Life Storage, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Greetings and welcome to the Life Storage Fourth 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 at 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 fourth quarter and full year 2016 conference call. Leading today’s call will be Dave Rogers, our Chief Executive Officer. Also participating are Andy Gregoire, Ed Killeen and Paul Powell. As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected, due to risks and uncertainties with the Company’s business. Additional information concerning these factors is included in the Company’s latest SEC filings. For your reference and in addition to our press release, we have included 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.

[Dave Rogers:]

Dave.

[Diane Piegza:]

Dave.

[Dave Rogers:]

Thank you, Diane, and welcome to our call. Q4 wrapped up the most ambitious and progressive year in our 32-year history. We acquired and assimilated 120 new stores, entered three big new markets, greatly improved the quality of our portfolio, and changed our long-standing company name. Except for the rebranding, most of the heavy lift was done by the end of Q3; so this quarter we let the dust settle a little bit, and we like what we see. Results from the LA, Sacramento and Vegas markets are meeting our high expectations. The lease-up in the CFO stores are ahead of plan in almost every instance. The benefits we planned as a result of increasing our scale are there and the sign change and rebranding effort remains on budget and ahead of schedule. The name change has quickly become a catalyst for a significant boost. We’ve built a tremendous marketing campaign around the new brand, both poignant and effective. Life Storage has been well received by our operating team, our customer base, especially the commercial tenants, and the communities we do business in. Organic search results have measurably improved, driven by some clever programs we’ve initiated. The new brand’s also helped us in a big way on the property management front. At the end of 2016, we had 69 JV stores and 26 third-party stores in the fold. Since the first of this year, we’ve added 12 stores to that, with five more coming online as soon as construction is finished, and some 30 more are in late stage negotiations. We really expect property management to be a major growth driver for us in the coming quarters and years, all as a result of an upgraded image derived from a great new name. For the foreseeable future, we will not be active in the acquisition market. We did buy two stores in the fourth quarter that had been under contract since early 2016. One was a CO deal in Chicago and the other was a stabilized property in Orlando that came to us via the management pipeline. We’re in contract to acquire two more CO deals later in 2017 for a total cost of $22 million. One of those is in Charlotte and the other one is again in Chicago. These have been in the hopper for quite some time and we’re not currently seeking many more. One way we may add some flags to the portfolio is via joint venture purchases. In January, we added four stores to our California markets and one in Long Island City using JVs. The purchase price of the five stores totaled $135 million. The capital we contributed was about $28 million. We’re currently considering adding one more California store to one of the JVs. Stepping back and looking at the macro picture, the self-storage sector, as has been more than well documented, hit some speed bumps during the past seven or eight months. While somewhat sudden and rather unexpected, we don’t think this recent deceleration of fundamentals warrants the malaise it’s generated. Yes, pricing power has been diminished and leasing incentives are again necessary. Operating costs, especially property taxes, are increasing by fairly substantial amounts. New construction is putting supply back into the equation again. And in a number of markets, Texas especially, these factors have given us a reason for somewhat of a pause. The strong tailwinds we’ve enjoyed for many consecutive quarters have swung around to present us with a bit of a headwind; but we’ve been here before and, compared to other challenging periods, the outlook this time doesn’t look nearly as dire. Occupancy for many in the industry, and here at Life Storage specifically, is at a record high for December and we’ve hit record highs almost every month this year. Demand is strong, as phone and web inquiries have increased year-over-year again this quarter. After years of significant and sustained NOI growth, especially in a non-inflationary time, this remains a pretty attractive business. As we always say at this time of year when introducing guidance, we’ll have a much clearer picture in a few weeks. We think we’ve positioned ourselves well to take on the recent challenges to our sector and we’re looking forward to the upcoming leasing season. The moves we made in 2016 made us bigger, better, and, as Chicago song says, we’re feeling stronger every day. Andy?

[Andy Gregoire:]

Thanks, Dave. Last night, we reported adjusted funds from operations of $1.31 per share, a result of same-store revenue growth of 4% and same-store NOI growth of 3.7% for the quarter. The drivers behind the revenue growth included a 50 basis point increase in average occupancy and a 2.9% increase in rental rates. The increase in occupancy was achieved in the face of our rebranding, which not only is a testament to all of our employees, especially the marketing team, but to the strength of the Life Storage brand. Same-store occupancy at December 31, 2016 was 90.4%, an all-time high for a year-end. Same- store property operating expenses increased 4.6% for the quarter. This was a result of increases in real estate taxes, repairs and maintenance and internet marketing, offset partially by decreases in other advertising and insurance. Although our same-store real estate taxes increased by 5.6% for the quarter, it was less than we had expected, despite the significant increases in San Antonio, Phoenix, portions of Florida and Raleigh, North Carolina. This favorable variance from expectations was offset by some higher than expected real estate taxes on properties not in the same-store pool. G&A costs were approximately $1.4 million higher this quarter over that of the previous year fourth quarter. The main reasons for the increase were the fact that we operated 117 more stores at the end of this year as compared to last year, costs associated with the name change, increases in wages in our call center, and additional legal fees. We had a few unusual items this quarter. We recognized a $623,000 gain on a land taking, which we eliminated from adjusted FFO. In addition, we wrote off $1.8 million of property deposits assumed with the Life Storage acquisition. We made the decision not to pursue the acquisition of two Texas CFO properties for which the previous owners of Life had put deposits on. In regard to the 83 Life Storage properties acquired in July, we have made excellent progress in cleaning up customer accounts and are excited to be entering the busy season with a cleaner rent roll and a true occupancy in the mid-80s. As we said last year, we felt the 92% occupancy of the mature portfolio was inflated with a less than quality customer base attracted with significant upfront specials. This puts us in a solid position to grow occupancy at market rates. For the 11 non-stable storage acquired with Life, the occupancies continue to grow nicely. Our balance sheet remains in great shape. At December 31, we had approximately $24 million of cash on hand and $247 million available on our line of credit. We have no material debt maturities until December of 2019, when our line of credit matures. We were not active with our ATM program this quarter and we have no plans to be active with that program, based on our current stock price. With regard to guidance, we have included in our release the expected ranges of revenue and expenses for the first quarter and the entire year. Same-store revenue and NOI growth for Q1 should be in the 3% to 4% range. Expenses outside of property taxes should increase between 2.5% and 3.5% for the quarter. Property taxes are forecasted to increase 5% to 6% over Q1 of 2016. Once again, we are not including in our same-store group any stores acquired as certificate of occupancy over the last three years, since the high occupancies at these stores were obtained with below-market rates. Our guidance assumes no additional accretive acquisitions. Guidance does assume $0.01 to $0.03 per share of FFO dilution from the certificate of occupancy deals we have completed to date or that we expect to complete in 2017. As a result of the above assumptions, we are forecasting adjusted funds from operation for the full year 2017 to be between $5.50 and $5.60 per share, and between $1.24 and $1.28 per share for the first quarter of 2017. With that, Melissa, we can open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Juan Sanabria with Bank of America. Please proceed with your question.

[Juan Sanabria:]

Hi, Good morning. Thanks for the time. I was just hoping you could talk to the revenue trajectory you are expect in 2017, particularly relative to how you view supply coming on. And it seems like you guys are expecting kind of a flat growth 3% to 4% for the year and for the first quarter. What gives you confidence that we won’t see any deceleration this year relative to what we saw last year in the face of what seems to be increasing supply.

[Andy Gregoire:]

Hi, Juan, it’s Andy. When we built the budgets and we start those through our area management and work with the revenue management team. So a couple of things trends we’ve looked at that helped us guide through the year. First half of the year tough free rent trends. So we are going to have some headwinds from a free rent point of view first half of the year. First half of the year though, we think we’re going to have good occupancy trends. We think we can hold some occupancy gains in first of the year. Second half of the year sort of flips around, the free rent trend gets easier we don’t expect much occupancy gain. But all in all, we are trying to maximize revenue and we think we can keep it steady but pulling those levers at different times of the year.

[Juan Sanabria:]

Okay, great. And is there anything you could say in terms of supply expectations this new store openings this year versus last and any sort of visibility into 2018 at this point.

[Paul Powell:]

Good morning Juan, this is Paul. Yes, on our internal analysis of new supply, we’ve identified total of 227 stores that compete within five miles of our properties. Of that in many 144 are in construction or in planning and 83 have open. So we’ve been saying this year we thought to be 700 to 800, which we still believe going into 2018. It’s hard to say, but I would expect to see at least that many maybe a little bit more there may be some additional development and secondary Treasury markets. But as of now, we think 2017 will be 800 to 900 and then maybe the same going into 2018.

[Juan Sanabria:]

Great thank you very much.

[Operator:]

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

[Gaurav Mehta:]

Yes, hi, good morning. So couple of questions on transaction, I think in your prepared remarks, you mentioned that you may not be looking to buy anything on the wholly-owned side, but you may buy assets in the JV. So I was wondering, if you could expand upon what’s the difference in the asset quality that you may buy for wholly-owned portfolio versus what would buy for your JV by portfolio?

[Dave Rogers:]

Not much. This is Dave, Gaurav. We keep standards both on properties that we like to acquire for JVs, as well as those that we want to manage for third parties. So we would look to have at least B quality properties and markets where we already have a presence or where we can garner scale really quickly. So, of course, we look that our JV partner on these, but the interest are pretty well aligned. So I don’t think you’ll see much of a difference between a JV store, or even a third-party managed store from our core properties.

[Gaurav Mehta:]

Okay. And then given that same-store revenue growth in 2017, it’s lower than what we saw in 2016 and 2015. I was wondering, if you have seen any impact of slow growth on the cap rates that you seeing in the private market?

[Dave Rogers:]

Not really. It’s – there’s some product out there. We look at all of it, even though we may not be pulling the trigger. We certainly look at a lot and I don’t think we are seeing much of a disconnect yet between cap rates even with a little bit of pressure on interest rates and perhaps some of the larger buyers selling off to the sideline, there’s still a lot of interest in these properties. And the story has been the last year or so with the sellers don’t get their price, they pull it off the market. So cap rates in the private side are holding.

[Gaurav Mehta:]

Okay. And then lastly, could you provide some more detail on the right off that you had in Austin for the two CO assets.

[Andy Gregoire:]

Yes, Gaurav, those properties were put under contract by the previous owners of Life. They had deposits down non-refundable deposits on those. Because, we wanted to take time to analyze those after we made the acquisition and once we did, if we weren’t comfortable with two of the properties. There is a third that we really do like and that we may do a lease agreement and we are negotiating a lease now on a third one. But those two, we just didn’t like the properties and felt that was best of walk away than to spend the money on those facilities in Texas.

[Paul Powell:]

Yes, Gaurav, this is Paul. Just a quick add to that. We had looked at all three of these properties prior to Life getting the deals. We had passed on them, mainly because two of them compete with each other and the pricing expectations were higher than we wanted to pay at that time. So that’s – we just didn’t like the two, we do like the third one which is Andy said we are currently negotiating lease on.

[Gaurav Mehta:]

Okay, thanks for taking the questions.

[Dave Rogers:]

You’re welcome.

[Operator:]

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

[Todd Thomas:]

Hi, thanks good morning. Can you talk about trends that you are seeing in move in rates, whether you’re seeing the decrease in move in rates stabilize on a year-over-year basis. And then on the free rent side, so it sounds like you’re expecting concessions to stabilize in the second half of the year. Is that a flat year-over-year impact, essentially that’s in the model for the second half of 2017?

[Andy Gregoire:]

Correct. For the free rented flat in a second half of the year. In rates, Todd at the end of the year, our Street rates were right on top of December 2015. So they are even with the prior-year. This time of year, we normally do have roll down, because our people who moved in – those customer moved in June and July move out half of them are gone within six months remember. So as they move out in the lower rent period, you have roll down in the few months of the year. That’s typical – nothing a typical about, what we are seeing now rents, obviously being flat year-over-year is something new, we haven’t seen a lot of that. But we would hope that with these occupancies as we head into the busy season, we’re comfortable that we will have some pricing power.

[Todd Thomas:]

Okay. And, when do you normally start to see sequential occupancy increases in the portfolio wends the peak leasing season really kick off for you traditionally?

[Andy Gregoire:]

I’d say the middle of May gets to going by the 1st June we have a pretty good handle on what things are looking like, but starts in May but by May 15th, May 20th, those weekends that are in that period are what really tells the story for us.

[Todd Thomas:]

Okay, got it. And then, on the operating expense growth in the quarter – pretty outsized growth on the Internet Marketing that you mentioned also repairs and maintenance. How much of that has to do with rebranding that might be spilling into the same-store. And can you just talk about those items and what we should expect handing and 2017.

[Andy Gregoire:]

On the Internet Marketing, we are typical of about 5% to 8% growth is standard typical growth. The rest of it is rebranding related. So we expect that to happen to continue through the first half of 2017. R&M wise we did have the Hurricane Matthew actually caused a damage to quite a few of our stores, but it was minor damage in all that had to be repaired. It was trees down, fences down, that type of thing. So there was a lot of repairs related to Matthew, but no major destruction. It was just a lot of minor items.

[Todd Thomas:]

Okay.

[Dave Rogers:]

Tood, during the fourth quarter and heading into the first quarter, the marketing spend on a market by market basis, as we transition to the Life Storage brand will be about 20% to 25% increase. But I think overall next year as Andy said our increase will be somewhere in the 5% to 8%.

[Andy Gregoire:]

Yes. Ex that charge in the first year should in the 5% to 8%.

[Todd Thomas:]

Okay thank you.

[Operator:]

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

[Ki Bin Kim:]

Thank you, good morning everyone. So, can we first start off with some stats on Street rates or promotions as you’ve seen so far in mid-February or end of January?

[Andy Gregoire:]

Sure. Street rates are down a little bit, there were zero at the end of the year. They are slightly negative at the end of January, Ki Bin. Free rent, fourth quarter we were up $500,000 over our previous fourth quarter. Q1 maybe a little less than that, but still we got a top comp Q1 and Q2 from a free rent point of view. So we will have still some headwinds from the free rent.

[Ki Bin Kim:]

Okay.

[Andy Gregoire:]

So we are offering more free rent.

[Ki Bin Kim:]

Okay. And just going back to the guidance of 3.5%, it seems our revenue growth in first quarter down from 4% in the fourth quarter. And basically you’re expecting a soft landing no further deceleration for the rest of the year. My question is, can you help us understand what are the underlying ingredient for that, I know you already gave some information. But I guess what you are expecting for existing customer rate increase contribution and what are you expecting specifically for Street rate growth for rest of the year to get to that midpoint.

[Andy Gregoire:]

Sure. I think, you hit on the one the in place customer and now with over 60% of our customers with us over a year we don’t do a lot of in place in Q4 and Q1 but we expect Q2 that will be a driver of some revenue growth there. So we have a lot 40% of our customers right now are below Street rate. So of those 60% then with us more than a year 40% of them are below Street rate. So its a good place to be we think that’s going to push us coming the busy season in the second half of the year. We talked about free rent having some tough comps first half but easier second half of the year. And I forget the other part of your question sorry about that Ki Bin.

[Ki Bin Kim:]

No, its okay. The Street rate portion of it, so what you basically implying modeling in for Street rate growth for the rest of the year?

[Andy Gregoire:]

Yes. I think it will be pretty muted the first half of the year busy season we are only talking 3% growth in the Street rate.

[Ki Bin Kim:]

Okay. And when you think about that 3% projection, and I think you are saying for the busy season not the full-year. Is that projection driven by market level predictions or is it just on the higher level portfolio I asked that because I wanted to see if you’re projecting some markets to be a bigger driver of that growth versus…

[Andy Gregoire:]

We’re talking in overall numbers here but if we talk Atlanta and Miami and St. Louis, Tampa, Phoenix you are going to see growth rates are up in those areas 5% to 7% then you see them in Houston down 7% to 8%. So it does very tremendously from market to market.

[Ki Bin Kim:]

Thank you.

[Operator:]

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

[George Hoglund:]

Good morning just in terms of the guidance, given the amount of deceleration kind of what gives you the confidence to have a relatively narrow range on both the same-store NOI growth and the FFO per share growth?

[Andy Gregoire:]

George I think we’ve build these models, we look at our projections we’re comfortable that every year when we go into the year we’re comfortable with that. Hey, this is what we can do this is a reasonable expectation. And we try to get a range from our reasonable expectation. Based on what we are seeing and what we’ve seen in January, there’s nothing right now that’s telling us any differently than our what we thought in the first half regarding free rent being a headwind and second half it shouldn’t be. But the – what we’re seeing is that reaction to the free rent and some of it name change we are seeing occupancy growth. So we are comfortable that we can pull that lever and increase the occupancy for the first half of the year. Second half of the year at these occupancy levels they are still all-time highs we should have some pricing power as we did in 2016 not as strong as we’ve had in 2015 in the first half of 2016. But there still will be the ability to push rates in many markets not all markets but many markets.

[George Hoglund:]

Okay and then with the new brand are there any plans to ramp up the third party management program in 2017?

[Dave Rogers:]

Yes, that’s – we love what the brand has done for us. Not to speak ill of our old name but unfortunately I think we handicapped our marketing guys with that and then we had a lot of people who came to our office, who were very impressed with our people with our platforms with the success that we’ve had and it wasn’t until after we change the brand that we realized how many people turned us down just because they didn’t want to put the name Uncle Bob’s Self Storage on their brand-new facilities. So we’re enjoying a bit of an upswell here. We had some people come back to us who had turned us down in the fall fortunately they had not selected another provider. But our guys are busy, we are ramping up a little bit here. Right now and we expect to do more. But I think third party management is a game that we played quite quietly for the last three years we want to make some more noise in that facet of our business.

[George Hoglund:]

Okay. And just one last one as far as the $250 million line balance kind of what are the plans to turn that out in the near-term?

[Andy Gregoire:]

We don’t have any plans in the near-term to turn that out, we’ll see how the market reacts over the next year or so. And we have until the end of 2019 there’s no need to turn that out we’re comfortable with $250 million to $300 million of floating rate line of credit balance out there of our $500 million that we have available. So we are fine with the level we are at.

[Dave Rogers:]

We just did as you probably know our first publicly executed that deal. And I think we would late at least until we had uses of $300 million before we went back to that market. And when we get there that’s probably when we will do it.

[George Hoglund:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from line Smedes Rose with Citigroup. Pleased proceed with your question.

[Smedes Rose:]

Hi. I wanted to ask you a little more just about the fourth quarter results, particularly in Houston where it looks like you came in a little better than expected. And it seems by implication that the balance of the portfolio maybe get a little worse than expected relative to your guidance and you only had two months left in the year at that point. So can you talk a little bit about what you are seeing on the ground in Houston? And what happened across the balance of the portfolio that seems like maybe it was a little worse than what you thought?

[Andy Gregoire:]

A few things in the, in Houston we actually saw free rent start to level off later in the fourth quarter. So we are comfortable that occupancy was holding where we wanted it to we didn’t need to pull the free rent lever as hard as we thought we are going to have to in Houston, which was good. But there’s other markets where we did have to start that we did see some new comps in Raleigh-Durham and in Dallas and some other Texas markets where we had to start pulling a little harder on the free rent lever.

[Smedes Rose:]

So when you say that like that you saw new free rent and stuff happening in Raleigh. I mean are these facilities that are opening that you are not aware of in advance or are they opening faster than you thought? Just trying to get a handle on – it seems like you’re having a tough time really nailing your guidance particularly when you only had two months left in the quarter and the variance is quite significant. I’m just trying to wonder – how are you going to handle and what’s happening on supply is that opening faster are you not aware of it what’s maybe some color around that?

[Andy Gregoire:]

I think there is couple things going on there Smedes. We are very aware of the new comps when they open exactly no. So we could be off a month or two when they’re going to open that does happen. But we just felt that with the name change it’d be better to have some free rent in some big markets, it grew occupancy, it just worked out well. And it’s what we expected it just sometimes that free rent lever when you pull it to maintain occupancy hurts you in the short-term. But we don’t see that long-term we see that as a headwind in the first half of the 2017.

[Dave Rogers:]

Smedes, where we would see…

[Smedes Rose:]

Okay.

[Dave Rogers:]

Go ahead, I’m sorry.

[Smedes Rose:]

No that’s okay. Go ahead.

[Dave Rogers:]

I was going to say where we see incoming competition in new development it’s just – it’s not we don’t think it’s a matter of a market being oversaturated it’s a temporary position where its meet and compete with these comps that come in. And as they raise occupancy things begin to kind of normalize. It doesn’t appear to be the days where there’s 2,000 and 3,000 properties coming on and the market would suddenly become oversaturated and the demand just wasn’t there. It’s just again a short-term position, you got to do that if a comp moves in next-door down the street. And then things begin to normalize a little bit.

[Smedes Rose:]

Okay. You mentioned 227 stores opening or in construction open during construction. Could you give some extra detail just around the Houston specifically what you are seeing on supply additions that you think come online over the course of the year. And do you think that market is sort of bottomed out here now?

[Paul Powell:]

Smedes this is Paul. In Houston in the fourth quarter we identified 14 of which, well 14 within our 5 mile radius of our stores. Two of them were in planning, 10 of them were in construction and the remaining had already opened. So we do know there’s additional development going on in Houston. I think it slow down to some degree. But we’ve seen other markets where there’s a higher potential for more supply.

[Smedes Rose:]

All right, thank you

[Operator:]

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

[Gwen Clark:]

Hi, Good morning. So I know you guys talked about expense growth. But can you walk us through the different line items and how you are getting to the 7% increase in taxes for the year?

[Dave Rogers:]

Yes. I mean, the taxes, Gwen, are very property specific. There is some headwind in Chicago. We had a great year in Chicago. We thought we were going to get hit with a few we are not. So next year we should expect that we do see some headwinds in Chicago gathering real estate taxes. And there’s quite a few markets Texas and Florida that were still – we still have properties that have the potential to be seen as undervalued. So we will see some pressure there and that’s what we are modeling in right now. Otherwise on the expense growth, we see some pressure on the repairs and maintenance from snow plowing potential in the first few months of the year as the Northeast got hit pretty good and we will see if that plays out. So maybe we are conservative there, but we put extra in there compared to last year from the snowplow. Benefits we are seeing some pressure payroll and benefits. Payroll 3% up and then benefits pushing that all payroll and benefits probably up over 4% growth just in that line item. So other than that we don’t see – our insurance renewed March 1 and then we do have some pressure there. We had a lot of damage last year from different situations hail damage in a lot of claims. So our insurance premiums will increase from March 1.

[Gwen Clark:]

Okay, that’s helpful. So as you think about operating cost excluding taxes, is it possible to quantify how much of that increase might be due to the rebranding?

[Andy Gregoire:]

I would say none of that is due to the rebranding. None of that cost built there due to the rebranding. Other than -- I can say that other than the Internet marketing in the first half of the year, we would expect some pressure on that. As you saw on the fourth quarter, some 20 some odd percent more we spend in that market as it switches over, we still have those switch over is going through April, so we will see the pressure on that line item.

[Gwen Clark:]

Okay. That’s helpful. Thank you.

[Dave Rogers:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Barry Oxford with D.A. Davidson. Please proceed with question.

[Barry Oxford:]

Great. Thanks, guys. Getting back to the property management fees and in fact that’s going to be growing how should we think about that line item from a modeling standpoint?

[Dave Rogers:]

For this year, I think you won’t see that much of a difference. If we add say maybe 30, 50 stores, we will be ramping up our team. So as we’ve talked about on prior calls, the margins in this business are really not very good. You’re taking essentially about a 6% fee and some absorption of cost, but you are basically – we staff those – we staff our G&A for those stores just like we do are corporately owned in our JV stores. In other words we have extra amount of people for example about 18 stores per area manager, say 50 stores per IT support tech or property maintenance staffing, one call center rep for every 12 stores. So you are scaling up and it’s costing some 3% to 4% of that fee just to manage those stores properly. So the impact on balance sheet would be nil. The impact on the guidance is not that significant this year or it’s a nice part of our business right now, but the incremental add in 2017 is not the reason we are doing this. We are doing this in large part for scale. It helps to spread the Internet advertising across. It helps to have more stores and more markets we are doing it for the – just to put our presence out there in a better way in the markets that we are in. It certainly pays its way. We call it paid due diligence. These are stores as I mentioned before that we would want to own eventually, so this gives us a great opportunity to understand and operate the stores, but as far as an impact on NOI or – I’m sorry, on FFO not significant for this year.

[Barry Oxford:]

Okay, great, thanks. Thanks for that color. When I look at same-store NOI and the growth for 2017, have you look at the Life Storage portfolio? I would imagine that would be above the average that you currently are showing that, that portfolio would do better than the 275 to 375 you have.

[Andy Gregoire:]

You are right Barry. This is Andy. We do expect that, again those properties once we cleaned up the AR took their occupancy from a 92% inflated occupancy down to an 85% true occupancy on a mature portfolio. They have great run room there to grow NOI, so it will grow significantly faster than the same-store.

[Barry Oxford:]

Great. Okay guys, thanks so much.

[Dave Rogers:]

You’re welcome.

[Operator:]

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

[Paul Adornato:]

Hi thanks, good morning. Just a follow-up in the past, we spoke about the potential harm done by localized price wars. I was wondering if that – if you saw that happen during the winter and if you’re seeing it now and what you’re feeling is on competition out there, sounds like your little bit more optimistic on marked behavior if you will.

[Dave Rogers:]

Yes. We are a bit more optimistic. We are a lot more optimistic. While we are seeing development and new comps come in that in many cases you really do have to compete toe to toe example being in Raleigh where a new comp opened right across the street. We’ve got a new comp in Miami right down the street. Yes, there is going to be a bit of a price war, but again that’s sort of a temporary position that we have to take. It’s not a case where the market is suddenly oversaturated with the multiple of locations. There is going to be a limited time period where that comp is going to – want to build occupancy and you’re going to need to compete. But it’s nothing that we really weren’t prepared for. We know there’s new comps coming in. There is new development. And you just simply need to compete. And again it sort of a temporary blip on the screen you get to deal with and you need to be the better provider.

[Paul Adornato:]

Got it, thank you.

[Operator:]

Thank you. Our next question comes from the line of RJ Milligan with Robert W. Baird. Please proceed with your question.

[RJ Milligan:]

Hey guys, good morning. Andy you gave us stat actually 40% of the customers are below Street rate. What percentage of the customers do you think are at Street rates and what percentages do you think are above Street rates?

[Andy Gregoire:]

RJ, end of the year at the current rate were 8% and 52% were above the current rate.

[Dave Rogers:]

Keep in mind that, at the end of the year our rate structure is about as low as get, so this is the nadir for that kind of status. If you look at that same stat and say July when rates are high it’s considerably different.

[RJ Milligan:]

Okay. But it’s fair to assume that this 52% as they roll off are going to roll down?

[Andy Gregoire:]

Yes, those 52%, yes, if they roll off – this time in year, they roll off in June, July, no, they would not rolled on.

[RJ Milligan:]

Okay. And then Dave you had given some comments on last quarter’s conference call about the expected yield on the Life Storage portfolio acquisition. I was just curious if you could give any more colors to, if you think that’s going to hit underwriting or where you are relative to underwriting?

[Dave Rogers:]

Andy said it best the other day when we were talking about things. I would say we are very close. We are probably six months behind in about 10 basis points low and the main reason for the 10 basis points is Texas. We underwrote Texas less aggressively than we did California and Vegas and even Chicago. But nonetheless we did not when we went into contract on this in April and May, we did not expect the headwinds that we saw in Texas starting in the mid summer. So I think we are close. I think we are fooling ourselves if we think Texas is going to pull the low, the way we thought it work, but certainly the other markets are on target. Sacramento is great. We love Los Angeles. There’s only three from Life in Los Angeles, but the other nine that we bought earlier in the year are doing well. So we are close, but the Texas storm has got us a little off course.

[RJ Milligan:]

And then do you think that the trajectory over say year two and your three, you’re eventually going to get to the original underwriting or do you think that it’s just given the weakness in Texas you’re just not going to hit. What the expectations were for the longer-term yield on that project or that portfolio?

[Dave Rogers:]

I think so. I mean I think Texas as we said before Texas in 2013, 2014 was just screaming. It carried our portfolio. Now in 2015 and 2016 and probably 2017, this is – it’s going to – I mean actually even in 2016, why I think we were 4.5% top-line growth in the first and second quarters. So we got to laid out 2017 probably part of 2018, but it will be back. So if you look at the projected NOI for late 2018 and 2019, it comes right back and we are there. So yes, its again – it was one of the best things we ever did. This was a big deal and it made us as we’ve been joking about bigger, better and stronger, but it’s no joke, it’s worked. And to be off – I told our Board we essentially did this big transaction, this formative deal as well as the 30 some stores we bought in the first quarter. We did all these great things and then we did it all in a blizzard, the whole sector segued from tailwind or headwind caught us. And but it’s fine, I mean we are – if the properties are going, if you believe it all in self storage, it really got to believe in the Life Storage acquisition and we do.

[RJ Milligan:]

Great. Thank you, guys.

[Operator:]

Thank you. Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.

[Jonathan Hughes:]

Hi, good morning. Thanks for taking my questions. Just a few more on Texas. You given a lot of color in Houston, but when you think we see peak deliveries in the other three major three Texas markets of Dallas, Austin and San Antonio. Is that a summer or fall or winter, middle of 2018 just trying to get some color there?

[Paul Powell:]

Hey Jonathan, this is Paul. Yes, in San Antonio, we’ve identified six. Four have been open to in construction. And I have already talked about Austin. And well, in Austin we are showing 11 total, all those are under construction. In Dallas, I don’t have Dallas right in front of me at the moment. But yes, I mean there is still a lot of development, no public storage is doing a lot in Dallas, northern part of Dallas. There yet to come online. And actually I just found Dallas there. We’ve identified 28, 10 of them in construction, 13 have opened and another five in planning. So Dallas size was a little bit of concern, but again at some point, we think is going to slow down. This year it’s going to be little difficult going into 2018 is yet to be seen, but we are tracking this quarterly or actually daily with our – in the field personnel. So we can update this on a quarterly basis for you, but Dallas is looking like the most active right now.

[Andy Gregoire:]

I think something to keep in mind even looking at Dallas is the size of that market and the trade areas and how the market is just so spread out geographically and we’ve got 19 some locations around. So that is the big number, but that doesn’t necessarily mean that those properties are right inside that five mile trade area, they could be on the outskirts. They might end up not being comps to us. So we’ve got to sort of let that play out before we really see how they are going to impact our performance.

[Jonathan Hughes:]

Okay. And is Houston the only Texas market where you project potentially negative revenue and NOI growth for the year?

[Andy Gregoire:]

Yes, it is.

[Jonathan Hughes:]

Okay, great. And then switching to some northern markets New York and Chicago saw about 200 basis point sequential deceleration in the revenue growth in the quarter. Did you see a lot of new supply delivered in those markets are increased discounting by peers. I’m just trying to get a sense of why those were a little weaker than the overall portfolio.

[Andy Gregoire:]

Jonathan, New York was a little bit of a different situation. We have two stores there where we see the need for climate. So we basically have moved out customers. We are putting in climate control. So that caused the revenue issue in that area. Otherwise that would’ve showed a little better growth along 3.7% or so, it would’ve showed better in the quarter had we not done that, still not as strong as it had been. So there is a little weakness there and it is more free rent in that area than we’ve been going through the slow season using, but those two stores definitely had an impact on that market. In Chicago, there is some new supply in Chicago, but we feel comfortable with our – that we are positioned well in that market.

[Dave Rogers:]

Yes. Some of the new supply is us. So we’re a – so you fight that battle same-store total versus total revenue its much like we do in Buffalo and a couple other places where we brought on some new stuff, it’s not on the same-store pool. So we are pretty much done adding our CO stuff. I think the Chicago market is ramping down a little bit as far as new supply goes, but it’s a good market, but it doesn’t always show up in the same-store number.

[Jonathan Hughes:]

Then could you maybe quantify yes, what’s in the pipeline in Chicago. I don’t know if I heard that or if you mentioned that earlier.

[Dave Rogers:]

In Chicago, we are showing 13, eight of them which have opened and another five either construction or planning.

[Jonathan Hughes:]

In a few of those are your own, right?

[Dave Rogers:]

No, these are not our own.

[Jonathan Hughes:]

Okay. All right, that’s it for me. I will hop off. Thanks, guys.

[Dave Rogers:]

You’re welcome.

[Operator:]

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

[David Corak:]

Hey, good morning, guys. One other questions already addressed this a bit, but just wanted to follow up on in place renewal rate expectations for next year. Can you give us just maybe a range mid single-digit to high single-digit renewal growth that you’re baking into your guidance range?

[Andy Gregoire:]

From a revenue point of view?

[David Corak:]

Yes.

[Andy Gregoire:]

1.5% revenue growth would come in place customers. That’s on the high end of what normally, we would see, but we think we had a lot of potential this year from our customers that are under Street rate.

[David Corak:]

Okay, that’s great. And then same kind of question from non-rental fees, non-rental income insurance fees, how much of that is driven by kind of insurance fees.

[Andy Gregoire:]

You won’t see a whole lot of growth in insurance other than penetration or insurance administration fee did not change from 2016 to 2017. We did have to change from 2015 to 2016, which helped that line item. We have no change from 2016 to 2017 in that line. So it’s really just penetration, it will show 4% to 5% growth over the year, maybe a little heavier in the front part of the year.

[Dave Rogers:]

Our current penetration rate is 59.2% and that’s up 173 points. But more importantly is our cap store rate at 85% and that continues to grow. So the teams really continue to improve in that area and they know how to sell insurance or promote insurance I should say.

[David Corak:]

Fair enough. Okay, and then I appreciate the commentary on the free rent comps. Could you just how quantify it, in terms of comps for 2016, maybe in terms of percentage of new customers actually received a discounted promotion or free rent. I know you guys usually have the dollar amount? But, could you help us understand the percentage of new customers that are actually receiving a discount.

[Dave Rogers:]

Well, all of our ends 66% of our customers received free rent versus 60% last year same period and 53% in Q3.

[David Corak:]

Okay. And what is kind of your guidance assume for next year?

[Andy Gregoire:]

It’s very similar levels. In the slower time you’re going to be in a 60% of customers will get free rent in the summer months it will be in the 40%s.

[David Corak:]

Okay, great. That’s help for me. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

[Todd Stender:]

Hi, thanks. And, it’s sounds like you’re not willing to acquire stabilize properties on balance sheet, but you do have an appetite within JVs? Can you just go through some of the growth in return expectations for JV deals? And then maybe just touch on new supply in the markets you’re looking at for JVs see that’s factoring as well? Thanks.

[Dave Rogers:]

Yes, the return expectation we are partnered with folks who have the same philosophy we do with regard to whole periods, with regard to leverage use of leverage fixed rates so forth. So the balance sheets of the joint ventures kind of mirror ours maybe a bit more leverage. But it’s non-recourse mortgage financing. So that’s the main difference. We look for properties, in some cases in the past, we did a couple deals that we thought, we’re very solid we called them bonds like in terms of their yield expectations. They had gone through the downturn with very little detrimental impact. We didn’t see a lot of growth potential in them. We were fooled or we didn’t realize the power of our platforms back in 2011, but that was one reason we did that we did some pretty extensive JV acquiring in 2011 was to take none. What we expected to be not significantly high-growth assets, but rather steady eddies and put them on. Right now we are in a situation where our currency is we think undervalued. So we are looking to our JV partners, if they are willing to grow with us to just basically use the lever of their capital at say, and 80% to 20% lend their 80% or 20% and 50% are so leveraged with mortgage debt. That’s basically the main driver right now. We have not changed our acquisition philosophy as a result of our financing circumstances. So what becomes of it is we have a very pairing fiduciary arrangement, we do take a management fee for running the property and it’s pretty – so we try to keep it simple, there’s not really much of the way it promotes or other financial wrangling it’s pretty straightforward borne of circumstance.

[Todd Stender:]

Okay. Thanks, Dave. And just going back to the Austin CFO deals, wasn’t a surprise you walked away from them but maybe I miss this, what’s the real cost or equity that you are losing by not pursuing these? Is it more than just the deposit? What other value are you walking away from?

[Dave Rogers:]

That was it. They place it – we wanted time to analyze to dig in a little bit more after otherwise we probably would’ve written it off right at the acquisition date. But we went through and did quite a bit of talking with the developers and got to understand it a little better and just thought the risk reward in Austin was too great. So, fortunately the contracts were structured that the only penalty was forfeiture deposit and that made the decision easy.

[Todd Stender:]

That’s all it was it was $1.8 million?

[Dave Rogers:]

Correct.

[Todd Stender:]

Great. Okay, thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

[Ki Bin Kim:]

Thanks. Could you talk about if maybe overall industry level demand what you expect that to grow compared to previous years. And are you seeing any changes in contribution from different customer buckets?

[Dave Rogers:]

I think demand is everybody that’s everybody’s sort of golden goose to try to capture right. Where does demand come from? Why does it come? Certainly it grows with population growth certainly we can make some inroads. We see a greater growth every year in our business customers. We worked hard at that because we have a platform and stores that we bought that were not very focused on business customers we are hoping to make some inroads there.

[Andy Gregoire:]

Yes. Looking at the demand fees and that customer segmentation that you are asking about we are making a great effort to look to attract commercial customers, corporate customers and that’s something that’s a program that we’ve been working on for several years and we’ve really – it’s reached a much greater level of sophistication and the features and benefits that we are able to provide for these corporate customers are well beyond what is typically available from the Self Storage segment. So we are really excited about continuing to grow that piece of our business.

[Ki Bin Kim:]

Okay. And as you’re testing different things, right in terms of pushing the Street rates or customer rate increases or just the overall level of activity that you are seeing at your website how many click you’re getting. Any incremental changes you are seeing there, are customers becoming more sense of surprise less low any kind of color on that would be useful.

[Andy Gregoire:]

Well, I think something to keep in mind during this transition even whether it’s a bit of instability in our ranking online our organic traffic or click through in the fourth quarter is up 75% and even when you look at that on a store-to-store basis not same-store of course but average we are up 30%. So the demand is there and we think not in large part but it’s going to continue to grow is because of our brand. I mean the strength of this new brand is really giving us the opportunity to sort of redefine ourselves in the market and change the personality and the perception of the Company. The Uncle Bob’s name offered sort of a folksy friendly appeal and might have even signaled bargain rates and discounts and maybe even lower quality. And as much as we all love the brand this is a much different brand and we’re trying to attract a different customer and we are seeing that in the feedback that we get from the customers online. Our current customers, our business customers, our third-party management customers and it really is like David said the strength of this brand is really something else and we are seeing it and we are going to continue to see it in all effects at all customer touch points.

[Ki Bin Kim:]

Okay. It’s fine clarify. You are saying that on a store level basis you are seeing a 30% increase in Internet.

[Paul Powell:]

If you look at the number of stores we had beginning fourth quarter last year and fourth quarter 2016, it is a 30% increase in click through or search, overall it’s a 75%. But again you’re adding – 100 or excuse me, 100 some odd stores to the base in the fourth quarter.

[Ki Bin Kim:]

Okay. So it’s not in same-store.

[Paul Powell:]

Yes. It can’t be same-store because it’s online.

[Ki Bin Kim:]

Okay. I just wanted to clarify that. Okay, thank you.

[Operator:]

Thank you. Our next question is another follow-up from the line of George Hoglund with Jefferies. Please proceed with your question

[George Hoglund:]

Looking at the JV programs what are you hearing from current and potential partners in terms of appetite for acquisitions?

[Dave Rogers:]

We think it’s there. We have dealt primarily with one JV partner we did bring on another one this year for the Long Island property but there are others that have been knocking on the door and Paul has had conversations and expects to continue. So there’s an institutional demand these are fairly well pocketed, well recognize names. So I think the appetite on the private side and in institutional money is certainly there for stores. That’s what’s keeping the cap rates where they are. I don’t know what 2017 brings in terms of actually pulling the trigger. The big thing with those players as they want scale immediately and they want terrific returns immediately so do we. So it makes it a little tough in that regard. But, I would say overall institutional appetite is strong, there’s a lot of interest whether or not that involves a lot of deals being appended in sort of a new format we will see but there certainly an interest.

[George Hoglund:]

And given that significant amount of capital from private equity and sovereign wealth and that want to get into storage in a big way. Do you think it’s possible we see any take private transactions amongst the public REITs this year?

[Dave Rogers:]

That’s speculation. I don’t know. That size has not been on the radar. There was activity for Life Storage there was activity for smart stop there was – the billion dollar range yes you are talking a whole different level when you are getting into the four legacy REITs. I don’t know that that’s there.

[George Hoglund:]

Okay. Thank you.

[Operator:]

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

[Michael Bilerman:]

Hey, it’s Michael Bilerman with Smedes. David I have two questions the first you talked about your cost to capital or where your stock is at that doesn’t give you the ability to want to pursue a lot of external growth outside of leveraging your joint venture partner who can put up 80% of the capital in Life Storage would also have some fee income in that. Can you talk about the flip side of that comment which is you have a very solid balance sheet despite some out performance today your stock is at a very depressed levels. Would you or the board entertain a stock buyback program and is that something that’s on the docket?

[Dave Rogers:]

It is something we’ve addressed at both of our last board meetings. It’s sort of a balance we do have uses for funds in the E&E program in winding up the sign change in the rebranding. And depending on what kind of JV interest we are able to take. So, yes, it’s there we also balance that against the fact that it took us about – we were at BBB- company for about 17 years we put finally attain BBB. So there is implications there as well. But certainly we have – I think in order of preference we would want to obviously take care of our construction and deferred maintenance needs. We want to take care of the E&E allocation that we set aside, if the JVs are there I think that provides given the scale in the fee income a little better return at this point on a buyback. But that is certainly in the mix and if there are – if that’s the best use of funds that’s and it works to keep our balance sheet protected. Yes, that’s something that’s been under consideration now.

[Michael Bilerman:]

And then can you talk a little bit about any plan changes at the board level your board is basically split now three members that are 22 years of tenure between Bob, Chuck and Ken. And then three newer members over the last two years and one that had been there for five. I guess how do you think about board composition going forward. Is there a desire to begin to rotate off another either Ken or Chuck or Bob to continue to get board refresh and reduce age but more importantly reduce tenure on the board?

[Dave Rogers:]

That’s something that the governance and nominating committee takes of every year. I’m not on the board but I know that they do discuss it on a regular basis. We were tremendously energized with the – and even Steve five years ago made a big difference on our board. So that’s something to keep in front of themselves all the time I would not expect a change this year but I know it’s been in the conversation quite if they’ve gone deep.

[Michael Bilerman:]

Well I guess is there a thought I mean a six member board is relatively small in REIT world especially now given size that the old sovereign has become. So is there a thought not only of replacing three members that have been there the entire time but adding and expanding the board. And I also think about it from the perspective of if your stock is very cheap you don’t want to be in a position where someone does that for you. So I’m just curious you mention you’re not on the board is there a recommendation that you are putting forth as CEO to the board?

[Dave Rogers:]

No, on that part, no only because we think that we are – the founders have a significant part of the board there’s not room for another. You raise an interesting point when you say that we’ve grown now and that was one of the topics at our recent meeting that is not the same company anymore. So all of what you said has been under consideration I know, I’m not able to talk about where it goes but it certainly been considered we are not the same small company we were even two years ago. So these things have all been in consideration and will be in consideration as we go forward.

[Michael Bilerman:]

Well you spoken bigger, better, stronger could apply to a lot of things and certainly the board could be one making it bigger, better and stronger certainly the stock price hopefully with then follow suit. Thank you.

[Dave Rogers:]

Understood. Thank you.

[Operator:]

Thank you. Mr. Rogers there are no further question at this time. I will turn the floor back to you for final remark.

[Dave Rogers:]

Thank you everyone for your interest. We look forward to seeing you in the coming weeks. And enjoy the balance of the earnings season. Thank you.