Extra Space Storage Inc (EXR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Extra Space Storage Inc. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Norman, Vice President, Investor Relations. Sir, you may begin.

Thank you, Andrew. Welcome to Extra Space Storage's Fourth Quarter and Year-End 2017 Earnings Call.

In addition to our press release, we have furnished unaudited supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.

Forward-looking statements represent management's estimates as of today, Wednesday, February 21, 2018. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

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

Hello, everyone. Thank you for dialing in. I have been CEO for a little over a year now, and over that time, I've enjoyed meeting with many of you. And I look forward to continue to meet and talk about Extra Space and storage throughout 2018. But mostly, I've enjoyed working with a great team of talented and motivated people at Extra Space. I've learned a lot over the year, and I'm excited to continue learning and move towards the future.

1 year ago on this call, we discussed the concerns about new supply and deceleration of revenue growth. At the time, we said that while these concerns were valid, the industry was healthy and we were confident that our diversified portfolio, best-in-class operating platform and our talented people would produce solid results. We projected 2017 would be characterized by a gradual return towards historical and sustainable revenue and NOI growth levels. That is exactly what happened. Strong occupancy, together with increased rental rates to new and existing customers, led to same-store revenue growth for the year of 5.1%, NOI growth of 6.9% and core FFO growth of 13.8%. We exceeded our guidance in each of these categories, and we are seeing the predicted soft landing play out.

We also stated that along with the challenges presented by new supply would come opportunities. In 2017, we added 156 stores to our third-party management platform, approximately half of which were new developments. And we have a large pipeline for 2018. Year-to-date, we have brought on 19 managed stores, and we expect to add well over 100 before the year is over. In addition to revenue streams, these managed stores give us scale, density in markets and a larger dataset.

Our managed portfolio as well as our joint ventures provide a valuable acquisition pipeline that helped fuel future growth. These pipelines and relationships were important to us in 2017, with over 80% of our acquisition volume coming through off-market opportunities. Despite a competitive market, we invested just over $600 million in acquisitions. 16 of our 2017 acquisitions were new Certificate of Occupancy assets in key markets, which, like our C of O deals from previous years, are performing ahead of projections.

We also continue to see increased opportunities from developers to purchase new stores in various stages of lease-up. Our 2017 acquisitions exceeded our guidance of $400 million due to a $210 million off-market portfolio that was presented to us late in the fourth quarter by one of our longtime partners. As we projected, our acquisitions were largely back-end loaded, with 85% occurring in the fourth quarter.

Finally, I would like to provide an update on the 36-store portfolio that we sold into a joint venture on November 30 for $295 million. We retained a 10% interest in the properties, and one of our existing joint venture partners, TIAA real estate account, purchased the remaining 90%. We continue to manage all 36 properties for a fee, and we now have the opportunity to earn a promoted return in the joint venture. We've put the proceeds from the transaction to work the next day through a series of 1031 exchanges into other properties. These 1031 exchange properties have an average age of 3 years and average rental rate over $20 a square foot and strong demographics. As a part of this transaction, we agreed with TIAA to extend and revise the terms of our existing 24-storage joint venture. This enabled us to monetize and embed and promote, increasing our ownership in the venture from 25% to 34%. We also placed new debt on the portfolio and modernized its terms, including reducing the preferred return to current market levels. We are pleased with the outcome of these mutually beneficial transactions and the long-term value they create for our shareholders. We are also pleased to have renewed and strengthened our relationship with TIAA for the long term.

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

Thank you, Joe, and hello, everyone. As you may have noticed in our earnings release last night, we have made a change to 1 term. We've historically provided FFO results as well as FFO as adjusted. Going forward, we will refer to the latter as core FFO. We have not changed our methodology or the types of adjustments we make, but we have changed the name to provide consistency with other publicly traded REITs.

Our core FFO for the quarter was $1.12 per share, exceeding the high end of our guidance by $0.02, and core FFO for the year was $4.38 per share. The quarterly beat was primarily due to stronger-than-expected property performance. Occupancy for the same-store pool ended the quarter at 91.9%, a 40 basis point year-over-year increase. Throughout the quarter, we increased rates to new customers in the low to mid-single digits, and we continue our existing customer rate increase program without changes.

We continue to evolve our balance sheet and plan to remain leverage-neutral in 2018. We added unsecured debt throughout the year and have increased our unencumbered pool by $1.4 billion. We have access to multiple sources of capital and have plenty of capacity to fund our future growth.

Last night, we provided guidance and annual assumptions for 2018. Our new same-store pool will increase by 86 to a total of 787 stores. We expect the change to the same-store pool to positively impact our revenue growth by 25 basis points over the year. Same-store revenue growth is expected to increase between 3.25% and 4.25% in 2018. Same-store expense growth is also expected to increase between 3.25% and 4.25%. The increase in expenses is driven by difficult 2017 comps, with pressure specifically from property taxes in Florida, Illinois, the mid-Atlantic and Texas. Our revenue and expense guidance results in same-store NOI of between 3% and 4.5%, which we believe will be toward the high end of the self-storage sector and will compare favorably to other REIT sectors.

For 2018, we expect to invest $400 million in acquisitions, $255 million of which is closed or under contract. Our guidance assumes acquisitions will be financed with $50 million in OP Units and the remainder through debt. Seller pricing expectations are still high, and we are committed to being disciplined. We will only transact at prices that create value for our shareholders.

Our full year core FFO is estimated to be between $4.55 and $4.65 per share. In 2018, we anticipate $0.05 of dilution from value-add acquisitions and an additional $0.16 of dilution from C of O stores for a total dilution of $0.21. Our investment in C of O stores and value-add acquisitions continue to improve the quality of our portfolio and generate long-term growth for our shareholders.

I'll now turn the time back to Joe.

Thank you, Scott. As we move forward in 2018, I expect this year to look similar to last year. We continue to experience solid fundamentals, steady demand, strong occupancy and increasing rental rates to new and existing customers. We expect solid external growth through acquisitions and third-party management. We continue to focus on and invest heavily in technology, and our digital marketing and revenue management systems continue to evolve and improve. Our bench depth at all levels of the company has never been stronger, and I believe our team is second to none in the storage sector. New supply will continue to present operational challenges, and I do not, in any way, want to diminish its impact on some of our stores. But as I have said before, this is a micro market business, and the impact of new supply will vary across our portfolio.

In 2017, we benefited from our highly diversified portfolio, our ability to capture a disproportionate share of demand and a team with the track record of strong execution. I believe we will benefit from these same factors in 2018.

We remain focused on creating consistent FFO growth per share in order to maximize the long-term return on our investors' capital without taking unacceptable risk. I want to thank you for the trust you've put in this management team as stewards of your capital. I have been involved with Extra Space continuously since 1998 as a partner, as a board member and now as CEO. And I am as confident as ever about the strategy of this company and our team's ability to execute.

Let's now turn the time over to Jeff to start the Q&A session.

Thanks, Joe. (Operator Instructions) And with that, Andrew, go ahead and start our Q&A session.

(Operator Instructions) Our first question comes from Jonathan Hughes with Raymond James.

So the midpoint of guidance calls for about 135-ish basis point slowdown in same-store revenue growth this year, and I'm just curious which of your markets contributed to that, decelerating outlook the most, since 8 of your top 10 actually saw accelerating growth into the end of the year.

Go ahead.

Okay. Yes, Jonathan, as we've done our budgets, we obviously did ground up budgets, looked at every single store, looked at the supply. The deceleration is implied in a couple of areas. One is the burn-off of the impact from the change in same-store pool or the benefit from SmartStop, so that affects it obviously, and then also the impact of new supply in certain markets. If you look at those individual markets, some are impacted more than others. But overall, I would tell you, it's probably more the ones you hear about a lot, for instance, Florida.

When I look at our bottom 10 markets for a projected 2018 revenue growth, the ones that are large contributors to us are the New York Metro, Miami, D.C. The others in our bottom 10 are relatively small markets.

Okay. That's helpful. And then maybe one of your peers did actually quantify the negative impact at the store level on revenue growth relative to non-impacted stores. Could you maybe provide this number and take a stab at maybe how much lower that revenue growth is at those stores impacted by supply?

So that's really a difficult analysis to do with any specificity. We study real hard each of our stores that have new competitors opening. And sometimes, you have a new competitor opening within a mile, and it has absolutely no effect. And sometimes, you have a new competitor opening on the outskirts of the trade area, and it has a very large effect. So to try to predict based on the number of competitors opening how monetarily it will affect every store and roll that up, that's a tough thing. You need to take into account the distance, the number of competitors, who's going to run the new competitors, traffic patterns, whether it's across the river, or the other side, there's just many, many variables. With that being said, when we create our guidance, we create it both from a top-down and a bottom-up approach. The top-down is the revenue management team's impact. The bottom-up is the district managers at each store identify and are provided with each of their competitors that we know of that are going to open in their trade area. And each store's individual budget is graded with -- based on the projected impact to that store. And that's all rolled up and used to create our guidance.

Our next question comes from Wes Golladay with RBC Capital Markets.

I actually had a question on those variables that determine the impact of supply. Now what do you think is the most important? Is it the actual radius? Is it the rationality of the developer? Is it the price point that you're at? And then, yes, take that one, and I guess maybe a follow-up would be what is your actual supply outlook for '18 and '19?

So certainly, distance is a very, very important factor. We also think the operator is a very, very important factor. We would much rather compete with a mom-and-pop than one of our public peers. After that, you have a lot of other factors: saturation and traffic patterns and population growth and all kinds of other things that go into the mix. And then the second question was about development outlook? Is that correct?

Well, yes. The supply outlook, I guess, maybe for your markets from a bottom-up's perspective, maybe '18 and '19. Are you still seeing delays on deliveries?

So we are still seeing delays on deliveries. That's true. It's interesting when you look at the supply outlook on our markets, we really have, in many cases, kind of not intuitive results. So I'll give you a couple of examples because that was a real bunch of gobbledygook. So in Atlanta, for example, we have 67 stores. And Atlanta is a market that there is a great deal of development. But when we look at how many of our stores are going to be impacted by new development in 2018, we only see 6, and that number was 2 in 2017. So even though that's a market where there's a lot of supply coming, because of the locations of our stores, we're a little more optimistic about that market. And in fact, when we look at our projected revenue growth for that market, it's above our guidance. It's above our portfolio average. On the other hand of the spectrum, you could look at a market like Portland, where we have 13 stores, and 10 of them are going to face new competitors in 2018 after 3 of them facing new competitors in 2016. So that's a market where our projected revenue growth is below our portfolio average. And we could go through 67 markets and give you all those stats, but it gives you a sense of how we created our guidance.

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

Joe, just following up on some of your supply commentary. Are you seeing any shifts in development or even acquisition yields as buyers presumably adjust some of the rent growth expectations here?

I really haven't seen any movement in cap rates for acquisitions. You would think given the operational landscape and the rise in interest rates that cap rates should be going up. But there is so much interest in this sector, I think, because compared to other sectors, it's still pretty good that we just haven't seen any meaningful expansion of cap rates. The development yield is kind of an interesting question. One thing we're seeing is that in our ManagementPlus platform, when we produce a budget for a developer, we're getting a lot more pressure from the developers that our projections aren't good enough, and they're pushing us and they need a better budget to bring to the bank. So that's telling me that given their costs, our projected budget doesn't hit a required yield. So to me, that is a -- something that is going to control somewhat the pipeline of development.

Okay. And in your opening remarks, you did talk about seeing an increased opportunity for stores that are in lease-up. So just wondering what your appetite really is today in taking on some of those additional lease-up or CO type of deals.

Yes. So we have a strong appetite for buying good deals that meet our return requirements, and what we've seen in the market is a number of developers have delivered stores. They've gotten to a certain point in lease-up, maybe it's stalling out, maybe they feel they just want to take their chips off the table, and they're willing to sell beforehand. If we can negotiate a price that we think provides value to our shareholders, we have enough dry powder and enough capital to execute. But if we can't get to that price, then we're going to sit on the sidelines.

I appreciate that. And last one for me is just in terms of the move-in to the quarter. How did those net effective rents compare to the fourth quarter last year? So baking into -- baking in the discounts and then just how do they trending in so far in 2018 as well.

Yes. So our Street rates in the quarter as well as into the current year have been about 5%, and our achieved rate has been closer to 3% and that for the fourth quarter and then into this year. And then in terms of discounts, I would tell you, we're discounting larger dollar amounts but to fewer tenants. But at this time of year, you're giving discounts to just about everyone anyway. So we are discounting slightly more.

Our next question comes from Todd Stender with Wells Fargo.

Just when you look at your size, scale and sophistication and Joe's remarks of competing against the REITs versus the mom-and-pops, what are some of the defense measures, for lack of a better term, that you roll out when a new competing store opens up? It would seem to me that you'd be able to match price or write out any discounting that the new competition's offering longer than they can. Maybe just talk about how you compete potentially longer than the newbuild.

Sure. So I can tell you that we do have a plan, that we've developed a playbook that sets out a series of actions that stores undertake when faced with new development. I could tell you that it's mostly reactionary, mostly reactionary because as much as we think we know, they're -- it's all a little different. Specifically what we do, I'm not really willing to tell you what our plan is.

Okay. And then not sure if I missed this, but when you talk about the C of O deals that we had seen, kind of, I guess, demand waned as 2017 went along for the REITs, but you guys had an appetite obviously in Q4. Can you just talk about the stabilized yields that you're projecting? And then how long until you get to stabilized occupancy?

Sure. So we approved 14 C of O deals in 2017. That's a pretty big drop-off from the 38 C of O deals we approved in 2016. 7 of those, we're really doing ventures. That allows us to control the dilution, reduce our risk and get a little enhanced yield because of management fees and tenant insurance. The stabilized cap rate on those 14 deals was 8.2%. They are all underwritten to stabilize within 36 and 40 months, but I've got to tell you, we continue to outperform that number, but we're still underwriting between 36 and 40 months.

Our next question comes from Ki Bin Kim with SunTrust.

Could you talk a little bit about the changes and promotion usage during the quarter and maybe thus far this year? I noticed that they were a lot less advertised promotions on the web at least. I wasn't sure if that was a larger change in philosophy? Or is it just the timing?

I would tell you it's not a large change in philosophy. We've always used discounts through various channels. I think if you look at the web, that's just one channel. But overall, our discounts are actually up. So if you're only looking at the web and they're down, that's one channel.

And was that because you were trying to program or train the customers not to be so used to getting promotions? Or -- and what was the reason behind that?

I would tell you that's all in an effort to maximize revenue. I mean, at the end of the day, that's what we're trying to do and we're trying to adjust those channels a little bit on the margins as we go. But it's going to vary by market, vary by channel at all times.

Okay. And just last question. If I look at your L.A. market, and I know L.A. is a big market, your rent per square foot is about $19. Your -- PSA's at $25. And I use them just because they're a large competitor. And your New York rent is $22 versus $25 for some of your peers. Is there anything to say for the lower rent absolute number that might help some of your momentum in same-store revenue going forward?

I would tell you that's a mix of properties. I think that if you look at our properties, where they absolutely compete, it's not a lot different. You also are probably including a little bit of the Inland Empire into Riverside and that type of thing.

(Operator Instructions) Our next question comes from Rob Simone with Evercore ISI.

Just a quick question on the TIAA deal, and then I have a follow-up. Is there anything on the table for '18 that could look similar to the TIAA deal, a.k.a. is that kind of be like a funding source of choice going forward? And then also I was just wondering if you guys could comment at all on what type or what size of portfolio premiums you're seeing out there right now.

We don't have a portfolio we're currently packaging up to do a repeat of that type of deal. But that being said, it's always an option for us. I wouldn't say it's a capital avenue of choice. I would say it's one in many options we have. We always want to be in a position to have a certain segment of the portfolio teed up where we could repeat that transaction in an effort to rebalance the portfolio and improve its quality. What was the second question?

Yes. I was just wondering if you could comment at all on what kind of spread or basis point portfolio premium we're seeing out in the market right now, given how much capital is out there.

Yes. That's a hard question. I guess, 50 basis points, but it's -- that's a difficult question.

Got it. So it really varies?

There's not a whole lot of transactions to give you a bunch of data points where you could come up with something that you're real comfortable with.

And also depend on what you call a portfolio. Is it 4 properties? Or is it 36? I think there's a big difference.

Our next question comes from Smedes Rose with Citi.

I wanted to ask you, I'm sure you saw, in addition to a bunch of management changes, PSA made an announcement that looks like they are going into the third-party management business as well after a number of years of not being in that section. I'm just curious as how you're thinking about competition in that space and if you have come up against them at all as you approach properties to add to your platform?

Sure, Smedes. It's a good question. So we've been in the partnership business, if you will, since 1998. It's part of our DNA, and we manage for other people. We've done it for a long time, and we think we're pretty good at it. So obviously, having another entrant into the market to compete for market share is not a good thing, and we're going to have to compete with them. And frankly, as long as we can put up numbers that exceed our competitor's, we're going to have a very good argument about why people should choose us for management. But I also think that the overall pie is getting bigger. More and more people are recognizing that they need professional management, that they can't compete with the REITs. So while it is difficult to see a new market entrant, and one that's capable like PSA, I also think the pie is getting bigger at the same time.

Okay. And then I just wanted to ask you, there's a lot -- as you know, supply remains a big concern. You touched on it a little bit. But I mean, do you have a view as to whether or not the supply will peak this year in terms of just sort of nationwide new deliveries? Or do you feel like it's more of a 2019 event or later?

Yes. I don't think we have a strong view with that. It's really difficult to have transparency into 2019 and see what's going to be delivered given the fallout rate and in some markets, the quickness which some of these properties can be entitled and shovels stuck in the ground.

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

Joe, your comments about developers sort of pushing back a little bit for higher budgets or higher projections, what's been your experience in those situations? Are they still moving forward? Are they getting the financing they need, maybe opting to work with someone else? What sort of happened in those situations? And how big is the shortfall, on average, would you say, between where you are and where the developer thought they would be or needed to be?

Yes. Unfortunately, I don't have the answer to the last one. I got to -- I'd have to go talk to our guys about that. But we do -- obviously, we can't move our budgets to satisfy some bank or developer because we then have to deliver, so we can only produce budgets that we're comfortable delivering on. And we're seeing the higher fallout rate. We're seeing that projects, at least with us, they -- more of them don't get done.

So to your knowledge, sort of tracking those projects, as far as you know, they've been abandoned or deferred for the time being?

We see some, probably a greater portion of them, being abandoned. And there's other high-leverage sources of capital out there. There's other ways to get deals done, but I think a good number of them get abandoned.

Well, there's also local management companies, things like that. I mean, there's local management companies, there's other opportunities for them. But I would tell you, things are still getting done with banks. I think that the local banks as well as some of the large banks are still doing a relationship lending, but it is more and more difficult.

Okay. And then, Joe, your comments about the soft landing at the beginning of your comments, can you just talk about what that means in the context of fundamentals? The deceleration that you're forecasting in 2018 for revenue growth at 135 basis points, is that the bottom? Or do you think that we could continue to see additional deceleration as we head into 2019?

So it's pretty early to start talking about 2019, but we've said that we believe the industry is going to return to historical revenue growth numbers. And I would think by the end of the year, we would be there.

Okay. So growth -- so you would expect growth to bottom out in 2018. You've historically said that revenue growth is in the sort of 3.5% to 4.5% range, I believe, over a longer period of time, right? And so we're -- you're expecting that to be -- you're expecting revenue growth to be slightly below that longer-term average in '18. And so by the end of '18, you would expect to get back into that longer-term range?

Yes, that is our expectation. Now we could have some economic shock that we don't all view or something happened. But currently, that's our view.

Okay. And just lastly. Scott, can you just tell us where occupancy is today and how that looks on a year-over-year basis?

So occupancy is pretty close to where we ended the year. It's down slightly from year-end, just with the cyclical nature of the product. Your lowest occupancy is typically January, February, but it is -- year-over-year, it's not that different from year-end and it's in accordance with our plan.

Our next question comes from Ki Bin Kim with SunTrust.

Just a quick one. Have you noticed any performance difference between assets of different physical quality or by the age of the quality or age of the asset?

I think it depends on the location of the asset, the quality, the square feet per person in the market. It's a lot more to it than just the age of the asset.

How much capital has been put into it. I mean, clearly, your point is that if you have 2 assets in the exact same market and one is brand-new and one is old and hasn't been taken care of, the brand-new one should perform better. But an old capital starved asset can do very well in some other markets.

Yes. That's right. I mean, I was looking at it. All is equal. And are the developers generally doubling down in the markets they've already developed in? Or do you see them moving on to different submarkets or different MSAs?

Well, that's a great question. I asked our ManagementPlus guys to give us kind of their observations before all of these calls, and that was one of the observations they gave us is, previously, they saw people just inundating markets, and now they're seeing people spread out some more. So yes, we do see that trend.

Our next question comes from Vikram Malhotra with Morgan Stanley.

So I just wanted to clarify your comments about the 25 basis points impact from the changes in the pool. Is that a combination of the 30 stores that you disposed off of? And is there any that's an ongoing benefit from SmartStop in that number, or is that separate? Or is there no benefit?

There is some benefit from SmartStop and then a -- some benefit from the change in pool. So we're growing from the 701 that we ended the year at. Two, we're adding the 2016 acquisitions as well as some Certificate of Occupancy deals that are now stabilized. The 2016 acquisitions are not going to add a large amount as many of those were joint ventures or previously managed. So it's a combination primarily of the C of O deals that are being added as well as the little added benefit from SmartStop.

And that total is 25 basis points?

Correct. It's higher at the start of the year, going closer to 0 at the end of the year. So if you think of it in terms of a line, it's 50 basis points at the start and 0 at the end, for an average of 25.

Okay. And then just second, turning to West Coast. Any changes you've seen in either San Francisco or L.A. in terms of -- maybe more L.A., in terms of new supply? Any sense of do you see the market being as strong as it was last year? Are there any pockets of weakness? And just comparing to sort of some of the multifamily folks who are seeing maybe more deceleration than at least I thought, I just wanted to compare and contrast those 2 markets.

So we are seeing some deceleration in Los Angeles. There is a little bit of new supply, but nothing anywhere close to what we see in Florida or Texas or other markets. A lot of it is in Irvine, and there's a few in Los Angeles. San Francisco is -- we see no new supply in San Francisco, at least none that affects our stores. And that's a market we actually -- our 2018 projected revenue is accelerating, it's higher than in 2017. So those 2 markets are still very strong for us. I don't think markets like that can be as strong as they were through 2015 and '16 forever, but they're still very strong markets, performing above our portfolio averages.

And just, if I may, just to clarify. You said San Francisco is one of the markets that's accelerating. Just can you give us a sense of maybe 2 other markets in that top band that are accelerating in your guide?

Yes, I can give you exactly 2 other markets because we have 3. Maryland and West Florida, Naples, are other accelerating markets.

Our next question comes from Nick Yulico with UBS.

This is Trent Trujillo on for Nick. Maybe just getting into another market in New York. It looks like on your supplemental disclosure, you combined, I guess, the Boroughs with New Jersey. Is it possible to break out the performance of how your portfolio performed in the fourth quarter and the trends you're seeing on the ground now?

Sure. So absent the Boroughs stores, our New York, New Jersey market had 4.5% revenue growth; 0.2%, expense, so 6.3% NOI growth. We have 8 stores in the Boroughs, so pretty limited exposure. Our revenue in the Boroughs was negative 2.5% and for a negative 2.9% NOI.

Okay. And since you acquired or took on the Tuck-It-Away stores kind of midyear, how have those stores performed since they've been under the EXR brand?

We're still early in the transition. Those stores needed significant attention to the physical assets, and we have spent a lot of time doing that, getting our people in there. But I would say, overall, they are performing at expectations.

Okay. On -- maybe one more, if I may. On the same-store expense side, I know there's pressure that you spoke about with property taxes and perhaps other line items. But is there a potential for an offset or an expense reduction opportunity?

We're always looking for those, but it's typically smaller items. Our biggest pressure this year is coming from property taxes, which accounts for about 1/3 of your expense. And then your next largest or one of your largest expense item is payroll, and it's coming in just north of 3%, which is inflationary plus, but -- so there's not -- if anything else comes in below, it doesn't drive the needle very much.

Our next question comes from George Hoglund with Jefferies.

2 questions for me, one on the supply side. I mean, you had mentioned 2 markets, Atlanta and Portland, where you gave numbers of how many properties are facing new supply. Do you have a number just across the portfolio, generally, how many properties are facing new supply in '18? And what was the number in '17?

So it's a little under 300 properties in '18 and maybe closer to 250 in '17.

And that depends on the geographic...

Yes, I'm sorry. This is -- let me back up. This is new supply opening within a 3-mile radius, and we perfectly recognize it that it's not -- that that's a convention and not a totally accurate description of what new supply will affect you. In New York City, 3 miles is irrelevant. In other areas, 3 miles is too small. But to have some type of consistent approach in numbers, that's what we used.

And was your best guess for '19 be greater or lower than 300?

I don't have a guess for '19 at this point.

Okay. And then just on the demand side. What's your sense on how certain factors will influence demand in kind of '18, things such as you have greater apartment deliveries overall, strengthening economy, more disposable income? How will that affect the demand side?

Everything that we see and feel and experience tells us that demand is very, very steady, and that there's -- we have no indication that demand is waning. The top of the funnel is very strong and growing, and our job is to convert as many as possible.

This does conclude our Q&A session today. I would now like to turn the call back to Chief Executive Officer, Mr. Joe Margolis, for any further remarks.

I want to thank everyone for their participation today and interest in Extra Space. Have a good day. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.