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Edited Transcript of PSA earnings conference call or presentation 31-Oct-18 5:00pm GMT

Q3 2018 Public Storage Earnings Call

GLENDALE Nov 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Public Storage earnings conference call or presentation Wednesday, October 31, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* H. Thomas Boyle

Public Storage - CFO

* Joseph D. Russell

Public Storage - President

* Ryan C. Burke

Public Storage - VP of Investor Services

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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

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

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

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Third Quarter 2018 Earnings Call. (Operator Instructions)

It's now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Sir, you may begin.

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Ryan C. Burke, Public Storage - VP of Investor Services [2]

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Thank you, Holly. Good morning, good afternoon, everyone. Thank you for joining us for the third quarter 2018 earnings call. I'm here with Joe Russell and Tom Boyle.

Before we begin, we want to remind you that all statements, other than statements of historical fact included on this call, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected by the statements. These risks and other factors could adversely impact our business and future results that are described in yesterday's earnings release and our reports filed with the SEC. All forward-looking statements speak only as of today, October 31, 2018, and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included on our earnings release. You can find our press release, SEC reports and an audio webcast replay of this conference call on our website, publicstorage.com.

With that, I'll turn the call over to Joe.

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Joseph D. Russell, Public Storage - President [3]

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Great. Thank you, Ryan, and thank you for joining us. We had a good quarter. I'd like to 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 will come from the line of Juan Sanabria, Bank of America Merrill Lynch.

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

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Just hoping you guys could speak a little bit about your tech initiatives. I think you guys have launched a new web platform that I think is pretty all-encompassing. I was hoping you can just give us an update on that and the benefits you've seen and how that should impact core results and earnings over time.

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Joseph D. Russell, Public Storage - President [3]

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Okay. Thanks, Juan. Yes, the frontline, or customer-interface, system you're talking to is what we call Web Champ 2. So Web Champ 2 is both the interface from customers to employees, and it's also our inventory system. It has a number of attributes that we've built over several years and fully now have implemented it throughout the company. We started integrating it into our properties in 2000 -- early 2017, finished by the end of the year. So now, we're coming up to a full year of its use. And the levels of benefits tied to it are several. First of all, it's built around a very high degree of customer interface, so it includes speed of transactions, knowledge of customer, tools that the property manager and the district manager can use to enhance not only our move-in activity, but the ways in which the -- we -- other ways in which we can encourage our customers to stay with us. And it's also a paperless system, so it has a number of other advantages relative just to the day-to-day operations, as well. Now those are some of the headlines of the system. The other things that, over time, it will continue to give us benefits around are the ways in which that we grow and understand customer behavior and the knowledge that we have relative to not only existing customers, plus or minus, today about 1.5 million customers, so we've got a big pool of existing customers. But even year-to-date, we've moved in nearly 900,000 customers. So the system is working great. We're getting a lot of good traction out of it. It's a system that we can, like I mentioned, continues to enhance over time. And its inherent design, it included a number of things that we integrate from, again, customer sourcing, revenue management and other things, but a lot of that's highly proprietary. But I can tell you that we're very pleased with the success the system is bring to us and the efficiencies and knowledge that we continue to gain to optimize our overall environment.

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

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Great. And then just a follow-up question, if you don't mind, on the occupancy front. From a same-store perspective, that's kind of declined consistently the last few quarters. At what point do you think that you'll have easier comps and that occupancy will stabilize at least from a same-store perspective?

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H. Thomas Boyle, Public Storage - CFO [5]

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Sure, Juan. So, it's Tom speaking. Yes, occupancy trends throughout the year have, frankly, been encouraging on a year-over-year basis. So while we've had year-over-year declines, we've seen some positive momentum there. And the hurricanes this quarter, in particular, masked some of that benefit. So if you look at the occupancy at quarter end, for example, which was down 1.2%, if you look at the system as a whole, excluding the hurricane markets, it's down 0.8%, so there have been some positive trends there. I think, generally speaking, we've talked about this in the past, the system as a whole, before supply really started impacting us in 2016, was north of 96% occupied. And there's no question, we've been impacted by the opening of new facilities in many markets, which I won't rattle off here, as you know them, where occupancy has been more impacted than otherwise. Looking at our markets this quarter, we're still looking at Los Angeles, 95.4%; San Francisco, 94.8%, so very healthy occupancies. And again, system-wide, I think we've seen some encouraging trends as we've stepped through 2018.

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Operator [6]

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Our next question will come from the line of Jeremy Metz, BMO Capital Markets.

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

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Can you just give us an update on your outlook for supply here looking out into the rest of this year and 2019 and any changes? Because if I were to look at just where deals are trading in the market on a per square foot basis and I look at where you're building today, that spread remains pretty attractive. And lending is, more or less, still available, so wondering why supply would tail off if developers can still get these sort of margins out there.

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Joseph D. Russell, Public Storage - President [8]

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Okay. Yes. Thanks, Jeremy. So, yes, let me give you a little bit of view on the way we track supply and some of the perspective coming into an environment that really started in 2016, more or less, when the supply momentum began to build and it's carried now to 2017, '18, and we feel we'll have a consistent level of deliveries going into 2019, but let me give you a little bit of color on that. So coming into 2016, obviously, for a decade, plus or minus, prior to that, overall, nationally, you might have been seeing deliveries, say, plus or minus, in the $1 billion range. That doubled in 2016, went to $2 billion. And then 2017, we hit $3.5 billion. 2018, our best guess is it's going to be slightly higher, say, plus or minus $4 billion. And the data we track in our top 30 markets is telling us 2019 is likely to be equivalent to 2018. So you step back and you look at, okay, that volume has been pronounced. Tom just talked about it relative to the impact that we see relative to occupancy. In total, it's a plus or minus 400 to 500 properties a year, plus or minus 30 million square feet. And the other element that we're also tracking is a nuance that goes on with this inventory today is overall facility size is magnifying. So even if you also evaluate it on a market-to-market basis on a per square foot or amount of inventory that's hitting markets, it can be heavy. So we clearly see, again, part of your question, developer motivation to continue to put product into some markets. The motivations tied to -- again, you can sell assets at still pretty low cap rates. There are a lot of funds and investors out there that want to own this type of product. And in the past, we've talked about this ability for a developer to go out and build to a 9, sell it at a 5. That's plus or minus an 80% margin, even with some shift down. So say today they build for an 8, but they can still sell it maybe at a 5 or today maybe a 6 cap, that's still a 33% margin. So there's going to be developer motivation that has not eased enough to really shift down the momentum that is there. Now with that said, there is a little bit of different news that's somewhat encouraging because some of the most oversupplied markets that we've seen over the last 2 or 3 years, which include Denver, Charlotte, Austin, Dallas, Houston and Tampa, we see statistically fewer deliveries going into those markets as we transition into 2019. And, Jeremy, the data that I'm pointing to is really what we consider pretty accurate data because these are actual construction-in-motion projects. This isn't anything play-in. This is -- these are properties that have been launched and/or in full development mode. So again, we're seeing some benefit hopefully there, in those markets that have been, obviously, pretty hard hit. Now however, again, when you look at that holistic amount of deliveries that's likely to take place in 2019, again, that we think is equal, plus or minus, to what we've seen in 2018, we're still going to see markets, like Portland, New York, Miami, Boston, West Palm Beach and Riley -- and Raleigh that will likely see slightly elevated lever -- levels of deliveries. So we're monitoring those actively. We're not infused about the impact that this new inventory can have market to market. And again, we're going to continue to track and react to it and deal with, I think, an overall environment that, again, for 2019 is probably, at the end of the day, somewhat similar to '18.

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

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No. That's great color. Appreciate that. Switching gears just a little bit. If I look in the move-in rates, they were down about 2% in the quarter. They were down 4% last quarter. So wondering if you could just talk about how those trended in the quarter so far into October. And then directionally, is the right read, or is there a read at all, and whether it would be from comps -- easier comps and better traction on rents that we see that negative spread continue to trend down? Or is it too early to tell?

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H. Thomas Boyle, Public Storage - CFO [10]

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So let me take that apart. So thanks, Jeremy. The move-in rate, as you highlighted, down 2.1% in the quarter on a square-footage basis compares to the 4.2% in the second quarter, so that is some improvement. I would say the down 2.1% is pretty consistent through the quarter, so it's not as though you see a significant amount of variability by month. We did have, in the second quarter, some sale activity that drove that rate in the second quarter lower but, overall, down 2.1% for the quarter. We continue to see, in many markets, a more challenged move-in environment in those markets that have had new supply impacted. And in other markets where there's less supply, we have more traction and ability to hold rate or even push rate. So as Joe highlighted, supply, as we move forward, will be impacting some markets, maybe less next year than it did this year, and in other markets may impact it more. So I think it's too early to call where move-in rates are going to go down the line, but there's no question will be impacted by supply in some markets. The flip side is we continue to see pretty good demand and move-in volume, and the broader macro environment is good. So the job market is great. Wage pressures are increasing. And so our customers and consumers as a whole are putting more dollars in their pocket, which is helpful. And GDP is growing well. So that's all supporting the demand situation. Maybe taking that a step further just in general around our customer base, our existing tenant base is also being supported by those same demand factors. And that group of customers is behaving as they have in the past, if not better. So I talked a little earlier about occupancy trends improving. One of the drivers of that is actually an even stickier existing customer base and with move-outs actually declining year-over-year. So I would say those are the pushes and pulls. I think it's early to call where exactly we're going to end up as we move forward here, but some encouraging trends in the quarter, as you highlight.

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Operator [11]

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Our next question will come from the line of Ronald Kamdem, Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [12]

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Just going back to the existing customer base, maybe could you just talk about -- I know you mentioned in the 10-Q that increases are similar -- were similar in 3Q as it was in the previous year. Maybe, could you just provide more color in terms of what kind of -- what type of increases are you pushing through and sort of the reaction that you're seeing, would be helpful?

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H. Thomas Boyle, Public Storage - CFO [13]

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Sure. So the third quarter is a busy quarter for us, sending out existing tenant rate increases, and those were received well by our customer base. No change there. In terms of the magnitude or strategies, again, no distinct changes in strategies. We're always tweaking and testing and modifying our approach there. But generally speaking, the range of increases can be reasonably large depending on the customer, the market, the dynamics, but we point you to kind of high-single digits as a ZIP code for average increases.

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

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Got it. That's helpful. And then for the contract rents, I think you touched on this a little bit. In terms of the improvement, it sounded like -- is it fair to say that sort of all markets improved in 3Q versus 2Q? Or were there some markets that were notable standouts and so forth?

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H. Thomas Boyle, Public Storage - CFO [15]

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No. Certainly, this is a very local business. So even within a market, you'll have pockets of demand that are doing much better than others. Even in a market like L.A, where you'd say that's one of the strongest markets in our system, it's our largest market, we see differentials within that market with strengths at San Fernando Valley, out east or Inland Empire, as we've been able to push move-in rates there at a higher rate than in other parts of L.A. So I would take it even down further, which is that this is a local business, and the variability is meaningful. We're, obviously, driving pricing decisions on a very dynamic but also very local unit size level by property.

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

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Got it. All right. The last one for me is I just noticed that Portland was added to the list of challenged markets this quarter. Maybe if you can just talk about a little bit more color maybe what's the supply outlook, when you see that sort of abating and so on.

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Joseph D. Russell, Public Storage - President [17]

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Well, yes, Portland is a market that, again, we've been talking to in the last couple of quarters as one that has been positioned for an outpaced level of inventory. And again, with the construction starts that have taken hold and the amount of inventory in that market, it's certainly poised to be a challenged market in the next year or 2. We have, statistically, a number of properties on our radar that, again, are examples of what I talked to, not only by quantity. There's roughly 18 properties that are coming into that market, as we speak. On average, they're bigger. And there's more square footage that's likely to hit from a percentage on existing inventory. So if you stack rate Portland, it's near the top of the list relative to, again, a market that's likely to see an elevated level of stress tied to the deliveries themselves. Now the thing that we do have is we have a portfolio there of about 40 properties, well located. We think we've got good competitive positioning because of the locations those specific properties have in the market, some of the new developments happening in some of the outer parts of Portland. So again, as Tom mentioned, we have to evaluate, as we do, market to market, submarket to submarket, the individual impacts on how we'll react to all things relative to potential customer demand, the way we price, the way we encourage customers to stay with us. So the good news on that front is we think we've got a good sustainable portfolio in the market. And we're going to keep a close eye on the potential impact that this new inventory is going to have, not necessarily adjacent to or abutting up to most of our existing product, but it's going to be in the market at large.

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Operator [18]

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Our next question will come from the line of Smedes Rose, Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [19]

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I wanted to ask you just a little bit as you look at acquisition opportunities, if you have seen any changes in pricing or if you saw an upward bias on interest rates and maybe your expectations around pricing going forward.

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H. Thomas Boyle, Public Storage - CFO [20]

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Yes, Smedes. I would say not a big change yet. You're correct in the potential impact that higher interest rate environment could create relative to, again, the opportunity tied to picking up properties that certain owners may have decided to put back in the market because they don't meet either their own investment returns or they've got some level of stress that they want to deal with. But unfortunately, at the moment, we're not seeing a lot of that. On the fringe, we are seeing a few reverse inquiries, where owners have come into the market thinking that pro formas that were set, say, 2 or 3 years ago, with pretty aggressive assumptions, not only to lease up, but rate and stability of assets may not be happening. And you can probably imagine some of the areas that, that could be taking place relative to, again, the pressure points tied to the supply that we're talking about. But for the most part, we really haven't seen a material shift yet. As I mentioned, there's still a lot of capital that wants to come into the sector. And we, at the end of the day, really can't make sense of a lot of the valuations. When you see stabilized assets in certain markets trading at $300, $400, $500 a square foot, I mean, it makes no sense to us. Now part of the things that we've obviously shifted to and we've continued to do is look for opportunities that are rounding out presence that we have in markets that we can increase our scale, we can buy good assets, say, plus or minus, for $100 to $110 a square foot. We've seen a number of those and that's really the theme of the amount of buying that we've done year-to-date. Now the other thing that we've pivoted to and we feel it completely validates another capital allocation decision that we made a few years ago is the investment that we're continuing to make store into our development and redevelopment pipeline. So in like value, we can and have been building generation 5 new state-of-the-art facilities for that same per-square-foot range. The $100, $120 a square foot, these are Class A properties. They're in great locations. The lease-up is going really well. If you even take a look at a market like Houston, which, clearly, a couple of years ago was a poster child for extreme overdevelopment, we not only had the short-term benefit of a hurricane there, but we've continued to deliver a number of properties in that market strategically. And if you look at the portfolio that we've built and delivered there, and it's 9 properties, say, over the last 12 to 18 months, lease-up is going very well, and this isn't all hurricane-related. It's also just related to core demand that we're seeing in submarkets of that particular market. So again, until we start seeing, again, some interesting opportunities, we're going to continue to be very disciplined in the way that we approach the acquisition environment.

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

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That's super helpful. And just -- maybe just on that, you talked a fair amount about development in the levels of dollar spend. And I was just wondering, since you're in so many markets, obviously, the biggest portfolio, have you seen at all a migration maybe out of some of those poster child markets that people have focused on for a while into smaller markets as developers kind of migrate, I guess, if you will, into MSAs or not much?

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Joseph D. Russell, Public Storage - President [22]

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Yes. And I talked about that a few minutes ago relative to, again, some of those oversupplied markets that, statistically, we see a tapering down of deliveries in 2019. I wouldn't say, necessarily, it's a migration. Some developers leave one market to go to the next market. But again, I think that's some encouraging news relative to, hopefully, some level of discipline that will play forward relative to slowing down some of these developments that, at the end of the day, may be oversupplying certain markets. So that's encouraging. And again, we'll see how, through not only next year, but the year after, how some of that discipline continues to play through.

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Operator [23]

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Our next question will come from the line of Todd Thomas, KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [24]

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This first question, I guess, following up on the development topic and speaking to your development and redevelopment pipeline specifically, both of which are thinning a bit here as you complete some projects and bring them online. Are you seeing opportunities to backfill projects, such that the thinning in the pipeline is really just timing related? Or is the opportunity set in front of you for development shrinking?

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Joseph D. Russell, Public Storage - President [25]

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Yes, Todd. I wouldn't take that as holistically shrinking. We've continued to look for well-placed and priced land sites. And concurrent with that, we've talked about, over the last few quarters, also another opportunity we continue to have, which is the redevelopment or expansion of existing properties. So there's been a shift to even more investment into the redevelopment and expansion part of the portfolio. One of the things that came out of the hurricanes I mentioned a few minutes ago in Houston, specifically, is we ended up accelerating some of the potential rebuilds that we saw in that market because of the damage that took place on 8 or so properties, so those have or are close to being fully completed. So there's a little bit of that in the shift of size of the development pipeline going into the next couple of years. But again, we continue to see really good opportunities to develop and create great value with the expertise that we have not only in ground-up construction, but with our team focused on expanding, enhancing existing properties. Again, in a natural way, it is shifting where, over the last couple of years, we've put a lot of new product in Dallas and Houston, for instance. But going into 2019, although Texas is still an area we feel confident about investing into, but it's more balanced. We've got properties going into Florida, Washington, Minnesota and other markets. So we're continuing to find really good opportunities. And again, we're keeping a very close eye on other factors as well, which includes construction costs and, again, the things that we need to make sure that we're ticking and tying as we look at the value that we can create. But again, it continues to be a very vibrant part of our capital allocation decisions, and I think we're going to see really strong value. As you look at, again, how these developments stack up, particularly from 2016 to today, most of them are still in really early stages of not only lease-up, but stabilization. And if you look at the vintage of acquisitions -- or not acquisitions, excuse me, but developments that we did between 2013 and '15, they're, plus or minus, in the high single to low double-digit return range. And again, the population of assets that we continue to develop are still likely to generate similar levels of returns. So it's a good business for us. And again, we continue to see very good opportunities around that.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [26]

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Okay. That's helpful. And then I just wanted to also circle back to the new technology system you've implemented. And I'm assuming that, that system is state-of-the-art in terms of utilizing data and understanding customer behavior and ultimately helping maximize revenue. How do you think your technology stacked up before the implementation of that system? I'm just wondering how much room is there for an improvement. And where is the biggest opportunity across operations from your standpoint?

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Joseph D. Russell, Public Storage - President [27]

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Well, there's a lot of factors that go into that, Todd. I wouldn't say, again, it was because Web Champ 1, which was its predecessor, was a failing or deficient system. We intentionally took a number of years with a sizable investment and a very different perspective, again, based on the world that we live in today in terms of customer acquisition, where a decade ago, you had a higher dominance tied to a call center or a drive-by or, frankly, even Yellow Pages, where today, again, our world centers around all things tied to the Internet, okay? So we saw that evolving. We -- we're able to design and continue to enhance the system and we'll continue to do so even in its current version. And the company, as a whole, we've got a firm commitment to continue to invest in technology initiatives. A fair amount of that, like I mentioned, is very proprietary and it's in the backbone, but it's effective. And we are very encouraged by the things that we can continue to drive with the knowledge base, again, that we have not only from a market standpoint, but from a customer standpoint and the tools that we can use very vibrantly, as this system's in place and the things around it continue to evolve. So we're encouraged by it.

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Operator [28]

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Our next question will come from the line of Ki Bin Kim, SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

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Just following up on Todd's question. So the new platform, the improved platform you put in place, so where does that ultimately lead you to? Is the new system, in some incremental way, suggesting that you should improve or change allocation or invest in mobile versus however you use SEO? Where are the different avenues that is pulling you towards?

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H. Thomas Boyle, Public Storage - CFO [30]

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Yes, Ki. I wouldn't say the system itself does that. Those are all other, again, I would say, interrelated initiatives that we pull together to, again, drive the tools that we uniquely can drive because we've got a brand that resonates very effectively through even an Internet world versus one that a decade ago was tied to Yellow Pages and drive-by and call center, okay? So we've got search engine optimization that's tied to that. We've got Internet strategies. We've got knowledge around our customers. So it's a very vibrant, but interrelated set of initiatives. And again, we think that we've got great opportunities and tools that will continue to improve our ability to not only find but retain the most valuable types of customers.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Okay. And in terms of capital allocation, you're sitting on about -- over $400 million of cash. You have, obviously, some uses for capital in the near term. And you have, I think, about $700 million-plus of preferred equity that is redeemable next year. Just curious about where you think the best use of capital would be next year or going forward.

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H. Thomas Boyle, Public Storage - CFO [32]

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Sure. So, Ki Bin, maybe -- it's Tom. I can talk about the cash balance we have and the uses there. And we can talk about capital allocation as the second component of the question. We're sitting on, as you highlighted, about $430 million in cash. That's largely spoken for. For the most part, the $340 million of cash is required to complete our existing pipeline, so that'll be spent over the next 12 to 18 months. And so that's the capital allocation that Joe highlighted we think we'll have good returns and value for the company, and we've made that decision. In addition, we have about $80 million of acquisitions under contract today. So you add those together, you get a meaningful portion of our cash balance. We're hopeful that 2019 will bring more opportunities on the acquisition front. Maybe cap rates do change at some point here and would allow a shift back to acquisitions from a capital allocation standpoint. We're not seeing that today, but that's certainly an opportunity. And if that were the case, we would need new financing for that. But as we look at our capital allocation today, I would go back to what Joe said earlier, which is we see a lot more value in being able to build Class A Public Storage design and location pick, locations at $100 to $120 a square foot compared to the acquisition environment out there that's multiples of that.

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Operator [33]

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Our next question will come from the line of Eric Frankel, Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [34]

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I posed this question to the management team at PSB last week, but maybe you could comment. It looks like the split-role Prop 13 ballot initiative will be on the 2020 ballot. Wanted to get a take on what the impact would be to your portfolio in terms of either expense growth or NOI hit at -- if that passes. Eventually, obviously, implementation will be -- it's obviously uncertain. But I'd like to understand if property tax bases were brought to market, how that would impact your portfolio.

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Joseph D. Russell, Public Storage - President [35]

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Sure. Yes, Eric. I mean, we're tracking the potential of this happening if -- over the last, literally, 2 or 3 decades, has come and gone many, many times. So frankly, we haven't gotten to the point where we think that, at this point, there's a high likelihood that it could happen. But as we get closer, we'll continue to evaluate what impacts it would have. There's no question that we've got a sizable portfolio in California. We've owned it for a number of years, so there would be an impact, no question. What we have no idea is what that impact could be from a size, timing and even complexity standpoint. I think that's all ahead of us relative to what could play forward. So it's a change that we, frankly, have no idea if it's going to happen. So we're going to hold off on putting a lot of potential impacts out because we, frankly, just don't know what it could be yet. We'll track it. We'll see. If it becomes something more realistic, we'll at that point give a little bit more perspective relative to potential impacts. But at this point, it's too soon to tell.

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Operator [36]

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

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [37]

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I just -- I may have missed this in -- early on, but could you just talk a little bit about how the acquisition outlook, whether you're starting to see cap rates moving as supply continues to be an issue and kind of what you've also kind of seen out there just in regards to how buyers versus sellers are interacting?

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Joseph D. Russell, Public Storage - President [38]

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Yes, Tayo. I think we've talked to that at some length. But at the end of the day, there's really not yet been a material shift in both seller expectations and what buyer expectations are relative to create, what I would say, a more vibrant transaction environment. We've been very disciplined. 2018 is, at the end of the day, going to be a light acquisition year for us, and I think that's appropriate. So we are not seeing a lot of sense that's tied to valuations that are far in excess of replacement costs. And as you may have heard, we're instead putting far more of our energies into our development pipeline, where we can create much better value.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [39]

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Great. Okay. And then also with Shurgard now being a public company, does not -- does that not become an attractive source of capital for you guys?

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H. Thomas Boyle, Public Storage - CFO [40]

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Shurgard, obviously, went public. And we're very happy for the management team there. They hosted their first conference call yesterday. Over time, we've had that investment since 2006. As we said, we have no plan to monetize that position today. But we're believers in that business and wish the team there certainly all the best wishes as a new public company.

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Operator [41]

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(Operator Instructions) Our next question comes from the line of Mike Mueller, JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [42]

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Joe, I was wondering, can you give us an update on the rollout of the third-party business?

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Joseph D. Russell, Public Storage - President [43]

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Sure. So as we've talked the last couple of quarters, Mike, we've been building the team that's focused and dedicated to build that business for us. So Pete Panos has got now a fully rounded-out team. So they're out hitting the markets hard over the last 2 or 3 months, have now started participating in SSA shows, whether on a national basis or -- they were recently at the Texas SSA. So that transition to more of an outbound process has begun. We're encouraged by the level of receptivity we're getting to our platform, obviously, the advantages of coming into our system because of our brand and operational capabilities, et cetera. So, so far, the team has got 12 new properties signed up. We did, last quarter, mention a larger component of integration or new properties coming into the third-party management platform. We intentionally, however, made a decision to separate one portfolio that we decided was not a good fit for the program. We hadn't brought those properties into it yet. But we are very encouraged by the backlog that we've got and feel that the offering itself continues to resonate really well. It's weighted at the moment more heavily, as you can imagine, on pending and/or new development properties that are coming into market. So because of that, it takes some amount of time to actually pull those properties into our system once they open. But we're seeing good quality. We're seeing good ability on our part to integrate them into current operations. So we feel very encouraged by the platform.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [44]

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Got it. And just separately, on the expansion pipeline. I mean, what's the visibility that you have for looking out over the next few years to maintain $300 million, $350 million that you've been running at thus far?

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Joseph D. Russell, Public Storage - President [45]

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It -- yes. It's a good question, Mike. And obviously, we've got 2,400 properties. Many of them are in prime locations as candidates for this kind of development activity. So it's going to depend on a number of factors. The easiest expansion opportunities we always have is where we've either got land and/or just parking areas that we can put, say, a 3-plus story facility in to basically tie to or complement what's already on the ground. So we have many of those opportunities that we've yet to touch, so that's great, and we're evaluating those. And then what can be a little bit more complicated is when you need to make the decision to actually take down parts or full existing properties. So again, on a case-by-case basis, we continue to look at those. Another factor that comes into play is zoning may or may not enable us to get the kind of density that we would like in certain locations. So there's a number of processes that we put together relative to the right candidates for this. But I'm very pleased by what our real estate development team has been able to do so far. And I think it's going to continue to be a vibrant part of our overall development program.

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Operator [46]

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Our next question will come from the line of Juan Sanabria, Bank of America Merrill Lynch.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [47]

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Just a follow-up on supply. Do you have a sense on a 3-year rolling basis given that's how you think about the lease-ups? What percentages of your portfolio is exposed today in 2018 and how that changes in 2019?

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Joseph D. Russell, Public Storage - President [48]

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Yes, Juan. We really don't look that on a 3-year rolling basis. I really would tie it more to what we're seeing in just raw deliveries year by year. So as I mentioned, there is some shifting that is starting to take place in certain markets, which I named, that are likely to start shifting down in deliveries and then others that are likely to taper up. So again, it's not always to a specific property, an immediate or direct impact, but we track it by our top 30 markets. And as I mentioned, overall, nationally, 2019 is likely to be pretty similar to 2018.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [49]

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Okay. And then just one more question, if you wouldn't mind. What are -- were the net straight rates you guys got for the third quarter and return today so far in the fourth?

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H. Thomas Boyle, Public Storage - CFO [50]

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So we disclosed in the 10-Q what the per-square-foot rates were for the quarter. For move-in rates, we're at $14.76 per square foot on an annualized basis. As we get out of the summer and into the fall, seasonally, we have rates that were lower. As you'd expect, we're a seasonal business, where there's more demand in the spring and summer months given the use case for our product for many customers who may be moving in the summer months between school years and things like that, college students, et cetera. So the rates as we go through the fall and into the winter do decline. And so we're seeing that, as you'd expect. I think, from a trend standpoint, if you're asking year-over-year trend, that's pretty consistent into the October month compared to the third quarter.

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Operator [51]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [52]

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I just wanted to ask a quick follow-up question. Your on-site payroll and supervisory payroll year-to-date has been essentially flat, even slightly down. Could you maybe just talk about your expectations there and how you've been able to maintain so much, I guess, discipline there? I think the other industries that I follow that have a lot of, like, I guess, lower skilled, maybe lower hourly cost labor, that workers are getting a bid here. And I was just wondering how you are managing that in that kind of broader context.

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Joseph D. Russell, Public Storage - President [53]

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Yes, Smedes. There's no questions that there are pressure points. We're in a very challenging employment arena. We do and have found opportunities to look for efficiencies, productivity, ways of optimizing, again, our employee base. I give a lot of credit to our operational teams throughout the markets where from, again, both supervisory and then on an hourly basis. We continue to look for ways of optimizing use and size and, again, the burden that takes place relative to the tough environment that we're in. That said, there's no question we can't avoid and have not avoided what plays through relative to the competitive nature that's out there. So a lot of markets continue to raise wage rates that we need to deal with. And we have, I think, a very vibrant and effective way that our HR team, as well, assists us with that. So we continue to look at a lot of ways of, again, optimizing and creating levels of productivity that, to a degree, can help balance that. Going forward, it's going to continue to be a challenge. And we've got, again, a great team of leaders out throughout our markets that are helping us find very sensible ways of dealing with this environment. And we're going to continue to work through that as we play forward into 2019, which, again is likely to be, with everything we're seeing today in today's economy, a very tough unemployment environment.

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Operator [54]

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

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [55]

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One of our follow-up questions was already asked, but maybe you could talk about some market-specific data. It looks like your 2 weakest markets were Chicago and Dallas. And so Dallas is understandable, I think, to be experiencing a lot of supply. But we were under the impression that Chicago is recovering and there hasn't been as much supply in the market -- or as much inventory coming online recently, so maybe can you just comment on some of the trends there?

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Joseph D. Russell, Public Storage - President [56]

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Yes. Sure, Eric. Yes, your point on Dallas is correct. Again, the burden of supply deliveries over the last couple of years has been particularly pronounced there. Again, that was a market that I highlighted that we hope to continue to see fewer deliveries. The statistics point to that relative to 2019, but it's still a fair amount of product that needs to be absorbed. Chicago is showing some signs of improvement. Again, not as many deliveries going forward and, fingers crossed, hopefully, some degree of economic recovery there as well. But we're only a quarter or 2 into the change, but we're hoping that there's some sustainability there. And we're going to see, hopefully, fewer deliveries as well. Its stack ranks pretty low relative to deliveries going into next year. So again, we hope the pressure eases on that front, too.

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

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Is it fair to say that the big NOI hit was principally due to property tax increases there?

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Joseph D. Russell, Public Storage - President [58]

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Yes. That's right.

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Operator [59]

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Our next question will come from the line of Steve Sakwa, Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [60]

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I just was hoping you could maybe talk a little bit more about kind of the occupancy trend sort of throughout the quarter. I know the average was down 64 in the third quarter. I guess, Tom, maybe could you just walk us through how sort of July, August, September played out and then maybe give us some kind of look into October and where we are, just about to start on November?

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H. Thomas Boyle, Public Storage - CFO [61]

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Sure, Steve. So in terms of occupancy throughout the quarter, as you highlighted, the average is down 60 basis points. As we've talked about on prior calls, we've seen over the last year more move-outs towards the end of the month that leads to a tougher comparison at the period-end number compared to the middle-of-the-month comparison on an average basis. And so that's part of what's driving that differential between average and period end. The other thing is the hurricanes that I highlighted before. So if you exclude the hurricane markets, the period-end numbers from June to September improved sequentially compared to prior year and would have finished down 80 basis points for the 9/30 print. As we look through July through August, September, pretty consistent occupancy throughout those months. As we got into September, in particular, in Houston and then in Florida, we saw a much tougher occupancy comp. But to give you a sense, at 9/30, occupancy in Houston was down circa 600 basis points. And as we've moved through October, that has eased lower a little bit, but it's still a meaningfully difficult occupancy comp in Houston. Across the rest of the portfolio, as I highlighted earlier, occupancy trends have been improving through the year. So as we look at the non-hurricane-impacted markets today, we're down about 40 basis points in occupancy year-over-year, again, comparing to that averages 60 basis points in the third quarter, the period end down 80.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [62]

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Okay. And just to be clear, that down 40 is kind of blended with the Houstons and the Floridas.

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H. Thomas Boyle, Public Storage - CFO [63]

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No. The down 40 is excluding the Houstons and the Floridas. If you include the Houstons and the Floridas, you're down 70, 80 basis points in October.

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Operator [64]

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I'll now turn the call back over to Ryan Burke for closing comments.

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Ryan C. Burke, Public Storage - VP of Investor Services [65]

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Thank you, Holly, and thanks to all of you for joining us today. We look forward to seeing many of you next week.

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Operator [66]

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Thank you for participating in today's Public Storage conference call. You may now disconnect.