Life Storage, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Greetings and welcome to the Sovran Self Storage Third Quarter 2013 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Diane Piegza, Vice President, Corporate Communications. Thank you. Ms. Piegza, you may now begin.

[Diane Piegza:]

Thank you, Rob and good morning. Welcome to our third quarter 2013 conference call. Leading today's call will be David Rogers, Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Ed Killeen, Executive Vice President of Real Estate Management; and Paul Powell, Executive Vice President of Real Estate Investment. Each of you should have received a copy of our earnings release last evening. If you did not and you wish to be added to our distribution list, please e-mail [Indiscernible] us at Sovranss.com. As a reminder, the following discussion and answers to your questions contain forward-looking statements. Sovran's actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences is included in our company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC. At this time, I'd like to turn the call over to Dave Rogers.

[David Rogers:]

Thanks, Diane. Good morning everyone and welcome to our call. Concerning 3Q results, occupancy remains high, rental rates are increasing, incentives are decreasing and costs are in line. Andy will provide the details of the [Indiscernible] we had a really solid quarter. As we have all been noticing, the acquisition market has come to a rolling boil with just a plethora of deals hitting the market. The recent low cap rate environment has enticed the new group of owners to list their properties, or at least entertain discussions to sell them, and we anticipate heightened activity into 2014. During the quarter we acquired three Class A properties, two on Long Island, and one in Colorado for a total cost of $28 million. Last Friday we entered into an agreement to lease and operate four Class AAA properties in Connecticut and Long Island formerly known as Westy Self Storage. As mentioned in the related press release, the lease runs for 15 years. While we do have an option to enter the purchase outright, all four properties in 2014 -- 2015 or 2016. We are very happy to add these high-end stores to our growing Tri-State presence, and we expect them to add a good $0.04 to FFO in 2014. As of this morning we have three other properties totaling about $24 million under contracts, one is Toms River, New Jersey; one in Palm Beach, Florida; and the third in Austin, Texas. All are in various stages of due diligence and none can be assured of closing, but if they pass the test they will be fourth quarter deals. We’re looking at a good many other prospects in both portfolio and one-off form, and expect to have a busy start to next year. The overall picture of our sector is pretty much unchanged from the prior four or five quarters. The macro situation is very healthy, [go to] new supply remains muted, demand is still ticking up and customer awareness continues to grow. With regard to our company specifically, we benefit greatly from size and scale, and with almost 500 stores flying the Uncle Bob’s banner we have the ability to continually invest in the platforms most critical to running our business namely a broad based specifically targeted web marketing program, a state of the art customer care center, a data driven predictive revenue management system, and a sophisticated employee training process. These and other platforms and initiatives give us a terrific advantage over most of the industry, and I think it sets us up for great growth in the quarters and year to come. And with that, I will let Andy give the specifics of our quarter.

[Andrew Gregoire:]

Thanks, Dave. Regarding operations, same-store revenues were strong, increasing 7.3% over those of the third quarter of 2012. The 7.3% increase was on top of the 8% increase we experienced in the same quarter of last year. The growth was a result of the 250 basis point increase in average occupancy and a 3.6% increase in rates, as we saw pricing power continuing to show in the rents collected. Same-store occupancy at September 30 was 90.1%. We also saw a 24% increase in tenant insurance commissions in the third quarter of 2013 compared to 2012. Total property operating expenses on a same-store basis increased by a modest 3% as a result of an expected increase in real estate taxes and insurance. Partially offsetting these increases was the continued decrease in the yellow page spending and lower utility costs. As a result of the continued strong revenue gains and controlled expenses, same-store net operating income increased a very solid 9.3%. This was our fifth consecutive quarter of same-store NOI increases of 9% or more. G&A costs were $800,000 higher this quarter over that of the previous year. Aside from the $200,000 increase in internet advertising, the main reasons for the increase are the fact that we operated 23 more stores at the end of this quarter as compared to July of 2012, our continued investment in revenue management system, and incentive compensation. Offsetting a portion of the overhead costs is an increase of approximately $200,000 in third party management fees earned this quarter. Regarding properties, Dave had mentioned the three stores we purchased during the quarter for $28 million, and the now three stores we have under contract for $24 million as of this morning. On the disposition front, we didn’t sell any properties during the quarter, but in October we sold our only property in Dayton, Ohio, for $3.2 million resulting in a gain of approximately $300,000. We may look to prune a few more properties in 2013 and 2014. From a balance sheet perspective, in September we filed $100 million on our delayed draw term loan paid off by maturing a $100 million term loans. This draw was contemplated in our $500 million bank term loan and line of credit refinancing completed in June. As previously disclosed, the interest saving from this refinancing will reduce our interest costs by an annualized $4.1 million. The refinancing also extends our maturity our line of credit to June of 2018, and our bank term notes to June 2020. We also issued almost 445,000 common shares under our ATM program during the quarter resulting in net proceeds of $31.6 million. We used the proceeds to purchase the three properties in the quarter and to reduce the balance on our line of credit. At September 30, we had $9.7 million of cash on hand and $201 million available on our line of credit, including this accordion feature. With regard to guidance, we have included in our release the expected ranges of revenues and expenses for the fourth quarter and the entire year. Same-store revenues for Q4 should be in the 7% to 8% range and NOI growth around 8% to 9%. Property taxes for the quarter are expected to increase between 8% and 9% as a result of the tough comparables to the fourth quarter of 2012, which saw a benefit from previous over-accruals. We are forecasting full-year property taxes to increase between 4.5% to 5.5%. For the year, we have increased our same-store revenue estimate to between 7.5% to 8.5% and increased our NOI growth to 9% to 10%. Core G&A are projected at $36 million for 2013, including [Indiscernible] over $5 million in internet advertising. We have not assumed any additional purchases or sales of properties in our guidance nor have we included the related acquisition costs incurred to-date or that could occur in the future. Our guidance assumes a weighted average diluted share count of 32 million common shares for the remainder of 2013. Although not included in guidance, we do expect a $1.7 million of fourth-quarter acquisition costs connected with the Westy lease transactions completed in November in the three properties we have under purchase contract. As a result of the above assumptions, we are increasing guidance and are forecasting funds from operations for the full year 2013 at between $3.77 and $3.79 per share and between $0.98 and $1.00 per share for the fourth quarter of 2013. And Rob, with that we will open the call for questions.

[Operator:]

Thank you. (Operator instructions) Our first question comes from the line of David Toti from Cantor Fitzgerald. Please proceed with your question.

[David Toti:]

Good morning everybody.

[David Rogers:]

Hi David.

[Andrew Gregoire:]

Good morning.

[David Toti:]

Dave, I have a question for you, I just want to go back to some of the comments you made, you know, I think everybody has been noticing the heated acquisition market, the heavy volumes, how do you think about 2014 relative to what is arguably a compressed cap rate environment versus the expectation to sort of, you know, pick up acquisition activity again, are you just basically underwriting lower cap rates with stronger forward growth, how do you think about the spend in this environment of sort of overactive transactions?

[David Rogers:]

Well, we have been involved, and there has been a lot of activity and we have been pretty involved in all of it, and the cap rates have compressed considerably. We have been looking though as we always have, and not so much as the going in cap rate as to what we can do with the property going forward, and we want to see the opportunities. So that means making a forecast today on a 70% occupied property, and we like the way it is built and located and how it fits in with our footprint. We will go for it and with the expectation that we are going to be there in 150, 200 basis points a year picking up, so that by the end of year three we might be at a 7.5, 8. So, it isn’t so much the going in cap rates. Now having said that, you know, we looked at the big ones and we just didn’t see the upside that we needed on those to justify a 5 cap, or a 5.25 cap. First of all when you have a portfolio they usually run pretty well. Not to say that the [platforms] can’t help, but there is a limit because some of those that were bought this year were big ones. So, I think David to try to shorten it a little bit it is more the opportunity we see than it is for yield going in.

[David Toti:]

Okay. That is helpful. The other question I wanted to ask was, you know, we don’t see much of a seasonality these days and based on the performance it seems like it is more muted. Do you think seasonality is more muted in this environment of higher environment and stronger demand?

[David Rogers:]

I do. I also think as different markets have different seasonality too, and as you nationalize the portfolio it spreads around a little bit. But I think, yes, I think with occupancy being higher in length or stage being a bit longer, as that grows your quality of customer comes in and stays longer. That all needs the seasonality quite a bit.

[David Toti:]

Okay. I will hop back in the queue. Thanks for the detail.

[David Rogers:]

Thank you.

[Operator:]

Our next question is from the line of Christy McElroy of Citigroup. Please proceed with your question.

[Christy McElroy:]

Hi, good morning guys.

[David Rogers:]

Hi Christy.

[Christy McElroy:]

Sorry if I missed these numbers in the opening remarks, I just wanted to get a little bit more color on what you did in Q3 in regards to pricing, you have been making, you know, good progress on realized rent growth, I just wanted to get a sense for how these rents have changed year-over-year, if you are still reducing discounts, and then also the extent to which you are pushing existing customer rents today?

[David Rogers:]

Hi Christy. Looking at our asking rates in July year-over-year we were running at plus 8%, August a little bit off that and September 7%. So quarter-over-quarter was plus 1.7% in asking rates and while we expect that delta to shrink a bit, we still think there is room with asking rates getting into the fourth quarter. With in place, we were very aggressive this quarter. As a matter of fact it was probably our most aggressive quarter, or was our most aggressive quarter with in place over the last several quarters, 9.6% of our customer base received increases versus 4.6% last quarter, and 7.3% year-over-year. Our move out rate was a bit higher from 11.8% to 13%, but frankly that is by design looking at the quality of the customer and the retention rate, and our average rent increase was 9.5% versus 8.2% last quarter and 9.4% third quarter year-over-year. So, we are real strong with those two components, both asking and in place. And even with concessions, we -- our concessions were down 45%, demand continues to be high, and we continue to be able to suppress those concessions quite a bit, 40% of our customers received concessions versus 48% last quarter and 56% year-over-year. So even going into our low season given where we are at with occupancy, we think we will see concessions reduce over the next -- at least the next quarter and we will see what happens heading into next year.

[Christy McElroy:]

With regard to your comment on the street rents delta shrinking going forward, I mean, your move ins were down about 6% year-over-year, do you think that is more a function of the normalization of that move in piece, or are you comfortable with that level or to your comment would you think you have pushed street a little too much?

[David Rogers:]

We don’t think we have pushed street a little too much. We are actually quite comfortable with being down 5.9%. Again it is -- you can almost look at that as by design, I mean last year the [Indiscernible] involved the two primary components being concession management and sort of balancing that with rates. And we beginning in 2012, we were at $2.2 million in concessions, and we dropped that to $770,000 this quarter, I think. So, we are actually happy with those rents, and again, a quarter by design when customers respond to concessions and low rates, it is important that we repeat that quality customer, our customers that have been with us over a year have gone from 53%, this is in September I believe, 53.8% to 56.5%. So those customers are paying us a higher rate. So, we are good with how we are balancing things and the fact that our rents are down just a bit.

[Andrew Gregoire:]

We are trying to reduce the churn a little bit I think and it is working. The levers that we are pulling with regard to incentives and so forth are resulting in customers staying, customers not shopping with deals as much as really needing stores and willing to pay the long-term rates.

[Christy McElroy:]

Okay, and then just with regard to the additions to your property management platform recently, can you talk about sort of overall your efforts to market your management services, or how proactive are you being to add properties to the platform and how do you see that growing and coming here?

[Paul Powell:]

Hi Christy this is Paul. We are seeing our Uncle Bob management team is out on the road pretty frequently. They attend all the state association shows and the national shows. They are doing a lot of [calling]. As we have said in the past, we are very selective on who we bring into our management just because we’re looking for these to be acquisition opportunities down the road. So currently we have 23 properties under third party and then recently we have just contracted with two developments that should open up pretty soon, [Indiscernible]. We are seeing a lot of enquiries regarding that type of management, whereby a developer or an owner opens up a property looking for management day one. So those things have been picking up quite a bit recently. The majority of our traffic is through the trade shows that we attend. So, we think there is going to be a lot more of that as development comes online. So, we are still fairly aggressive. Again our team is on the road constantly, and we think there will be some good opportunities going into 2014.

[Christy McElroy:]

Is there a difference in the management fee structure on the newly developed properties versus the stabilized assets that you take under management?

[Paul Powell:]

Not really. We do have a minimum that we require. That is negotiable depending on the portfolio or just one property, but typically, you know, we require the 6% management fee and pass through some of the expenses for our call center and for our internet presence and so forth. So that is pretty much standard. There is some negotiation here and there, but it is -- that is de minimis. I do think those -- what you might be asking Christy is on the lease up loans from zero to stabilization, we do get a minimum fee of 2500 or so a month, $2500 a month. So it is 6% on [no dollars] is a pretty rough way to operate a management company. So we do hit the minimum till the property is stabilized.

[Christy McElroy:]

All right. Thanks guys.

[Operator:]

Our next question is from the line of Jana Galan, Bank of America Merill Lynch. Please proceed with your question.

[Jana Galan:]

Thank you. Good morning.

[David Rogers:]

Good morning.

[Jana Galan:]

Wanting to follow up on the Westy Self Storage transaction and why choosing that structure of a triple net lease versus buying the properties outright, and then maybe if you can give us kind of estimated range of where you think the cap rates -- what the cap rates would look like with your management in ’15 or ’16?

[Paul Powell:]

Yes, this is Paul again. Yes that is a -- it is a triple net lease that we signed just a few days ago. It is -- our option periods ends up in February 2015. We expect NOIs in year one, in 2014 to be somewhere between 700,000 to 725,000, 7 million to 725,000. Based on the $120 million option price that cap rate should be north of 6, probably the low 6 range. And then we expect that to grow 50 basis points to 100 basis points out the next two years or so. So, we feel like it is a very good opportunity for us.

[David Rogers:]

The net structure was driven by the tax situation of the owner at the time.

[Jana Galan:]

Thank you. And then kind of given the, you know, heightened activity and your pipeline probably being larger than you have seen in a while, how are you thinking about funding future deals?

[Andrew Gregoire:]

And I think -- this is Andy, we are going to continue to be aggressive with the ATM and match fund those acquisitions, while keeping our balance sheet very nimble. You know, pay down that line of credit when we can, make sure we have the ability to take on those big acquisitions if they come along. We wouldn’t -- we wouldn’t fund a large acquisition, 100 million plus with an ATM, we will do the traditional offering, but right now we are just going to be nimble and take these one-off deals and fund them with the ATMs, match fund with the ATM and borrowings on our line of credit.

[David Rogers:]

We have a total capacity on the line of about quarter billion. We have drawn 49 million at the end of the quarter. So there is quite a bit of capacity on the line, and I think our leverage ratio is basically doing, what Andy said, keeping us nimble, flexible, and with a lot of fire power at hand.

[Andrew Gregoire:]

And the ATM has 90 million still on the current ATM program.

[Jana Galan:]

Okay. Thank you, Andy. Thanks Dave.

[Operator:]

Our next question is from the line of Brandon Cheatham of SunTrust. Please proceed with your question.

[Brandon Cheatham:]

Hi, good morning.

[David Rogers:]

Good morning.

[Brandon Cheatham:]

When you think about the [Indiscernible] that you were able to push this quarter, I guess on a forward looking basis, what percent of the occupancy that you currently hold you would feel comfortable pushing that forward, should we expect to see some more stability to increase as employees ramp?

[David Rogers:]

Well, 9.6% is pretty strong right now as a percent of our customer base receiving increases. I would say that during the low season you are going to see that -- you are going to see it push down that number quite a bit. It is just heading into the low season overall. It is -- sometimes it is not worth the risk for a potential moved out, for those customers may sort of fall into that grey area, and we are not 100% sure that they can be back filled. So, if they are paying near the asking rate, we’re not going to get too pushy with the in place increases. We will however see that the rent increase average will sit between 8.5% and 9.5%. So those that do receive increases will receive, you know, hefty increases.

[Brandon Cheatham:]

Okay. And then on the property taxes comp you are expecting to experience in the fourth quarter, can you explain why is that going into next year or should that level out as you said about 4.5%, 5%?

[Andrew Gregoire:]

Hi, [Brent], this is Andy. It should level out next year. If we hit budget what we expect in the fourth quarter, next year should be very level throughout the year. Again last year we had a little benefit come in the fourth quarter. So, the comparable looks strong, but to 3Q to 4Q, you can say, well, you won’t see a bump up, a big bump in property taxes, but year-over-year you will. So, next year if we hit budget, it is becomes, if the rest of the Florida and Texas come in as we think they will, it should be pretty smooth next year.

[Brandon Cheatham:]

Okay.

[Andrew Gregoire:]

And again, it would be 4.5% to 5%.

[Brandon Cheatham:]

Okay. Just on the acquisitions you are looking at now, can you give us kind of the sense on cap rates on those?

[Andrew Gregoire:]

On the -- cap rates on what we bought in the third quarter range from about 5% to 7%. So, the Long Island deal’s bills were just coming out of lease up. So, our going in cap rates to Long Island were around 5%, and then the Colorado deal was low 7%. So we expect those again to grow 50 basis points to 100 basis points over the next 12 to 16 months.

[David Rogers:]

I think important though [Brent], it is -- as we have always done, if you are looking at deals that are in lease up stage, 50%, 60%, 70% occupied, you are going to be talking a very, very low cap rate with opportunity to come. You are talking stabilized, mature in a very high-end market, you are going to be looking at a 5%, 5.5% maybe for a Class A property, and then it depends on the deal, it depends on the opportunity, it depends on the market. So it is going to be a pretty wide range I think and the idea is to underwrite it with all those factors under consideration.

[Brandon Cheatham:]

Okay. So generally your market varies between 5% to 5.5% that is Class A stabilized?

[David Rogers:]

That is usually -- we feel like there is still some runway left on those deals that that cap rate. Typically, I mean, we like -- we were targeting 6% or 7% cap to stabilize and that is just in core markets and some of the bigger MSAs. We are actually seeing some low 7 caps in some secondary markets that we are looking at. But yes, I think the low 6s and then to be more opportunistic we will be about 6 going into 2014.

[Brandon Cheatham:]

All right, thanks. I appreciate it.

[Operator:]

Our next question comes from the line of RJ Milligan of Raymond James. Please proceed with your questions.

[RJ Milligan:]

Hi, good morning everyone.

[David Rogers:]

Good morning RJ.

[Andrew Gregoire:]

Hi RJ.

[RJ Milligan:]

So with occupancy now in the 90s, and looking at public storage running their portfolio just over the past two quarters closer to 95, just curious what your thoughts are in terms of, you know, where you think you can rein peak occupancy within the portfolio, where you want to bring it and how long do you think it will take to get there?

[Andrew Gregoire:]

Hi RJ, it is Andy. You know, we are looking at probably 93, 93.5 next year, 95 is probably a little too high. We are probably not taking the advantage of pushing rates, and reducing concessions at 95. Turning away too many customers at 90%, at 95% we will be turning away a lot more than we want to turn away. So, we want to be more aggressive rate wise and 93%, 93.5% is probably where we would max out. We hope to get there somewhere in the next season.

[David Rogers:]

RJ, we are always concerned about the store occupancy for the overall portfolio occupancy, but really every -- each store has its own particular balance that any time between the asking rates and the occupancy and the concessions, and that is going to vary micro level. So it all washes out and produces results at the end of the quarter. But we don’t -- we would love to get 94%, but if it doesn’t make sense that is not where we are going.

[RJ Milligan:]

Okay, and just curious, you know, we haven’t heard of a lot of new supply coming into the market, just curious what you are seeing, obviously there is a lot of talk about people wanting to develop, but as some of the peers just said, we haven’t seen a whole lot go into the ground, I am just curious, in your specific markets, if you are seeing anything, hearing anything, anything that is concerning you on the plus side?

[Paul Powell:]

Good morning RJ, this is Paul. Yes, there is certainly a lot of talk throughout the industry of new construction. Again as I mentioned earlier, the trade shows that we attend regarding the track, because coming are talking about new development. They are mostly secondary markets. I think they have to be the new suppliers, some are bigger based on our research, we have got about 31 properties and [Indiscernible] coming out of ground, and the market in general there is another 26. So, we are tracking about 57 properties that would compete with us possibly over the next two or three years. So, again that is very small compared to historical development pipeline in the early 2000s. So we are still not that concerned all though I think as the economy continues to improve, and interest rates stay low, I think certainly this talk will turn into development, but we are just not that concerned at the moment.

[RJ Milligan:]

It is very helpful. Thanks guys.

[Operator:]

Thank you. Our next question is from the line of Ross Nussbaum from UBS. Please proceed with your questions.

[Ross Nussbaum:]

Hi guys. Good morning.

[David Rogers:]

Good morning Ross.

[Ross Nussbaum:]

I hope you can clear up some confusion for me, so I looked at your realized rent growth of 3.6% this quarter, I looked at what it was in the second quarter and I think it was right around the same level, yet you talked about asking rents being up, I think it was 1.7% sequentially from Q2, now running up to 8% year-over-year, concessions are down, you are pushing because existing customer rent is more, so I guess I am confused as to why all of that didn’t result in a more meaningful pick up in realized rent growth in the third quarter.

[Andrew Gregoire:]

Hi Ross, this is Andy. I think the biggest factor is that concession pull back. This was a tough comparable this quarter concession wise pull back. We had like a $600,000 reduction in total concession. That was over $1 million last quarter. It was a couple of million dollars in the quarter before that, I am sorry, over a million dollars in the quarter before that. So that is the piece where you dropped off like that concession savings reduced by about half a million dollars, but that was the biggest driver of that number, and why it might have surprised you.

[Ross Nussbaum:]

So, as I look ahead here given where your asking rents are, given what you are doing in place, if you didn’t change those numbers over the next few quarters, should we all expect that that realized rent growth should continue to accelerate higher?

[Andrew Gregoire:]

Yes, we would think that would continue to accelerate. We still have a couple of more quarters in concessions, about probably equal to what we did this quarter in reduction. But we think we have two of those left and the other drivers of rate will begin to show up, and you should see that 3.6 creep up.

[Ross Nussbaum:]

Okay. Does it creep up to when we are having this conversation a year from now, are we talking -- does that number creep up to 5%, I don’t -- it is not going to get to the 8% that you are getting on asking rents, right?

[Andrew Gregoire:]

Correct. Somewhere in the 4.5%, 5%.

[Ross Nussbaum:]

It is helpful, okay. Second question is you guys have about 25% of your properties that are not in the same-store pool, can you give us a sense for how much the NOI has increased on those, at least for the ones that you have owned for about a year on a percentage basis, I mean…

[Andrew Gregoire:]

Those stores, they are about 80% occupied. The group that we bought in 2012 that is not in the same store pool is about 80% occupied. There is a lot of room to grow those stores. How much have they grown, in 2013 I think they have grown from 70% to 80%, so they have we figure another 10% to go on 2012 acquisitions.

[David Rogers:]

No there is 55 stores that aren’t in the JV pool that we don’t [Indiscernible], and those have done on balance as well, perhaps a shade better, depending on the quarter, but on balance about the same as ours over the last six or seven quarters. So that 55 stores loss is in that two JVs that are tracking our quarter. And then as Andy says the new stuff is a little more opportunistic than the mature portfolio we report on.

[Ross Nussbaum:]

I appreciate it. Thank you.

[Operator:]

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

[Todd Thomas:]

Hi, thanks. Good morning.

[David Rogers:]

Good morning.

[Todd Thomas:]

Good morning. Just a couple of follow-ups I guess on the Westy, the deal structure, is that something that you are discussing with other sellers, something that you will be interested in doing more of?

[Paul Powell:]

Hi Todd, this is Paul. No, this was a unique opportunity. We built a relationship with one of the owners of the Westy portfolio, and based on some tax issues on his side, we wanted to tie this up, we didn’t want to wait for his tax issue to work itself out. So, we suggested the scenario which worked for him, so triple net lease. So, I mean it is certainly an opportunity we can or structure we could bring up going forward, but we are not into any hard discussions with any other sellers at this point.

[Todd Thomas:]

Okay, and then Andy, can you just explain how this will flow through the P&L, I mean is this simply, you are going to collect all the operating incumbent expenses, and then just have a $6 million, you know, new line for a sort of lease payment, lease rent expense?

[Andrew Gregoire:]

That is correct Todd, and we are going to be operating them as [Indiscernible]. We take all the revenue, pay all expenses, the 6% -- the $6 million lease payment, it is a little unusual for GAAP purposes because it has escalators in it. We have to straight line that. So our GAAP expense we’re going to have to show some $8 million a year. So actually from a GAAP point of view, it will be dilutive, but we will have a street line rent adjustment to add back that $2 million of extra expense that we have to report for GAAP, because on a cash basis it well maybe $6 million of rent expense.

[Todd Thomas:]

Okay. So year one your expectation is that it will be a positive cash flow of about 1.2 million if I heard you right.

[Andrew Gregoire:]

Correct.

[Todd Thomas:]

Okay. All right, that is helpful, and then I may have missed it, but did you give an update on where occupancy was at the end of October?

[Andrew Gregoire:]

At the end of October we were at 89.7%.

[Todd Thomas:]

And where does that stand year-over-year?

[Andrew Gregoire:]

It was 87.9% at the end of October. So pretty typical seasonality.

[Todd Thomas:]

Okay, and then just lastly you talked about sort of culling the portfolio a bit more in terms of selling some properties, just wondering what we might expect in terms of the magnitude of these sales over the next 12 months or so, how much are you looking to dispose of?

[Paul Powell:]

Todd, this is Paul. We have got a couple of other properties that we are discussing with potential buyers. But at that point that while we have -- we do on an annual basis review our portfolio, and there could be other opportunities, other disposition candidates going into 2014, but there is nothing at this point.

[Andrew Gregoire:]

And those three Todd were probably less than $10 million total sales price for those three.

[Paul Powell:]

Right.

[Todd Thomas:]

Got you. Okay, great. Thank you.

[Operator:]

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

[Paul Adornato:]

Hi, thanks. Good morning.

[David Rogers:]

Good morning Paul.

[Andrew Gregoire:]

Good morning Paul.

[Paul Adornato:]

Hi. I guess over time it seems like you guys have been able to move into higher demographic regions and I was wondering if you have any evidence or how you track the demographics of your customers?

[David Rogers:]

It was not that I expected. Yes, the demographics of our customers, it is really, it has got anything to do in the apartment game where you get credit ratings and then financial histories and so forth from your tenants, ours is credit cards and proof of who we are and herein. So, we got to rely pretty much on the studies done by the industry. There was a recent one that just came out by the Self Storage Association, pretty well done actually. And a large sample and it was very I think statistically valid, and they had essentially come back and say that the typical customer is by -- I think this time around it was 54% of Self Storage customers, not business, but residential customers. 54% of those had household income of less than $50,000. So, when you say that the income demographics are -- certainly population demographics are important. Income demographics we are not so convinced at all. I mean certainly you are going to see it in Alexandria, Virginia for example, or right in Boston, you are going to be able to drive higher rents because of the higher rent neighborhood. But the fact that you have got people in a typical storage facility, the income factor or the income component of the demographic study we do is way down on the scale in terms of importance. I think way more important I think is the number of households in the 5 mile plus radius. These -- you know a lot of people measure 3 miles. Our study shows that much of our traffic has nothing to do with 3 mile radius. It is farther than that. So we look pretty much at the five-mile radius in terms of density, but income is not a big factor.

[Paul Adornato:]

That is interesting, and maybe a related question is, as you think about branding and Uncle Bob’s image, you know, have you now done any focused groups or kind of understand the presence of Uncle Bob in the market, and maybe another way to say it is Uncle Bob kind of the right guy for you to lead you to the next level?

[Edward Killeen:]

Hi Paul. It is Ed. You know, we like Uncle Bob. We think he is the right guy. Our studies are certainly not client specific. We get a lot of feedback from our area managers, who get feedback from our managers, who are hearing directly from our customers. And while that name Uncle Bob, you know, might not work on Wall Street, it really works on main street with our everyday customer. It is very [Indiscernible], and it is -- you know, everybody likes their uncle, usually they like their uncle. And Uncle Bob really plays well with our customer. They feel safe being with Uncle Bob, concerned with Uncle Bob for the name. The name really does play well and we think we will keep it.

[Paul Adornato:]

Okay, great. Thanks very much.

[Operator:]

Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your questions.

[Paula Poskon:]

Thanks. Hi everybody.

[David Rogers:]

Good morning Paula.

[Andrew Gregoire:]

Hi Paula.

[Paula Poskon:]

Dave, I apologize, but I missed your introductory remarks when you were talking about the transaction environment, what do you think is bringing more sellers to market?

[David Rogers:]

Well low cap rates for sure. It is just the market, the conventions and it is brokers, and you know, it is -- it is an opportunity. I think we are seeing people who had no interest at all in giving up on the business are selling. Certainly not two years ago, or three years ago when we were just coming out of operators having a rough goal, but I think Paula to the [Indiscernible], we are hearing from more people who we thought were locked in and gone for ever running their own show.

[Paul Powell:]

I think -- hi Paula, this is Paul. I think that going into next year we are still going to see a pretty good influx of opportunity from people that as Dave mentioned probably weren’t even considering selling at the beginning of the year. I know we have worked on some relationships over the last couple of years that you know we thought at some point they would be sellers, but they are coming out of the works now. You know, we have got offers on the table for over $400 million right now on about 31 properties. A lot of those are off markets, and just relationships we built and all of them, we are seeing these cap rates and then they wanted to go down this road to see if they can sell their properties. So, the low cap rate environment, the low interest rate environment definitely it is going to create a lot of opportunity going into 2014. Then again we are going to be somewhat disciplined. We are not going overly aggressive on some of these larger portfolios, but I expect we will see some more of these you know $100 million plus portfolios coming to market.

[Paula Poskon:]

Thanks Paul and are you getting any inbound calls from private developers looking for financial partners, you know, are there opportunities for presale agreement as an example that we’re seeing in other sectors.

[David Rogers:]

Yes. We are -- we’re not too interested in that. We’re talking with some developers, where we’re not financing them. But they are going to build and we will buy their CFO, or take over their management. So, we are not going to be too interested in doing financing. If there is a large JV developer out there that is looking to build a large portfolio that may be something we may do a joint-venture with them on. There are a couple of discussions in progress now that you know, it is in that regard, but they are one-offs and especially they are inexperienced developers who don’t have a track record. We are not going to be too interested in financing their deal.

[Paula Poskon:]

Okay. Thanks very much.

[Operator:]

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

[Todd Stender:]

Hi, good morning guys.

[David Rogers:]

Good morning Todd.

[Andrew Gregoire:]

Hi Todd.

[Todd Stender:]

Most of my questions have been answered, but just to dig into that Westy portfolio, are the results going to be included in your owned portfolio, are we going to start to see occupancies amongst all your other owned stuff?

[David Rogers:]

Yes, it will be included with our own portfolio. It won’t be in same-store obviously, but it will be in our own portfolio.

[Todd Stender:]

Okay, thanks. And I don’t know if I missed this, did you give the occupancies, kind of rent per square foot on those facilities?

[Andrew Gregoire:]

Yes, the occupancy -- they are all fairly highly occupied, averaged around 95%. The in place rents were around $24. We are probably going to -- our asking rates are probably close to $25.

[Todd Stender:]

Okay, thank you, and how about the purchase price, is that already been determined or once you guys get in there, obviously you will drive results. So theoretically the value would head higher.

[David Rogers:]

No, it is a firm price, $120 million. That is our option price.

[Todd Stender:]

Okay, thanks, and just lastly would you attribute the strong up tick in term insurance is that something you are driving more of and secondarily do you self insure?

[Andrew Gregoire:]

Hi, this is Andy. We do not self insure. We do pass off that risk. We don’t like the risk associated with that. Strong hurricanes and some fires and things like that you take a lot of risk when you take it on yourself, so, right now we will pass that off to a third party. We are pushing it hard. I mean, it is an initiative we have internally. We get a big share of those premiums collected. So, we are requiring our customers carry insurance and we expect that to continue to grow into 2014 and 2015. We are going to see that continue to creep up.

[Todd Stender:]

Great. Thank you.

[Operator:]

Our next question is from the line of Ki Bin Kim with SunTrust. Please proceed with your question.

[Ki Bin Kim:]

Hi, thanks. Just a couple of quick follow ups, on your acquisitions, [Indiscernible] acquisitions or the options you purchased, just curious why you know, -- of the three that you can buy is only one year, and on a straight line basis, it looks like the payment you will be making to the seller will be a 6.7% yield. So if you don’t buy 5.15, isn’t there a risk that you might be paying more than you’re getting in?

[David Rogers:]

It is risky. It's one of the things we are going to balance, had we -- we would have bought it today, and we are accommodating the seller and it’s a good negotiation and just this -- the whole particulars of that opening the window in 2015, closing the window in 2016, it was all negotiated as part of the package, but given where we are today we would certainly execute the option, we -- that’s part of the reason why we are keeping our balance sheet as nimble as it is, and with the capacity we have so that we when the time comes, we will have, you know, presumably the markets won’t create, there won’t be issues but that would be our intention to purchase as soon as we could because you are right, that -- one of the reasons we might not as efficient, inflation runs away, and if that’s the case, the 4% escalator starting in 2015 might not look so bad. But we don’t know, but we are right now, you know, we are keeping our options open. Our intent certainly is to take it down and to acquire it, and that’s how it was negotiated.

[Ki Bin Kim:]

And is it at your -- fully at your option or do both parties have…

[David Rogers:]

It's fully in our option Ki Bin. Actually we’re required to give a 90 day notice so we can actually notify the seller in November of 2014 that we are going to exercise our option and hopefully acquire as early as February of 2015. So -- and it's strictly at our option.

[Ki Bin Kim:]

Okay. And I just want to clarify the questions regarding rates -- I think you said street rate at a portfolio level year-over-year are up 8% this quarter. Is that correct?

[David Rogers:]

Yes.

[Ki Bin Kim:]

What was that number last quarter? And when you made the comment that the delta -- I am not sure if you are mentioning in rates or street rates that it was going to shrink in the fourth quarter, maybe if you could clarify that if you’re referring to street rates, and you know I wasn’t sure what figure you are referring to?

[David Rogers:]

Well, we don’t think we are going to carry that 8% year-over-year right through the low season into the first quarter. We think that will shrink a bit as Andy said 4% or 5%. I think that probably will stay in 6%, 7% for the first two months of the year, but we will see that shrink just a bit the asking rates -- in the last year, I am not sure what the number was.

[Ki Bin Kim:]

I mean that quarter year-over-year. It was 7% last quarter.

[David Rogers:]

[Indiscernible]

[Ki Bin Kim:]

All right. Thank you, guys.

[Operator:]

Our next question is from the line of Shahzeb Zakaria from Macquarie Group. Please proceed with your question.

[Shahzeb Zakaria:]

Hi, good morning guys and thanks for taking the question.

[David Rogers:]

Good morning Shahzeb.

[Shahzeb Zakaria:]

So going back to development you guys mentioned during the last earning call that there were 30 assets that were new developments, all recently opened within the trade area of your portfolio and now that 29 in the general markets where you operate. How have those figures changed since the last quarter?

[David Rogers:]

Again, this is based on research we do in the field and I don’t -- it is not an exact science. So we have -- but we have, you know, we do this on a quarterly basis and this is the most recent number was 31 in the trade, the immediate trade area, and then another 26 in some -- in either being developed or in the final stage or, you know, we found on the books within the planning board. So the total of 57…

[Shahzeb Zakaria:]

Okay that is helpful. Thank you so much guys.

[Operator:]

Thank you. Mr. Rogers there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

[David Rogers:]

All right. Well, very good folks, we appreciate your time and interest in our company. We look forward to dialog going forward and have a good rest of the year. Thank you.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.