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Edited Transcript of EXR earnings conference call or presentation 21-Feb-19 6:00pm GMT

Q4 2018 Extra Space Storage Inc Earnings Call

SALT LAKE CITY Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Extra Space Storage Inc earnings conference call or presentation Thursday, February 21, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Norman

Extra Space Storage Inc. - VP of IR & Corporate Communications

* Joseph D. Margolis

Extra Space Storage Inc. - CEO & Director

* P. Scott Stubbs

Extra Space Storage Inc. - Executive VP & CFO

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Conference Call Participants

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* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Extra Space Storage Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Jeff Norman. You may begin.

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Jeffrey Norman, Extra Space Storage Inc. - VP of IR & Corporate Communications [2]

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Thank you, Michelle. Welcome to Extra Space Storage's Fourth Quarter and Year-end 2018 Earnings Call. In addition to our press release, we have furnished unaudited, supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements combined in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, Thursday, February 21, 2019. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

I would now like to the call over to Joe Margolis, Chief Executive Officer.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [3]

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Thank you, Jeff, and hello, everyone. Thank you for joining us for our fourth quarter and year-end call. It was great to have so many of you here last month for our Investor Day, and we appreciate your interest in and support of Extra Space Storage.

2018 was another solid year. Same-store revenue was in line with expectations. Our diversified portfolio and best-in-class platform are maintaining very high occupancies, while producing positive rate growth, despite a challenging environment with new supply in many markets.

Expenses were also generally in line with expectations, with the exception of a couple of uncontrollable expenses, which hit in the first half of the year. Our team stepped up and did a great job with controllable expenses, especially in the last 2 quarters and found ways to offset some of the expense growth through savings and efficiencies.

Our same-store NOI grew 4% for the year despite a challenging operating environment. Same-store NOI was enhanced by our strong external growth from third-party management and off-market acquisitions, resulting in core FFO growth of 6.6%, which was above the high end of our annual guidance.

Looking forward to 2019, many of the themes are similar to 2018. We continue to see new supply delivered in many markets. The rate of deliveries has started to slow. And while we still believe new openings in 2019 will be lower than in 2018, we expect the impact of new supply to be greater due to the cumulative impact of several years of elevated development.

These concerns are the same concerns we discussed on our call a year ago. However, there are also some encouraging themes from last year that will continue into 2019. First, the economy continues to be healthy. Second, we are in a need-based industry with steady demand and solid fundamentals. Third, concerns about declining use of storage due to millennials, disruptive new businesses or otherwise are proving to be ill-founded. And fourth, large operators continue to have a significant technology advantage over most of the industry.

As a result, occupancy remains very strong and we have positive rate growth in most markets. We have a geographically diverse portfolio and a platform built to drive traffic to our stores, our website and our call center.

In short, Extra Space is well prepared to navigate today's competitive landscape.

The challenges presented by new supply also continued to bring us opportunities. In 2018, we added 153 stores to our third-party platform and continue to have a robust pipeline for 2019. We invested $580 million in acquisitions, $145 million of which was invested in Certificate of Occupancy or development deals.

We were successful at finding accretive acquisition opportunities through our partners and other relationships before they were exposed to the broader market. 84% of all 2018 acquisition volume was completed through off-market transactions. This off-market acquisition trend has continued into 2019, as we recently completed the buyout of one of our joint venture partners in 12 properties in Los Angeles and the Bay Area. These are well-located, purpose-built properties that we developed ourselves in the early 2000 in top-tier infill markets with true barriers to entry. Extra Space realized $72.8 million promote in the joint venture through the transaction, which was applied to the purchase price.

While 2019 will not be without its challenges, we are making the necessary investments to strengthen our platform and support our growth, while maintaining operational excellence in the current environment.

I would now like to turn the time over to Scott.

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [4]

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Thanks, Joe, and hello, everyone. Our core FFO for the quarter was $1.22 per share and our core FFO for the year was $4.67 per share, ahead of our guidance. The beat was primarily due to property performance and G&A savings. Core FFO includes $0.02 adjustment for the write-off of deferred financing costs related to the prepayment of notes payable to trust. We continue to evolve our balance sheet, which has never been stronger.

During the quarter, we amended our credit facility, accessed our ATM and increased our unencumbered pool, which now stands at $5.6 billion. These efforts are part of our goal to further diversify our capital structure, latter our maturities and minimize our average interest rate while extending the average term. This will ensure that we continue to have capacity to fund future growth through multiple sources of capital.

Last night, we provided guidance and annual assumptions for 2019. Our new same-store pool increased by 38 stores to a total of 821. Same-store revenue is expected to increase 2% to 3% in 2019. As Joe mentioned, we believe the impact from new supply will be greater in 2019 than it was in 2018. The level of this impact will depend on the timing of deliveries and the speed of absorption in impacted markets, specifically the major Florida and Texas markets.

Our guidance also assumes some revenue growth moderation in markets not heavily impacted by new supply. This is due to multiple years of outsized growth resulting in tough comps.

Same-store expense growth is expected to increase 3.75% to 4.75%. The increase in expenses is primarily driven by outsized growth in property taxes and marketing spend. Our revenue and expense guidance results in NOI growth of 1.25% to 2.75%.

Our full year core FFO is estimated to be $4.73 to $4.83 per share. Our 2019 -- in 2019, we anticipate total dilution of $0.23 from value add and C of O acquisitions, up $0.03 from 2018. We recognize the short-term headwind this causes to our core FFO growth rate, but believe the investment in these lease-up stores continues to improve the quality of the portfolio and generates long-term value for our shareholders.

With that, let's turn it over to Jeff to start our Q&A.

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Jeffrey Norman, Extra Space Storage Inc. - VP of IR & Corporate Communications [5]

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Thanks, Scott. (Operator Instructions) With that, I'll turn over to Michelle to start our Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Spector of Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [2]

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This is Shirley Wu with Jeff Spector. I think on previous earnings calls, you've mentioned that the percentage of your portfolio being affected by the new supply would be around 60% in '19. Has that changed? And what do you think '20 is going to look like?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [3]

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So our view of 2019 has not changed. The only thing that's changed on the ground is a certain number of developments that we expected to be delivered in 2018 were, in fact, delayed and now will be delivered in 2019. But we expect the same thing to happen in 2019 that some of the properties that are scheduled to be delivered late in 2019 will, in fact, be delayed and not delivered until 2020. So our view continues to be that deliveries will be higher in 2018 than in 2019, although peak impact is in 2019 because of the cumulative effect. As to 2020 and our views, frankly, it's all subject to the trend continuing of decreasing new developments. If, in fact, people start putting more shovels in the ground, then we could be wrong and we'll just have to wait and see what happens.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Okay. So could you talk about street rates in 4Q and maybe how that's going to look in 1Q of '19 as well?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [5]

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Yes, Shirley, our street rates in the fourth quarter were -- this is our achieved street rate. We achieved streets rates that were in the low single digits, and it was about 2% in January.

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Operator [6]

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Our next question comes from Jeremy Metz of BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [7]

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Did you mention the drag from discounting at all? I know last quarter, it was about an 80 basis points drag that was supposed to have abate a little bit here in the fourth quarter? What was it?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [8]

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So in the fourth quarter, there was really no drag or no benefit from discounts, it was flat. And our guidance for 2019 assumes the same, no benefit or drag.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [9]

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So if we combine that with the 2% effective rate you had just mentioned here, it obviously takes a while to roll through same-store. But as we think where you're at today and where you're guiding to, is that 2.5% midpoint for revenue assume you actually go negative on net effective rents? And it sounds like January is holding, but are you seeing any sort of signs already, maybe in February of some slowing that's making you more cautious?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [10]

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February is not significantly different than January. And I think guidance all depends on where you are in that range.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [11]

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Okay. And then just one last one. Joe, at the Investor Day, you touched on the new bridge financing program you started. Can you just give an update on where that stands today? And what sort of activity you're seeing out there? And how much capital allocation are you putting in the budget here for 2019?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [12]

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Sure, Jeremy, I'd be happy to. For those of you who weren't at Investor Day, we started -- initiated a bridge lending program, the goal of which is to expand our management platform to form additional relationships across the industry because we found through ManagementPlus and other activities we do that those relationships frequently turn out to produce acquisitions or other benefits and to fill what we perceive as a capital void in the market and make some money by lending to nonstabilized stores. We will not be lending to development stores. We don't want to have to take over a half-finished development, but we believe there is an opportunity to lend on stores that are not yet stabilized. We're just starting this program. We've made a couple of loans. We have a few in the hopper. We're getting very good reception in the marketplace, but we're just beginning. We're going to walk before we run. We're going to see how the market reacts to this. And I would not expect it to be a significant capital allocation in 2019.

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Operator [13]

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Our next question comes from Ronald Kamdem of Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [14]

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Just following up on the same-store expenses. I think you mentioned outsized property taxes and marketing spend. Just curious if you can provide more details. How does the growth rate compare for those versus 2018? And if there is any markets or any kind of onetime thing that's really driving this outsized nature of these expenses?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [15]

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Yes, our property tax budgets for 2019 assume about 4.5% increase year-over-year. We continue to see pressure across multiple markets. So it's actually down slightly from 2018, but continues to be higher than inflation. 2019 marketing spend is about 11% is what we've budgeted, which is up from our annual run rate of 2018. And that comes from a couple of things. One is just overall inflation from more people bidding on using the search engines and that's driving the cost of the bids up as well as we're in a supply cycle and wanting to make sure that we stay top of the mind in people's buying decisions.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [16]

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Great. And then just a quick one on development. Maybe can you just comment versus 3, 6, 9 months ago, have you seen any incremental sign from developers, whether deal compression, whether it's projects taking longer to lease up? Any incremental color on slowing of that supply pipeline?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [17]

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I think we are seeing the factors you described, yield compression, increased costs and just an awareness that many markets are overbuilt or fully built and some more caution. So we are seeing a pullback in new supply in some areas, new developments in some areas. But there's still people who have either more optimistic views or lower yield requirements that are still trying to go forward.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [18]

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Great. And the last one for me is I just noticed in the release that Miami was added to markets lagging and Philly was added to the markets that are outperforming. Can you just -- maybe a little bit more color on what's going on there. Or is that -- is there anything to note there?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [19]

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I think that's directly related to new supply. Miami has had a very large influx of new development that is impacting performance, and we haven't seen the same thing in Philadelphia.

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Operator [20]

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Our next question comes from Smedes Rose of Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [21]

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I wanted to ask you the sequential decline in period-end occupancy from 3Q to 4Q was steeper than what was seen in several years now. Did that surprise you at all? Or can you maybe provide a little more color on the, I guess, vacates over the course of the quarter?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [22]

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So Smedes, first of all, I would tell you, I think sometimes people focus too much on rentals and vacates. I think if you look at our year-end occupancy, it was quite strong, maybe slightly stronger at the end of the third quarter, but again, the goal here obviously is to maximize revenue. You'll see plus or minus 10, 15, 20, 30 basis points depending on the month, depending on the quarter. But I don't think the fourth quarter played out significantly different than what we're expecting, and we felt like we had a strong ending to the quarter and the year.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [23]

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Perfect. You were looking for that level of kind of sequential decline, so it wasn't a surprise at all?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [24]

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Not necessarily decline, but on an annual basis, we were expecting no benefit from occupancy and that's largely where we ended up. And the same is true for 2019, our budgets and our estimates are no benefit from occupancy. But again, we're not focused entirely on occupancy.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [25]

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Okay. And then I just wanted to ask you, you mentioned that this third-party platform maybe has an opportunity as conditions are more challenging across the industry. Have you seen a pickup, an increase or just private operators looking to join a larger platform like yours?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [26]

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We have. We've had a pretty robust pipeline for several years now. I think we are seeing more increase from folks who are having some problems at their stores, meeting the numbers that they would like to hit. And I expect as things get tough, that will continue.

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Operator [27]

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Our next question comes from Todd Thomas of KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [28]

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In terms of the dilution from the lease-up stores of $0.23 versus $0.20 in '18, you have more deliveries both wholly owned and JV planned in '19, but a little less than '18. Would you expect that dilution to continue increasing throughout the year and into 2020? Or do you anticipate that the dilution will level off and begin moderating during 2019?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [29]

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I would...

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [30]

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So part of -- I'm sorry, Scott.

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [31]

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Go ahead.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [32]

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Part of it depends on what we buy. A good deal of what we bought in 2018 were nonstabilized stores. And I think there will be an opportunity, again, as operating conditions get tougher and some owners decide their best bet might be to sell. We may have an opportunity to buy stores that are not fully stabilized and may even be somewhat dilutive depending on where they are in the first year. So I think that's the biggest variable in which direction the dilution goes.

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [33]

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Currently, our budgets for C of Os, Todd, are, it's pretty even throughout the year, but that could move depending on deliveries. We have seen deliveries continue to take longer. But right now, it's pretty flat, specifically for the C of Os, not the lease-up stores Joe is talking about.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [34]

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I mean, I think it's important to note that in a number of things we're talking about today, we're very focused on creating long-term value for our shareholders. And if we have the opportunity to buy a good store at a good price that we know long term will produce value, will be accretive, then we're willing to accept the certain amount of short-term dilution to get there.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [35]

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Okay, that's helpful. And then can you provide an update or some color on the $300 million acquisition assumption that you have for operating stores in '19?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [36]

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Sure. So we've closed $240 million worth of acquisitions already in 2019. We have under contract another $100 million worth of stores. And we assume like in the prior years that it's going to be difficult for us to be competitive in the bid auction market and to be the high bidder and win a lot of stores that way. But our experience tells us that every year, we are able to buy a certain number of stores out of our management platform from our joint venture partners or from our relationships in off-market transactions. And -- but we can't identify those today. History tells us that we will have some success in that area.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [37]

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Okay, got it, right. So that includes the buyout of the JV partners' interests that have closed to date. Okay. And then just lastly, I was just curious if you could talk about the increase in G&A expense that you're forecasting. And what that's attributable to specifically?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [38]

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Yes, the increase in 2019 in terms of G&A, if you look at it in terms of a percentage increase, it's actually in line with the increase in the number of stores we've added over the last couple of years and specifically what we're forecasting to add in 2019. Now that being said, about 1/3 of the increase that we will incur in 2019 has to do with some outsized investments we're making in some technology opportunities and some technology initiatives that should provide a platform for us to grow in the future and to also achieve some economies of scale. I would tell you we don't expect to grow 1 for 1 G&A with our property count, but this is a year we've chosen to invest more heavily in technology that will assist us in the future.

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Operator [39]

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Our next question comes from Ki Bin Kim of SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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So this might be a hard question to answer. But from your perspective, what percent of development deals do you think are missing pro forma expectations?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [41]

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Well, I don't think we can answer that question, Ki Bin. I would tell you that on the deals that we do, our CO deals and development deals, we've been very happy with our underwriting, and as a whole, we're meeting or exceeding expectations, but we have no way of knowing what other people are underwriting or how they're actually performing.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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Yes. I mean, I asked that question just to see if there is any kind of trend in people missing their deals, as that's probably the only reason why development was slowed down, right? And on your expense growth expectations of 4.25%, do you expect that to continue on to like 2020, 2021? Or is this kind of an unusual year where you have some long-term resets that are happening heading in 2019?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [43]

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So in terms of our property expense growth being elevated, I think you saw it last year and this year largely as a result of property taxes and we hope that moderates. We're also seeing pressure on pay-per-click advertising and so that continues to increase. But we hope in the future to be able to move back more towards inflationary expense growth.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [44]

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Yes, one thing that hurt us in the past few years is as values of self-storage properties has increased dramatically, we've had property tax increases commensurate with that. And as taxes catch up and get to property values, you would think outsized property tax growth would stop and would just be inflationary going forward.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [45]

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Okay. And on just last one, when you close street rates, how close is that to the actual moving rate that you experienced in any given quarter? Is that pretty close?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [46]

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So when I say achieved rates are up 2%, that is actually our move-in rate. Our street rates are going to be higher than that.

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Operator [47]

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Our next question comes from Jonathan Hughes of Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [48]

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What's the contribution from the new same-store assets on revenue growth guidance? And how should that trend throughout the year?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [49]

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Jonathan, it's about 10 to 15 basis points of revenue contribution. And it is -- at the end of the year, it's basically 0. And so if you straight-lined it, call it 30 at the start of the year and 0 at the end for a contribution between 10 or 15 basis points.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [50]

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It's similar in '18 and '19, right?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [51]

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Correct.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [52]

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Okay. And then has there been any change to customer behavior and acceptance of renewal rate increases as competition has increased? I mean, are there any knowledgeable customers out there using these new deliveries and kind of leveraging that and pushing back on, say, your 9%, 10% rate hikes?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [53]

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No, we really haven't seen any change in customer behavior in that area.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [54]

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Okay. That's just surprising. Fair enough. And then I realize this isn't in guidance, but any plans to look at maybe recycling capital from some of your weaker and noncore markets, sell those, focus on better longer-term growth markets?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [55]

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Well, we put one property under contract yesterday. So that's one event. And we do have a list of properties that are always considered for either recap into a joint venture or outright sale. And we periodically look at the portfolio and try to look at where those opportunities would make sense. We don't -- to answer your question, we don't specifically have any portfolio on the market today, but it's always an option for us.

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Operator [56]

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Our next question comes from Eric Frankel of Green Street Advisers.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [57]

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I just want to go back to the same-store calculations. Can you just confirm -- so you say it's 15-basis point drag. Can you just confirm the number of stores that are going to be added to the same-store pool?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [58]

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We're adding -- so our current pool is 783 and the new pool goes to 821, so an add of 38.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [59]

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All right. And the average occupancy for the roughly, I guess, 40-or-so stores, is that significantly lower or the same as what you currently have?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [60]

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It's pretty much the same, very close to being right on top of each other.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [61]

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Okay. I was trying to understand that better. And then I know you've -- in earlier question just regarding your cap allocation guidance and the investments you have under contract and what you're hoping to close, but it seems like you're 70% of the way essentially in terms of what you have under the contract or have closed and what you're guided to. That seems somewhat conservative. Maybe you could provide a little more color on how you're thinking? I guess, you have a -- it's a roughly $160 million of deals that you haven't gone under contract or closed now, but it's kind of baked to your guidance. Any reason why that shouldn't be higher just kind of given all the trends that you're referring to?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [62]

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The only thing I could say is, it's very difficult for us to predict when we're going to have opportunities to transact on an off-market basis. And as I said earlier, that's really where we are able to be successful. So we could talk to the brokers and we can understand the pipeline and what we think is coming forward. But we're not -- we know we're not going to be very successful there. So is it possible that we exceed our guidance and buy more? Absolutely, if accretive opportunities are available and good deals, we have a balance sheet and capital flexibility to execute on those transactions. So I hope we do exceed our guidance in 2019 like we did in 2018, but we're not banking on that.

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Operator [63]

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(Operator Instructions) Our next question comes from Wes Golladay of RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [64]

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When rent growth slows, is it driven more by change in distribution channels or lower street rates?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [65]

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The streets rates are really what's going to drive your rent growth. I mean, our current -- your current street rates, your current achieved rate at some point flows through and becomes your rental rate growth. And so street rates are going to probably be more influential than anything.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [66]

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Okay. And then going back to that 3-year rolling supply, when do you see that peaking? And do you expect a gradual decline or a sharp decline? Or how should we look at that going forward?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [67]

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So we believe that 2018 was the peak delivery year and we expect a gradual decline. And that's fully caveated by, we don't know, what people are going to do in terms of picking up development. We're looking at current trends and assuming that they continue. But if for whatever reason a bunch of people throw capital into development and start putting shovels in the ground where they shouldn't then we could be wrong.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [68]

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And then maybe going back to Ki Bin's question about the developers not hitting the returns. Are there certain markets where you see maybe in the next year or 2 you can have an opportunistic fund and take advantage of some of this?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [69]

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I think that is likely. I think there are going to be opportunities to purchase projects that are not hitting pro forma or not doing as well as a lender would like or an equity partner would like. And our acquisition guys are fully focused on that.

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Operator [70]

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Our next question comes from Todd Stender of Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [71]

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Just to go back to the $0.23 dilution expected from C of O and value add. Have you guys separated those 2? And how much do you ascribe to those 2 buckets each if you have?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [72]

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It's about $0.16 from C of Os and about $0.07 from lease-up properties.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [73]

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Okay, thank you Scott. It could be a pretty good source of upside to earnings. You've got 12 of the 17 project -- projected openings, I guess, opening in the first half of the year, but I also want to see potential offsetting that. Have you tapped the ATM already in January, February just because you've acquired so much just seeing where your capital is coming from?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [74]

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We used the ATM in the fourth quarter and in the current quarter, we've not hit the ATM.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [75]

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Third and fourth quarter.

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [76]

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Correct, third and fourth quarter of last year we used the ATM.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [77]

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Okay. And then just finally, excluding the 12 assets you described in California that you have already gotten, where are the other locations? I know you've got a couple C of O deals that are wholly owned that you've acquired already in the first quarter. Where are those markets?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [78]

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Plantation, Florida, Louisville, Kentucky and Manayunk, Pennsylvania. Actually, we just closed one in Brooklyn too last week. Was that last week in here?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [79]

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Yes, we had several that were -- we have 3 that we're closing, 2 in Brooklyn, 1 in Queens and then also Massachusetts, Maryland. So they're kind of throughout the country.

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Operator [80]

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Our next question comes from Tayo Okusanya of Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [81]

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Couple of questions. The first one is the 2% increase in street rates that you guys discussed. Is that net of concessions or is that without concessions?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [82]

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It is not net of concessions. That is just our achieved rate, it's the average someone is paying no matter which channel they come from. I was going to say discounts year-over-year or there is no change.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [83]

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Okay, so that's the first thing. Then going back to a question that was asked earlier on, not getting a lot of pushback from in-place tenants on rent increases. But I was just curious, the guidance contemplate of slower rate of rent increases going forward because of supply or no?

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [84]

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No. We really don't believe supply impacts our ability to increase rents to tenants when appropriate.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [85]

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Okay. That's helpful. And then could you help us understand what the mark-to-market is in the portfolio? Like today if a tenant moves out, average rents are X versus if a tenant moves in, they're probably moving in on average at this particular rent?

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P. Scott Stubbs, Extra Space Storage Inc. - Executive VP & CFO [86]

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Yes, if you look at our in-place rents and compare those to our achieved rents, so what people are renting out when they come in the door, on average for the year it is mid-single digits. So call it 5%, that is considerably higher in the off-season. So right now, it's call it double digits. And then it goes to 0 in the summer months. So dependent on the time of the year, we typically -- our rates are typically higher in the summer when more people are moving and lower in the off-season when fewer people are moving. So that roll down is higher in the colder months. And I would tell you to be careful to assume that's the roll down on everybody because you have many people that move in and move right back out. And so they're at very close to what the street rate is.

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Operator [87]

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There are no further questions. I would turn the call back over to Joe Margolis, CEO, for any closing remarks.

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Joseph D. Margolis, Extra Space Storage Inc. - CEO & Director [88]

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Thank you, everyone, for joining us today. We expect another great year for Extra Space in 2019 despite the challenges we're all aware of and we've all discussed. We operate in a resilient sector. Our demand is need-based. We're able to achieve high occupancies and positive rate growth and we have significant external growth opportunities. We continue to invest heavily in technology. Our digital marketing and revenue management systems continue to evolve and improve. But none of this would be possible without our people. We have an incredible deep team of dedicated, motivated and engaged employees who live our values every day and are driving our performance. And I want to recognize their contributions to our efforts and our success. Thank you all for your interest, and we'll talk to you soon.

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Operator [89]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.