Life Storage Inc (LSI) 2017 Q2 法說會逐字稿

Greetings, and welcome to Life Storage's Second Quarter 2017 Earnings Release Conference Call. (Operator Instructions) I would now like to turn the conference over to Diane Piegza, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Brenda, and good morning. Thank you for joining our second quarter 2017 conference call. Leading today's call will be Dave Rogers, our Chief Executive Officer. Also on the call is Andy Gregoire, our Chief Financial Officer.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to risks and uncertainties with the Company's business. Additional information regarding these factors can be found in the Company's latest SEC filings.

In addition to our press release, we have added a financial supplement which is available on the Investor Relations Page at LifeStorage.com.

(Operator Instructions)

At this time, I'll turn the call over to Dave.

Thanks, Diane. And welcome everyone to our call. Last night we reported adjusted FFO of $1.33 per share for the second quarter against a tough year-over-year comparison. This quarter was marked by challenges on the operation front and clear wins on the external growth initiatives. We achieved a record high same-store occupancy of 92.8% at the end of the quarter; grew our joint-venture efforts with the acquisition of 20 high-quality properties; and added 17 new third-party management stores that will carry the Life Storage brand.

As we continue to lay the groundwork for our next phase of growth, however, we face pricing pressure in some of our key markets due to well publicized incremental supply and the [protected] need to support our brand transition to Life Storage. The brand change we undertook last August has really enhanced our competitive positioning and it's providing us with a great advantage in soliciting third-party management contracts and attracting commercial accounts.

The physical change over relating to signage, point of sale materials, uniforms and so forth was executed on time and on budget by the end of April. Our web presence under the new name, however, has grown slower than expected especially in organic search which is key.

We've worked to offset this reduced exposure on the organic side with increased pay spending, temporarily increasing our operating costs. Through 2Q the additional spend hasn't completely compensated for the reduced organic exposure, and it probably won't for the next several quarters. We know though that the Life Storage brand sells well and that these redoubled marketing efforts should result in a direct improvement to operating results.

The combination of new supply in select markets, the related pressure on rental rates and the marketing support around Life Storage's online presence have required an elevated level of move-in incentives. As a result, we're updating guidance to account for the additional marketing investment in the increased rental incentives we see as necessary going into next year.

Let me provide a framework of what we're expecting for the remainder of 2017 and discuss our markets and a few industry trends, and then talk a little bit about some of our external growth initiatives. The markets in which we face our biggest challenges continue to be the big 4 Texas markets Houston, Dallas, Austin, and San Antonio which comprise 23% of our same-store pool. Austin bounced back a bit this quarter as some supply got absorbed quicker than expected, but there's another round of building coming.

To give some context to our exposure, we have 100 same-store properties in Texas. In the past 12 months, 47 stores have opened in those market areas, and we expect up to 35 more in the next 18 months. These will have an adverse effect on as many as 70 of our Texas stores for the next couple of years. But these are rapidly growing vibrant markets that are ideal for self-storage. This is a cyclical drag and mid and long term we want to here.

The other important markets we have some concerns about upcoming include Denver, parts of Phoenix, Tampa, and Miami. The impact to Life Storage resulting from new builds in these cities is nowhere near as strong as it was in Texas, but there will be some pressure on our top line as a result.

The markets where we feel optimistic include much of Florida, Saint Louis, Cleveland, and New England. And while we've seen some new supply in those markets it's not always near us, and for the most part the construction in those markets is warranted.

So what happens in these oversupplied markets? What tactics do we use to combat pricing pressures? Well, we advertise especially via mobile search heavily. We use incentives, especially the first month free. We maintain our always high levels of customer service, curb appeal, and community involvement. We continually monitor the competing stores for movement in rental rates although we don't often match. It's usually better to wait it out using the other tools to attract customers at a market stabilized rate. No question, new supply will crimp revenue growth at some of the more effected stores but as long as the store remains relevant in terms of its quality, its appearance, and the services we provide it'll rebound.

Concerning demand, we think it's fine. High occupancies across the board show there's a need, even a growing one. Typically demand for storage space outpaces population growth by a bit, and we still see that. We hope to increase even from that level via our B2B programs which have been revitalized by the new Life Storage brand.

Concerning our external growth initiatives, as we've communicated on prior calls and our meetings with you the diversification and broadening of our revenue streams through joint ventures and third-party management contracts are an important focus for us. And our growth here is accelerating. These initiatives improve scale in our operating markets which helps us leverage the cost of web advertising, other marketing cost, and maintenance expenses in those cities. It also provides for greater efficiencies and corporate overhead at the operating platform level. During the quarter we purchased 20 high-quality properties with our JV partners including two stores in Nashville which is a new market for us. The other 18 fit in well with our existing portfolios in Arizona, California and Las Vegas, affording greater scale for us in those markets.

Our third-party management business is also enjoying accelerating success, much of which is due to our new branding. In the quarter, we added 17 new agreements to manage stores in our existing markets. As they come online later in 2017, these will add fee income, contribute to our advertising spend, and allow for the other benefits of increased scale.

Our ongoing expansion program should see about $30 million invested this year to add attractive third-generation storage buildings to our existing properties. Not only do these add much needed climate controlled space, the new buildings usually upgrade the overall appearance and presence of the property. We continue to realize cash on cash yields from these projects in the 10% to 12% range.

So just to wrap up here a bit, it's been just over a year since we completed the Life Storage merger, and it's still under a year since we undertook our company's name change. It's a year that's brought a lot of growth to our portfolio and to our platforms. It's also a year that's brought some sector headwinds. Oversupply in some markets and some operational challenges. The headwinds in the oversupply are cyclical. We've seen this numerous times. The operational challenges are temporary and surmountable.

Life Storage is better equipped today than it has ever been in its 33 year history. We have 700 high-quality stores in good markets. We have over 100 recently acquired stores that are just now reaping the benefits of our operating and marketing platforms. An additional 2 dozen stores are in the early stage of lease up and growing fast. Our third-party management division is rapidly ramping up. We have a rock-solid balance sheet and $75 million of free cash flow after dividends. And our new brand is attractive to both residential customers and our corporate storage clients.

We remain certain that our enhanced size, strength, brand, and presence will enable us to create significant value for our shareholders over the long term. And we're confident enough in that and that our Board is authorized and has us introduce a $200 million share buyback program.

So to talk about that and other matters concerning the quarter, I'll turn the call over to Andy.

Thanks, Dave. Last night we reported adjusted funds from operation of $1.33 per share compared to adjusted FFO of $1.32 per share for the same period in 2016. As we have shared in the past, our same-store growth in the first half of 2016 presented us with challenging comparables. But we were able to increase adjusted FFO based on the performance of our acquisitions.

Overall, total revenues grew 24% as we benefited from a higher store count, mainly due to the Life Storage acquisition. With respect to the Life Storage facilities in particular, we were able to grow occupancy nicely during the start of the busy season. And as of June 30, the 72 stable stores occupancy was 90.1% up from 85.9% at March 31, 2017.

The 11 non-stabilized Life Storage stores continue to increase occupancy ahead of expectations and were at 85.1% at June 30. The overall revenue increase also reflected a $1.2 million acquisition fee from our joint-venture activities. Same-store revenue grew 1.4% as a result of rental rate growth. Occupancy at June 30 was a second quarter record high of 92.8%, a 10 basis point increase over 2016 June occupancy.

The balance of the revenue increase came from growth in tenant insurance and other operating income. Same store expenses rose 5.6%, but the biggest drivers of the increase being payroll and benefits up 2.8%, real estate taxes up 5.5%, and internet marketing up 42% to $2.5 million from $1.7 million.

G&A costs were approximately $5.8 million higher this quarter over the second quarter of 2016. Primarily due to a $5 million legal settlement incurred during this quarter, and less so by the incremental cost associated with the larger store base.

Our balance sheet remains strong. At quarter end we had cash on hand of $8 million and $169 million available on our line of credit with no maturities until 2019. Our debt service coverage ratio rose to 5.2 times from 5 times, and our net debt to recurring EBITDA ratio was 5.6 times. As noted in our release, our Board authorized a $200 million share repurchase program. We expect to use free cash flow and any proceeds from the sale of properties to fund this program. In addition, we are suspending our dividend reinvestment plan until further notice.

Now with regard to guidance, given what we believe to be continued weakness due to new supply, slower than expected brand traction on the internet, increased incentives, as well as increased marketing expense we are reducing our same store and annual FFO outlook. Our revised guidance for the same store revenue growth for the full year of 2017, is 1% to 2%. From our previously forecasted 2% to 3%.

In addition, as Dave mentioned, due to the additional web advertising we are raising our expectations on same-store expense increases to 5% to 6% from the 3.5% to 4.5%. Resulting in forecasted NOI for the year to be down 1% to flat from our previous estimate of up 1.5% to 2.5%.

Pressure on the same-store revenues will be offset by increased third-party management fees which we anticipate in the $2.3 million to $2.4 million range per quarter for the remainder of the year. We also expect our share of FFO from joint ventures to increase to between $2.1 million and $2.2 million per quarter.

Most of our certificate of occupancy deals are filling up well, but those completed over the last year have a slower growth rate and will result in dilution of $0.01 to $0.03 per share in the second half of 2017. Taking this all into consideration, a revised adjusted FFO guidance is $5.25 to $5.30 for the full year 2017 and $1.33 to $1.38 for the third quarter.

I just want to remind you, that our guidance does not contemplate acquisitions or additional joint ventures or management contracts. And with that, Brenda, we can open the call for questions.

(Operator Instructions) Our first question comes from the line of Ki Bin Kim with Sun Trust.

Could we start off with maybe giving some stats on the quarters street rate changes year over year, free rent usage, and how that trended into July, please?

Sure, Ki Bin. This is Andy. Street rate, so let's talk about a little bit sequentially what happened from March to June of this year. We saw some nice increases as we went into the busy season. So June rates were 7% higher than March's rates, pretty typical as you go into the summer season to see an uptick though. Year over year as of the end of June, street rates for new customers and being at this occupancy and obviously that's only the 8% or so of the vacant spaces. About 6% below last June. July it was 5.5% below last July. So we're seeing that to bring in those customers. In the competitive market we're seeing out there for pricing, rates aren't as high as they were last year. But those rates that I just mentioned, are all higher than our in place customer. So in fact, the rates that we're asking at the end of June were some 5.7% higher than the average rate that our in place customer was paying. So rent roll down not an issue, so rates down year over year up sequentially. On the free rent we saw an uptick, $1.2 million of additional free rent this quarter, Q2 over Q2 of 2016. That's about 2.6% of revenue that was our free rent. For the rest of the year, that's probably the delta we'll see. We didn't think we'd have that. We thought we'd have easier comps. But right now, we're projecting that we will have to give more free rent and keep that delta probably $1.2 million a quarter for the next few quarters.

And I guess that leads to my second question, I mean the last time we spoke or on your last conference call you guys were hoping for a second half rebound. And because mathematically your comps are easier in the second half, so what caused the change in kind of tone over the last quarter?

So a couple of things. I think the competition into those Texas markets Houston, Dallas, San Antonio we're seeing one of the peers out there with significant reduction in rates and increases in specials. You may know who they are, but when you see a ten by ten for $33 when the market is $120 that's going to cause us to reduce rate. We won't match that rate, but we'll reduce rates a little bit and we'll have to offer more free rent. On top of that, the drag we're seeing from the internet exposure process has increased our close ratio on the customers that are reaching us. So as we go through the brand transition, more free rent to increase that close ratio on those calls coming in.

Got it, and I'm trying to just incorporate a lot of different things you just said and the trends in same-store revenue. Does it seem like to you guys that this quarter is dropping the same-store operating metrics should last a few quarters? I mean maybe into the first half of 2018 almost equal just because due to customer [maturing] the minus 5% rates are probably not even showing in your same-store revenue yet. Is that the right way to think about it?

Yes, I think the second half of the year yes, we would expect some further slight deceleration in revenue growth. And on the expense side, not a whole lot has changed. It's really the internet marketing is the only change we made on the expense side in our projections. That we'll have to keep up that additional spend.

Our next questions come from the line of Gwen Clark with Evercore ISI.

These results were a bit below our expectorants. I'm hoping to touch upon whether you guys think you have everything you need to succeed in navigating the downturn. Can you talk about whether you think you have the staffing and RevMan System that will allow you really to compete going forward?

Yes, we do. We think last year was a really big year for us. We grew our company by 30%. And after 30 some years to grow a company by that much it was a [digest], no question. So we've got this big acquisition and we staffed for it. And we had the platforms that had been running, especially RevMan and marketing the way we do it now for the last 4 or 5 years. So we were pretty confident in that. I think the absorption of the stores went very well both at the field level and the absorbing them out in the platform. So with regard to the call center, with regard to RevMan, with regard to our marketing teams, and our training is fine.

We ran into some pretty serious headwinds shortly thereafter. I guess late second quarter last year we were seeing headwinds that we really didn't expect. I mean I'm not sure the sector did, but I know we did not. So we had to buckle down a little bit. And then in the face of that, we did the brand change. And that's probably where a part of our trouble is. I'm going to say the Texas exposure certainly in our company's case when you've got almost a quarter of your stores there, your same-store pool, that's going to show. But I think what we're wrestling with a little bit more than we expected is the organic search for Life Storage is not where the organic search for Uncle Bob's was. And we knew that. We telegraphed it for a couple quarters now that we're increasing our paid spend, our paid ad spend to get there. And it's working. We're getting it, but not to the extent that we've lost organics. And so it's coming back. We have actually bolstered that team, especially the marketing team, both with internal folks and a couple of fairly high powered outside consultants to get there. That's where aside from the Texas exposure I think our issue is, is getting that relevancy of Life Storage back to where we think it should be. When it gets there, it's a great brand. The penetration compared to Life Storage versus Uncle Bob's, let's say, is excellent. Life Storage versus a lot of our competitors, excellent. So when we get it there, it's going to be great. This is the part that we didn't expect for the last couple quarters and the couple quarters to come. So a long way around on your question, yes. I think we're staffed well. I think we are taking that extra step in the marketing department to really ramp that up because that's where the help is needed.

Okay, that's helpful. Just one quick question on the advertising front. It seems like that's a major headwind. As you think about the last year or so, is there anything specifically that you guys think you could have done differently or better? Or is it just the nature of the transition that it's going to be a pretty rough process?

I guess in retrospect, we would have understood the degree of difficulty a little better. I don't think what we're doing is coming up short. I think our expectation going in. We knew that the folks in Melbourne had a difficult time with their brand change for a bunch of quarters. And we appreciated that. And we thought, I think, because we were coming with an already somewhat established brand, nowhere near as big as Uncle Bob's or some of the others, but Life Storage had some traction in some markets. And we thought that with the changes in marketing strategies and our experience with Google in that 5 years since the other brand change [was in] we thought we would have an easier time of it. I guess what we would have done is forecast for more difficulty than we expected. But I don't know that it would have changed what we did.

Our next questions come from the line of with Nick Yulico with UBS.

This is Trent Trujillo on with Nick. Kind of following up on that last line of questioning, recent history hasn't really been great with respect to your adjustments to guidance. So perhaps taking a step back and looking at the big picture, what inputs are you considering when you set your guidance? And what potential changes to that approach might you be considering to enhance your business projections going forward?

Trent, we're looking at a lot of data with our RevMan team, with our marketing team; the hits on the internet, the calls that are coming in. We're constantly adjusting that and forecasting. It is a retail business. It is what happens that month, and the busy season it really drives the rest of the year. And we saw where we were in the busy season what it would take for free rent. We obviously were excited that we can increase the occupancy with the investment we made in that internet spend. But up front it takes a lot of up front special, free month for customers. And that was something that had not been expected and now going the next 2 quarters we expect that a special, that up front 1 month free, to be more prevalent that we anticipated.

Okay, that's helpful. And going to the share repurchase authorization, if I caught it right it sounded like you were going to be funding that with free cash flow and perhaps some dispositions if I caught that right? If that's correct, how are you evaluating the quality of your portfolio and what you may put on the market to be a source of funds?

We have presently 4 stores under consideration. We had them under consideration even before the share buyback. So they don't fit in a couple markets and there's a couple opportunities we have from other developers. So those are the low-hanging fruit. We do every year, of course, take a look at all of our assets and try to see what's involved. If they're sustainable as in, if they require an influx of additional capital or expansions and enhancements. How they fit with the new stores that we've just acquired or that we've perhaps just brought on via JV or a third-party platform. So the low-hanging fruit is there on 4 or 5 stores. The free cash flow is there. There’ll be a more serious look though in terms of potential growth with an eye toward an alternative use for the funds as we go forward.

Our next question comes from the line of George Hoglund with Jefferies.

Yes, one question in terms of the increased use of free rent. How do you think this may impact overall length of stay and bad debt expense going forward given that you tend to attract the lower quality of customer?

Yes. George, we think that is the case. They have a tendency to attract a lower quality customer. The prevalence of the free rent everywhere helps that case because you're not the only one out there, so you're not just attracting that low. We still, based on our data that we looked at even this morning, offer the least 1 month free. And we still think to go to the levels where some of the peers are -- doesn't make sense.

And we probably won't be at their level, but it does make sense when it's prevalent in the market, a lot of customers are looking for that now. So when it's that prevalent you will see us in the market with a free month. But we do not expect to be offering as many units for a free month as some of our peers do.

We should correct that term low quality customer. We think all of our customers are high quality. We should classify them as shorter stay perhaps would be a better way to put it.

Okay, and then just in terms of markets that had negative same-store NOI growth. I mean this quarter 15 of the top 30 had negative same-store NOI growth versus 7 last quarter. I mean where might this go or when do you think that might trough?

You know, George, as we continue to spend on the internet that's what's driving this. Really besides the property taxes the only driver of expenses is the internet expense. We have control over the other expenses and we think we're doing a good job. Outside of property taxes and internet, our expenses were up 2%. We constantly look at that side to keep the expenses. So I think the internet spend continues across the markets. So potentially I don't see big swings in that over the next couple of quarters.

Our next question comes from the line of David Corak with FBR.

I'm just going to stick with the expense question line. Just thinking about that going forward beyond the next 2 quarters, I'm not asking you to give guidance for next year, but just theoretically if we think about it you're certainly going to have an easier comp given the expenses for this year. But assuming we see comparable kind of mid to high single-digit tax growth and inflationary expenses on the majority of the other line items, it kind of comes down to your advertising spend. And obviously that's just one of your levers. But do you see that absolute spend level being comparable to 2017 and ‘18? Or are any of my assumptions kind of off that might help you contain expense growth next year?

You know, David, I think the investments we're making in the internet spend now will drive long-term growth. And occupancy staying at these levels, we should be able to pull that back as we get the traction on the web as our impressions grow in organic search, you would see that pull back. We don't expect that to happen this year. At some point next year we would expect it to happen.

Pull back on an absolute level or pull back just from a growth standpoint?

Pull back on an absolute level.

Okay, fair enough. And then appreciate your comments on the brand switch online. But from our perspective, it's sort of tough to measure the progress of that. Maybe internally, how are you guys determining whether you're having success with the rebrand? What metrics are you looking at?

Is it the click through? Is it the organic searches? Is it relevancy? You said organic search has improved. Maybe you could kind of share with us your goals and timeframes on a metric like that? And how to really quantify your success there?

Sure, there's a few different things we look at. Number one is domain authority which we've seen the Life brand grow tremendously over the last few months. That started in the 30s. It's from zero to 100. Life was at 30, Uncle Bob's was at mid-50s. Life as of last week was in the mid 50's. So we saw tremendous growth there. That's number one. That eventually leads to organic search growth, but not right away. So number one, we watch the domain authority. We're going to continue to see that click. We've passed one of the competitors. We think we can be in first or second place in that. That is our goal, and we're going to continue to work with our SEO specialists to work with our marketing team to do that.

Besides that, we look at the organic search. We want to grow that organic search. And we did see that down pretty significantly in the second quarter as we switched over. Remember, it was only March that we shut off the Uncle Bob's brand totally online. So we did see a falloff in organic search. We're seeing it start to come back, but that's going to be our metric. We're going to watch the domain authority and organic search. The click through which means if that's presented to a customer, how many people click on that brand. It's much better than our old brand, so we're really liking what we're seeing there. And we wouldn't expect that probably to grow any better. It might get a little better, but it's better than our old brand. And that's going to drive significant long-term growth in the revenue line.

Okay, so what is the timeline or what is the measurement when you guys look at each other and say, okay, we made it. We're back to where we were before or even better, and what does that time line look like?

I mean it's the organic search per store because we have to put everything in per store. The organic search per store we would want to see that in the excess of what we saw in our old brand.

And probably we definitely need to be there by first Q of next year in advance of the busy season. Let's call it April to May of 2018 to be back there where we were and better.

Our next questions come from the line of Todd Stender with Wells Fargo.

Okay. Just back to the funding sources when you guys talk about share repurchases. How much in dispositions are you expecting? And are these Life Storage properties? And what markets could you be targeting?

The low-hanging fruit I referred to was Salt Lake City, a couple in Austin, and perhaps one other I don't want to say just yet. But those would be the 4 low-hanging fruit which would generate somewhere in the range of about $50 million. Then we go from there. And there's a bunch of different things we've been exploring for the last few months. Not the least of which is forming a joint venture for a core investor and spin off a bunch of properties there to maintain the flags. This is still a scale business. We don't want to shrink the company. We don't want to reduce the number of flags. This is important. This is getting us a lot of benefit. And so to sell outright is going to be on a very select basis. But to move assets into different ownership classifications, maintain the brand, and the management, that's our goal. And that's what we hope to generate some funds from in the coming quarters. The cash flow that we have been -- the $75 million plus, that we've been able to chug has gone to some degree to the brand change and some of those efforts. That obviously is done now, so we'll be looking a little bit harder at our alternate uses whether the expansions of enhancements make as much sense in some cases a buy back. Most times they will, but there will be a little bit different priority and a little different, I guess a sharper pencil used as we go forward with the projects that we want to spend on. So the $75 million free cash flow is now fair game inside our company, and the sale of assets hopefully retaining some semblance of control is one of the other avenues we're looking at.

That's helpful. So the $75 million free cash flow estimate that's what we have. But no change to that in light of the guidance change?

A couple million dollars.

Okay, the same ballpark. And how about tapping debt for this? I know you do have a balance outstanding on your line, but how about tapping the line of credit to fund share repurchase.

You know that would do wonders for goosing the return, but we want to stay pretty leverage neutral. We have a hard earned investment grade rating. We are fairly well received by our debt partners. So I think not. I think to leverage up to borrow on the line, it's tempting but it isn't in the cards.

Our next question comes from the line of R.J. Milligan with Robert W. Baird.

Just wanted to go back to Texas and what the strategy is going to be going forward as we see new supply coming into Houston and Dallas and to a lesser extent Austin. But just curious, one of your peers obviously has signaled that they're going to be cutting rates. And I'm just trying to figure out, a large peer cutting rates and you have new supply coming into the market, what do you anticipate your second half of ‘17 strategy to be in Texas as you navigate some of those headwinds?

Well, first of all that's a pretty big factor in our guidance reduction. We saw that coming. We watched the – we [break] the web. We see what they're doing. We watch all of our competitors in all of our markets but especially Texas pretty heavy. And as Andy referenced, we've seen some pretty drastic moves. Not sure they're warranted but they're happening.

So as I mentioned, you do everything you can. You certainly have to match the specials. You don't get away from that. You certainly have to double down on making sure your stores and your flow through process once you get a query you do everything you can to hang onto that query so your customer service at the call center level and at the store level has to be top notch. You treat every query as gold. So you're fighting for customers. This isn't something we haven't done before, you know it happens. Unfortunately, it's happening in our very, very largest market.

I don't think, as Andy referenced, that we're going to be dropping rates that significantly. In Texas more than elsewhere, but nonetheless if somebody is charging $33 bucks for a unit you're getting $120 for, you know that there's only a few left. It's not something that we've got to fight a battle for 500 units. A lot of the stores that this happening at is probably a temporary thing. It's a different philosophy than we had. We're not totally sure we even get it, and we know we're not on board with it. But we got to work it out. We're going to be under pricing pressure in the 4 Texas markets, Houston now especially. We're pretty confident in Dallas, next, and nothing is as big as Dallas or nothing is as big for us as Houston but they're all big markets and important markets for us. And as I said in the prepared remarks, these are great markets. They're under pressure now for supply. Everybody that's bringing stuff into Houston sees the long-term viability of it. It's a big city. It's a growing city. It's vibrant. It's got activity. It's made for self-storage. So yes we're taking a punch now. Two and a half years ago, Houston was leading our path. We were in 2013 and 2014, we were the top dog in terms of same-store revenue growth. A lot of that was because of our Texas exposure. It's a real cyclical game. You've got to wait it out is what it comes down to. If you believe in the market and you can keep your stores relevant, you've got to wait it out and it'll be there.

Our next questions come from the line of Smedes Rose with Citi Group.

It's Michael Bilerman in here with Smedes. Dave, you talked about…

Good morning.

Dave, you talked previously about being staffed well I guess at the asset level and the regions. But I'm curious if we step back and think about the board as well as senior management and the decision, the judgment, the estimates that you've put out and effectively having a lot of misjudgments in this guidance in that over the last year. You know there was a lot of critical push back when you bought Life Storage for the price you paid. You had the original initial credit write off. You misjudged the ramp in that portfolio in terms of how it would grow and the amount of brand, which I think we all agree that Life Storage is a better brand. But I think you underestimated the amount of capital it would need to have that penetrated. And even you used to reference Cube Smart and how that was not a (inaudible) brand and online presence before and Life Storage did. So it's going to minimize the amount of capital you need to spend. So I guess you take all of that, at some point do you or does the board sit back and say maybe we have to figure out other things because it's just not working the way it is.

Well, I think if you step back and look at all the activity that went on last year, adding a hundred plus stores, mature stores, that haven't yet got the benefit of the platforms. We've got 2 dozen stores now that are in lease up and are growing; 3PM business, all of these things are plusses that our acquisition did and our brand change did. The business to business model is there. The new name is tested well. It's very strong. You're right, we missed on the timing. That's probably the single biggest thing. The headwinds came, Michael. I mean that was something. We bought the properties, fortunately we matched funding, we didn't necessarily hurt the company with the way we purchased the properties. They're there, they're ours. It's given us a 700 store platform.

I mean we're one of the biggest storage companies in the world. We've got markets with assets bigger than most companies. When you've got huge submarkets that we have, we've built a really strong big company with a lot of better quality assets than we had. There are a lot of moving parts. I admit we missed on the degree of difficulty on the brand change. I don't think the integrations of the stores absent a few hiccups has been a problem. The integration of the 120 stores is good. The physical part of the brand at the store, the signs, the people, the uniform is good. We are having trouble, and it's an important miss. It's an important issue to be in front of people and relevant, and when they're looking for us we want to make sure they see us. And that's why what we've had to do when we do get a contact is make sure we treat them, as I said, treat them like gold. Make sure we close the sale. It's costing us in terms of incentives. So lack of exposure on the web, we think, is temporary. We've got a lot of irons in the fire to get it there, but that lack of exposure on the web is causing us to do more in terms of incentives. So you've got a double whammy right now. We're investing in brand and we're giving up revenues to capture occupancy. We've got so many benefits yet to harvest, and our share price right now isn't coming close to reflecting the real value, and that's the reason we're doing the buy back. But I think this is a temporary thing. We've been doing this for 33 years. There's been years where we've led the pack. It's not like we don't know what we're doing. We took on a degree of difficulty that was a couple levels higher maybe than we expected. But as far as the whole picture goes, we all agree here that this platform, the size of this company, the strength of this company, and the assets that we've garnered, the markets we went in, markets we were criticized for not being in, California, Las Vegas, great markets, big markets, bigger stores, much bigger stores, much better stores; all the things that we had been taking check marks against for in the 2012 to 2015 run, we've addressed considerably and have made a lot of progress on. So this one is painful in the glare of the spotlight that we're in, and unfortunately, the headwinds that we're facing in our very biggest markets. But I think, and again that's cyclical. And the other part is certainly surmountable. So I think we're getting there. It's just the only thing I regret is not knowing that degree of difficulty and forecasting a little better 2 quarters ago.

I guess obviously the share repurchase was a discussion, a Board-level decision. Walk us through sort of the view of doing a share repurchase, how they came to that conclusion versus thinking more strategically about the business, right? And you think that if you're sick you can get put on medication, or if you want to get rid of something you have the full operation. And how did the Board and what was the debate about? I mean look, over the last year you've had disappointing earnings for 3 out of the 4 quarters. I mean this is not just a one quarter thing. This is 3 out of the last 4 quarters there's been a material decline or something that wasn't anticipated.

That's right, and as we've said that Texas, as we went out 3Q of last year Texas is hurting us. That is cyclical. That's how we approach that. We know it's there. Nothing we can do. We like it there. We've been there a long time. It's done well. It's not right now, it will again. So cyclical on a quarter of your assets is one thing that we considered certainly. The strength of the brand on the near horizon is the other thing that we considered. The value of the assets that are still brewing is a big part of it. We've got a lot of stuff brewing, and it'll come. So to talk about an operation at this point, as you put it, is pretty extreme.

So how did the board come to the decision on the share buyback? Walk us through the decision that they came to the valuation that's the symptom of treating it.

I think when you look at all of the options we had and our share price being where it's gone, we're not a big fan of share buybacks. We haven't been in our history. We have been able to take a lot of assets and grow them. When you take stores under our wing, we're able to goose those pretty good. So it's always been non-buyback. Let's look to external growth. But in this case with the share price drop the way it is, the fact that we're a strong company that we've got a pretty solid balance sheet and the free cash flow it pops up. You know we've been talking about it since January. But as we got into this part of the cycle here with our share price being what it is, it's a compelling argument.

Okay, I just hope the Board is going to be a little bit more keep it focused so that we don't come into recurring problems, and think strategically about potential ways to maximize value for shareholders (inaudible) missteps.

They know what to do and so do we. Thank you.

Our next question comes from the line of Todd Thomas with Key Bank.

Just a couple quick ones here. Sorry if I missed it, but Andy do you have a July occupancy figure and where that is year over year for the same store?

Yes, we were at 93.0% the same as last July. So it was very similar. It was very similar to last July's activity.

Okay. And then just following up on an earlier question about the balance sheet, the line balance that did tick up a little bit to $330 million. What are your plans to permanently finance that line balance, and what's embedded in guidance?

Yes, we have a lot of options there. The market is wide open. There's nothing embedded in guidance. We look at the market on a weekly basis, and if we feel it's the right thing to do we will. We don't have a lot of uses for the line right now. So we're comfortable with our free cash flow, what we can do with that. So we don't see a lot of activity on that line. And it's not due until the end of 2019. But we do have options out there. The credit markets are wide open, and we have been reviewing those.

All right, and then just lastly back to the web strategy. Can you just help us understand will the increase in ad spending help with organic or is that separate? And just helping drive incremental demand until organic improves. And also, are you working with third-party consultants or are you handling all of this in house right now?

I'll answer the last question first. We are working with both inside and outside. We have 5 SEO consultants working with different aspects of the transition right now. And then we have all of our marketing group works on it, and there's a team that works on that internally up to 13 people.

From a spend point of view, we think it's the best use of our money right now to pull in that long-term customer with that spend. And it is paid ads. It doesn't affect your organic search a whole lot. The organic search is a lot of the things we do on social and the SEO experts what we're changing on our website, how it functions, different things like that to increase the organic side. Really it's separate from the paid ads. The paid ads for us are showing a return. We're spending a lot of money, but those are long term customers we're bringing in. So that investment makes sense to us to bring in that long-term customer. And that investment should be relatively short lived as you look over the next few quarters.

Our next question comes from the line Juan Sanabria with Bank of America.

Just following up on that organic search question. So what do you need to do to improve that specifically? And why hasn't it necessarily worked to date relative to your initial expectations?

You know there's a lot of experts in this, Juan. And that's why we have the SEO experts we're working with. There's a lot of things from link building to your social presence. Remember, we had a brand for some 30 years we've been working through the Uncle Bob's. It was very prevalent on the web. Google we saw was confused when we did do the switch over. It was confused with Uncle Bob's and the new Life Storage. So the Life Storage brand now is gaining that traction. Obviously working with social media, new links, most of our advertising campaigns have some internet aspect to them to drive the traffic. So there's numerous things you can do and I'm not an expert at it, but I know we have experts here and that's what they're working through. It's just going to take some time.

So just a follow up on that if you saw that there was some confusion by Google, why the decision to pull the plug on the Uncle Bob's brand? It seems to maybe have accentuated the pressures on the organic search. I mean all this stuff you're saying I think you knew when you did the deal and you decided to rebrand. So I'm still confused as to why you've missed, particularly given you've got all these experts helping you figure it out.

I think the confusion was when both brands existed, that's where Google was getting most confused. So we had to make the cut at some point. We tried to do it before the busy season and that's why we did it in March. It made the most sense. At some point we had to pull it, and that was the best timing.

Okay, but what's I guess you knew that you had to go on Facebook or whatever to get the social media presence to build up the optimization. So I'm still a little confused as to why it's not where you thought it would be.

Just as Dave mentioned, we had a brand out there that existed. We just thought the transition would be quicker. And we're doing all the right things now and have been since day one. It's just not as quick as we had anticipated.

Okay, and then just on the buy back again, so your stock is below $70 bucks per share. Are you buying back stock today or are you still favoring redevelopment? It sounds like you think that that's a good use of capital. How should we think about that? I'm not sure if you've got a range of your NAV you feel comfortable discussing.

Well, we're not buying today. We can't buy until next week. So we'll be select. But the overall theme will be to invest back at share prices at this level certainly. The theme would be to buy back in shares. At different points in every quarter we'll be looking, but depending on what the share price is. But certainly where it has been for the past couple months it's a compelling buy.

Okay. And then you guys talked about I think it was slower lease ups in some of your CO deals kind of having bigger dilution in the second half that you expected. How should we think about that jiving with your comments about demand being strong and no issues on the demand side?

Yes, Juan, I don't think the dilution is any different than we thought before. What was completed over the last year, and I think it's industry wide, is leasing up slower. So I don't think that was a surprise. It's just I just wanted to point out what the dilution would be. We normally had pointed that out what it would be for the rest of the year. But it's no different than we had thought.

The point, I think, Andy was also trying to make is that the CFO deals we did in 2013 leased up a lot faster than the deals we did in 2015. So the low hanging fruit was kind of gone. It was a longer lease up time for most CO deals, even ours, than had been 3 and 4 years ago. But demand is being diluted by new supply. That's really what the issue is. But the customers are there, it's just that there's more places for them to go and more places for them to see.

If I can just one kind of big picture question. It seems like Texas it was maybe at the forefront of the supply pressures and clearly that's going to persist. But maybe some other markets, maybe South Florida just to point to one, has more supply kind of in the pipeline that is yet to necessarily hit. And so do you expect what we've seen in Texas to maybe play out in other markets? As that supply comes and then you get the cumulative impact of having to lease it up over a couple of years.

I do. Yes, it won't impact us nearly as much because we're a lot more diverse than most other markets. Texas, as we've said, is such a big proportion so it's hurting us much more than it is the peer group. But yes there's markets, we said Denver, some parts of Phoenix that we've seen. Now there are other guys that are in areas we're not. But this one happened. There's a lot of building going on in a few places that's going to have an impact.

Do you think (inaudible) will be higher?

Juan, we've got to cut you loose, Juan. It's been about 4 or 5. So I'm sorry.

Okay, our next question comes from the line of Ki Bin Kim with Sun Trust.

Could you remind us what the existing customer rate increase program profile looks like today, and if there's been any changes to it?

Ki Bin, the profile is pretty much the same. We do them once a year anywhere between the tenth and twelfth month. So we'll do it once a year. Now that being said, we increase significantly the number of customers they got at Q2 of 2017 over Q2 of 2016 on a same store basis. Last year, Q2 of 2016 we did 28,000 customers. This Q2 we did 40,000 customers.

We're still seeing that customer very sticky. On average this year an 8.4% rate increase. The move out rate didn't change from a year ago. Actually it was a little bit better, so we're seeing the customer still very resilient, loves Uncle Bob's and now loves Life Storage and staying with us. So we're happy what we're seeing from our current customer. It's the fighting with the new customers that is the issue.

Okay, and let me know if I say anything incorrectly, but if I think about your program I remember that you guys generally speaking in a given year don't push a rent increase out if it causes the customer to be above market. So I guess first part, if that's correct? And the second, if you are seeing these street rate decreases today as we head into the wintertime, you're going to see that dynamic flip upside down, right? Where maybe under that same philosophy you wouldn't send out a rent increase there because it would cause them to be above street. Is that the case? And if that's so, would you expect maybe a change as we get into the winter on that program?

Well, Ki Bin, we did test. And I think we had talked about this on earlier calls that we did test a couple thousand customers. We like what we saw by pushing those couple thousand customers above the street rate. We knew this year would be too late to change because you do most of your rent increase letters in Q1, Q2. Obviously, because those move outs that do occur you can replace them quicker. So next year the strategy there will be some of that where we push customers above street rate. So that will be a little change. How many? We're not sure yet, but regarding roll down in the fourth quarter and first quarter that's normal you do get some roll down where you move someone out because your rates do go down in those. But overall for the year last year, we didn't have rent roll downs. This year Q2 we didn't have rent roll down. We did in Q1, but that's typical in Q1. So we're happy what we're seeing. We still have 60% of our customers today are below the current rate. They're below, 5% to 8% below. So we like what we have there on the rent increases. Most of them are going occur in Q1 and Q2 though.

Yes, I mean I asked that question because I would think that conservative nature of your program in somewhat of a downturn right now would actually help you because you don't have these massive roll downs. So I was thinking maybe next year you might (inaudible) a little more aggressive and allow the rent increases to push the customers above market in more mass scale.

Yes, I think you will see some of that. And we do it as a long term. It's the right thing to do with a customer, how to treat that customer. And they have a tendency to stay longer as our customers over 1 and 2 years show that we keep our customers and we treat them well. We're going to continue with the program and a little bit more aggressive. We're more aggressive this year than last year. We do think we have something different than our competitors do by not pushing them above street rate. And by doing some of that next year it may be a benefit for us.

Thank you. This concludes our question and answer session. I'd like to turn the floor back to management for any closing comments.

We thank you everyone for your time this morning and your confidence in us. And we'll be looking forward to talking to you over the following sessions. Thank you.

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