Life Storage Inc (LSI) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Sovran Self Storage first quarter 2012 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Diane Piegza, Vice President, Corporate Communications for Sovran Self Storage. Thank you. Ms. Piegza, you may begin.

Thank you, Melissa. Good morning, and welcome to our first quarter conference call. Leading today's call will be David Rogers, Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Paul Powell, Executive Vice President of Real Estate Investments; and Ed Killeen, Executive Vice President of Real Estate Management.

Each of you should have received a copy of our earnings release last evening. If you did not and you wish to be added to our distribution list, please email invest@sovranss.com.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Sovran's actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences is included in our Company's SEC filings. Copies of these filings may be obtained by contacting the Company or the SEC.

At this time, I'd like to turn the presentation over to Dave Rogers.

Thanks, Diane. Good morning, everyone, and welcome to our first quarter conference call. You've likely noticed a change in the way this call has been opened. Ken alluded last quarter to the idea that we'll be integrating our newly promoted management team into the mainstream, and here's where we start.

Diane Piegza, who kicked off the call, is our Vice President of Corporate Communications. She's in charge of investor relations, and she's been with us for over 20 years. Andy Gregoire is our newly appointed CFO. He spent nine years at Ernst & Young before joining us 15 years ago. Paul Powell has been in the self-storage industry for over 25 years, the last 14 with us working with Bob Attea in our acquisitions group. And Eddie Killeen joined us 15 years ago after a 16-year career in retail operations. He's been working with Ken overseeing the sales, marketing and store operations folks all that time.

So it's a deep bench, and we want you to get to know us, so in addition to the quarterly calls, we'll be attending NAREIT and various conferences as a group in the coming weeks and months.

We enjoyed a good strong start to 2012. In what's typically our slow season, we experienced more inquiries and greater move-in activity than last year, resulting in a 340 basis point increase in occupancy. In large part, this is due to Uncle Bob's online paid organic and mobile search refinements, enhanced utilization of our revenue management system, and a great call center and sales team.

Expenses have been well contained, and favorable operational trends continue throughout most of our portfolio, with positive same-store NOI achieved in 24 of the 25 states we operate in.

During the quarter, we closed on a 10-store, $30 million portfolio on behalf of the HHF II joint venture we formed last year. These are high quality assets in the Dallas-Fort Worth market and bring to 55 the number of stores in our JV programs.

Competition for acquisitions has continued to be very intense, with a greater number of players surfacing and cap rates continuing to compress. With our conservative balance sheet and sizable credit facility, we've got the capacity to bring properties into the portfolio. The challenge is to find those that we can add value to and, in turn, have them add value to us. We have three such properties under contract at a total cost of $36 million, and we hope to close on these later in 2Q.

Let's now turn the call over to Andy Gregoire, our CFO, who will provide more detail and some color on our first quarter's results.

Thanks, Dave. Regarding operations, total revenues increased $7.5 million, a 15.2% increase over 2011's first quarter, and property operating expenses increased by about $1.3 million, resulting in an overall NOI increase of 20.3%.

These total Company results reflect the impact of the 29 stores we acquired in 2011, the one store we opened in Richmond about two and a half years ago, and the increase in same-store NOI I'll get to in a minute. The same-store results include 350 of our 380 Company-owned stores. We provided some additional detail in the press release regarding our same-store revenue and expense components, but I'll provide some highlights.

Same-store revenues increased by 3.9% over those of the first quarter of 2011. This was primarily the result of a nice increase in average occupancy, driven by a 13% increase in same-store move-ins over Q1 of 2011. We also continued to see significant increase in tenant insurance commissions.

Property operating and maintenance costs on a same-store basis decreased by 2.8% as we realized reductions in Yellow Page costs, credit card fees, snow removal costs and utilities. Obviously, we won't see the snow removal savings for the rest of the year, and the warmer weather could lead to increased landscaping and utilities as we head into summer.

Property taxes, insurance and personnel costs increased modestly, as expected.

Overall, then, with same-store revenues coming in at plus 3.9% and same-store expenses decreasing by 2.8%, same-store net operating income improved 7.9% over 2011's first quarter.

G&A costs were $1.8 million higher this quarter over that of last year. Again, we've broken out some details in the press release. Aside from the $421,000 increase in Internet advertising, the main reason for the increase is the fact that we own 70 more stores this first quarter than last year's first quarter. These new stores resulted in additional accounting, IT, HR and management personnel. Offsetting these overhead costs is an increase of almost $500,000 in third-party management fees earned this quarter.

Regarding properties, Dave mentioned the 10 stores we purchased. In addition to that activity, we continue to look at pruning some of our mature properties from our portfolio, and currently have 12 stores up for sale with an asking price of $40 million. We have interested buyers and are in negotiation on the sale of these properties, but nothing is certain at this time. Should we sell any of these stores, the proceeds would be used to reduce our line of credit balance, as virtually all of our assets are unencumbered by secured debt.

From a balance sheet perspective, 2011 was a very busy year for us on the financing front. Now that all the dust has settled, we're in a very good place. We've added Exhibit B to the press release which shows our debt maturities and interest rates.

At March 31st, we had $13.4 million of cash on hand and $112 million available on our line of credit, plus an accordion feature to add another $75 million to our capacity.

During the quarter, we did not issue any shares under our previously announced at-the-market program. There's $77 million available for issuance under this ATM. As I noted, we have plenty of capacity on our line of credit to fund acquisitions, but we may use the ATM to fund a portion of the acquisitions to maintain our comfortable debt ratios.

With regards to guidance, we remain optimistic concerning demand and pricing in most of our markets. We expect to realize significant benefits from our revenue management platform this year and will augment it with more advertising and marketing programs to continue to improve occupancy.

We expect an increase in same-store revenues of 3.5% to 4.5% over that of 2011, driven primarily by occupancy. Property operating costs are projected to increase 2% to 3%, including a 4% increase in property taxes. We are projecting same-store NOI for our 350 same-store pool to come in at between 4% and 5% ahead of 2011 levels.

Core G&A expenses are expected at $29 million to $30 million for 2012. We have not assumed any purchases or sales in our guidance.

As a result of the above assumptions, we're increasing guidance and are forecasting funds from operations for the full year 2012 at $3.09 to $3.13 per share, and between $0.76 and $0.78 per share for the second quarter of 2012.

With that, I'll turn the call back to Dave.

Good, Andy. Thanks. Okay, so before we go to questions, we'll conclude our prepared remarks with a couple of observations. Operationally, we're in a great position to leverage our technology, our systems and our scale to keep our properties in growth mode for the foreseeable future. We feel that by selectively acquiring additional stores, procuring third-party management contracts and continuing our expansion and enhancement program, we can achieve significant external growth.

As far as the macro picture is concerned, we don't see much in the way of new supply coming onboard, and with even a bit of pickup to the housing sector, we should see gains in pricing power and occupancy. So overall, we remain optimistic about our company's and the self-storage industry's prospects.

And with that, Melissa, we're ready for you to open the line to questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we poll for questions. Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. I'm on with Jordan Sadler, as well.

Morning, Todd.

Morning. First, I was just wondering if you could give us an update on occupancy in April and where that was year over year?

Hi, Todd, it's Andy. April, we saw a 10% increase in move-ins over April of 2011, and we saw the move-outs decrease 1%. So we saw another 100 basis points increase in occupancy from March and April of 2012, which puts the delta at 420 basis points over last April. So we've continued the trend that you saw in the first quarter.

Okay. And what do you think is causing the decrease in move-out activity in your portfolio?

In some ways, we worked last year and really hurt a little bit in 2010, especially with having a lot of churn of new tenants coming in shopping for the specials, the easy six weeks, seven weeks, eight weeks of rent with a free truck. And we were seeing that the quality of that tenant was pretty poor. So we made a conscious effort to sort of back off on the upfront incentive and hard selling that stuff and turned -- and are looking more to get a tenant who was going to be saying, "Okay, I'm here." We wanted to attract the tenants who were going to be here for a bit of the long run, and so in that case, pricing meant something. What they were going to pay on that third month, the first of the third month that they were going to be in our place meant something.

So we've made a conscious shift over the last eight to twelve months pretty much to bring in tenants that are real tenants, that have needs for a bit of time. So we think that's helped quite a bit. I think also part of it might be just the overall trend in a lot of our markets. We're capturing more tenants perhaps than the mom-and-pops and it's just a better time.

Okay, that's helpful. And then just switching over to acquisitions, I'm just curious about your thought process a bit in terms of how you think about pricing if an opportunity of size and of high quality was to become available. Would you be willing to endure some near-term dilution should some sort of opportunity like that arise?

It's always -- we've done some recently even where we bought properties that were only at a 5 yield or thereabouts, but we saw upside potential over the next 24 to 36 months that far outstrip that what we usually do. As we've talked before, our goal is to go into a property -- if we're going to buy mature properties at market cap rates, we want to make sure that we can add them into our system and perhaps achieve 100 to 125 basis point increase a year out. If we're looking at a big pool, and there's some pop in it, if it's at 70% or 75% occupancy, sure, we'd take the dilution in the near term as long as we can see over a two- to three-year period that we're going to get it back. To go in and buy a high quality asset at a mature level and dilute, probably not.

Okay, great. Thank you.

Okay, Todd.

Thank you. Our next question comes from the line of David Toti with Cantor Fitzgerald. Please proceed with your question.

Good morning, guys. Appreciate the increased exposure of the team, and perhaps this question is more for Eddie or Andy. Maybe you can elaborate a little bit on some of the progress you've made relative to the RMS system. I know that was sort of in implementation last year. Can you give us an update as to where you see that system today, what's left to do relative to technology implementation? How far is it rolled out relative to the portfolio, et cetera.

Sure, Dave. Thanks. Well, we've been working on the latest updates of our RevMan system for about a year now. And while we're certainly benefiting from all the functionality that exists in this system, where we're at right now is it's more of a manual process. We do have four rate analysts here at the home office. And again, right now it's a manual process, but we're right in the middle, actually, of building the user interface. And that simply is going to increase the efficiency of the group. We're going to be able to touch stores more often,.And we see that we'll probably be finished with that by first quarter of 2013, end 2012. And at that point, we believe we'll be -- there will be full implementation of the system.

Okay. And then how much competitive pricing do you have coming into that system at that point? Is that component manual as well from the ground, from the site?

That actually is not manual. It used to be a very manual process. For years, we counted on our managers to shop comps. But now we systematically -- and it is fully automated -- we scrape the Web for comp rates, and that's done on a very consistent basis. Now, of course, we can't do that with every competitor, but anybody with Web exposure, we're able to get a pretty good look at their offered rates.

Great. And then my last question, Dave, this sort of touches upon your earlier commentary about the occupancy gains. How much of that do you attribute to the Internet, and can you see the increases that you're getting from Internet exposure -- are you seeing that dynamic continue? Do you think it's going to mature? What's your view on the Internet presence relative to the occupancy gains you book?

It's huge. I mean, we have that advantage over 90% of the population of storage facilities. So we're getting a lot of traffic, both generated by the Web and directly into our call center and then just the inquiries directly from the Web and from mobile search. So it's -- I don't even think we've begun. I think we're going to see this power -- and it's been talked about now for well over a year by the larger guys in the industry. But it's so much fun to have this. I think it's -- as much as the call center changed the game nine or ten years ago for the larger operators, this has, by a factor of many, changed the game for us. And I think it's -- we're getting the calls and we're converting the calls, and it's because of the Internet and our Web presence.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Good. Thanks. I just wanted to follow up on the occupancy gains that you saw from the fourth quarter to the first quarter. Just looking over your data last night, it would look like this is the first time you've ever seen an increase in average occupancy. Is that right, this is the first time?

That is right, Eric. This is Andy. That is the first time we've seen it.

So, obviously, pretty unusual, but I guess my question is, given the better than expected first quarter, would you still expect to see the typical seasonal patterns in the second and third quarters that you see and get that same revenue lift that you usually get from the first quarter into the second quarter and into the third?

Yes, I think we would see that same lift. I think we're going to have tougher comps as we go through the year, but we'll see the lift in the second quarter like we have historically.

Okay. And then I guess just logically, based on the math of getting a better sequential increase in the first quarter, we should then expect your year-over-year same-store revenue growth accelerate into the second and third quarters then?

I think you're bumping up against some tough comps, so you have to watch that a little bit. I mean, we were 5-plus both second and third quarter in same-store revenue last year, so there are some tough comps. So we do expect an increase, but the comps are going to hold us back a little bit.

Okay. And then just sort of lastly on that, you said that you were 420 basis points above last year in terms of occupancy. I mean, when would you expect those tougher comps to sort of kick in? Is that like June, or like when would you expect that gap to narrow to a range of like, I don't know, 200 or so?

It would be June, starting in June.

Starting in June. Okay. All right, thank you.

Eric, thanks.

Thank you. Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning.

Morning.

Good morning.

I wanted to -- I know the guidance doesn't include any acquisitions or dispositions, but just curious, since you have $36 million under contract and then potentially $40 million set for dispositions, maybe how should we think about the spread and cap rate between those two?

The stuff we're looking at is good quality. We're looking at right around 7 for the acquisition. The disposition is some of our older stores. Again, we're not in contract on those yet. They're just on the market, so they would be probably the earliest, a 3Q close. But those are closer to an 8 -- smaller markets and older facilities that are in need of some repair. So the spread is about 100 basis points, and we're happy with that. That's a good trade in our mind.

Thank you. And then maybe just some color on the competitive environment. I know you're expecting to see increased use of leasing incentives and more aggressive advertising as we head into the peak leasing season. Just curious if what you're seeing now in April was similar or more aggressive than what you experienced last year.

Certainly our traffic counts and our website hit count and all the metrics are up for us. This is something that we try to get a handle on in terms industry wide. We look at an awful lot of properties in terms of due diligence for acquisitions and in terms of prospective third-party management contracts, and we see how a lot of the mom-and-pops and smaller operators are doing. We don't see the same trends, by any stretch of the imagination, industry wide.

So for us, we're really happy. We're hitting on a lot of cylinders here in terms of driving customers toward our portals. I don't know if your question is general and industry wide. I would say anecdotally and from everything we can see industry wide, nowhere near as how the other three REITs and perhaps U-Haul and a couple of larger operators and us are -- we're pulling away. The train's pulling away a little bit, and 85% or so of the industry is having a harder time catching up.

Great. Thank you very much.

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Good morning.

Morning, Mike.

First question, Dave, the three assets -- where are those located?

Mike, we want to hold back on that, only because we're not done yet with everything and there are back-up offers and so forth. We don't want to have a flood. So we'll tell you as soon as we feel comfortable, but two are in a new market and one is in an existing market. And we're just not -- we've got them under contract, but one slip and they could go another way, so we just want to keep it tight on that until we're closer.

Okay. Fair enough. Second of all, the drop of effective rents there in the first quarter, was that mostly concession or are you actually lowering street rates to drive the occupancy there?

Mike, this is Ed. First quarter last year, there was a drop in street rates. You could almost look at it as a right-sizing of the street rates. But on the positive side, for the first time as far as I can remember, we've been increasing street rates since December, so I think what you'll see is we'll continue on that trend. So throughout 2011, we were making adjustments. We [count] on what our Rev management system tells us. That data in regards to street rates is critical to what we do with concessions and rates. But over the last four months, it's a real positive indicator that we've been slowly edging up street rates.

Okay. Just to go back, then, because I want to make sure that I'm understanding the -- because you did have that -- because street rates on a year-over-year basis did go negative in the first quarter according to the presentation you show here. So what drove that? Was it just the trailing four quarters that drove that, or was there actually more concessions in the first quarter offered?

No, the concessions this quarter were less than last year. As a matter of fact, Mike, this might be the last quarter we appreciate a burn off of quarter-over-quarter concessions. So as Eddie said, we sort of were right-sizing, and as we got more into the RevMan program and had it dictating to us, we were dropping rates on a street rate basis in a lot of unit sizes throughout 2011, but were able to pick it up starting in December of last year. And so for the last 12 months, our -- let's put it this way -- for '11, we were dropping rates. Starting at the very end of '11, we were picking them up again. It was probably masked a little bit by the fact that our concessions were burning off so much throughout 2011. And we had just a little bit more of that at first quarter, but going forward, I think you're going to see our concessions probably pretty much the same quarter over quarter starting Q2 of 2012.

Okay. That's helpful and clears that up. Where are street rates now? You mentioned you started pushing them again late in the fourth quarter and early in the first quarter here. How do those compare on a year-over-year basis now?

Year-over-year basis -- I guess March's street rates were about -- this year were about 5% lower than March's street rates last year.

Okay. You mentioned move-ins were up and move-out -- move-downs were down. Can you give us the degree to which move-ins were up and move-outs were down?

In the month of April -- this is Andy, Mike. In the month of April, move-ins were up 10% and move-outs were down 1%.

Okay, that's helpful. Then finally, just in terms of the transaction market, can you talk about what you're seeing in terms of overall deal volume, seller interest, and also what you've seen in terms of pricing over the last call it three to six months there?

Mike, this is Paul. Our team and myself are currently reviewing almost $500 million worth of self-storage properties, which are a mix of stable and [opportunic] assets. We hope to actively pursue anywhere between 20% and 25% of these assets this year. Pricing -- there continues to be a fair amount of interest for self-storage properties from private equity and from some of the larger, well capitalized owners, so we're seeing cap rates continue to compress somewhat. We're expecting cap rates to come in between 6.5 to the low 7 range for Class A properties.

We are getting a few calls here and there from some lenders that may have some assets that they are working with the owners on, either a DPO or a short sale,. And we're seeing a little opportunity there, not as much as we expected, actually, going back as far as 2011. Coming into this year, we thought we'd see a lot more of that type of distressed assets coming to market.

But the volume is there. We're not seeing a great uptick, but we're -- we think we can do, like I said, maybe another $100 million this year.

That's great. Thanks, guys.

Thank you. Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed with your question.

Hi. Good morning. Could you talk about the delta between street rates and in place rates in the portfolio? And also, what type of rent increases are you currently giving to existing customers?

As far as the delta goes with street rates and in place, that has not changed much since last year. It's a very fluid process, and I'll let Eddie talk a little bit about -- he has talked about the RevMan program, but there's that whole dynamic -- it's not nearly as severe, obviously, as with office or even with apartments. Our in place tenants are -- if we have 500 units at a store and 100 of those are 10x10, we might have 70 different rates for those 10x10 players. So the delta -- I think on a big picture, it's probably helpful, but as we manage rates, it's not that significant a deal.

Paul, this is Ed. The street rate, as we alluded to earlier, it's -- street rates are very fluid and they move certainly throughout the month by store and by unit several times. Right now, a snapshot in time at the end of the quarter, we had 52% of our customers paying above the street rates, roughly 38% paying below, and the difference about 8%, 9% paying right at street rate. But that changes so dramatically throughout the year based on occupancy, that it's a real -- it's a number that we really don't pay too much attention to as far as a metric to measure our performance.

Okay, great. And any comment on which type of rent increases you're putting through to existing customers?

We've had -- I guess we continue to be cautious. We were very cautious in 2010 putting in rate increases. We got more aggressive in 2011, felt that we'd suffered some setbacks, so we're, I guess, leaning a little bit more on the cautious side. But we're basically using the data that the RevMan program is giving us and locking us into saying, all right, these -- and working, of course, with the managers, who know the customers on site.

So I would say that they'll flow with our street rates. They'll flow with our -- with what the RevMan program is telling us to do,. But we're at, I don't know, about 25%, 26% of our customers have been -- are eligible at this point. They've been with us a year or more,. And we're putting those through as we see, but the rate increases are not probably any more aggressive than our street rate raises, in the 3% to 5% range.

Okay, that's helpful. And just one more question with respect to revenue management, and that is you mentioned that you're starting to automate the comparison process, the price comparison process. And was wondering, first of all, what percentage of your direct competitors even have a Web presence? And what percentage of all customers do you think go to the Web to get their first kind of pricing inquiry? The thought is, are you perhaps missing some non-Web customers in that process?

Paul, this is Ed again. We certainly don't think we're missing those non-Web customers. Again, being sort of, if you will, an omni-channel business, I mean, people -- our customers come to us in so many different ways. It is very -- it's difficult to follow that customer from origin to transaction. But given what we do in the field as far as branding our product, that in conjunction with how we market ourselves online, we're capturing that customer. We're just capturing them in many different ways.

As far as revenue management goes, I mean, we might not be able to scrape comp rates off of, of course, all our comps via Web. We still do go out and shop our comps on a very -- it's a manual process, but at the store level. But we -- I can't really tell you exactly how many of our comps show their rates online. That's a pretty -- that's just a difficult number to come by right now.

Okay.

Paul, we sort of bridge the gap with old school, where for years we used a comp chart and every store within a five-mile radius of our store would be on this comp sheet, and we would list the various attributes and amenities and whether it was a well located store. We would even go so far as to grade the current manager, the curb appeal of the store, and lay that out. So we've always had the data that allowed us to track every comp at every store we have.

Obviously, it's a lot easier to load in the stuff when the stores have a website. I think a lot of them do, more than you would think. They don't advertise on the Web, but they have Web presence. And so we capture it, but it's a lot easier to load in the stuff right from the Web as opposed to working with the area manager and the store manager to get updated rates and manually plug those in. But I think we do a pretty good job of capturing what the competitive picture is like at every one of our stores.

Okay, great. Thanks, guys.

Thank you. Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Thanks. Good morning, everyone.

Morning.

I want to follow up on this continued dialogue, but in a kind of bigger picture sort of way. So you've had a good year and a half of improved metrics, and that's happened in a time where you're both doing things differently as Sovran as well as in the midst of a more stabilized set of fundamentals, right, where fundamentals have been improving. So how much of your improvement -- how much of Sovran's improvement and its metrics do you attribute to what you're doing differently versus the rising tide lifting all boats periods we've been in?

Well, obviously it's 100% us, right? It's hard to say. As we alluded to before, the idea that it's hard to get a grasp on the industry and what the other 90% are doing. We know, just as I said, from our own investigations and due diligence, that most of our mom-and-pop competitors are not doing as well as the four companies with which you see the industry. That would be great if the whole industry was on a tide like that. I'm sure it isn't.

But it's a real tough -- I know there are a lot of larger operators who are doing just fine, and even some mom-and-pops are. But I've got to say that if we're doing -- if we're going to do 3.5%, 4% top-line growth this year and the other three companies do something in line with that, I've got to believe that that's significantly better than the other 90%. I just can't give you a number. I mean, there's -- [SFBS] tries to do it, and there are another couple of groups that try to do it. It's a real hard thing to measure just because of the fragmentation of the industry.

But after a year and a half, almost two years of this, though, I've got to say it's -- there's a significant gap.

Okay. And then, Dave, I just wanted to follow up on one of your comments in your opening remarks about integrating into the mainstream. What does that mean? What should we -- what do you think Sovran's going to do differently, and what might we be surprised by over the next, say, two years?

Integrating into the mainstream -- I think, Paula, I was talking about us, right? The management team, is that --

Yes.

I mean, you'll see Paul and Ed and Andy and Diane and I at -- more active, I think, in the investor community. Encourage visits here to see the stuff that we're talking about. We're really proud of our marketing capabilities, the Web presence we have, our revenue management team, our call center, just the way we do business. So I think we want to have more visibility in the investor community. I hope we don't surprise you with good results. I hope you expect that, and I'm sure we'll deliver it. I'm not sure where else to go with that, but I think you'll see more of us more often I guess is the way I would put it.

Thanks very much.

Thank you. Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

Hi. Good morning, guys. I know it may be early, but I just wanted to hear an update to the best you can on the Lackland portfolio and just how that's been performing relative to your original underwriting.

Well, as you know, most of that is in the joint venture, the HHF II joint venture, so we don't want to really comment on all of their business. But it's -- we bought that, as we said, at a pretty -- at the time, actually -- I mean, things have changed a lot since the year we went into contract and closed on that. But at the time we thought it was a pretty rich cap rate at 6.8, 6.75, whatever it was, but it's a good market. They're as advertised.

It's a new market for us. The Jersey market is perhaps a little more rough and tumble than a lot of the markets we're in, but nonetheless, they're good stores and they're performing well, and I think we're happy with them. We think our partner is happy with them. They're doing what they're supposed to do. They're providing good yield. They benefited some from our call center. I think the Web presence is just now -- they had a decent one before us. So there was a lot of efficiency baked into that portfolio when we took it, so the potential for upside wasn't as great perhaps. But I think we're -- I know we're happy, and I believe our partner is happy, and the stores are fine.

Is that -- your comments about being rough and tumble, is that a reflection of the competition? Is it high density? How do you encompass that?

It's just -- how do I encompass that? The competition is pleasant. It's a challenge to get certain things done, I guess, on the repair and maintenance front, on the just general services that we subcontract out. We're there now, but it was a rough fall. We'll just put it that way.

Okay. Thank you. And just the assets held for sale -- is that reflected on the balance sheet, or do they have to get further along in the sale process before they're broken out?

They would have to get further along, Todd. Right now there's nothing under contract, so they're not shown as held for sale.

Okay. And just to stay on that theme, who are the buyers? I mean, what's the appetite for a 1031 exchange buyer? Or would this portfolio attract an institutional buyer?

No, I don't think it would attract -- yes, I guess you could -- the markets are small. As we've said before, we're working to -- we sold about 25 assets over the last three years, almost all have smaller markets, although some of these are -- a good portion of these are in the Houston market, which we like a lot. We put a big slug of properties into Houston last year. We consider those all A or B++ properties. The ones we're selling we've had -- gosh, some of them we bought right after we went public, so we've owned them for 16 years and they were probably 15 years old at the time, so we're sort of trading out.

So I think the buyers that we're attracting are more of the local operators or regional players, nothing on the 1031 front. We've had a couple probes, but I don't think we've done --

No, we haven't seen a whole lot of 1031 money looking at these deals. As Dave alluded to, we're seeing some local operators out in the Texas market take a look at these, but again, there's nothing imminent. We're looking at some offers now, but there's nothing imminent.

Okay, thank you.

Great.

Thank you. Our next question is a follow up from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi. Thanks. Just wanted to circle up on the occupancy gains. Last quarter, there was some discussion about getting occupancy to an 85% to 87% range and sort of a real bullish case scenario during the peak third quarter. But I believe that the comment was that that's not baked in the guidance. But based on where occupancy was in the first quarter and where it's heading into April and sort of thinking about the average 240 , 250 basis point increase that you normally see from the first quarter to third quarter, that would get you into the 85% range or so. But guidance for revenue growth is unchanged, so is there sort of an offset to top line, or is it just early in the year? Can you comment on that a bit?

Yes. Well, first of all, [Ken] is looking pretty good now. And we sort of chided him a bit and now he's looking pretty good. But we're -- as we've said before and as we've always said, Todd, we run the whole package -- concessions, rates and occupancy, and it's just a mix. And we like the idea of having -- when we're sitting at 81% or 80%, we don't like that, so we wanted to grow it and made a conscious effort.

But we raised occupancy I think 270 basis points on average for the quarter, and we're at 3% revenue rate, so obviously something gave. And I -- it is a little bit early in the year. We're very encouraged by April certainly, and that was -- but we're still pushing and pulling rates, occupancy and concessions. And we're talking 3.5% or 3% to 4% top-line guidance and we're pretty much -- I'd feel uncomfortable doing anything more than that just given what we've got. We like what we're doing and we like the traffic. We hope to beat, but right now I certainly couldn't say that, given all the things I mentioned, that we'd want to do anything about guidance.

Okay. And then just one last follow up. Is the thought process on sort of easing up on the rent increases to existing customers, is that to get occupancy higher this year and then perhaps next year get more aggressive? Or do you think that you will sort of always just run a little bit less aggressive on the existing customer rent increases that you push through relative to some of your peers?

It's costing us to bring every customer in. We like -- it's a lot cheaper to retain a customer than it is to get one. So at least for the foreseeable future, while we're not enjoying 90% occupancy, I think we're going to tread lightly on increases to existing -- certainly put them in, but not the heavy handed approach of the early 2000s or the late '90s.

All right, great. Thank you.

Thank you. Mr. Rogers, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thanks, Melissa, and then thanks, everyone, for joining us on the call. We're looking forward to seeing you next month at NAREIT and perhaps sooner, so enjoy spring. Thank you.

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