Life Storage Inc (LSI) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Sovran Self Storage Second Quarter 2016 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Diane Piegza, Vice President Investor Relations for Sovran Self Storage. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. Thank you for joining our second quarter 2016 conference call. Leading the call today will be David Rogers, Sovran's Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Ed Killeen, Chief Operating Officer; and Paul Powell, our Chief Investments Officer.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to risks and uncertainties with the Company's business. Additional information concerning these factors is included in the Company's latest SEC filings. At this time, I'll turn the call over to Dave.

Thank you, Diane. Good morning, everyone, and welcome to our call. As you know, we had a very busy quarter what with underwriting and negotiating the LifeStorage transaction, a large equity offering, our inaugural debt offering, and then developing the plan to rename our Company and re-brand our stores.

All of this came on the heels of a very active first quarter, wherein we acquired and integrated over two dozen new properties including nine in Los Angeles, which was our very first foray into that market. So we were busy, but it was good.

On the Operations front, we've encountered a bit of a mixed bag. Occupancy has pretty much held their growing a bit across most markets. We improved this year's level by 30 basis points over last year's 2Q. The percentage of customers staying with us longer than one year has never been higher, and rate increases to in-place tenants are being implemented at a healthy pace.

We came out of a strong Q1 to post a very solid April, and we're optimistic as we entered peak leasing season. We've said for years that you really can't tell how the year will go until you see how much you can push rates in the busy months, May through September. Around Memorial Day, certain markets have potential new customers pushing back on street rates, and our RevMan Group saw our competitors in those areas dropping their rates and boosting incentives.

But it's a very market-specific game, and in many cases it's micro market-specific. For example, it's been booming business as usual in Atlanta, Tampa, Phoenix, Chicago, Charlotte, San Antonio and virtually the whole of Florida. These markets all showed same-store revenue gains of 7.5% or better this quarter. No problems getting rate growth from both in-place and new customers in these markets.

But we've seen some slowdown even from Q1 to Q2 in New England, Buffalo, Portland and Cleveland. For the most part, the underperformance in these areas was an inability to really push some street rates starting late May and into June.

Austin was also slow. It's a bit of a special case. It's the one market in our portfolio whose decline is primarily attributable to new competition coming online. Houston slipped a little bit under our expectations with its top line coming in at 4.9% over last year. We're actively working to hold occupancy there, and it grew 30 basis points this quarter over 2015's 2Q, but we've had to use incentives and have lowered rates from April to June.

We think we can hold off a somewhat slowing macroeconomic issues there, but we're fighting some new supply as well. Despite the current challenges in Houston, long and even medium term, it's a great market for storage. It's soon to be the third-largest city in the country, and it presents a perfect dynamic for our business -- growing, transient, rife with change, and with a housing stock that cries out for additional off-premise space. We're good with Houston.

I'll note again this quarter that our overall same-store growth suffered somewhat in comparison to some of our REIT competitors in that we don't have 20%-plus of our same-store pool on the West Coast. We're working to fix that and, as of now, have about two dozen properties in California, and they're already performing pretty well for us. They don't join our same-store pool until 2018, so we continue to be on the outside looking in at an incredible double-digit growth party.

But these stores will nonetheless grow well for us, even if it's outside the same-store metrics and make a strong contribution to our FFO. Except for Austin, parts of Houston, and a smattering of other areas, we don't think new supply is a big issue and should only be a temporary setback, at worst, to those stores immediately impacted.

We don't think the softness in those markets experiencing lower growth rates this quarter is due to weakening demand. Our organic and paid search traffic is significantly higher year-over-year. But our close rate did slow in June on prospective new customers, which caused the revenue management team to call for lower rates and increased incentives in those markets.

So as a result, we think it prudent to reduce our revenue expectations for our same-store pool by 100 basis points at the mid-point for this quarter coming up, and 50 basis points to 6% at the mid-point for the full year 2016. Some of the markets we're in have enjoyed good strong rate pushes for several years, and now we see some customer resistance to what they perceive to be pretty high rates. We'll see growth but not at quite the levels we've enjoyed. And I guess that's one consequence of 20-some quarters of consistent outsize revenue growth in non-inflationary times.

So while we're on the quantitative side of the story, we'll have Andy give some more of the details, and then I'll come back and talk about the big-picture impact of some of our recent activities. Andy?

Thanks, Dave. Last night we reported same-store revenues increased 5.7% over those of the second quarter of 2015. The drivers behind the revenue growth were a 30 basis point increase in average occupancy and a 5.2% increase in rental rates. Same-store occupancy at June 30th matched our June record high set in 2015 at 92.7%. Same-store property operating expenses increased 3.3% for the quarter. This was a result of increases in payroll, property taxes, and Internet marketing, which were partially offset by savings and insurance and utilities.

As a result, our same-store net operating income increased 6.8% for the quarter. G&A costs were approximately $400,000 higher this quarter over that of the previous year. The main reasons for the increase were additional payroll and legal fees, which were partially offset by reduced taxes on our taxable REIT subsidiary.

We were very active with our balance sheet this quarter. We issued 6.9 million common shares through an equity offering in May resulting in net proceeds of $665 million. In addition, we had a very successful inaugural 10-year public bond offering of $600 million at a better-than-expected 3.5 percentage rate. The issuance of the equity and the sale of the bonds in May and June resulted in a significant cash balance of $900 million at June 30th and resulted in $0.09 per share dilution in the second quarter.

This was necessary to be certain we had the cash for the acquisition of LifeStorage, which occurred, as expected, with no delay on July 15th. We went back to the market in July with a private placement of $200 million of 12-year notes at a very attractive 3.67%. What may have been missed in all the activity were the amendments we made to our private placement notes, which modified to remove some restrictive covenants and brought those other notes in line with the market.

So we were active in the debt and equity market, and we went a little out of our comfort zone for funding the LifeStorage acquisition with 50% equity. This was possible because of our conservative balance sheet, and going forward you'll see us return to our typical funding strategy.

With regard to guidance, same-store revenue growth for Q3 should be in the 5% to 6% range, and NOI around 5.5% to 6.5%. Expenses outside of property tax, this should increase between 2% and 3% for the quarter. Property taxes are forecasted to increase 5% to 6% over 2015 levels for 3Q and our annual property tax expense are expected to increase 6% to 7%. Our guidance assumes an additional $20 million of accretive acquisitions are completed over the remainder of 2016. We have not included in guidance the related costs incurred to date or that could occur related to those acquisitions.

Those acquisitions' costs will be significant in Q3 with the LifeStorage acquisition costs themselves being $32 million to $33 million. This includes significant defeasance costs, severance costs, transfer taxes and other typical closing costs. Our underwriting of the LifeStorage acquisition modeled an annual G&A increase of $2 million. Therefore our guidance for the remainder of the year includes half that, or $1 million of additional G&A.

I mentioned during the balance sheet discussion that we incurred $0.09 per share dilution in 2Q from the carrying cost of the debt and equity rate for LifeStorage. Q3 will have an additional $0.05 of drag just for the 14 days we carried that funding before the acquisition occurred. As a result of the above assumption and other items noted in the press release, our revised adjusted FFO guidance for the full year 2016 is expected to be between $5.30 and $5.34 per share and between $1.37 and $1.39 per share for the third quarter of 2016. And, with that, I'll turn it back to Dave for a few additional comments.

Thanks, Andy. I thought it might be helpful to review some of the changes we've made to the Company over the last few quarters. In the past 18 months, including July, we've acquired 140 high-quality properties in major markets. 97 of these are [infill] stores adding to our presence in the New York Metro area, Chicago, Miami, the Big Four Texas cities, New England, and Orlando. 39 of these newly acquired stores are in the new markets of Los Angeles, Las Vegas, and Sacramento, and we've already achieved sufficient scale on each of these three cities.

Compared to our in-place portfolio, these new stores are newer, larger, equipped with third-generation amenities and in markets with much greater population density. Further, the rental income per store is considerably higher than that of our existing stores, which allows for greater G&A efficiencies and market-scale benefits.

We've also sold 12 stores in that same 18-month timeframe. Smaller, older properties and market sets for the most part are smaller density and remote enough to be inefficient for us to manage. These include several in Lynchburg, Virginia, and stores in Greenville, Mississippi; Kingsland, Georgia; and Anderson and Florence, South Carolina.

We've raised almost $1 billion of equity in 2015 and 2016. We increased our line capacity by $200 million, improved our credit rating to BBB -- BAA2, and we negotiated away most of the bothersome covenants on our 2021 and 2024 term notes.

We recently raised $600 million by issuing our first series of 10-year unsecured public bonds at a rate of 3.5%. We followed that with a $200 million private placement offering of 12-year unsecured notes at a rate of 3.67%. We've been raising, and we expect to continue raising our dividend, which is well covered with a sub-70% payout ratio. Even so, our cash flow generated by operations after paying the dividend should be in excess of $75 million next year.

So we entered the second half of 2016 with a larger, stronger, and more diversified Company than we had at this time last year. Our capital structure is greatly improved, our debt cost significantly lowered, our covenants are significantly relaxed, and our loan tenures are significantly extended.

The portfolio has been upgraded both in quality of markets and quality of properties. There is an extensive upside in most of the 140 stores acquired in 2015 and 2016, especially the 11 lease-up stores in the LifeStorage portfolio and the nine CO properties we've put in place.

The upcoming name change and rebranding the LifeStorage will afford us the long-sought opportunity to improve our image most beneficially and recently entered upscale markets such as LA, Chicago, and the New York Metro area. We expect it will also help us attract more third-party management contracts and enhance our business-to-business logistic sales efforts.

We realize there's a lot of noise associated with these activities as evidenced in this 2Q earnings report. Unfortunately, there will be more of the same in Q3. We're doing our best to identify and break out the unusual one-time items associated with the LifeStorage deal, the financing transactions, the name change, and the sale of the eight assets and related investment of the proceeds. We expect that by Q4 of this year and then on into 2017, we'll be back to our usual straightforward model and structure.

Everyone here at the Company is really charged up as our upcoming plans and prospects, especially concerning our recent entry into California, the LifeStorage acquisition, and the rebranding. To paraphrase the great Joe Walsh song, life's been good to us so far. With what we've accomplished this year and what we have now to build on, we expect life to be so for years to come.

So, Melissa, let's now open the lines for questions.

(Operator Instructions) Jeremy Metz, UBS.

Dave, you talked about the challenges pushing rates that you faced this quarter, and it sounds like it was more of a demand than renter fatigue issue here versus your supply. So, I guess, first, is that a fair characterization? And then, second, as you look out at the rest of this year will you be more focused on holding occupancy and maintaining market share first and foremost especially as you get into the slower winter months even if that means cutting rates and ramping business?

With regard to the first part, Jeremy, yes, I think that's true. There is new supply here and there, but that is not an issue except in Austin.

Hey, Jeremy, I guess the first thing that we might want to look at, and Dave mentioned it in his prepared remarks is that there are several markets, many of our markets, where rates are very stable or very strong, for that matter. The Florida markets, Arizona, the Carolinas, many of the Gulf Coast markets, Dallas, some down states areas, Atlanta. As a matter of fact, in Atlanta our asking rates are up 12.8% right now, so there remains quite a bit of rate strength. There is a bit of softening in some areas. There is some rate sensitivity.

Right now, it's very market-specific, but that is not at all related to demand. Demand remains very healthy. Our overall demand online, overall search, is up 24%. Organic search is up 27%. Mobile search is up 35%, so people are still there, potential customers are still there needing storage. So those two really are completely unrelated. Demand is there, there is a bit of rate sensitivity.

And just in terms of the second half of this year, how are you thinking about these main drivers of revenue? Is the focus going to be on kind of holding that occupancy, then, at these levels, first and foremost?

Unidentified Speaker: Well, you know, as it always is, it's really a market-specific exercise. What we do in blending rate and discount in order to get occupancy, so there is quite a bit of push and pull.

So as we've often said, revenue management is just that. It's managing our revenues not so much rate or discounting or occupancy, whatever the best blend is to get the highest revenue is what we'll be looking at on a market-by-market basis.

I think probably, though, as we tail down the busy season, we'll work more for occupancy going into Quarter 2, and that --

(multiple speakers)

More incentive (inaudible) to build occupancy.

Yes, thirdly, every season going into the low fees, and you try to build that occupancy and just like any other season, we'll be attempting to do that.

Okay, and then I just wanted to ask one more on Sacramento is one of the key markets you picked up with the LifeStorage deal. Can you talk about just how that market performed on a same-store basis? If you have those stats, year-to-date or last year when it was under LifeStorage? And then, kind of, what your expectations are there, going forward?

Hi, Jeremy, it's Andy. Let me pull that out, I'm sorry, I do believe I have that here for Sacramento. LifeStorage, Sacramento, same-store was in the -- just about 10%. So it was strong in Sacramento.

And then you're thinking pretty similar expectations or double-digit growth there? It sounds like that's, sort of, what your peers have been putting up in that market as well.

Yes, (inaudible) in LA, the nine stores we took on pre-Life, and then the four we added -- the three we added from there, and the 10 Sacramento stores are all -- there's room. There's room with rate, especially. It takes a quarter, sort of, to clear out some of the chaff, but, yes, I think we're going to enjoy for a couple of years some pretty strong growth in both the LA and Sacramento markets.

Gwen Clark, Evercore ISI.

I realize it's only been a couple of weeks since the deal closed, but can you just give us an update on LifeStorage?

The integration point?

Specifically meaning whether there are any surprises during the quarter or post quarter?

Okay, well, I guess I'll lead off with there's been no surprises just yet. Things are moving along splendidly. We recently are turning to system integration and management -- manager team assimilation. The management team at LifeStorage, they've just been great in helping us with the whole transition, and, I'll tell you, if it wasn't for them and their willingness to work with us and, pretty much, open up their books and allow us to get in there with our management team, the picture would look much different.

So our management teams are through 18 of 21 days of manager training and WebEx sessions. We've got onboarding teams entering the market right now, as a matter of fact, because come August 8th is when we turn all the stores over to our operating system, website, and call center. And all the work leading up to that, it has gone flawlessly internally. Everybody's been hitting it, and there's been no major issues.

Okay, I guess just on the August 8th date, is that the date that you're going to debut during the name change and, if so, can you walk us through how you're going to do it across the portfolio?

With regard to the corporate name, Gwen, we are going to change the name officially on August 15th to LifeStorage, Inc. The ticker symbol will change to LSI that day, and we'll be operating then as LifeStorage, Inc. With regard to the rollout at the store level, the re-branding, I'll let Andy talk about the schedule for that.

Yes, the branding process is going in about nine stages, and the primary stages are really based on exterior signage. Looking at an engagement this large with so many moving parts, the interior branding of the store moves along as quickly as we can in the various markets. But the exterior branding we have staged in a very specific way from market-to-market right through until April. We should be complete April of 2017 of all store branding, interior, exterior, online, everywhere.

Smedes Rose, Citigroup.

Hi. It seems that the dilution expected from LifeStorage this year is maybe a little more than what you had initially anticipated. I wanted to know if that is accurate. And given that you're seeing, it looks like, you know, a fair amount of pushback, as you say, on rates. Do you expect the acquisition could be more dilutive next year than you had initially anticipated?

Hi, Smedes, it's Andy. No, our dilution from Life is as expected. We expect $0.05 in the second half of 2016, probably $0.03 in the third quarter, $0.02 in the fourth quarter. Our 2017, 2018, 2019 still, with the financing, 2017 is looking like $0.02 dilution; 2018, $0.05 accretion; 2019, $0.16 accretion. Very similar to what we thought, adjusted a little bit after the financing.

I think with regard to --

What sort of assumptions are you making on pricing or stabilizing in order to get to those numbers?

Well, I think what -- what -- you know, to the second half of your question sort of leads into that, which is are we expecting pushback? I think the pushback comes from our season stores where our rate structure is pretty high, and the markets where we're having difficulty. And as Ed pointed out and I pointed out in the prepared remarks, it's only some of them.

Certainly, the stores that we take over have a greater run rate in the early years. So we expect to be on plan in Las Vegas, in Sacramento, in Los Angeles. We expect the stores that we added in Chicago to do well. We love those stores, and they've been under our operating metrics in terms of rate per square foot, especially in terms of premium space. The LifeStorage portfolio, I think, has a lot of room to grow wherever it has premium spaces.

So the underwriting assumptions that we put in place back in May when we were looking at this deal, have not really changed even though some of our markets have been dinged on the rate push. I don't think that happened to stores that were in our first or second or third year of management on our platforms.

Okay. You mentioned in your opening remarks, too, that you have more customers that are staying for more than a year. What percentage of the customer base is now staying for over a year?

60%, over 60% of our customers, Smedes, stay with us over a year. And at the two-year point, it's just over 44%.

David Corak, FBR Capital Markets.

Hey, guys, looking at your C of O pipeline, the last update that we had, I think, in your investor presentation was weighted average yield in the high 7% range. Do you still think you'll achieve that? And then in terms of any update for your overall appetite for additional deals -- I know you said you had a few in the works for 2017 but just looking for some color there.

Yes, our C of O deals, they're leasing up stronger than we underwrote. We're very pleased with how they've been doing, both top line and occupancy. We're still looking at C of O opportunities. We're going to be very selective. The second half of this year, we're going to be mainly focused on accretive acquisitions. So we may do one or two. We're looking at a couple. We're also working, again, with some development -- preferred developers and doing some CO deals and JVs. So we'll still continue to look at them. Buying them into south directly. They're going to have to be homeruns before we'll consider those, though. It's still active. We're just going to be very disciplined.

Right, that makes sense, okay. And then can you talk about the lease-up velocities on the 11 LifeStorage assets that you bought in lease-up and how are those going? And then do you ever give a breakout of, kind of, timing there as far as when those look to stabilize?

Yes, David, those stores lease up nicely as of two days ago, a few days ago, July 31st, I should say. The occupancy on those 11 lease-ups was at 66%. That includes the ones that were zero when we last talked. So I think the lowest one right now is 24%, so they're leasing up nicely. They did use, obviously, a lot of specials and discounted rates to get there, but the occupancy is mounting up nicely.

Todd Thomas, Keybanc Capital Markets.

Hi, thanks, good morning. My first question, you talked about competitors reducing rates and offering more discounts in a number of markets, which impacted conversions in your system. Any sense what the magnitude of the rate cuts were in those markets and maybe how far below your asking rates the competition was in those markets?

You know, Todd, it's difficult to get a handle on precisely what our comps are doing with discounting and standard rate, for that matter. We just have to be aware of it. We know that the comps have been a bit more aggressive than they have in the past. And while we certainly want to be out, you know, we're on the lookout.

We take a close look at what's happening out there, but our job is to, kind of, execute our revenue management plan. And one of the things, one of the levers that does exist, one of the components of RevMan is the comp rates, but it's only a small component, but we're keeping a close eye on things, so we can tell you precisely what kind of impact the rates we're discounting have on our performance.

Was the competition -- did you find that it was lower on existing stabilized facilities or was it mostly lease-up properties or new developments, I guess, where you saw some of the more competitive rates being offered?

Certainly, you're going to see it wherever there's development, and we did see that in Austin, especially, which impacted three or four of our stores. There, you just have to sort of sit out and hang onto your existing customers, which, fortunately, we've grown that base. That's been a strategy of ours now for a good three-plus years. Hang onto that core base of, as Eddie said, 60% or better that have been there a year.

And, you know, as you lose through normal attrition, that's where you (inaudible), that's where you put -- you know, we haven't seen full-month discounts in a good long time. We're still not there with most of our stores, it's still a half-month. But nonetheless, anytime you pull that lever after a few quarters of not having pulled it at all, you're going to see a little bit of an impact.

So -- the lease-up ones are going to sit back and just wait it out, and I think the larger operators do that. They are both the cause and feel the pain of that in various markets. But I think it's the markets where there's established stores and, all of a sudden, customers are looking at us in some of those places. Like, here in Buffalo or in Cleveland, and saying, "Jeez, you guys are getting that for this?" And it's the first-time person coming in, and they may be more prone to shop.

So -- it's not unlike most of our history. It's just that we've been spoiled the last five-plus years in terms of pretty much we get what we ask, and now we're seeing, we're getting questioned, I guess, would be one way to put it. But I think most of the difficulty is from established and stabilized stores and not from new comps.

Okay, and, you know, you talked about the length of stay, and you mentioned that it's never been longer and that, you know, existing customers continue to endure rate increases here. But I'm just curious how you think about the existing customer rent increases that you pushed through, given some of the customer resistance. Does it cause you to sort of change your policy at all regarding either the rate increase being pushed through or just the number of customers that you're planning to send increases to?

You know, for the last several years, and it doesn't appear we're going to have trouble in the near future with customer retention. You are right when you say there are customers able to endure these rent increases. This quarter we put in more rent increases to existing customers than ever before -- 29,000 increases went in, and the move-out rate was at 11.3% versus 12.5% last year. And they've received a pretty hefty rent increase as well.

So retaining those customers that truly need storage, really has been a non-issue, and we don't see it becoming an issue in the near future.

George Hoglund, Jefferies.

So a couple of questions, I guess, first of all is how much of a negative impact will the re-branding process have on same-store NOI growth in the near term? And then also just in terms of focusing moreso on the third party management business, sort of, what's driving that decision since, you know, in the kind of recent past you guys haven't really been focused on growing it.

Yes, with regard to the neaer-term impact on ordinary operations, there's always a little [haze] that happens even when we take over a store. It used to be an awful lot worse with the Yellow Page, and you had to wait for the store's name on the sign to catch up with the customer point-of-sale was. Fortunately, we don't have that anymore, and the Web marketing team has been studying this ever since May 17th when we got awarded the bid -- how to handle this.

And it goes hand-in-hand with the sign change the image change at the stores. So the rollout will be, as we change signs, the concentration of Web marketing will occur in those markets simultaneously.

We're fortunate with LifeStorage in that it's an already-existing name, and 55 of the stores that we bought from them are in markets where we already play, so we're not starting from ground zero with a new name, and that should help.

So I think, very short term, we might get a little bit of a hiccup. It will probably be more in Web spend than in occupancy or traffic. I think even near term after that and medium long term it should be a benefit. I think we've heard a little bit with the association, especially, as I mentioned in the higher-end markets like Greenwich and Stanford and Westchester County and Chicago, the nicer parts of Chicago and in a lot of places, our old name hurt us a little bit in that regard. Some of the studies we did showed some negativity, so we fooled around with some models and built some test cases just to see what, if we eliminate the 16% unfavorable associated with our name, what that would do.

And, you know, you're really in statistician territory here with assumption based on pretty loose soil but, nonetheless, we think it should, over the course of a year to two, come up with something in the range of 70 to 125 basis-point pop in occupancy just be eliminating the negative connotations that 16% of our sample saw in the studies we did.

So -- that part we're pretty hopeful. Third party management, we expect good things from. We show very well against our competitors in that class with regard to our platforms, our training, our people, the way we approach the business, and we've had absolute rejections of our contracts solely based on the name. This is what got us going on the overall change. We started working on this a good two-plus years ago and just didn't have a name we could justify changing to.

But I think third party management, we're going to do very well in because of this. I think the image at the store level and all the markets we're in will be enhanced, and we're really looking forward to it.

And will some of that near-term weakness might increase Web spend and stuff, that all, I guess, impact expenses. Is that incorporated into guidance?

Yes, it's de minimis. I mean, we said $20 million to $22 million change. We've based the better part of $1 million in over the next three to four quarters for that. But it will be in the Web spend, yes. There's not an additional layer of guidance adjustment.

Okay, and then one last question -- just in terms of peers that are getting more aggressive on pricing and promotions. Is that primarily one larger peer, or are you seeing that, kind of, across the board in those markets where you are seeing that competition?

Would that larger peer (inaudible) stores?

(laughter)

Yes.

They are pretty aggressive and they are -- we're everywhere they are -- or, no, they're everywhere we are, and it's a noted challenge from them, yes.

Okay, so it's primarily just them. It's not everyone else lowering brand as well?

I mean, there's not -- they'll follow even quicker, but they're harder to find, and we don't compete as directly with them. So -- but, yes, I would say that's pretty much them.

Ryan Burke, Green Street Advisors.

Thank you. Dave or Andy, can you quantify the main components of the 50 basis-point decrease in revenue guidance for us. About how much is attributable to lower expectations to rate the new customers versus in-place customers versus occupancy?

Hi, Ryan, it's Andy. Most of it is related to rates for new customers coming in from additional specials being offered to those new customers. So that's where we think we're going to have to be a little more aggressive on the specials. We haven't seen that in years, but think that up-front special is what's going to drag it down.

Okay, and then historically has rent pressure from new customers been a precursor to rent pressure from existing customers?

Yes, long term, I guess, yes. If you have enough of -- or for a long enough time, yes. That's why sometimes it's pretty good to use the special to attract customers, but then you get into that situation where the special attracts the shorter-term stay guys. So you've got to balance what you're trying to achieve. You know, if you're street rates stay still for too long, and you raise your in-place for a year or two, then you get into that flip situation where your in-place is higher than your street. We have not had that for a good long time.

You can prevent that buy keeping the rates high and offering the specials, but then, as I say, you get those shorter-term stay, and we're really proud, and it's been very beneficial to us to have gone the other way on that and attract the long-stay customers without use of specials.

So it's a challenge for our RevMan Group. Certainly, it's not there yet, and we hope it doesn't get there. We've got, probably, a good year or so before we worry about how much we can push the in-place. But right now it isn't an issue, but it's something that we certainly watch very carefully.

Okay, about how far above are your rates to new customers versus in-place right now?

Hi, Ryan, it's Andy. The -- 75% of our customers right now are below the current rate. So we still have a lot of room there. A majority of our customers are below the current rate, and the averages are below is 2.5% below the current rate.

Okay, so it's really not too far below?

Correct.

It seems to me that there's an improved pricing transparency in self storage in the sense that your customer can more easily go online and either see on your website or a competitor's website or an aggregated website where the rent they might paying versus market is -- does that worry you more now some than it has in the past?

You know, Ryan, I think it's a bit more of a concern. As we've always said, the smaller operators, it's more difficult for them to be seen online, and that remains true when it comes to both organic and paid, because there's so much SEO that you have to be involved with and be engaged with in organic search and so full engagement is becoming so much more important, and content building and location target marketing for mobile apps. So things are becoming much more sophisticated, so I think that will remain. But what can't be ignored is that, you know, this is going to maybe drive a change in consumer habits.

You can get online, you can do a lot of shopping, and it's driving people to look a little bit deeper, go into the second and third page of a Google search and spend a little more time before they make a phone call or make a few phone calls. So I think that's where that pricing sensitivity is born from. It really is online search, online engagement, and it's just much easier to shop nowadays than it was in the past.

Okay, thanks. And then last question, you guys continue to be acquisitive above and beyond the LifeStorage portfolio. You know, $100 million-plus for the quarter or, yes, over $100 million for the quarter, your cost of capital has changed in the form of lower share price. Have you changed your outlook for acquisitions at all? We obviously see what you've put in guidance, but call it beyond 2016?

Well, I think on doing the Life transaction and seeing the reaction, I think our thought here is unless something really sweet comes along and it fits our market and has some pretty outstanding growth characteristics, we had planned on backing off a bit until we, a, digest the LifeStorage portfolio and, probably, more importantly, prove it out to everyone that our underwriting assumptions were, indeed, right.

We feel very confident that they are, but we will not be testing the market, even before the downturn of the last couple of weeks, we had come up with this overall capital plan that we're going to be lighter -- I mean, we did almost $2 billion this year in acquisitions. It's going to take us a little time to make sure we're doing it right and let the capital markets settle down and let our investors get comfortable with us again.

So, yes, we will not be -- the $100 million that we did this quarter was on the books before we even knew we had an inkling of LifeStorage. So the plan has changed, certainly.

Guarav Mehta, Cantor Fitzgerald.

Yes, hi, good morning. You sold a couple of assets in the quarter. I was wondering if you could talk about are there any plans to sell anymore non-core assets in your portfolio?

Good morning, Guarav, this is Paul. No, we have no other plans to sell properties this year or even going into next year. As I think I've mentioned in the past, on an annual basis we do a pretty thorough review of all our assets and talk with our operations teams and occasionally we'll -- somebody will put forth a potential sale. But right now there's nothing in the pipeline.

Okay, and then I understand you have mentioned that you've already acquired a lot of assets and they've made other plans to buy more, but could you comment, in general, as to what you're thinking in the acquisition market as with cap rates and product growth is concerned?

Yes. There's, you know, we're seeing a decent amount of one-offs and even some small to medium portfolios for sale. You know, we're looking at them and, as Dave mentioned, we're not going to get too aggressive the remainder of the year.

Even so, the quality and locations of some of these assets are not anything we'd be that interested in, anyway. And I think pricing is still going to be fairly aggressive, especially on the portfolios. So we're just going to, you know, as Dave mentioned, remain disciplined and focus our attention on any further acquisitions on being accretive and then, you know, again, we'll continue to review some development opportunities with JV partners.

So cap rates, we're still seeing -- they range from 5% to 6.25%. The acquisitions we did in the second quarter, those cap rates range from 5.1% to 7%. So that's a range of class A institutional quality [AAB+] properties. The West Coast, you know, we're still seeing some compression of cap rates there. Overall, those are still commanding 25 to 50 basis-point premiums.

So, you know, things -- you know, cap rates, I think, are still overall compressed, maybe 25 basis points this first half of the year. And, you know, compression of cap rates and secondary and rural markets continue to compress. So not a whole lot of change from the first quarter from what we're seeing.

Todd Stender, Wells Fargo.

All right, thanks, guys. Just a quick one. When you look at Atlanta, revenue was obviously very strong but at the expense of occupancy. Can you talk about this market specifically, just to see how it trends for some of the other markets. If you're pushing rate, occupancy might back off a little bit. Can you talk about some of your assumptions that go into that?

Well, right now, as you said, that market is incredibly strong for us. We're off a little bit in occupancy, but part of that is the fact that we've been able to push rates to just an incredible level at 12.8%. Reservations are high, there continues to be a lot of demand in that market. It just appears to be just a real strong market for us, and we'll certainly adjust as we start to see things change if they do in Atlanta. But right now it just remains a real strong market for us, and we're able to put themselves right through and sort of suppress discounting and occupancy remains pretty tight.

Ed, does it have to get to a certain level? Does it get to 90%? Or you guys would take your foot off the gas at, call it, 91.5%? Where do you get there?

Well, we're at 92.5% right now, I believe. I don't think we're going to take our foot off the gas at this point. We're going to keep on pushing.

Jonathan Hughes, Raymond James.

Hey, good morning, guys, thanks for taking my questions. You know, you mentioned the weak macroeconomic backdrop has begun to impact some tenant behavior, but could you dig a little deeper there? I mean, has the demographic profile of your customers changed? You know, are incomes up or down as business demand is slowing? You know, I'm just looking for some more granularity here on what's happening to your customer base?

Yes, Jonathan, I'm not sure that it's necessarily macro picture in our case. As I'd said, the demand is up, search is up, so I think our customers are looking for storage.

We have a distinct disadvantage from most property types in that we know less about our customer than virtually anybody else in real estate. We don't do credit profiles, we don't get very significant applications. We get a name, address, ID card, and credit card pretty much, and that's what we know about our customer.

So a lot of what we do know is based on industry surveys and our own individual company surveys, which don't delve into income, for the most part. The last two industry surveys that have been taken have shown that approximately 50% to 55% of the residential customers who use storage have household incomes of less than $50,000. I don't see any reason why that would have changed since late 2013 or 2014 study that was done. I think that's typical.

I think, for us, at our company, we strive to attract and retain commercial customers, and we hover around the 30% mark. It's going to go down quite a bit right now, overall portfolio, because of the 140 stores we absorbed. The stores we buy rarely have anywhere near the commercial penetration that we do. But after a couple of years, we build that up.

So commercial business is good. We're growing it. We use our corporate alliance and warehouse anywhere programmed to do that. So I think we have good prospects on the business side. I don't think our tenant mix, our tenant usage has changed appreciably at all over the last couple of years. And the only reason it looks different for us is because our portfolio has changed so dramatically over the last 18 months.

But if you look at it, say, in two to three years, it ought to be line with the rest of our company stores.

Okay, thanks for that and then just one more. You touched on cap rates earlier. What's the differential, maybe, between first and second tier markets where it's maybe a little easier to deliver some new product?

Hi, Jonathan, this is Paul. Well, yes, I guess in the first tier, top tier markets, that's going to be the lower range of my cap rate analysis. But in the second tier, you know, cap rates are continuing to compress. I just think it's money -- a lot of money out there chasing deals and so those cap rates continue to compress.

I think, Jonathan, one of the things to keep in mind, at least of late, and as we look into the future a little bit, the first tier markets that you're referencing, I think, are the markets where the new competition is coming in. You've got New York and Chicago and Miami and Phoenix as among the busiest new developments, even though they're heretofore maybe considered -- or for other property types, considered low barrier to entry markets.

Certainly, in our sector they're seeing all the new stuff right now. So when we consider a first tier market it's more in terms of population density, I think, is what we're concerned about. But to say that a second tier market is more susceptible to new comps coming onboard, at least recently is a wrong assumption.

(Operator Instructions) Ki Bin Kim, Suntrust.

Good morning, Dave. Sorry I got on the call a little bit late. Did you guys already talk about street rates for the quarter since July and (inaudible) for promotion usage?

I can cover the promotion usage, Ki Bin. The promotion in Q2 were $172,00 greater than Q2 of last year. So they went from, on this same-store pool, $928,000 to $1.1 million. Again, that is the first increase we've seen in a while, but that was the increase from Q2 of 2015 to Q2 of 2016.

Street rate -- the other one on the street rate, I think we have the date on street rates for the quarter?

For June we were 5.5%. I'm sorry, Ki Bin, I thought you said July.

I did say July.

Oh, well, we don't have the exact numbers in for July, but it's just a bit under that June figure of 5.5%.

Okay, all right, thanks for that. And just on acquisitions, given the slowdown in some markets, does that actually make you want to pull back on your assumptions for rent growth on these deals? And, in fact, just maybe a lower pace of acquisitions for you over the next couple of years? Or is this type of slowdown just, in your mind, very market-specific, maybe temporary, where it won't really impact your desire to buy assets?

Well, it certainly is very market-specific. I think the surprise of it is probably temporary. I think we're going to see a bit of a slowdown, overall, from the 7%, 8%, 9% top-line growth to a more moderate, say, 4.5%, 6% over the next couple of years, if I had to guess.

One of the answers I gave earlier, though, had to do with how we expect the assumptions on the stores that we bought recently. The 140 stores we bought in the last year and a half. We expect those to do well. They haven't been on our platforms, they have haven't enjoyed the benefit of the Web marketing team, the professional call center, the RevMan team that we have, they haven't enjoyed any of that.

So our same-store mature pool and some of those stores have been with us for 30 years, in some markets have slowed their growth pace. We certainly would not expect that from the stores that we've recently taken on. They should enjoy outsize growth for the first two or three years at our platform and then do as average.

As far as our overall appetite for acquisition, ordinarily in a time like this, you might think it would be an opportune time to buy. Although we always see sellers lag reality by many, many quarters. But our, overall, just given that the almost $2 million that we bought the last -- just this year, has caused us to give pause. So you will not see us overly active on the acquisition front for a few quarters.

Okay, and just to go back on some of the stats you've mentioned, I think you guys had 75% of your customer base is 2.5% below current rates. So how about the other 25%? Or are those 25% just too short term of a duration of stay to mention where they are versus market?

Yes, Ki Bin, I should clarify that. That was an error I made. 75% are below the current rate. The dollars below the current rate are $25 below the current rate (inaudible). That 2.5% was a misquote. I'm sorry about that, Ryan. It is $25 below the current rates is what they're paying. We have 18% they're paying above the current rate and 6% that are right at the current rate.

Remember, that current rate changes every week, though. It's not really a metric we try to concentrate on. You know, it's not something we look at a lot. We do look at our current customer increases. Those that are below, what's our current rate, and we don't push them above the current rate.

Okay, and just sticking with that, maybe a better stat might be what is the mark-to-market rolldown for -- that have stayed over a year that end up leaving -- or rollup?

I don't have it in front of me, but it's been rollup for us for years, and we don't expect that to change anytime soon.

RJ Milligan, Robert W. Baird.

In the markets where you've seen some weakness in terms of the ability to push rates, I'm curious, and it probably hasn't happened yet, but are you seeing any movement in cap rates in those markets in terms of have cap rates started to move a little bit higher? Or what's your anticipation for cap rates in those markets?

Hey, RJ, this is Paul. No, we certainly have not seen any of that. It doesn't mean we hope that the cap rates would rise a little bit but, no, we're not seeing that in the market today.

Our business, RJ, is when things are good, the sellers are looking to raise their prices, and when things are bad, they're looking to hold their prices. So it doesn't work like the economics textbooks by any stretch.

Mr. Rogers, there are no questions left. I'll turn the floor back to you for final remarks.

All right, well, this was our 84th Sovran Self Storage, Inc., conference call. It's our last Sovran Self Storage conference call. The next time we talk to you we will be LifeStorage, Inc., and we look forward to it. Thank you all for your support.