we underwrote those less aggressively and should hit it. The only group that gives us pass and only for the near-term are the 19 in Texas, but they’re best in market properties and they’re a great add. We’re glad Life Storage is ours, it moves the needle on our overall portfolio quality, got us into new and stronger markets, and haven’t had them onboard now for these past weeks, we’re more confident than ever that’s our performance expected. On a related note, we’re progressing well on our rebrandings. We changed over the 14 stores in the Buffalo, Alberta market; learn what we like concerning the signage, media coverage and the web marketing transitions, and we’re ready to go starting this month in Chicago, Denver and Los Angeles. We’ll do a few markets a month, so that by the start of the busy season on April all 650 of our stores will be rebranded Life Storage. We fully expect to be right on time and right on budget. With regard to our presence in Texas, well, that’s been the situation plus or minus that we’ve dealt with for years now. As we’ve say all the time, ours is a very market specific business. And in 2013 and 2014 when we had numerous quarters, where we lead the storage sectors where we were the storage sector’s leader in top line growth, it was Texas and especially Houston that led the way. Now Houston, Dallas, San Antonio and Austin are our most challenging markets. And with 20% of our stores there, it’s had an outside impact on our same-store results. What surprises us about Houston and now Dallas is the speed of the market shift. We fought this by pulling on the incentive lever really hard, something we’ve done very little of in the past few years in Texas. Using these incentives, we got desired result. We maintained and even grew occupancy in those markets, but at a price. When you give up the free months, you’re giving up a third of the quarter’s potential revenue on that space and it makes for an instant and brutal comp over the prior year. So we’re down shifting on our near-term expectations for the Texas markets. We previously bagged and reduced result in Austin because of the large number of stores recently opened there. That’s a market where the problem is virtually all over supply. The situations in Houston and Dallas and San Antonio are a little more complex. Certainly new supply is a factor and it will continue to be because the lot of it isn’t even in place yet. But year-over-year comps especially in San Antonio weigh heavily. Competitors have become ubiquitous with their free month promotion, so we’ll have to fight that. Street rate growth will be paused for a while. It’s competitive. But again I’ll reiterate that this is a market specific industry and market strength ebbs and flows in cycles. Just a couple of years ago Atlanta, Phoenix and many parts of Florida were dragging us down. Now, we're enjoying real success in all those markets. So Texas is down this year and probably next, but long-term the four markets the match data going to be fine. They’re made for self-storage users. We'd love to have some meaningful exposure to the West Coast markets in our same-store pool, we don't yet, but we've built a real presence in California this year, so it's coming. It's good to be geographically diverse. Andy and I’ve spent some time on the details here because there's a lot of moving parts to our story. I don't want to overlook the big picture. In large part, things are very good. The industry fundamentals are solid in most markets. We, large players, continue to build on our platform advantages and we hear at Life Storage have done a lot to grow and strengthen our company this year. In particular, we acquired 120 high-end stores, 80 quality infill markets such as Miami, Chicago, New England, Orlando and the big four Texas cities. The other 40 gave us sufficient scale and three dynamic new markets for us

[Operator:]

Thank you. [Operator Instructions] Our first question comes from line of RJ Milligan with Robert W. Baird. Please proceed with your question.

[RJ Milligan:]

Hey, good morning guys. Dave you mentioned that taxes deteriorated a little bit quicker than expected, obviously increasing discounting. I'm curious where did you underwrite the 19 assets in terms of revenue growth from Life Storage? And what gives you confidence that you’re going to be able to hit that underwriting?

[Dave Rogers:]

We underwrote those at 6% RJ, growth at first year back in April, when we did the underwriting. The nice thing about taking on new stores to the portfolio even in tougher markets, even in stores that appear to have been pretty well run, we get a nice pop almost always from both our top-line growth and our economies of scale and expense. So, I think, we're not going to do maybe 6%, but we'll certainly do a lot better than the core, just because of the new stores, new to our system and we'll get some pop. So we're not too disturbed by it. Andy and I ran some numbers over the course of the last month as we saw Houston doing and what it was doing. I think we have five stores in the Life portfolio in Houston, right. And there are 19 overall

[RJ Milligan:]

Okay, I'm curious then. Does that given the recent weakness that we've seen especially in taxes, does that push out your timeline at all before this transaction becomes accretive?

[Dave Rogers:]

I mean we're going to miss – the yield – the overall yield might go from 4.7 to 4.6. And so that really won't make that much difference.

[RJ Milligan:]

Okay and then just one last question on taxes. We've been hearing from everybody that they've been very aggressive in terms of increasing property taxes. Do you think most of that is going to be a 2016 event? Or do you anticipate significant increases in property taxes in 2017 as well?

[Andy Gregoire:]

Hi, RJ. It's Andy. Most of it will be a 2016 event. San Antonio is the worst of the bunch. That’s going to hit us pretty hard. But we had some nice wins elsewhere. We were hitting Houston last year. So in Houston actually fourth quarter, it looks like as bad because it’s comparing to a tough comp, but really San Antonio is going to be the story from a big increase in property taxes. But overall we just bumped up organic a little bit for the annual property tax change, I think 50 basis points and that’s really San Antonio.

[RJ Milligan:]

Thanks, guys.

[Operator:]

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

[Todd Thomas:]

Hi, thanks. Good morning. Just first question, just regarding the comments around the lack of aggressive property management between the deals announcement and close. Can you just talk about how that impacted operations a little more specifically and maybe talk about the steps that you're taking to remedy the situation?

[Andy Gregoire:]

Hi, Todd. It’s Andy. Really, the biggest issue there was delinquent rents probably came in $500,000 more than we thought. And deal in this side doesn’t sound like a lot, but $500,000 of customers where the option process was not solved properly in the latest doing those options we said keep those customers in place not paying us for the quarter and probably through at least half of the fourth quarter. But it will be cleaned up by year end, but that cost us probably $300,000 of loss rent we figure that does delinquent customer gain in place.

[Todd Thomas:]

Okay. So the impact should likely be less than that in the fourth quarter?

[Andy Gregoire:]

Correct.

[Todd Thomas:]

Okay. And then what about on the property maintenance side, is there anything the comments in the press release mentioned property maintenance as well. Was there something there, net debt also…

[Andy Gregoire:]

Sure expenses came in about $300,000 more than we expected a few things there lack of HVAC maintenance, gate maintenance, there were some things that were deferred and we prepare those very quickly that should be – that was done in the quarter. So we don't have any of that left, but that did hurt the quarter

[Dave Rogers:]

And just we keep it in perspective, I guess, have they’ve been done during the period of operator – wouldn’t have cost to sell us anymore or any less. There was a closed loop transaction. So, we would have appreciated them doing it. So that when we took over the stores, there would have been perhaps all right several hundred thousand dollars less cash in the bank. It would have been part of the purchase here by leaving the money in the bank we bought it and then we had to kind of take the hit on the P&L on some of this stuff. So just the way it worked out, but like we said by the end of the year we should be in pretty good shape, all of that will be cleaned up.

[Todd Thomas:]

Okay. And then I'm just looking at the revenue growth going forward here, so the deceleration that you're anticipating in Houston next quarter it's roughly 300 basis points on about 9% of the portfolio. So 25 basis points to 30 basis points or so is that impact that would suggest that sort of backing into the rest of the portfolio that you’re expecting similar revenue growth in the fourth quarter to get to that 4% to 4.5% forecast to some markets, maybe decelerate a little further, some maybe improved, but on average no change for the balance of the portfolio except for Houston. Is that the right REIT?

[Dave Rogers:]

Yes. I think there are some other Texas markets that are impacted also, but there is we do have some great markets, the whole Florida areas really going strong, Atlanta very strong. So we’ve got some offsets to that weakness in Texas. So, yeah, we're comfortable with the gains.

[Todd Thomas:]

Okay. And just lastly, Dave, the incentive lever that you said you’re pulling in Texas right now. Since increasing the promotional discounting in those markets? Are you seeing results improve as occupancy beginning to build a little bit?

[Ed Killeen:]

Good point. Todd, we have actually going to hold occupancy there. So pulling that lever early and strong as Dave suggested that that would allow us to low customer into the winter season, so yeah, we’ll talk quite well as I said occupancy is holding actually up, I think occupancy is up a few basis points in Huston. So it’s worked out well for us.

[Todd Thomas:]

Okay. Thank you.

[Dave Rogers:]

You’re welcome.

[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 walk us through the fourth quarter guidance and how that compares to what’s implied for the full year? It seems like there is a slight mismatch. So if you could talk about that that would be great.

[Andy Gregoire:]

Yes, Gwen. The fourth quarter guidance is exactly what we think, not always going to hit the midpoint of what we put out there for guidance, but we think that the guidance of 4% to 5% revenue with our 4% to 4.5% revenue will be in that range. Some of things expense [indiscernible] you can’t always be exactly in the midpoint if we put a range there. But we are comfortable that it will flow to the annual guidance, we did reduce that full year revenue guidance from 5.5% to 6.5% to 5% to 6%, but it should promote through nicely into the – from the fourth quarter into the year, based on that range of 4% to 4.5%

[Gwen Clark:]

Okay, that’s helpful. And can you just break out what you’re kind of thinking for occupancy versus rate growth in the fourth quarter?

[Andy Gregoire:]

We’ve saw 50 basis points at the end of the quarter. October, we saw another 50 basis – the same 50 basis points so the gap held nicely in October. So it's nice to have that lever of a pull. So you’re going to see some occupancy pull, many in the industry don't have that pull I think. The incentives will be an easier comp, so rent rates will be part of it. So it's a combination of occupancy, but there still will be enough rate growth there to pull us up in that range of 4% to 4.5% revenue growth.

[Gwen Clark:]

Okay. That’s helpful. And then just really quickly, I know its Massachusetts and Sacramento, Vegas and some other markets that in California aren’t in same-store. Can you just give a quick update on how these markets are sharing relative to expectations?

[Andy Gregoire:]

You know Gwen, we're looking at numbers and so I got a caveat to say we ran these for 2.5 months. What we did is we took the average monthly revenue based on that 2.5 months compared to what the seller had for revenue, we can’t really do it as an NOI because their expenses were much different than ours. But on a revenue point, we’re both – all of California stores and Nevada are over 10% based on that comparable that small timeframe we used to compare. So they're holding up very nicely and the other markets are technically weaker as Dave said, but the other markets are holding up as we expected.

[Gwen Clark:]

Okay, that’s helpful. Thank you very much.

[Dave Rogers:]

You’re welcome.

[Operator:]

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

[Smedes Rose:]

Hi, thanks. You said in your opening remarks that you’d expect Texas to be negative in 2017, and I just wondering if you could quantify that if you're going into the fourth quarter, I think Houston is negative 7% or so. What do you think it is for the – maybe talk about Houston for next year and just Texas overall.

[Andy Gregoire:]

Well, I think if you look at Houston means for the fourth quarter, it does look unusual with NOI down quite a bit. For the annually though, Houston doesn’t look that bad. If you look at the annual look – Houston will end up being – if Houston does what we think it’s going to do in 4Q annually that would be 2.6% revenue growth for [indiscernible]

[Smedes Rose:]

The phase of deceleration across course of the year is accelerating to the negative. So shouldn’t that continue into next year?

[Andy Gregoire:]

We don't see it. We think that the biggest deceleration is behind us.

[Smedes Rose:]

Okay. So for next year, when you say Texas is negative, are you thinking like down 1% or what kind of – what’s your forecast at this point?

[Dave Rogers:]

Yes, it will be – I’d like to really build our budgets from the bottom up and we haven't finished that process yet, it has only been the first part of November. But obviously the first part is going to decelerate faster just on year-over-year for the comp store, our [indiscernible] as we flipped into the later part. I think – as I’ve said, it's working. We pulled the levers, demand is there, we're holding occupancy. So we're throwing incentives out that we didn't throw out last year. I think as Andy said, the fourth quarter gets a little easier on the comp as we did – we always do incentives in Q4 and Q1. So it will decelerate and it will be sort of – I would expect and again we're saying this without having done the budgets. But I would expect Q1 and the Q2 will decelerate like this quarter perhaps or a little slower than this quarter, but certainly by Q3 and Q4. If only for the merger of easier comps, it should be better but also I think we will see – as Andy said, there’s worst behind this.

[Ed Killeen:]

Smedes, regarding on there’s worst behind us like Andy said just in regard to call volume and search activity in Houston, we saw the biggest call volume decline come really as they suggested earlier. It hit us pretty hard, but that didn't happen until August and that was the greatest call volume decline. Since then that call volume has been going up week in and week out over the last few months. And the same is true for search, things were a little bit challenging in August, but we see better search results since then.

[Smedes Rose:]

Okay, thanks. And then I wanted to ask you on your acquisition of the Life Storage portfolio. What do you – what would you do differently I guess in your due diligence going forward on deals where you don't have these kinds of mistakes where there's more delinquent customers. I mean, aren’t are – isn’t that information made available to you before you purchase or is there no kind of clawback feature or something and no maintenance going on across the portfolio. It just seems like these sorts of things are things that you should've been aware of the time you made the offer on this portfolio to closing.

[Ed Killeen:]

Well, I guess that the maintenance part and then the costs really didn't matter. And it was a function of when we bought them had they done the work, they would have been paid for other cash and we would have bought less cash on closings. So the purchase price would have been a little bit higher and the operating expense for the first couple of quarters would be about a little lower. That’s no dollars loss, just the way we treat them, and unfortunately it's penalizing us into the P&L. With regard to the delinquency, yes, I think what we would have done and we look in the mirror we would say, you know what, we should have. We saw the people, we focus really hard on hiring the 210 people that were at those stores. We wanted to make sure that integration of employment and procedures and benefits and the whole thing works smooth. What we didn't pay attention to was their lease process, their delinquency process. When we got into it in August we step back and said, we don't feel comfortable auctioning these people off. It just – would put ourselves at risk. Freeze the auction process, unfortunate of that result we’re keeping a lot of dead bees there in the units that we could have had good customers for, so we’re delayed. So, yes, never having done it this way before, I think yes, we would have looked harder at their lease program earlier in the process than – rather than waiting until we put them on our system in August.

[Smedes Rose:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your questions.

[Jeff Spector:]

Great, good morning. Just maybe a couple follow-ups. I guess from that last conversation, can you just confirm again the steps you're going to take between now and the end of the year to resolve those delinquencies? Can you just explain that one more time?

[Dave Rogers:]

Yes, we already did it. I mean we face it when we came in we said their policies, their procedure put out that risk to auction. So we basically froze them, put ours in place with the proper notice, the registered letters, the printing were applicable in give to give notice. So we basically sort of started late, we avoided there. Whatever offers they had, we avoid it, said, put us too much at risk start of the talk and that’s why as we go here now into November to December, that should all be done. I think it will be almost five months by the end of the year. Typically it takes 90 days some take – some part 120 days. So I feel pretty confident, I think all of us here at the table feel pretty confident. Those issues are done next month.

[Ed Killeen:]

One of the other matters that we had to deal with was the abundance of customers that came in under a prior ownership with really extreme discounts in order to kind of boost the occupancy a little bit. While all of those concessions have since burned off and we’re either able to capture the rents the way it should be positioned or those customers have move out replace them with higher yield customers.

[Jeff Spector:]

Okay, thanks. That's helpful. And then just to confirm in Houston, what do you feel you exactly missed when you said it’s weaker than expected? Just want to make sure we're following the right macro metrics or market metrics to gage how Huston is performing early into 2017.

[Dave Rogers:]

I think this is – of the speed with which the pricing power went away I guess the demand as I've said we were concerned in August but we feel better about demand, still a growing city. There is supply. But people I think more than anything are shopping. I think that’s the difference. They're shopping deeper and harder and comparing us where we were before. In a lot of markets we have a big advantage, visibility-wise and service-wise. In that market the traffic seems to indicate that they’re shopping longer and deeper.

[Jeff Spector:]

Okay. Interesting and then last is any changes in length of stay or retention throughout the portfolio anything we should be aware of?

[Ed Killeen:]

Retention is about the same 61% of our customers stay with us at a year’s time and 45% at two years time, and that's up slightly over last quarter. And I believe last quarter was nearly dead on to the quarter before. So there hasn't been much change. Our customers remain very sticky and they absorb the rent increase as well.

[Jeff Spector:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Gaurav Mehta with Cantor Fitzgerald. Please proceed with your questions.

[Gaurav Mehta:]

Yes, thanks. Good morning. So a couple of follow-ups, you talked about increase in discounts in your Texas market. I was wondering if you could comment on have you seen any increase in discounts in any of your other markets besides Texas?

[Andy Gregoire:]

Hi, Gaurav, it’s Andy. Yes, we have seen increase in discount in other markets, not every markets but there's – you can usually see the softness in those markets based on the revenue growth where we're pulling the lever for pre-ramp and we look that pre-ramp is going from a $900,000 in last Q3 to $1.5 million in this Q3. So that was the big – the biggest jump we've seen in long time that $600,000. So that was probably the biggest we're going to see in the last Q4, we have an easier comp Q1. If you look at it, we gave away $1.5 million in Q3, that’s about what we gave last year Q1. I mean in January we have January to March of 2016, that's what our pre-ramp was. So we got to meet the comps coming up, but it isn't more than just Texas, but Texas is the big part of it.

[Gaurav Mehta:]

Okay, great. And then I think for Houston and Texas you mentioned that retrade growth would be paused for a while. Can you also comment on renewal rate growth that you saw in the third quarter and what kind of renewals you’re sending out for fourth quarter for Houston and Texas?

[Andy Gregoire:]

Yes, we backed off Houston and particularly in some other Texas markets. In the third quarter we did $13,000 rate, which was a little less than we did last Q3 but year-to-date we have done quite a bit more $52,000 versus $36,000 last year. So this time of year you usually pull back kind of those in place they’re still going out at 10%-plus increases and sticking into there with our 12% of loans.

[Gaurav Mehta:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed with your question.

[Paul Adornato:]

Yes. Thanks, good morning.

[Dave Rogers:]

Hey, Paul.

[Paul Adornato:]

Hi. You noted that every market had positive revenue in the quarter expect Buffalo your home market. And then you also mentioned that that’s where you kind of experimented with the re-branding. So I was wondering if you could tell us what should we expect in terms of friction in the rest of the re-branding process and what did you learn.

[Dave Rogers:]

Well, Ed, can talk about the re-branding Paul, but when you look at upstate in New York at Buffalo, Rochester, Syracuse; Buffalo was the best of those three markets. So we’re confident that main change had no impact on that deceleration. We did have a couple of things happen in Buffalo and Syracuse where we bought two stores in Buffalo this year in May. Good stores, well under managed, they compete against our store. So now they’re sort of pulling from out of their stores, now that they're on the web and people can find them. Those stores are working out nicely for us, they were pretty well-occupied, same thing happened in Syracuse. So that was really the upstate market story that Buffalo was actually better than the other two markets in upstate.

[Andy Gregoire:]

That’s the issue with the same-store pool though we bought good assets underperforming we’re getting and work well. Overall Buffalo and Syracuse are better, but the same-store optics don’t make it look that way.

[Ed Killeen:]

Paul, the negative impact on search was minimal in our trough market in Buffalo. There was of course absolutely no impact when it came to the local search, the Macpac that I'm sure you guys are aware of. You get listed immediately. And then paid search, we increased our budget a little bit as we bring on these market. So our paid search is strong. So the only concern that we really have is organic search and as long as we’re able to effectively transfer domain authority from Life Storage or excuse me from unclebobs.com to lifestorage.com. We should do very well and that that entails creating links and more contents and real and pack full of social media interactions and we've done all that. And the Life Storage sites in Buffalo especially didn't really lose any ground but for maybe three weeks with some of the generic searches, we in a matter of three weeks we were already on the first page and things moved very quickly for us. So that was a great indicator as to what might happen in future markets as well.

[Paul Adornato:]

Okay, great. Thank you.

[Operator:]

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

[George Hoglund:]

Yes. I was wondering if you could just give a little bit more color on the promotions, that you are using in Texas, first month free and how is it different than you’ve done historically.

[Dave Rogers:]

It is the first month, free George. I mean we have two promos, we do half month offer, the first month free, really in Texas there is a lot of first month free competitive – the competition there is going to that – has gone to that. So it checks for openers there in Texas to head that month free. We are seeing a lot of that, and we talked about the dollars that increased overall from last year. We do have to meet your comps coming up but to do that third quarter was unusual.

[George Hoglund:]

Okay. And then also in the Austin market. You guys have three CofO deals that came with the Life Storage portfolio and given Austin is already suffering from new supply and how we weak might Austin get going into 2017.

[Dave Rogers:]

Austin is actually strong, there is a lot of supply diluting it. So if the market is good the supply is [indiscernible] we inherited them, we like them in normal times they’d be good we have some options we're looking at, they don’t come on for a while. So we've got some time to consider what we're going to do with them here. But, yeah a year ago, year and half ago it was so great this is a plus to the Life deal that was one of the few negatives we saw in the Life deal, was the baggage that came with the three Austin stores. So we’ve got some time and we’re sort of exploring our options with what to do with them. Long term that will be great, but I know that we can bring them in again and have some more impact in the Texas market.

[George Hoglund:]

Okay

[Dave Rogers:]

They're going to be there though, whether we – whether we run it or not they're going to be there.

[George Hoglund:]

Okay. And then just last one from me. Outside of the Texas markets, what would you say will be the next in the top two or three markets where your competitors getting most aggressive with promotions?

[Dave Rogers:]

I think we see a fair amount in Charlotte and Phoenix, I think what I would say to two that are, they don’t add more markets where we have a meaningful presence, those two seem to be Chicago, also but Chicago is such a diverse market and we play in areas where the big guys or the other big competitors aren’t someone. We are north of the city and the northern part of the city. So I would say the ones that are having the most impact are probably Phoenix and Charlotte.

[George Hoglund:]

Okay. Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

[Ki Bin Kim:]

Thank you. Good morning guys.

[Dave Rogers:]

Good morning

[Ki Bin Kim:]

Good morning. So as I looked at your stock price today, now you’re trading at about a 7% by cap rate. How does that configure into how you think about capital deployment going forward, obviously some of the things that we've done are in the past buying Life Storage at 4.8%. And maybe some other acquisitions or CofO but that 7% feels like it's pretty attractive and you have the balance sheet capacity to, to do something about it. So I was curious if you could comment on that first.

[Dave Rogers:]

Yes. We have really worked really hard to build ourselves to be very strong and from the opening comments and then just looking at our balance sheet you can see that it's very strong. Our liquidly likewise is good we did say that we're going to take our foot off the pedal with regard to acquisitions in this price metric because certainly the sellers haven't addressed their expectations, either on CofO deals or stabilized property. So the mismatches is pretty, pretty great here and we're not going to bridge that gap on. I’d hope that rare will be the property, where we think we can increase it fast enough to warrant, buying it our current situations. But in terms of what we’ve done, as we mentioned, we have about $75 million worth of free cash flow. We got a $0.25 billion on our availability on our line of credit. If your question has geared towards stock repurchase, its something that you have to consider we do have an old plan in place, we did it years ago, we’ve never been fans of it. We basically play in the market really. But if we see that that we’re comfortable with things especially in the challenging markets of Texas, if we see that we have a cash flow jugging, we’re not going to do anything to jeopardize our credit rating. We’re not going to do anything to jeopardize the stability that we have here. But you are right, it’s better than most – our stock at 6.5% or greater it certainly a lot better buy than a lot of the properties we see.

[Ki Bin Kim:]

So it sounds like not really your top one or two options for a capital deployment even symbolically at all?

[Dave Rogers:]

Yes, don’t be wrong. We just want to – like I said, we digested a whole bunch of stuff here. We’ve got – I guess it would be choice one providing a dozen jeopardize to credit rating.

[Ki Bin Kim:]

Okay. And the fact to that I realized the decrease in the stock prices for the sector is kind of happening pretty quickly over the past few months. But if your stock, as they trade that there is kind of discount for a longer period of time. Did that change your thinking or your willingness to maybe do some kind of M&A – or look at M&A optionality or no change there?

[Dave Rogers:]

I don’t feel comfortable talking about it Ki Bin. No change there.

[Ki Bin Kim:]

Okay, all right. And in terms of free rent, on your same-store revenue guidance, the 4.25%, I know you’ve addressed some of this question already, but it seems like a pretty – very muted deceleration from 3Q to 4Q. Should we expect the 4Q to be a good run rate for going forward or is there something else that might happen for example promotions, expanding beyond taxes that might bring down that the same-store revenue a little bit lower as we ahead into 2017?

[Andy Gregoire:]

I think the free rent comps get a little bit easier. So I think you’re right, the deceleration should be muted as we go into Q4. There will some because of free rent, but the comps get much easier next year.

[Ki Bin Kim:]

Okay. And just last one from me. Can you give some stack on the street rates for this quarter and what you’re seeing in I guess in October?

[Andy Gregoire:]

For the quarter they were up about 2%, October a little less than that, but that’s a big picture Ki Bin. We’re up 10% in Georgia, 10% in most of Texas – or most of Florida, I should say. Texas is negative, street rates have down a little bit. It is a place of mix of market really the market tail of what street rates if you look at the overall you might say its between 1% and 2%, but definitely it doesn’t tell the stories some of those very strong markets that rates are way up.

[Ki Bin Kim:]

Okay. Thank you, guys.

[Operator:]

Thank you. Our final question comes from the line of Jeremy Metz with UBS. Please proceed with your question.

[Jeremy Metz:]

Hey, guys. Good morning. Just one on the Life Storage properties, the stabilized properties, are the occupancy there was down to about 89%, I think that’s down from a little over 92% when you first announced the deal. And I think the initial underwriting cost for occupancy to go down while you’ve focused on pushing rent. So I’m just wondering if that still the plan there and therefore should we expect to see occupancy get below further in the 4Q and maybe could you talk about what sort of rent growth you are seeing across those assets versus the existing portfolio?

[Andy Gregoire:]

Yes. Hi, Jeremy, this is Andy. Yeah, it’s typical that occupancy does down this time to you, but you are right. We have a couple of things there. We did start the option process. We did clear out some of the bad debt. So, we’re starting that process, which does knock occupancy a little bit, but that was non-paying occupancy so that’s not a big deal. But we’re in a slower time. I think we’re very comfortable with what we thought we could do with occupancy. So it’s on track with what we can do with occupancy. Rates like I say in California, Nevada very strong other markets holding nicely except for Texas.

[Jeremy Metz:]

Okay, so generally on track. And then I guess one last one. Dave in your opening remarks, you talked about the speed of the market shift in Texas, it was a bit surprising, but you’re able to combat some of that by ramping concessions there. So I’m just wondering as you look out at other markets in 2017 is it didn’t make any start to consider shifting strategies, have been more to ramp concessions ahead of others in the market doing the same and therefore try to hold the occupancy before you see a similar market shift as you saw within Texas?

[Ed Killeen:]

Jeremy, we’re really not seeing a similar behavior in other markets compared to the way Houston behaves since August. Again demand remains healthy in almost all markets. Like David suggested earlier it just looks like a sort of picture of maybe some rate sensitivity, more rate sensitivity in Houston and other markets. But I don’t think you’re going to see us change strategy next year, it for nothing if more than we’re not seeing a behavior like Houston, it just seems to be a little bit off. Now, if something happens going forward, we’ll react just as we did this year, but we’re not seeing that right now.

[Andy Gregoire:]

I think that’s the one part of our revenue management program that we are not proactive on. We are reluctantly reactive I think on free month incentives. We had some good stretches there and well run property should lead them, but markets do. So you won’t see it’s taking the lead on free much that’s for sure.

[Jeremy Metz:]

Okay. Thanks, guys.

[Operator:]

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I’d now like to turn the floor back to Mr. Rogers for any final remarks.

[Dave Rogers:]

Well, we appreciate your interest. We appreciate the involvement you have with us. And we think – we really think we’re in a good shape going forward. This is been a great year for us. We had some pickups. We’ve tried to explain them. We feel confident that we got them put to bed and we’ll look forward to seeing most of you in Phoenix in a couple of weeks. Thank you everyone.