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Edited Transcript of LSI earnings conference call or presentation 1-Nov-18 1:00pm GMT

Q3 2018 Life Storage Inc Earnings Call

Buffalo Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Life Storage Inc earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Gregoire

Life Storage, Inc. - CFO & Secretary

* David Dodman

Life Storage, Inc. - VP, IR and Strategic Planning

* David L. Rogers

Life Storage, Inc. - CEO & Director

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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 - Analyst

* Jonathan Hughes

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

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* 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

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Todd Michael Thomas

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Life Storage Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Dodman, Vice President of Investor Relations and Strategic Planning. Please proceed.

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David Dodman, Life Storage, Inc. - VP, IR and Strategic Planning [2]

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Good morning, and welcome to our third quarter 2018 earnings conference call. Leading today's discussion will be David Rogers, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer. As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to risks and uncertainties with the company's business. Additional information regarding these factors can be found in the company's SEC filings. A copy of our press release and quarterly supplement may be found on the Investor Relations page at lifestorage.com. (Operator Instructions) At this time, I'll turn the call over to Dave.

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David L. Rogers, Life Storage, Inc. - CEO & Director [3]

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Thanks, David, and welcome, everyone, to our call. Last night, we reported adjusted FFO of $1.45 per share for the third quarter, driven by strong same-store top line growth and well-controlled operating expenses, especially Internet advertising. While we admittedly benefited from a somewhat easy comp over last year's 3Q, we are seeing some headwinds in Houston as we passed the anniversary of Hurricane Harvey. All in all though, we're pleased with our results.

Touching on a few macro industry topics. Additional supplies continue to dominate the discussion. Life Storage markets that are most impacted with new deliveries are San Antonio, Dallas, Charlotte, Miami, Raleigh, Phoenix and Austin. Markets with less of a new construction issue, but still managing through a substantial absorption process are the Chicago and Houston markets. In evaluating with the dynamics of Chicago and Houston, the supply impact was maybe not so severe as we anticipated given the quantity of space that has come online since 2015. We believe this to be a function of strength of our brand, the quality of our storage and great customer service. For the most part, demand remains pretty solid across most markets. And while attracting new customers is a competitive gain, really competitive in some markets, existing customers continue to absorb rate increases.

We've been able to keep our operating expenses well under control so far this year, but we expect the advertising and property maintenance costs to exert pressure on margins in 2019. Property taxes, of course, continue their relentless march on. Construction costs of all types, concrete, steel, labor have risen considerably in the past 18 months. And while not overly impactful to us, these do the crimp the ROI on our expansions and enhancements program.

I'll list just a few of our company's highlights this quarter, aside from a strong property operating results. We announced the rollout of our Rent Now initiative in early August. It's in place at almost 300 stores as of today, and we've just had our 1,000th customer take advantage of the program. Rent Now is expected to be in place in all 750 of our stores by mid-2019. We announced major enhancements to our Warehouse Anywhere storage in inventory management solution by expanding our product suite and offering added optionality for our B2B and B2C customers.

We acquired 2 stores during the quarter and another in early October for a total of $27 million. As of today, we are in contract to purchase 5 more properties at a further cost of about $50 million. All 8 of these are in our key core markets: Atlanta, Boston Metro, the Greater New York Metro Area, Orlando and Sacramento. We are still in a due diligence process on some of these and can't guarantee we'll be able to finalize them all, but these are the type of properties we would like to put the Life Storage flag on. They are larger. They are newer, and they are in higher growth markets. We also brought on 3 properties via Joint Venture investments, one each in Phoenix, Miami and Brooklyn. Again, adding Class A, third-generation stores to markets we like.

On the third-party management front, we've experienced strong momentum, and we're realizing some significant wins. This morning, we're putting Life Storage signs on 42 high-quality stabilized stores in the southeast, primarily in Louisiana, as we take over management for a significant new client. We're very excited about this transaction, and it puts our 3PM account at over 200 properties, a 110% increase since just year-end 2016. Andy will speak more on this.

But yesterday, we entered into an agreement with our commercial bank group to extend the duration and improve the terms of our corporate line of credit facility. Our asset recycling program is underway with the sale of some of our noncore properties expected by year-end to do a Joint Venture in which we expect to own a majority interest and then manage the property going forward.

We have a second group of assets that will be put on the market soon. Attaining ever and higher levels of operating scale, customer satisfaction and the application of data and technology are key drivers to profitable growth and NAV accretion. These occupy much of our focus, and the targets we're hitting this year bear this out. We don't plan on letting up. Andy, you want to take the rest?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [4]

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Thanks, Dave. As Dave mentioned, last night we reported adjusted quarterly funds from operations of $1.45 per share, a 4.3% increase compared to adjusted FFO of $1.39 per share for the same period in 2017. These results were above the high end of our forecast, driven by better-than-expected same-store performance as well as better-than-expected growth at our lease-up facility. As a result of this strong performance, we have again increased our annual guidance, which I will review shortly. Our same-store performance is highlighted by NOI growth of 4.2%, achieved by both improved revenue growth and controlled expenses.

Specifically, same-store revenue rose 3.6% over the same period last year, driven by improvement in rental rates. Same-store realized rates per square foot increased 3.9% over the third quarter of 2017. Third quarter same-store expenses, outside of property taxes, were well controlled increasing only 0.004%. The strengthening of the Life Storage brand on the web over the last year allowed us to again reduce quarterly Internet marketing spend, which decreased 9.6% versus the third quarter of 2017. In addition, our store and construction teams are doing a great job improving efficiencies at the stores, and this is showing up on the expense side. As we anticipated, the only significant expense pressure we are seeing is from property taxes, which increased 6.2% in the third quarter.

In addition to the improved performance of our same-store portfolio, we continue to see consistent growth trends and the properties that we purchased as Certificate of Occupancy are very early in the lease-up stage. With quarterly occupancy of 85.7%, these lease-up stores still have significant room to grow. Our overall third quarter revenue increase also reflected a 10.6% increase in other operating income, driven by an increase in Warehouse Anywhere sales. Our balance sheet remains solid, and we continue to have significant flexibility to capitalize on attractive investment opportunities when they meet our return requirements.

At quarter end, we had cash on hand of $13.3 million and $371 million available on our line of credit. Earlier this week, we closed on our refinancing of our bank credit facility, which included extending the maturity on the revolver to March of 2023 and reducing the credit spreads by 15 basis points at our current investment grade rating.

Subsequent to this opportunistic refinancing, we have no debt maturities until June of 2020. Our debt service coverage ratio was a healthy 4.9x and our debt -- net debt to recurring EBITDA ratio improved to 5.2x. Regarding guidance, we are encouraged by the better-than-expected results from Q3 and have raised our guidance on annual same-store revenue ranges as well as our annual FFO guidance.

Specifically, we significantly increased the midpoint of both our 2018 same-store revenue and NOI growth guidance and the midpoint of our 2018 FFO per share by $0.04. As we discussed last quarter, we have a tougher comp in Q4 as a result of new supply and the return-to-normal trends in Houston and certain Florida markets that benefited from hurricane-driven demand in late 2017.

In addition, our Q4 2017 Internet marketing spend was reduced substantially as the Life Storage brand relevancy improved, eliminating much of the competitive benefits we have seen year-to-date. Same-store revenue growth for Q4 is expected to be in the 2.5% to 3% range. And for the year, revenue growth is now expected at 3% to 3.5%. Our expense guidance was also reduced slightly. As a result of these changes to our same-store guidance, we are forecasting adjusted funds from operations for the full year 2018 to be between $5.46 and $5.52 per share and between $1.35 and $1.39 per share for the fourth quarter of 2018.

With that, operator, we can open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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I was just hoping you guys could give us a little bit of color on same-store revenues on a go-forward basis? And how we should think about occupancy, particularly with the comps from the hurricanes, which you mentioned, maybe if you could give us how results are trending to-date on a year-over-year basis as well as the benefit of expansion? It seems like it's been 40 basis points or there about the last couple of quarters if that should continue into the foreseeable future?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [3]

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Juan, it's Andy. Yes, revenue, I think, if you look at our guidance, we are looking at a tougher comp Q4 with the Houston and Florida markets in 2017 Q4 were very strong from the hurricane-driven demand. This year, obviously, that's a tough comp, so we would expect some deceleration. That really showed up in the occupancy at the end of the quarter. We were down 110 basis points, 70 basis points of that was just related to the hurricane-affected stores. So other stores were down 40 basis points. We expect that to continue. The easier comp from an occupancy point of view should come late in Q1 when those people moved out. But occupancy-wise, I would expect more than 1% -- or more than 110% in the fourth quarter just because of the tough comp; revenue, as we have shown 2.5% to 3% in Q4. We've not given any guidance for next year, but I would expect Q1 to be a tough comp just from the hurricane zones.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [4]

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And then the benefit that you're getting from the renovations and your expansion, should that continue that roughly 40 basis points? Or how sustainable is that or when does that comp become an issue, if at all?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [5]

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Yes. It’s not a perfect calculation, but 30 to 40 basis points is probably a reasonable estimate of how it's affecting the revenue. I won't expect any changes. We have a great team down there working on those expansions. They are keeping the flow of them pretty consistent. So until the point where we stop doing those, I would think the effect would be very similar because as we take stores, we'll take buildings out of services, as we knock those down, we lose the revenue on them and then it's usually 6 months to a year later before we replace that revenue with something new. So the net effect by taking some out of service, put some on, spend about 30 to 40 basis points and that would -- I would expect it to continue.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [6]

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Great. And then just one more from me on the supply side. Can you give us any sense on a 3-year rolling basis how the store exposure, percentage of total stores, changes as you go from '18 into '19? If there is any increase, decrease or if it stays the same and by what amount?

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David L. Rogers, Life Storage, Inc. - CEO & Director [7]

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I think -- this is Dave, Juan. I think, for the most part, on balanced across the portfolio. It doesn't change very much. As we mentioned in the prepared remarks, shifting Chicago and Houston are absorbing now, they don't seem, at least as far as we can tell, they have a lot of new supply coming, that will abate. Dallas and some of the other markets, we mentioned, are still getting deliveries. But by the end of 2019, they will be pretty much in the absorption phase. We probably expect some to go to other markets, more secondary or suburban. So I think, on balance, it's pretty consistent '18, '19 into '20. It's just market specific. It rolls as far as what's coming, what's being absorbed, what's past.

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Operator [8]

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

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

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Andy, I just wanted to go back. You talked about Houston and Florida impacts on the Q4 revenue. You mentioned that they will carry into the first quarter next year. But just as we look past, actually, we almost think about that as sort of a trough here for revenue.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [10]

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It's tough to say right now, but definitely in those markets, I would think, that would be the trough.

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

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Okay. And then switching gears, you mentioned the Joint Venture sale progress. It sounds like that first slug will be done by year-end. Just wondering if you can give a little more color on them in terms of the number of assets that's in that first bucket there? What sort of proceeds do you guys -- are we talking about? Are you going use those for acquisitions? And then any sort of goalpost on the yield would be helpful?

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David L. Rogers, Life Storage, Inc. - CEO & Director [12]

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Yes. I think we're -- it's a plus or minus tight range around the $100 million expected by year-end. The proceeds are always spoken for by properties we have under contract. I think in terms of accretive dilution, I think we're in a good spot. I think the assets we're selling, we're hoping we were expecting to keep as third-party managed and in the Joint Venture. So our part of that Joint Venture and the fee income should basically take away the dilution you would ordinarily expect by selling stabilized properties in core stores versus the growth-type properties we are getting. So I think just in terms of what you're asking, a figure of $100 million we expect by year-end to be slightly accretive on that pool. There's a fairly large second pool that we'll be taking to market very soon. We hope to have the same end result to get them into a joint venture or at least third-party management basis, take the proceeds into core plus stores in markets that we already have a presence or maybe even enter a new one. So I think for 2019, we would expect again that much or more with the same accretive effect.

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Operator [13]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [14]

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I just wanted to follow up on the comments around occupancy. You mentioned that it's down on a seasonal basis also year-over-year given the hurricane comps and I suppose some new capacity entering the system, some new supply growth. Any indication where you might see occupancy portfolio-wide sort of bottom out during the off-peak season? And when does occupancy typically trough in your portfolio?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [15]

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Yes, the trough on occupancy is normally at the end of January to mid-February is the low point. So we don't see any changes in that. That's what we would expect. The new supply, obviously, is a piece of that drop in occupancy, but majority of it right now is occurring because of the hurricane-driven demand from the prior year.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [16]

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Okay. Any thoughts around where you might see that bottom out in late January?

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David L. Rogers, Life Storage, Inc. - CEO & Director [17]

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I would hope it wouldn't be -- we're 40 bps down now. So I would hope that would not increase much. We're -- at this time of the year, we sort of fight for occupancy. So the pressure on the street rates comes back a little bit. The incentives go up a little bit. So I think, at this level, we are willing to fight for occupancy and we will. So I would not expect much of a dip through the -- from the prior year through the upcoming slower season.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [18]

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Okay. And then switching over to existing customer rent increases and sort of the program there. You mentioned previously that the company wasn't really increasing rents to in-place customers above street rates in the portfolio, and I think now you've changed that policy and strategy. It seems like there would be some upside there, just based on sort of the stickiness of the customer. And I was just curious given the churn and the seasoning of the portfolio, if you have a sense of how much upside that could present, and if you can sort of quantify and help us understand what that opportunity looks like over the next year or 2?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [19]

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Todd, we do believe there is more upside. So this year, we did go above street rate. We did have a limit on how much above street we would go. So we have the ability to push more above street rate and maybe a little bit higher above that. We also -- this year, we did a lot of testing of where in the curve, meaning how late after they move in do we give them their first increase. We like some of the results we see, so we have more potential there next year. Impact on revenue, it's difficult to point to that. It's anywhere from 1% to 2% right now. I would expect probably very similar next year.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [20]

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So when you say 1% to 2%, what would is -- what exactly does that mean? So the current yield on an average asset you think that there is 100 or 200 basis points upside as you sort of reach it -- change the strategy in the rent mix for some of these customers?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [21]

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To clarify, that 1% to 2% is what I mean -- the impact we think -- and it's not a perfect science remember because there is move-outs and how you replace those customers and what free rent is offered. There is no exact way to calculate the impact of rent increases. But of our rental growth, we believe 1% to 2% this year came from that, and we think we can get a similar number from that next year.

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Operator [22]

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Our next question comes from the line of Smedes Rose with Citi.

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

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I wanted to ask you, first of all, just as you look at acquisition opportunities, if you are seeing any change in pricing or cap rates. If you would expect to see -- or just -- it seems like an upward bias in the interest rates and now maybe that should be playing out in the private market? And just kind of how you're thinking about external growth now?

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David L. Rogers, Life Storage, Inc. - CEO & Director [24]

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Yes, we wish, Smedes, it was that quick, but overall in the cycle, the rises in rates have really eventually trickled through, but it takes several quarters. There is also -- so we haven't seen any change at all in the asking prices and what owners' expect. Sort of exacerbating that is the fact that there is a lot of higher capital wanting to get into the space. They're just in. It's remarkable, the pressure on prices. So we -- from last quarter to the quarter before to last summer, there has been almost no perceptible change in cap rates for property, especially it stabilized. That's probably the best barometer because a lot of the variables have taken out of the equation when you are evaluating them. But we have seen, as is evidenced by some of the purchases we made this quarter by the pipeline that we have we -- Joe Saffire pretty much realigned our team and house here over the past year, so we got sort of a coordinated effort with our third-party management solicitation team and our acquisitions team finding properties. We had good relationships with a lot of people over 25-plus years. We were able to bring them one of our third-party managed source. We have another one on the contract that we are bringing in. So they are there, but the pencil has to be sharp. It has to fit. I think that's really where it makes sense. We did some synergies by buying properties in markets where we already have a presence. We are doing a lot of one-off now, which our history has shown that pretty much when we take a property that hasn't been exposed to platforms, we can get the return up there, but it's not. And no, there has been -- the short answer is, there has been no perceptible move. We don't really expect one for the next few quarters, even if interest rates were to grow by 30 to 60 to 70 basis points, I don't think you're going to see that much of a change in pricing in the near future.

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

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And I guess I just wanted to ask you, could you maybe just talk about what you saw in the third quarter on street rates versus in-place rates and maybe what you are seeing thus far in the fourth quarter?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [26]

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Sure, Smedes. Street rates in 3Q are up about 1.6% increase over the prior year. Free rent was up as well. So it was up from 2.8% of revenue in 2017 Q3 to 2.9% in this quarter, down from last quarter's 3%, but 2.9% this quarter. So the net effect is, we're about 50 basis -- about 0.5% up effective rents, very similar so far in the fourth quarter.

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Operator [27]

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

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Can we go back to the existing customer rate increase program? It seems like to me that change in the philosophy of that program to increase number of tenants getting it and the level of increase as well contributing 100 to 200 basis points of the same-store revenue growth is pretty important. So my question is, basically, can you recap how many more customers are getting this increase? What their level of increase is versus what it has been? And when does that benefit, actually, for it to wind down? I know it can take a while because you have to feed in customers to enter that program. But when should we expect that to tail off?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [29]

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Sure, Ki Bin. The number of customers year-to-date have increased. We put out -- 149,000 versus last year 63,000. So obviously, we've done a lot more. We've moved in the curve where we do them. Pushing customers above street rate has changed, how many we do. So that has changed. The actual percentage increase, the receiving has not changed much. Last Q3, it was 9.8%; this Q3, 9.6%. So still pretty significant increase is going to those current customers. Move-out rates have been relatively consistent other than the ones we do early in the curve, which we would expect it to be higher because how most of our customers are. I shouldn't say, half of our customers gone by 6.5 months. So when we put them in earlier in the curve, you're hitting customers that would have move out anyway. So the move-out rate did tick up year-over-year, but we attribute that to where we did those in the curve.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

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So when should this benefit tail off?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [31]

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Well, I think we've got some more strategic items we can do on that side of the ledger next year. So we're comfortable that we've got some good tailwinds pushing us in the next year.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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Okay. And just last question. How much money are you making, like, in absolute dollar terms, roughly in the Warehouse Anywhere program in the third quarter? Because I get a sense of where that is and where it can grow to.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [33]

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Sure. I got the -- I have the annualized numbers in front of me. So when you look at the Warehouse Anywhere, there's 2 pieces of it, right? There is the rental of the space, and that's about $4 million a year, the rental of the space that those customers are in. And then on top of that, the fees we received from our customers, whether they'd be in the retail side or on the equipment side, those that service the ATMs, those fees that we get are about $8.5 million on an annualized basis. So -- I'm sorry, $7.5 million on an annualized basis. So we are about $11.5 million total revenue coming from all assets of that program including the rent part.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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And how do you balance that versus taking some inventory out from just the regular retail customer?

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David L. Rogers, Life Storage, Inc. - CEO & Director [35]

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So I think what it does, Ki Bin, is it adds pressure to the system in terms of we got more occupancy, we got good customers that we know we can raise rates, too. So we like commercial customers first. And the less space we have, the more we can charge for those who want to get in. So it's not a justification of taking it away from retailers, basically filling our spaces and making the incremental rates on those spaces more valuable.

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Operator [36]

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(Operator Instructions) Our next question comes from the line of Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37]

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So growth in the third-party management platform has been very strong. Can you just talk about why you entered the 42-property platform left to one of your competitors? Were they strictly pricing related, maybe performance-related? Just trying to understand the switch, which is great for you and a vote-of-confidence in your platform?

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David L. Rogers, Life Storage, Inc. - CEO & Director [38]

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Yes, it's -- we've known the owner. We've -- for a long time, our acquisition guys have kept in touch with them. So we know the markets. We've been down here since probably 1996. So I think we have -- when we put it up for bid, we were happy to go down. Joe took a team down there, and we sort of matched culturally in a very good way. So I think this is one where that we were very happy to get a pool of 42 established and stabilized stores. And because we know the market, because we like the properties, because we've got on the same page with the owner and knowing what his objectives are, I think it was a good fit. He is a quality operator. He's got good storage. He's going to be demanding. All of our third-party clients are demanding. And we think we are on same page, and we got a good cultural fit. I think you're going to see, Jonathan, more of this. And these assets are big dollar value. They're a big part of most of our clients that work. Basically -- given the fact now that there are options for them to go to, they are going to say, "Geez, I've had you here for 4 or 5 years." And not so much on this type of -- a lot of times on the development deals, you see a fair amount of impatience. And when these things were penciled out and put to paper and then put into the ground, these owners have very high expectations. We try and I've heard the other guys on their calls say the same thing, we try to temper the expectations, a lot of the low-hanging fruits have been taken. But yes, these guys are anxious to see their stores do very well, and it's like a football culture or a hockey culture. Now you do so much for so long, and they say, "You know what, it's not going away quite a way for us. Time to changed up." I got to say, I don't know that we're all that different, but nonetheless, the owners are wanting to see responsiveness. They want to see results, and they want to see a culture fit. And so we were able to go in with some of the things that we've done, Rent Now, our B2B, those kind of things. I think that's how we won this particular deal and our experience in the market. But it's a competitive game, and it's going to be that way, I think, going forward more and more.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [39]

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Okay. That's great. And then are you scheduled to operate the 8 properties that are under construction that you're going to open up for the next 1.5 years or so?

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David L. Rogers, Life Storage, Inc. - CEO & Director [40]

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Yes, that's part of the -- I think, the overall plan would be crazy not to, but yes.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [41]

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Yes. Okay. And then just one more. But looking at the 22 stores that are in lease-up and outside of the same-store bucket, I know your threshold for adding is the second year after reaching 80% occupancy. And when I look at that, I don't see 3 that are not there. So fair to assume that 19 of this 22 are going to be added to the pool next year?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [42]

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No. I don't think you would see that many. You probably see half. We have said, not only do they have to be at stable occupancies above 80% but they got to be at stable rates, Jonathan. So we haven't made that decision now. We got to make -- we'll look back at the data and see what was stable, but we'll be clear with you on which ones we're going to add, come February, when we give our guidance for next year.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [43]

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Okay. Got it. And then actually one more. Can you just talk about the sequential revenue growth acceleration in Atlanta? That's a market that's seen a lot of new supply. Just curious of the strength there, maybe that new supply is not in your submarkets, but the acceleration from last quarter just caught my eye?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [44]

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You're welcome. Yes, Atlanta was a -- it's a strong market for us. It had a tough comp last quarter, and it had an unusual benefit of some cell tower income. So there was an unusual item -- and the cell tower income was in '17. So Q2 '18 was -- it actually was negative in Atlanta, but Atlanta has been strong for us. We've got good stores in Atlanta. Yes, there is a lot of competition, but our stores are not as effective as others in that market. So yes, I think, we are over 4% revenue growth there with strong market, and we like that market.

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Operator [45]

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Our next question comes from the line of Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [46]

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Just one quick question. In your guidance, can you just explain why your fourth quarter NOI growth range is a little bit tighter than your annual NOI growth range?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [47]

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I think...

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [48]

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Now it's getting a little bit wider rather?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [49]

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Yes, I think the wideness happens because of property taxes. In one quarter when you can have the swing in property taxes, which a lot of our Florida and Texas markets solidify in the fourth quarter, and we adjust those estimates, that's what swings, and it could swing the NOI a lot. So it's really -- you can really easily go from high end to low end of that property tax range.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [50]

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Right. I'm sorry, I was just -- I got my terminology mixed up. I mean, your annual guidance is wider than your fourth quarter guidance I would think would be the opposite?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [51]

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No. I think it's the same explanation. It's where property taxes can come in. And we tried to put a range out there to give people an idea where the midpoint would be. It's tough to always keep that guidance tight. We want to give yourself some flexibility.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [52]

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Right. But if 3 quarters of your full year guidance is already baked in, I'm not sure why they got -- I wouldn't sure why that number is little bit more predictable?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [53]

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Yes, I think, it's just, again, looking at the midpoint and putting a range around there, I think there is no science to it.

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Operator [54]

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Our next question comes from the line of Samir Khanal with Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [55]

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I'm sorry if I missed this, but on the noncore properties that you're putting into the JV with the 2 pools, did you say anything about sort of pricing or maybe where pricing is coming in versus maybe your expectations?

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David L. Rogers, Life Storage, Inc. - CEO & Director [56]

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It came in -- it's good or better than what we expected. We had some pretty good data points with the couple of the big deals that came out of what we actually and I think our buyer considered, perhaps lesser quality than we even put out. So we got a little bit of a portfolio premium. We had -- so they are definitely market priced, and they are core properties, but they are market priced. So they came in where we had hoped.

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Operator [57]

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Our next question comes from the line of Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [58]

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Dave, congrats on your retirement as well. I just had a quick question around CofO deals. Just given all the concern about rising supply, construction delays, things of that sort, are you underwriting CofO deals any differently now versus, say, 6 or 12 month ago?

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David L. Rogers, Life Storage, Inc. - CEO & Director [59]

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Well, we're hardly underwriting any, and note that we are -- have been up and running a bit. So we kind of got out of the CofO game a couple of years ago, just because the spreads were unattractive to us. It seemed like they came in and they pay. We were getting the value we are able to create. It was less than less the valuation put on the lease-up part of the equation just shrunk to an untenable amount. So some of the stuff we're buying, though, that we have under contract, is in the 30% to 60% lease-up stage. One of those is one that we're managing. But I do think it's tougher. You're seeing construction costs go up. You're seeing lease-up times go up. You're seeing rents being more competitive. So there is squeeze. So there's still enough CofO deals out there, obviously, but we have not been too enticed by any of them. We -- we'll take them on as management, of course. But as far as buying them, given the risk-reward ratio and the amount the developers really want to keep to themselves, it's gotten away from us a bit.

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Operator [60]

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(Operator Instructions) This is our final question. And ladies and gentlemen, we have reached the end. And I would like to turn the call back over to Mr. David Rogers for closing remarks.

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David L. Rogers, Life Storage, Inc. - CEO & Director [61]

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All right. Well, thank you, everyone, for your call. We look forward to seeing you in San Francisco next week. I honestly don't think we're going to have much of a different story to tell, but we will look forward to seeing you next week and -- safe travels. See you there. Thank you.

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Operator [62]

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This does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.