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Edited Transcript of LSI earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Life Storage Inc Earnings Call

Buffalo Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Life Storage Inc earnings conference call or presentation Thursday, October 31, 2019 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 of IR & Strategic Planning

* Joseph V. Saffire

Life Storage, Inc. - CEO & Director

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Conference Call Participants

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* Jonathan Hughes

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

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ryan Gregory Lumb

Green Street Advisors, LLC, Research Division - Senior Associate & Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Smedes Rose

Citigroup Inc, Research Division - Director & Senior Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior 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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Good morning, and welcome to the Life Storage Inc. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to David Dodman. Please go ahead.

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

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Good morning. And welcome to our third quarter 2019 earnings conference call. Leading today's discussion will be Joe Saffire, 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 Joe.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [3]

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Good morning, and welcome to our third quarter earnings call. We reported another solid quarter yesterday of adjusted FFO of $1.46 per share, which was again at the high end of our guidance range.

I'm going to begin with an update on our portfolio transactions because we had an extremely active quarter. We acquired 22 stores for our wholly-owned portfolio for roughly $280 million, all of which were discussed on our second quarter earnings call. That includes the 12-pack of lease-up stores for $135 million, which closed in July; entrance into 2 great strategic markets with a 3-pack of stabilized stores in Seattle for $57 million; and a 5-pack of stabilized stores in Baltimore for $63 million as well as a store in Las Vegas for $13 million and an Austin store, which we were previously leasing for $14 million.

We are pleased to be in Seattle and Baltimore, 2 markets we've liked for a long time given the demographics and rates. We expect to continue building our presence in both of those. And in fact, we have a CofO deal in Seattle under contract this quarter as a minority interest partner in a new joint venture. We made a $1.8 million investment for a 20% stake in that property, which we expect to open in the fourth quarter of 2019.

During the quarter, we put 2 additional stores under contract for our wholly-owned portfolio in the greater New York City market for $37.1 million. One actually closed last week. Greater New York is our third largest market which has performed very well for us, and we plan to continue growing our portfolio there.

As it relates to JV activity, we are on pace to achieve our minority investment guidance for the year and are pleased to establish a strategic relationship with Childress Klein Properties. We acquired a 40% interest for $16.5 million in 6 Class A stores that were previously managed under the Space Max brand. We are also under contract for a minority investment in 5 stores in Tampa and Sarasota that we currently manage for $5.9 million and a 20% ownership interest.

And finally, as it relates to portfolio transactions, we completed the sale of 32 mature stores to Inland Real Estate Group for $212 million in July, also discussed on our second quarter earnings call. We will continue to manage all 32 stores subject to terms of a long-term management agreement.

So as a result of many of these exciting initiatives we have been executing on this year, we decided to change protocol and provide 2020 guidance earlier than we have in the past. Andy is going to get into the details, but we expect the aggregate impact of all of our ongoing initiatives to generate adjusted FFO per share growth that is substantially higher than we have experienced in recent years. Specifically, as a result of our portfolio transactions this year, we expect to have a larger non-same-store pool by year-end than we have had in recent quarters. We expect that pool will have roughly 53 stores, of which 27 are currently in lease-up in strong markets with good rates and average occupancy of 67.1% providing significant opportunity for growth.

Additionally, we are extremely focused on margin improvement to ensure NOI is growing faster than revenue given the pressure that supply is putting on street rates. We remain excited by trends we are seeing in Rent Now, which is contributing to our ability to actively manage payroll and benefits. And we are focused on driving cost savings in utilities management and repair and maintenance by reevaluating how we manage those activities. Many of these initiatives are already underway, and we are already seeing the benefit of some of those actions.

Our third-party management platform is having another strong year as we have grown the total number of managed stores by 75% year-over-year, and we continue to have a strong pipeline of opportunities. We expect to finish this year at almost 300 stores. We remain focused on growing our JV's portfolio and expect to finish the year with almost $25 million in investments. And we expect a similar amount of investments next year. And we have been very active with expansion enhancements as we are on pace to complete roughly $50 million this year compared to $25 million to $35 million in each of our previous 3 years. We anticipate another $50 million of opportunity next year as well.

So 2019 has been a transition year as it relates to FFO growth. But given the dilution we took to reposition certain markets in our portfolio, I'm excited by the momentum we are building as we prepare to enter 2020.

I'll now hand it over to Andy.

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

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Thanks, Joe. As Joe mentioned, we reported adjusted quarterly funds from operations of $1.46 per share last night. Our same-store performance was highlighted by NOI growth of 2.6% achieved by a combination of revenue growth and controlled expenses. Specifically, same store revenue rose 1.8% over the same period last year driven by realized rates per square foot that increased 2.8% over the third quarter of 2018. Rate growth was partially offset by 110 basis point decline in average occupancy. Third quarter same-store expenses outside of property taxes continued to be extremely well controlled, decreasing 270 basis points over the third quarter of 2018. Decreases in payroll and benefits, repairs and maintenance, and office and other operating expenses offset the increase in Internet marketing spend. Our investments in technology and our focus on efficiencies are producing great results and are evident in the 50 basis point improvement in our year-over-year same-store NOI margin. As we anticipated, property taxes increased 5.7% in the quarter.

We are very pleased with the continued benefit of our transition to a captive program for our tenant insurance as net operating income associated with this program increased 16.6% over last year's third quarter. In addition to the strong performance of our same-store portfolio, we continue to see consistent growth trends at the properties that we purchased at certificate of occupancy or early in the lease-up stage.

As a result of our acquisition activity over the past 12 months, our lease-up pool today consists of 27 stores with quarterly occupancy of 67% compared to 22 stores with quarterly occupancy of 85.7% at the end of the third quarter of 2018. Our current lease-up portfolio has significant room to grow.

Our overall third quarter revenue increase also reflected a 43.1% increase in third-party management fees due to the significant traction we have gained in growing that portfolio of stores. Our balance sheet remains very 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 $16.4 million and $475 million available on our line of credit. Our net debt to recurring EBITDA ratio was 5.5x, and our debt service coverage was a healthy 4.5x. We have no debt maturities until 2021. Our average debt maturity was 7.3 years, and the percentage of our total debt that is fixed rate was 99% at September 30.

Regarding 2019 guidance, we raised the low end of full year guidance and now expect adjusted FFO per share to be between $5.59 and $5.63. Therefore, we expect adjusted FFO per share to be between $1.40 and $1.44 in the fourth quarter of 2019.

Keep in mind that our FFO per share guidance introduced in February contemplated a debt offering late in 2019. You will recall from our second quarter earnings comments that we opportunistically issued $350 million of 10-year, fixed-rate senior unsecured notes in early June, which was earlier than planned in order to capitalize on favorable market conditions for secure long-term fixed rate debt. That issuance resulted in $0.04 of additional interest expense that was not included in initial guidance. We have not adjusted our guidance down to account for this additional cost since it was offset by favorable operating trends.

As it relates to 2020, we expect same-store revenues to grow between 1.25% and 2.25% for the 2020 fiscal year. Excluding property taxes, we expect other expenses to decrease between 1.75% and 2.75% as a result of continued discipline on our operating costs and the impact of savings related to our Rent Now online rental platform. We do expect these reductions to more than offset the pressure from Internet marketing cost increases. Property taxes are expected to grow again in the 5% to 6% range in 2020. The cumulative effect of these assumptions should result in 2% to 3% growth in same-store NOI. Consistent with our past practices, we are not including in our same-store group any stores acquired in the early stages of lease-up that were less than 80% occupied at market rates at the beginning of 2019.

Similar to 2019, we anticipate G&A cost to be between $48 million and $50 million, investment in acquisitions to be approximately $200 million, expansion and enhancements to be between $40 million and $55 million, and investment in joint ventures to be between $20 million and $25 million. In aggregate, we expect adjusted FFO per share in 2020 to be between $5.93 and $6.07 per share.

With that, operator, we can now 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 Shirley Wu with Bank of America.

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

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So my first question has to do with your '20 expense guidance. So the other costs outside of taxes, you're expecting that to continue to come down negative 2% to 0%. And that's significantly better than a lot of your peers. Could you talk about some of the initiatives that you've mentioned earlier that's creating those efficiencies? And also talk a little bit about Rent Now, the utilization and that financial impact in '19 and what you're expecting in '20 as well.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [3]

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Shirley, it's Joe. Thanks for the question. We've been talking for a while now how the company has been wanting to improve our margins, and part of that was the premise for the asset rotation. And obviously having bigger stores in better markets will help us there. But at the same time, we've been really laser-focused on how to improve our margins at the store level and at the head office.

Part of it is Rent Now. Rent Now has been now about over 1 year since we launched it. And initially when we did it, we expected to get some efficiencies in the payroll level. And we're pleased to say that we've been recognizing them sooner than we expected. If you think about it, 10% of our move-ins are now directly handled by our customers. They're not going to the counter, they're not calling the call center and so forth. So that is a big chunk of it.

But obviously, we are not just focused on Rent Now. We are embracing other technologies to really improve the efficiencies at the store level, to really drive down the number of FTE per store that we currently have. And we're pleased to say that we've been recognizing those benefits now. And those real efficiencies that we're seeing today are really the premise of what we are forecasting in 2020. We're pleased with the results. We're doing things like online auctions. We're looking at all the processes and procedures that the teams currently have and how can we improve them, how can we make them more efficient at the store level, how can we reduce the need for double coverage, things like this. Online auctions, going paperless, how many bank runs a store manager has to do a week, all of these things add up to efficiencies and fewer hours at the store. So we're really pleased with it. These are real savings that we're seeing today. And everything that we have guided for in 2020 is what we see from what we are already achieving today.

There will be new initiatives next year, new ideas that we come up with. We haven't factored those into our guidance. That's upside, but we continue to work hard. The team has great ideas, a great experience. And we're looking at everything that we do at the store level, at the head office level to drive more efficiencies so that we can spend a little bit more on marketing. We know that we can't control property taxes, but we really can control our overhead cost, and that's really the premise of 2020.

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

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Got it. And for my second question, it's on revenues for '19. So your current guidance would imply that 4Q stabilizes at that 1.8, similar to 3Q. So I just wanted to get your sense of the cadence of revenue growth moving forward, if revenues -- if you feel like those revenues have hit their lows.

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

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Sure, Shirley. Yes, I think there's a few things that we like what we saw in Q3. Street rates down, I think, as they are in the industry, and we saw them down 5%. But our net effective, with some changes in specials that we've done, were only down 2.2. And that's the lowest they've been down all year. So we like the trends that we saw.

The occupancy gap narrowed as we went through the quarter, ended the quarter at 100 basis point occupancy gap. Today that gap is 80 basis points. We like the trends we're seeing in net effective rates and in occupancy. And you're right, so the fourth quarter we see pretty consistent with what we saw in the third quarter.

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Operator [6]

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

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

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Joe, I guess I wanted to stick with that last point on the revenue front and go back to 2020 guidance. I mean if we look back, you and your peers have never come out this early and given guidance. Just given the pullback and the seasonally slower season here, the more or less limited visibility in the sector. You combine that with the current supply picture, and I guess I'm just wondering what really gave you and the team the confidence to plant a stake in the ground at this point. I get the non-same-store benefits coming on. That's helping earnings. The expense side makes sense. But from the revenue side, that seems like the hardest to predict here. So any color on that?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [8]

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Yes. Thanks, Jeremy. Thanks for the call. Yes. We have changed protocol this year. But there's been a lot of moving parts, as you know, this year for us. We took some dilution. We sold a bunch of stores. We bought a bunch of stores. We launched some new technology. We've had a considerable amount of efficiencies. And we saw somewhat of a disconnect with what was expected next year and what we really feel confident is what we're going to produce. I talked about the efficiencies already which were real and which will be real.

And on the revenue side, I still believe that same-store projection is not only what we're going to see on the rates and with our store level but some other fee income that we're seeing this year from things like our captive and so forth. But we feel good about making that projection now, Jeremy. If you look at our top markets, in particular Chicago, Houston and the New York greater market, Chicago and Houston in particular, if you look at Yardi's latest report, those are the 2 markets on the top 30 MSAs that are at the lowest in terms of new supply. We've already been hit with that supply. We don't see a lot of new construction coming on. That gives us some comfort with those 2 markets in particular. And then for sure, New York, we're not in the boroughs as much. We have 1 store in Long Island City. Most of our stores, Long Island, mid-Hudson region, northern New Jersey, we're not seeing a ton of new supply affecting us. We feel pretty good about our projections there.

Houston in particular, we saw it in the first quarter, asking rates down pretty high double digits at 17%, 18%. And we've seen that get less negative over the year. I think we're at mid-single-digits now.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [9]

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Correct, yes. 8%.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [10]

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8% and we've seen occupancy kind of improve a little bit and stabilize. We feel really good that maybe the worst is behind us in Houston and that maybe in the second half of next year we'll see a positive. So we think it's very realistic what we projected on the revenue side.

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

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And as a piece of the revenue side that gives you some confidence still, the push you're making on existing customers, is that still one of the drivers here, that you're seeing the results and you're seeing the confidence and it's helping with that forecast at this point?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [12]

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Yes. Exactly, Jeremy. We now have about 2 years of this. We feel very confident. We're still testing some different ideas with the in-place strategy. We have some different promotions out there. That gives us a little bit more comfort to maybe work with occupancy. We're lower than some of our larger competitors. We think we have a little room there to improve that. And with the more aggressive in-place strategy, we think we can we add a little there.

It's not so much in our guidance. I think we'll see how that goes, but we're excited about what we're seeing in the last 6 weeks or 7 weeks. We've been tweaking with our revenue management model. We've got some new things that we're doing there. We're excited about that. And that's kind of on the upside I think for next year. We'll see how it goes. But yes, the in-place strategy is the bulk of most of that increase next year on the same-store revenue.

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Operator [13]

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Our next question comes from Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [14]

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Could you give us some more details maybe on customer trends like traffic and conversion rates, and maybe what that looks like today versus before rollout of the Rent Now platform?

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

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Yes. I think the trends are similar to what we saw [here]. Move-ins are where the most struggle is, right? So getting those move-ins at the right rate and bringing them in to maximize revenue is still, in this part of the supply cycle, the challenge. So we're seeing move-in rates trend down, and you see that quarter-to-quarter. But what we saw in September and October, we like what the special is producing in that occupancy gap narrowing. So we're comfortable with that.

On the rate side, we like where our net effective is. That gap is shrinking as well. So you're right, it's the move-ins.

On the move-outs, they continue to surprise us, how aggressive we've been. We increased 73% of our customers during the year on our in-place increases, and the move-outs have not ticked up from last year. So that has been the big surprise is the move-outs not ticking up based on how aggressive we've been.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [16]

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And Jonathan, we are focused on that conversion rate, the capture rate. Rent Now is for sure a great tool. If somebody is booking on Rent Now, that's kind of a 100% capture rate. We're not losing them. And in fact, we typically see those customers pay 3 days on average before they move in. So that definitely helps us.

But in general, we're seeing the activity, the hits on our website, either through maps, organic, pay. We see that even though move-ins have been lower this year and they're improving in the last 6 weeks to 8 weeks, the activity is really at an all-time high. We are getting the traction. Our organic search is high. We do have a great presence on maps and then we spend really, I would say, efficiently on the paid side.

The real idea is I think the consumers are a little bit more aware of options out there. There is new supply. There's stores that are being leased up. There's some specials out there. So we're focused on improving that capture rate. If somebody calls, we do our best now. We've been doing some retraining in our call center and our sales team. We've got some new tactics that we've been experimenting with. And I think that bodes well for us heading into 2020. As we get into the peak season next year, I think we're going to be really well prepared to continue to improve our capture rate.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [17]

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Okay. Great. That's helpful. And then maybe just one more for me. The third-party platform growth in the quarter, that's 50 stores added. Were those mostly new deliveries? Or were there some flag transitions from other third-party operators?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [18]

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Yes. Well, 32 of them were the stores that we sold to Inland and we kept that in a long-term contract with -- we have no equity in that. But they loved our platforms, and it was a no-brainer for them to keep us as a manager. We've since brought on a couple more stores that they've purchased. And I would say the remainder 18 or so, half are probably lease-up and half are stabilized stores.

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Operator [19]

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Our next question comes from Smedes Rose with Citi.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [20]

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First, I just wanted to ask, you mentioned that 73% of customers got rent increases the last -- or over the course of this year. What is the average increase in rates that you've been able to push through?

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

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The average increase, Smedes, this quarter was 10.4%, which is a little higher than it had been the previous quarter. Year-to-date it's 9-ish, 9%.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [22]

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Okay. And then I just wanted to go back to your -- the fact that you think you can bring down costs at the property level in 2020. And I don't mean to undermine any of the things that you mentioned, but none of them seemed all that sort of drastic in terms of cost savings. And I'm just wondering is there something maybe more sort of structural maybe with the Life Storage platform that was acquired a while ago now, or something that you've just been able to change more kind of holistically that's maybe sort of a catch-up to just -- that's bringing more efficiencies to the system?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [23]

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I don't think so, Smedes. Honestly, it's a number of initiatives that we're doing. Rent Now is a big part of it. That is significant. We brought on over 100 stores in the last year, and our call center FTE is lower than it was, despite bringing on 100. I mean that is part of Rent Now. The hours per store, the FTE per store, if you think about the number of stores we have and the number of people we have in the field, it adds up. It provides significant savings if we can manage more efficiently. We have different ideas. We have some multi-store managers. We're doing a number of things like that. Repair and maintenance is something where we've been focused on this year. I think part of it is more discipline. We brought on a different software program to manage all of those projects last year. And I think we're just starting to see the benefit of better control, better approval. And that's a big part of it.

So there's a number of things. And a lot of it is, again, trying to improve the efficiency at the store level. And those dollars add up. And we're very confident in what we have projected for 2020 because there's savings that we're already realizing partly in the third quarter. We'll see it in the fourth quarter, and we're going to carry it on into 2020.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [24]

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Okay. And then just finally, do you -- does the change in the same-store pool for 2020, does that have some impact on the same-store NOI projection?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [25]

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It's a minor change. We're adding 13 stores to our 504 stores so it's not a big change. But obviously, normally, those 13 stores would grow higher than the rest. But to move the needle a whole lot, they won't.

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Operator [26]

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Our next question comes from 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 [27]

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Just first question. So for the 2020 guidance, it looks like the same-store is expected to account for about $0.17 of growth from the 2019 midpoint, so that's $5.78. You mentioned the non-same-store lease-up, some other initiatives. Can you sort of decompose the other $0.22 a bit further and help bridge that growth from 2019?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [28]

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Sure. There's a few things flowing through there, right? The recycling is quite a bit of the pop, right? So we sold those stores in the middle of the year. That cost us about $0.16 of NOI. But the stores we bought on are adding $0.21. So there's a positive $0.05 from that recycling. The same-store NOI with the initiatives -- I have a little bit more than that, about an $0.18 pop in FFO from those. The rest is the -- there's some CofOs, the legacy CofOs that are leasing up nicely and add another $0.06. Management fees are adding another $0.06 or so. So there's a few of those other things and Warehouse Anywhere. And the insurance program, which we implemented on April 1, we have a full year next year and we like the results we're seeing from that.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [29]

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Okay. That's helpful. And then in terms of the same-store, can you share what your forecast for occupancy is throughout the year in 2020? You clawed back a little bit of occupancy here, but you're still lower year-over-year. Are you expecting to close that gap and trend higher on the occupancy front?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [30]

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Yes. I think what we predicted through the modeling is that we would close the gap through next year. So as we go through the year, we would expect that now 80 basis points to be flat to positive late in the year.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [31]

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Okay. And last question. You just mentioned Warehouse Anywhere amongst some of the initiatives there. I know that's been in motion for some time. You recently made a hire to help with that effort. Can you just provide a little bit more detail there, an update on your efforts there overall, and talk about some of the income that you're starting to generate from that initiative?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [32]

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Yes, Todd. We're excited about Warehouse Anywhere. We look at it as a tool for our business customers, right? We've always been focused on business customers. We've come out with some technology that we think plays well into the whole idea of the last mile. It generates some decent fee income for us. It obviously generates some rental income.

We haven't really forecasted in our 2020 guidance a big pop from Warehouse Anywhere. It's still too very young. I mean there could be some upside there. The new hire has been great. I think we brought on 4 or 5 new contracts in the last month of larger household names. But it takes time for us to see what those really mean. They want to come in. They want to -- we've got to work on kind of a pilot, we have to test things out. And sometimes it works and sometimes it doesn't. But the noise, I would say the visibility of this product, is gaining speed. Companies are finding us just through search now, which is great. But we haven't really forecasted a big spike. I think compared to this year, $0.02 maybe improvement from what we experienced this year into 2020 but not a ton.

But we're excited about it, but it's still in its infancy. We'll see how it goes, but again, our customers love it. It's a differentiator for us. I think we're talking to third-party clients. And we show them our Warehouse Anywhere and our Rent Now. They come to our office. They get excited about it. And it's helping us win some business. So there's some intangibles to Warehouse Anywhere that don't equate to specific dollars to that business. We are winning contracts from it, and we're excited about it.

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Operator [33]

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Our next question comes from Steve Sakwa with Evercore.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [34]

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I know a lot of focus has been on 2020. Just on the Internet marketing side, clearly, your trend is very different than some of your larger peers who maybe are focusing a bit more on maintaining occupancy, and your occupancy has dipped more. Just help us think through sort of what you're doing to kind of close that gap. If you're not spending it on Internet marketing, then what exactly are you doing?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [35]

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We definitely are spending on marketing. Our marketing has been up, Steve. We had one benefit where we had a bucket of funds that we had been spending in marketing that over the last couple of years has been really building the brand for traditional marketing, the new Life brand. And we really started to decide about halfway this year to move those funds right into our Internet marketing. So there is an increase in Internet marketing, but the overall marketing line is offset by that kind of moving from the right hand to the left hand.

But in general, obviously we're watching move-ins. You still got to show up on organic. You still got to show up on maps. And paid search is obviously becoming more important. We kind of watch the clicks, the hits that we're getting, making sure that we're being found. And as I said earlier, we are at record highs in terms of the clicks. And then it really comes down to sales tactics, revenue management, promotions and so forth.

So we don't feel we need to just spread out our Internet spending and be #1 in every market. We can be smart with it. We are smart with it. We have an in-house marketing team who's excellent. They learned a ton when we did the brand change from Uncle Bob's to Life Storage. And I think that's paying dividends today from what they learned.

So I think it's being smart with the dollars we're spending. We want to make sure that we're not paying for an ad in Nashville when we're not in Nashville. We do a lot of that. And you do see some ads if you go around the country and you do a search, you might see a store pop up that's not even in that market. We really work hard to make sure that our dollars are spent appropriately. We even look at the time of day when we should be bidding on auctions. It's not all the time.

So I think we're very efficient. We're very smart with those dollars. But we do expect them to go up next year. I think we budgeted 15% growth and we'll watch it and see how it goes.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [36]

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Okay. And just to come back to the kind of the FTE point, Joe. I kind of appreciate your ability to sort of change the organization over the past year or so. And I realize those are sort of sensitive discussions, but is there a way to sort of quantify for us what the change in maybe FTEs has been is effectively built into the guidance for next year? Just to help us understand maybe how much of those changes have already taken place and what the size of those are.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [37]

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It is ongoing, it is sensitive. Most of it, Steve, has been through attrition. Part of the field for all of us is a high-level turnover in the assistant manager roles. They're not typically full-time positions. So that's usually the highest turnover rate in an organization. Less dependency on that workforce helps. So a part of it is that. A part of it is not hiring positions and being smarter about double coverage and where we should have stores with 2 persons and so forth. We've tested some reduced hours because of Rent Now. We're going to continue to test that next year, but we haven't built any of that into our guidance. It really has kind of taken a certain number of FTE per store and trying to bring that ratio down a bit. I'd rather not talk about it, but it's definitely trying to improve that number of FTE per store in general. And we're making progress already. And we're building that into our guidance, and we feel comfortable with it.

And by the way, we haven't projected, for example, Rent Now being 15% of our move-ins next year or 20%. We've kept it at 10%. We're hoping that it goes up. We don't know, but we haven't tried to be aggressive or whatever. We've been pretty conservative there that we'll be at 10% of our move-ins next year. I would expect it to go up, but we haven't built any growth in that channel because obviously any growth in the Rent Now channel will help us on payroll as well. Obviously, if we had 30% of our move-ins going through Rent Now, that would be a considerable amount of savings. We have not built that into our guidance.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [38]

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Okay. And just to clarify because I think somebody asked about average occupancy next year. So if I'm looking at this right, your 9 months occupancy weighted average is down about 110 basis points. Just what -- you're assuming that maybe it's around that number to close out the year. What is the occupancy gain next year then factored into guidance?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [39]

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The occupancy, Steve, is that we match up next year. So we -- today's 80% goes to a 0% gap. So it's not like we're growing occupancy. We just expect it to be -- the gap to narrow.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [40]

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Yes. That 110 is now about 80. Steve, we are going to be a little bit more focused on occupancy. That hasn't really been one of our drivers in the past. But as we said earlier, we got a different in-place strategy. We've got some ideas on revenue management, some things that I think are unique to the industry. And we believe that's going to help us close that gap. And we're already seeing within a month it closed above 20, 25 basis points. So we feel pretty comfortable with that.

And again, a lot of the supply and new construction in some of our top markets is behind us. We're not faced with some of the -- yes, we have some markets like Miami and Atlanta. But we're not in some of those other hot markets, Denver, Nashville, Portland and so forth that are just getting hit hard now. Some of our larger markets, the New York region, Buffalo, Chicago, Houston, are kind of behind us, Vegas. So we feel that's pretty achievable -- I would like it to be more than 110, but we'll start with that. And we feel pretty good about achieving it.

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Operator [41]

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Our next question comes from Ki Bin Kim with SunTrust.

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

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You guys talked about the reason for putting out 2020 guidance is that you thought the market or investors just had a different opinion about your growth rate versus what you guys are seeing. But it just feels like there's probably some other reasons why you would want to put out a flag like this. I mean especially given that we are in a declining environment and maybe things are a little bit hazy looking forward. Was there any other reasons why you felt like you wanted to put out guidance early?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [43]

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Well, I think yes, Ki Bin -- the real rationale is we've had a lot of moving parts, right? And then we do talk to our investors at the conferences. We do NDRs. And we wanted to get out and be more transparent about what we really are seeing. We're seeing some real efficiencies hitting our books and will benefit us next year. We're going to NAREIT in a couple weeks. We want to talk about it because these are real savings. They're significant. We had a lot going on this year with the sale of several properties, with the purchase of new properties, the timing of those.

So for us, it just makes sense. Will we do it next year at this time? I don't know. We might not have a reason for it. But we feel very good about a lot of things that gave us confidence to go out there, and that's really -- that's the reason.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Okay. And you said net effective street rates were down 2.5% this quarter. Implicit in that 2020 guidance, what are you expecting for net effective rates?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [45]

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So they were down 2.2% during the quarter, and we expect them to be down. I think the occupancy -- as Joe just mentioned, the occupancy is where some of the revenue growth will come from, not from the rate side. We don't expect a whole lot of traction on the rate side -- outside of some of our markets. We're seeing traction in Chicago and Houston that are on the end of the cycle. We're starting to see Houston's negative rate trend lessen. So we like what we see in trends in our top markets, but I think it's still going to be negative overall.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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Okay. So I'm just trying to think about these together. If rates are going to be negative, and I think you said earlier to Steve Sakwa's question, occupancy will be -- you'll get a benefit but it's really 0 so it's a comp benefit. And your same-store revenue forecast is 1.75%. Does that just basically imply that the existing customer rate increase program is driving the growth?

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

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Correct. It will drive most of the growth.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [48]

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Yes. That's what we saw this year, and that's what we're planning for next year. So I believe that's pretty -- it's the right thing to do.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [49]

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Okay. And just last question. Underlying that guidance, it does matter how your biggest markets perform next year. So how much good news are you embedding in that guidance for some of your biggest markets like Chicago or Houston?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [50]

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Well, we're showing Houston as negative next year. So it's not a whole lot of good news there, but second half of the year looks better than the first half. We'll put it that way, but still, we expect it to be negative. Chicago, we expect to be steady. It has been steady in the last 3 quarters in that mid-2s to 3 range, and that's what we would expect. Miami is another story. That would be a negative market, and that's what we're predicting, down 3%. So there are some markets that we're expecting to be down, some of the Florida markets -- Miami, Orlando and Charlotte. There are some markets we expect to go backwards, but there's a lot of steady markets. A lot of our markets are holding steady, and that's what we are showing next year.

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Operator [51]

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Our next question comes from Ryan Lumb with Green Street Advisors.

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Ryan Gregory Lumb, Green Street Advisors, LLC, Research Division - Senior Associate & Analyst [52]

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I just want to circle back on the 70%-ish of in-place tenants got increases. What is that number kind of on a year-over-year basis? Or what was it in past years for point of comparison?

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

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Last year, it was 60% on the same-store. The year before that, it was much lower. I don't have it calculated here, but it was much lower.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [54]

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About 30.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [55]

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Yes. It was about 30 because we did double in '18 over '17. So again last year, we hit -- there's 60 -- almost 63% of our customers were over a year, we hit them in '18. In '19, we were a little more aggressive hitting earlier in the cycle, after move-in. So it got -- we hit more than those customers that had been with us more than a year.

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Ryan Gregory Lumb, Green Street Advisors, LLC, Research Division - Senior Associate & Analyst [56]

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Sure. Do you think like 70%-ish is kind of the high watermark? Or do you think you guys can go higher from there?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [57]

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Well, I think there's always things you can tweak in that. I think -- we think there's a little bit left there, not a whole -- not a change from 60 to 70. But there's some change there and we have to be more effective with those.

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Ryan Gregory Lumb, Green Street Advisors, LLC, Research Division - Senior Associate & Analyst [58]

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Sure. And then in the past, you guys have sort of commented on Rent Now and sort of the adoption rate or the pace of adoption. Can you -- would you define it as the pace of adoption is accelerating at this point because there's -- a lot of the optimism that seems like there's baked into 2020 does have this Rent Now as a piece of that puzzle, it sounds like? So just wondering if you guys are seeing some sort of accelerating adoption of that program.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [59]

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Well, since we rolled it out fully, Ryan, it kind of went from 7 to 8 to now we're seeing 9 to 10. It's again only been a half a year. So we're not seeing it -- especially this time of year, it's kind of a slower season. We're seeing it kind of at 10%. We haven't baked in any increase in our guidance. We think as it becomes more known and repeat customers and these sort of things, we'll expect it to go up. But right now, we're seeing it at 10%. We don't really know how quickly or how far it will go up. I think over time, it will go up. I don't know when and how quickly.

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Ryan Gregory Lumb, Green Street Advisors, LLC, Research Division - Senior Associate & Analyst [60]

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Sure. And then the last question. I mean Life Storage has come out with a number of sort of, call them, innovative programs in the past year or so, Warehouse Anywhere and Rent Now. And it sounds like there's a handful of others in the hopper. Just wondering, I mean valet storage is out there in the news. Any interest in developing something along those lines?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [61]

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We watch that space. We know some of the larger parties out there. Our Warehouse Anywhere is a business-to-business valet. We have couriers. We have pick, pack and ship. We kind of provide valet for our businesses right now. We're going to watch that space. I personally believe there are customers out there who want their stuff picked up. And I think we should be aware of it, and we'll see where it goes. But it's an interesting one. There's a lot of money being spent on it. They have their challenges finding customers.

But at the end of day, people want to know where their things are, right? They want to know -- they want to go get them when they want them. And we'll see where it goes. But we're keeping our eyes on that space. But we're not -- we don't feel threatened by it. UPS came out with something recently. There's bin service. We looked at our 5x5s in our whole franchise. It's a very small amount of our inventory. And that's even bigger than the bins that they're selling. I'm not sure if that will go well. It's not really our cup of tea. But there's some investment going in it. So we'd be silly not to keep our eyes open and ears open.

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Operator [62]

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Our next question comes from Jon Petersen with Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [63]

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Another 2020 guidance question if I can. I'm curious what it assumes in terms of capital recycling. I know you gave some acquisition guidance. What are you guys thinking in terms of dispositions or -- I think you gave some color around JV contributions. And maybe how should we think about you guys continuing to dispose of properties?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [64]

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I mean we've done a heck of a job this year with some acquisitions, some real nice acquisitions. 80% of them are kind of off market. We have a great in-house team. We've got some visibility and some -- a pretty good pipeline. We feel confident we can get to $200 million next year. And we'll have a lot more JVs. We brought on some new strategic partners this year. I think it's a great way to use capital. It's a great way to get more scale, and we're going to continue to focus on that.

Dispositions? No. We're done with dispositions. There might be 1 or 2 if there's someone who wants to put up a multi-family in a property and willing to pay us recap, but other than that, no. That's another reason for kind of coming out with our guidance because there were some -- I guess some questions and thoughts that we'd maybe take some more dilution next year and do more recaps. We want to be clear that that's not in the plans for 2020.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [65]

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Okay. And then I think you mentioned you'd like to have about 300 third-party management partners by the end of the year. And I think you stated just kind of generally with the guidance that you expect to continue to grow that platform next year. But I guess do the FFO per share numbers include an assumption of an increase in the third-party management business, and what is that?

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [66]

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Yes. I think we built in about 50 stores, which is, in my view, conservative given our run rate, but we're conservative there. There's some great players out there. There's some new competitors. Public is getting into the space. But we built in 50, and I think that, that's not going to be a problem. I mean obviously we have some contracts already signed for deliveries in 2020. So we have an idea of how many we're already going to get just because the stores are going to open next year. So we feel good about it.

The pipeline has never been stronger. Our technology and our platforms are getting a lot of attention in the industry. We were at the Vegas show a couple months ago. We didn't have enough time to meet everybody. Everybody wants to hear about our products, our technology, and it's a great selling point. And as you can see, they're delivering real savings and real efficiencies to our business, and owners see that. So we think that business is going to continue to grow nicely.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [67]

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And Jon, obviously, the stores we brought on this year will be there for a whole year next year. So it's about a 20% increase in that line built into guidance.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [68]

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Nice job on the quarter. Thanks, guys.

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Operator [69]

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Our next question is a follow-up from Jeremy Metz with BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [70]

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Just one quick follow-up. Going back to the margin discussion from earlier. Can you break down how much of that is Rent Now versus other initiatives? And then I guess looking further out, what is the realistic goal as you see it in terms of where you expect margins to ultimately get and by what point?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [71]

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Okay. Jeremy, the Rent Now and the personnel savings is the big part of it. The efficiencies we're giving with online auctions, ESG and the R&M also add to, we figure, 50 basis point improvement in the same-store margin next year. And we think there's another year after that where we can improve it.

Obviously, our market mix drives some of our margins. When Chicago is your largest market, that's a low-margin city. But the other markets where we see some margin improvement compared to others out there, we think there's potential there to grow at 50 next year and 50 a year after that.

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Operator [72]

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Our next question is another follow-up from Smedes Rose with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [73]

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It's Michael Bilerman here with Smedes. So I just want to sort of understand from just a guidance perspective, overall, what sort of level of conservatism that you sort of built into the 2020 guide in the sense of -- and I appreciate all the detail and wanting to get ahead of this and really demonstrate to the street about all the changes that are going on. So I'd preface it by saying I think it's good that you're trying to do that.

I would assume, Joe, you want to be in a position where you're going to beat and raise throughout the year. And so I want to understand sort of in comprising all the components specifically probably on the revenue side because it sounds like you have a pretty good handle on the expense initiatives that you have and how that translates into next year, and obviously with property taxes being a big chunk of it and knowing that, that piece you have a good handle on. You have a good handle on the new stores that have rolled into the platform. You have a good handle on the financing side of the business. So it really comes down to the revenue side. And I really want to understand sort of -- what sort of you've built in from a conservatism on that front.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [74]

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Well, sure. I think they are conservative. Obviously, it's a little earlier than we normally do it. But there's some fee income -- improvements in fees. Andy talked about the captive insurance and some other things that we have there that we've built into it. I think those are conservative, and I don't think there's much upside to what we've put in.

The revenue side is just the same-store revenue. I think we're looking at a Houston for example, our gut is it will turn positive in the second half of the year, but we didn't forecast for that. So there could be some upside there.

I think in general, we took a more cautious view on some of our markets. But again, we're cautiously optimistic about some of our markets. We see in some of our larger markets, the new supply is -- there's not going to be as many deliveries in the past. We're seeing, for example, in Houston our occupancy turn around and improve. And the next thing I would expect would be rate. But again, we are conservative there.

And so as we get into the next earnings call, we'll have obviously a little better view on it. And maybe we'll adjust it or maybe not. But I think overall, we were conservative, Michael. But the whole idea of the efficiencies and the effects of the whole rotation program, we really needed to spell that out better. And these -- we feel very confident with what we put out there. I don't know if Andy has anything to add on that.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [75]

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No. I think we went through the markets where we definitely do see some pressure in markets where we will be negative. We've been surprised by Dallas year-to-date. But there's another market we don't think holds positive next year. So when we look through and ran the models, we were comfortable that there's some conservative continued rate pressure, continued new supply in many markets. But a few of our top markets, we're very comfortable with.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [76]

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And then is there an embedded view on street rate for 2020 embedded in that revenue outlook?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [77]

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Yes. We still expect street rates to be down year-over-year. Net effective with our specials and how we're handling those, we think less -- the street rates less impactful. And how quickly in the life cycle of a new customer we raise the rents, we think street rates is less impactful. We have to get those customers in the door. And then once they're in the door, we treat them a little differently than we had in the past.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [78]

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And then -- and I apologize if I missed this. What percentage of embedded in 2019? So you're going to have 2% revenue growth. What percentage of existing customers and the rate increase that they took versus what's now embedded in 2020 for the same settings? So just on an apples-to-apples basis, is that number increasing in terms of the existing customer base that you're assuming? Is it declining or is it remaining the same?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [79]

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It's increasing slightly, I'd say, year-to-date where we've hit 73% of our customers. We see a slight increase in that just because of doing it a little earlier in the life cycle.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [80]

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So that potentially poses some level of risk if some of the customers push back on the rate increases, 1 or 2 decide to leave, and you have to funnel them with a new customer with their rate probably being down rather than being up.

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [81]

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Yes. I think we're in a better position than others. We had rent roll-up in this quarter, which is not a whole lot in the industry are seeing that. We do get rent roll-down, and we will see that in the fourth quarter. But I think we're in a good spot from a rate point of view of where our current customers are at. We're relatively new at pushing them above street rate, so it's less of an issue in our portfolio.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [82]

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And then from an occupancy, you are assuming year-over-year for the year to be flat occupancy-wise, correct?

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [83]

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To get to flat. It will start negative; we expect it to get to flat.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [84]

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Right, but it's on average for the full year, you're assuming an average occupancy in 2020 in line with what it was in 2019. So no deterioration in pickup from a potential...

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Andrew J. Gregoire, Life Storage, Inc. - CFO & Secretary [85]

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For the whole year, it will be slightly -- we expect it to be slightly down in 2020, although that is an issue that we're dealing with that we think we have the most room there to move it higher.

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Operator [86]

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That is all the questions we have. I would like to turn the conference back over to Joe Saffire for any closing remarks.

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Joseph V. Saffire, Life Storage, Inc. - CEO & Director [87]

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Yes. Well, thank you, everyone. First, I want to just congratulate all those National fans. Well done. And then I obviously wish everyone a happy and safe Halloween. And we look forward to seeing many of you in a few weeks in L.A. Thanks again for dialing in.

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Operator [88]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.