Public Storage (PSA) 2017 Q1 法說會逐字稿

Welcome to the Public Storage Q1 Earnings Conference Call and Webcast. (Operator Instructions) Today's call is being recorded.

And I would now like to turn the call over to Clem Teng.

Thank you for joining us for our first quarter earnings call. Here with me today are Ron Havner and John Reyes.

Before we begin, I want to remind those on the call that all statements, other than statements of historical facts included in this conference call, are forward-looking statements subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in today's earnings press release and in our reports filed with the SEC. All forward-looking statements speak only as of today, April 27, 2017, and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Now I'll turn the call over to Ron.

Thank you, Clem. Good morning, everyone. We had another strong quarter, so we're going to open it up for questions. Operator?

(Operator Instructions) Your first question comes from the line of Gaurav Mehta with Cantor Fitzgerald.

I was wondering if you could comment on how your markets performed in the quarter and which markets outperformed and underperformed your expectations.

Well, I'll answer that a couple of ways, and then John can add to it. In our top 20 markets across the platform, every market had a lower growth rate than last year. So last quarter was at 80% of our revenue base was down year-over-year. This quarter, it was 100%. With respect to the most challenged markets, they remain Denver and Houston, which had same-store revenue growth; Houston was down 1.4%; Denver was down 1.1%. Our best markets, Tampa was up 7.1%; Seattle, 6.7%; West Palm Beach, 6.5%; and Los Angeles, 6.2%. So those have been strong markets and they continue to be strong markets. But then again, every market was down year-over-year in terms of growth rate.

Okay, great. And as a follow-up, it seems like your advertising and selling expense saw an uptick in the quarter. So does it really that you're spending more money to get them in (inaudible) by advertising more.

Yes. We've increased both television and Internet spend. And we expect to do that -- increase it again in Q2.

Your next question comes from the line of Michael Mueller of JPMorgan.

I guess, just thinking about the moderation and how it's trended, and I'm not sure if it's black or white, one or the other or a combination of both. But as you look across the market, I mean, how much of, I guess, the headwind that you're bumping up against in terms of the growth rate would you say is just really driven by new supply in the market, as opposed to -- you've had years of really great increases and just bumping up against those increases, regardless of supply?

Mike, this is Ron. I'd say there's a couple of factors. We've certainly had above historical trend line growth the last 4 years or so. If you take a 20-year average, same-store revenue growth and, granted same stores change, it's about 3.9% to 4%, so we've been above trend line through 2016. I think 2012 to 2016 was above trend line, so we're coming back down towards trend line. The second thing is new supply, as you indicated. And the third, which I actually think is probably a bigger factor, is macro factors affecting our customers. If you look at trends in credit card delinquencies, charge-offs, auto loans delinquencies and charge-offs; if you look at the aggregate amount of consumer debt in both credit cards, auto loans and student loans, we're over $3 trillion. That's up about $800 billion in the last 4 years. So you're seeing a variety of things where the consumer, which is basically our customer, is stretched and/or under stress. You see it also in companies like Nestlé and Unilever, they're reporting declining year-over-year sales. And for us, we've seen an uptick in delinquent tenant sales the last 2 to 3 quarters and a decline in merchandise sales: locks and boxes. So I'd say it's more than just supply. I'd say, in general, the customer is under a little stress. And that's why, across the platform, you see things like same-store revenue growth declining year-over-year. In terms of the growth rates, not absolute decline, but the growth rates -- the rate of growth is declining.

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

Just looking at the supply data that's kind of floating around out there and the folks commenting on it, there seems to be some debate as to which year is going to be peak starts versus peak deliveries versus kind of peak absorption. I'd love to get your opinion on that. But my question really has to do with the amount of kind of cumulative product that's actually in lease-up. So if we assume kind of a 3-year lease-up period, by the time we get to the back half of '18, we would theoretically have a lot of the '16 deliveries, all of the '17 deliveries and all of the '18 deliveries in lease-up, which, ballpark, could mean, pick a number, but maybe 2,000 stores will be leasing up at once. Does that really matter? Or is it just the first lease-up season that's impactful to fundamentals? Or should we kind of be thinking about this in a completely different way?

I think your analysis is pretty good. And in terms of when -- how long lease-up impacts the surrounding competitors, that really depends on the pricing and marketing strategy of the operator. For us, we will continue to be aggressive in terms of pricing, promotional discounts and marketing until we reach, what we view as stabilized 90%, 92%. And by stabilized, I don't mean that just hits 92%; that means it's operating at that level for a period of 1 year or 2. But I think your analysis is right, somewhere between 2,000, 2,500 properties in lease-up over the next couple of years, at least.

Okay. And then just a follow-up on that, just in terms of your specific development pipeline. You guys have been historically conservative relative to some of your peers with your 90%, 92% stabilized occupancy, not trending rents, lease-up time lines, et cetera. But with the deal that you've done recently -- (inaudible) recently, have any of these assumptions changed from how you were looking at those maybe a year ago? We've heard some reports from developers that are trending rents down over the next couple of years.

No, when we underwrite a development, we use spot rates that we get from the pricing group. We don't make forecast of what rates are going to be over the next 3 to 5 years. And we don't underwrite tenant insurance or merchandise sales. We underwrite a 90% occupancy with a cost of money to fill up at 8%, and that's not changed over the last year or 2.

As rates moderate and come down in markets -- certainly, in a market like Houston or Denver has -- as rental rates come down because occupancies are down, it will make it hard for us to underwrite new developments, because our return requirements haven't changed. And so if rates are coming down, that's going to eliminate a lot of potential product that we might otherwise have [bought] -- underwritten 1 year or 2 ago.

Your next question comes from the line of Todd Thomas with KeyBanc Capital.

Ron, occupancy trended lower throughout the quarter in the same-store portfolio, and there was a little bit more of a year-over-year decrease at March 31. Are you seeing signs that occupancy is stabilizing? Maybe you can provide an update on how occupancy has trended since the end of the quarter.

Todd, this is John. It's pretty -- occupancy, the negative spread's pretty much been consistent. So what's the problem that we're experiencing, aside from all the things that Ron touched upon, is what that's resulting in for us is a softness in demand into our system. And we're spending more money to get to basically maintain this almost the same level of demand as we had last year. But one of the things that I wanted to point out is that, at least with respect to the move-out volumes, our move-out volumes are pretty much still intact. The long-term tenant is still staying put. So it's really on the front end, on the move-ins to try to backfill the vacates that we are experiencing softness in.

Okay. And then, I guess, given some of that occupancy loss or the challenge in backfilling some of the move-outs, if the margin is due to the some of the new capacity that's entering the system, and I guess given Ron's comments that there could be 2,000 or 2,500 new facilities developed in the years ahead, I mean, would you expect to continue to see those challenges persist, where occupancy could continue to trend lower a bit from here forward?

I think 1 or 2 things will happen. Either we'll try to restabilize the occupancy and move it back up, but that might -- may result in more discounting and lowering of street rates. Right now, our street rates are up about 2% to 3%. We're discounting probably on par with where we were last year, so we're, at the moment, trying to hold rates and keep the level of discounting somewhat flat. But yes, it could get to a point where maybe we have to throw the towel in and start cutting rates and giving more occupancy -- I mean more discounts to stabilize the occupancy more.

Todd, also let me clarify. And I'm not forecasting that future developments of 2,500 facilities. The gentleman asking the question was just saying you have 3 to 4 years of 500 to 700 properties being developed, and it's a 3-year fill-up, so do the math. You're going to have 2,000, 2,500 properties across the country filling up in 2018, '19. So that's not a future forecast. The second thing, to John's point, if you looked at occupancies across the top 20 markets, Seattle, San Francisco, Los Angeles, West Palm Beach, Tampa are pretty darn full. There's not a lot we can do in terms of occupancy growth. You have gaps down in occupancy in Denver, Houston, Chicago that are weighing in terms of the portfolio, in terms of year-over-year negative occupancy growth. So we can't move customers from San Francisco, where we're full, over to Houston.

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

Just a question on the supply. Do you have a number you feel comfortable sharing at this point on 2018 supply, given where we stand today? And how does that compare to what you expect for the full year this year?

I don't have a forecast for 2018. The way I try to triangulate in terms of what I -- new supplies coming on in the market and what is the rate of change and that is looking at the C/O deals, what the other public companies disclose as well as what I know our own development pipeline to be. And so I think the 2018 numbers are still evolving. The only other company that's reported is Extra Space, and they reported a pretty good uptick in C/O pipeline for 2018. I know Life Storage has said they're out of the C/O deal market, so I don't expect them to report much. But I think, for everyone, the 2018 pipelines are still somewhat evolving.

Okay. And then would -- how should -- how are you guys thinking about street rate growth going into the second quarter and, I guess, throughout the balance of the year, given the pressures on supply and your comments about a softer consumer or demand environment? Do you think that 2% to 3% holds? Or do you see risk to the downside on street rate growth?

Yes, it's hard to tell. I mean, every market is so different. For example, Sacramento, which is probably our best-performing market right now, street rates are up 10.3%. And then at the other extreme, we have Houston down 8.1%, and everything in between. So it's really on a market-by-market basis and we'll just have to react as necessary to try to continue to maintain some level of revenue growth.

As John mentioned earlier, we have upticked marketing, both television and Internet. And so we're trying to drive more flow into the system.

Your next question comes from Ki Bin Kim with SunTrust.

So you just mentioned Houston street rates being down 8%. I think earlier you mentioned same-store revenue was down only 1%, though. So help me understand that. Is that -- does that, eventually, Houston same-store revenue has to get worse, all else equal? Or is there something offsetting, like occupancy, that's making up the entire difference?

Well, if it stays down at 8% -- at negative 8% for an extended period of time, then yes, that continues to drive down revenue growth year-over-year.

Well, I guess I asked that too simply. I guess, what I meant was how much time does it take to actually bleed into the results where it more reflects that minus 8%, do you think? Does it take a couple of years? Or can it be as quick as a year?

Well, again, if Houston stayed down 8%, right now, I would expect that by the end of the year we probably could be very close to 8% year-over-year reduction.

Okay. And on the contract rates that you guys quote in your press releases, is there a big difference between the walk-in rate -- contract rate versus just only online advertised contract rate year-over-year? Is there a big divergence?

Yes. We do offer a discounted rate if somebody comes to us through the -- through our website, makes the reservation and then moves in. That discount can range anywhere from, I think, 5% to as high as 15%.

John, I guess, what I meant was, on a year-over-year basis -- so I realize online is cheaper, but, like, has one trended better than the other?

I'm not sure I follow your question.

Well, meaning, I realize online rates are always lower almost, but the year-over-year change in that, is it worse than the walk-in rate?

Do you mean has the promotional discount changed on the Internet versus last year?

Yes, in effect, while the walk-in rate was holding more steady or so.

No, there's a channel shift key to mobile and the web from walk-in. And almost all customers are shopping the web before they're making a reservation. So by that process, you're getting more customers through the web, and therefore more customers are getting the, so to speak, web discount.

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

I guess, first of all, if you could comment on Shurgard's performance.

Sure. Shurgard, same-stores revenue was up 1.7%; expenses were down 2.6%; same-store NOI was up 4.8%; occupancies were down 90 bps, 89.8% versus -- down to 89%; and rates were up modestly. Best markets, France was up 5.3%; Holland 7.7%; and U.K. down 1.7%; and Denmark down 1.2%.

Okay. And then just one thing going back to the increases in operating expenses. The repairs and maintenance were up about 12%. Kind of what drove that large increase?

I wouldn't read too much into it. Its gates are broken, apartments get repaired, roofs get fixed. So there's the baseline R&M, and then there's things that need to get done kind of on the spot. So I think the increase was, yes, it's about $1 million.

Okay. And just one last one, just any updates on thoughts about issuing unsecured and maybe taking out some of the preferreds.

We're still evaluating that. It's something that's very high topic on our minds, so we're still looking at stuff right now.

No decision has been made.

Okay. And any sense on, if you were to do inaugural, unsecured deal, where it might price?

Probably at the best spread of any REIT.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

Just to clarify, so street rate growth in the 2% to 3% range. Is that -- it seems to be higher than last quarter, if I'm not wrong, where I think you had mentioned more like 1%. Is that correct?

I don't recall what last quarter was. I mean, that's where we are today. I can tell you, like in January, we were about up 1%; February, we were up 4%; March, we were up 3%; and now we're about 2% to 3%, somewhere in that neighborhood. It just -- it varies.

Okay, that makes sense. And then just as we think about sort of the folks taking -- or getting the web rate versus the in-store rate, would you suspect, over time, as you just have more and more people going to the web, you eventually just have more people gravitating to that web rate? And can you give us what the split is today between those actually on the web -- getting the web rate versus in-store?

I don't have that split, but I would be willing to bet that the majority -- the vast majority of the people who come to us are getting the web rate; either they're getting it through our website -- or desktop website or a mobile website. Walk-in traffic has really shrunk over the years as the Internet as well as mobile has become more predominant in people's everyday lives.

So effectively, am I correct, just to clarify and say, when you talk about street rate growth, it's really much more driven by the change in the web rate growth?

Well, if -- last year, we were doing 15% reduction and this year we're doing 15% reduction on the same thing. I mean, that's what I'm saying what the 3% -- the 2% to 3% would be. So that hasn't changed. I mean, year-over-year, the rates that we're telling you, it's not worse than the 2% to 3%, even though we're giving more -- we're doing the 15% discount, because we were doing that last year also. Doing the discount on the web, we've been doing that for years now -- many years.

Yes. No, no, I understand that rate is lower. I'm just saying, say, next year, you take that same web rate and you change it by X, the -- your overall street rate would be somewhat of a blend of the in-store that you -- that some smaller proportion of people avail of versus the web. But increasingly, that change in the web will be driving your street rate growth.

Yes. And that's why, in the past, I've talked about kind of disregarded street rates and talked about move-in rates, because that's the more relevant metric, is what are people actually moving in at, after you take away, whether they got a web discount or no discount. But I could tell you, for the first quarter this year compared to the first quarter of last year, the move-in rate was about flat. So notwithstanding the fact that I just told you that the rates were up about 2% to 3%, kind of Q1, the actual take rate was flat.

Your next question comes from the line of Smedes Rose with Citigroup.

It's mentioned earlier that you thought one of the issues overall in the industry is consumer, just weakness and macro concerns. Just in your history with the space, if the economy were to improve significantly or the consumer sort of feels better, how long does that take to sort of translate over to increased usage in storage or being more likely to take higher prices?

Yes. Well, Smedes, I would say, if you look at where we are today, unemployment's about 4.5%. We're back down to where we were in 2007. So our -- are we going to drop to an unemployment rate of 3.5% nationwide? I think that's a little hard. And some markets have 2.5% to 3% unemployment rate, but I don't see that happening. And barring that, I don't know what's really going to improve things for the consumer. I mean, they've levered up and everyone's employed and so you're -- like I said, you're seeing in a variety of factors in terms of the stress that the average consumer is having.

Okay. I just wanted to ask you, too, you discussed for a while there the web rate versus the in-store rates, and as consumers continue to move to web rates, do you think this also (inaudible) be, is considered such a 3- to 5-mile business from someone's home, but as rates become more and more transparent and competitive, do you -- have you seen any sense that consumers are willing to drive further in order to chase lower rates available on the web?

Well, the other day, I did a study of consumers coming into our new Jersey City property, which has very aggressive promotional rates. And there's certainly a number of customers coming outside the historical 3-mile radius. So we're getting people from the Bronx, from Brooklyn, from distant parts of New Jersey. So people are definitely migrating or figuring out a way to get to our Jersey City property. And we saw the same thing in Gerard when we opened that up.

(Operator Instructions) And your next question comes from the line of Gwen Clark with Evercore.

Can you run through the top 10 market performance on revenue and NOI? I know you went through a bit of it, but if you could just do them all, that would be helpful.

(inaudible). So Los Angeles, which is our biggest market by far, which represents about 15% of our revenue, was up 6.2%; San Francisco, 4.7%; New York was up 2.8%; Chicago, 2%; Miami was up 3.3%; Washington, D.C., 2.6%; Atlanta, 4.6%; Seattle, 6.7%; Houston was down 1.4%; and Dallas was up 3.5%. Those are the top 10 markets we have.

Gwen, that's revenue growth.

That's revenue.

Okay. Is it possible, the NOI also?

Sure. Los Angeles was up 7.5%; San Francisco, 5%; New York, 2.4%; Chicago, 0.3%; Miami, 2%; D.C., 0.6%; Atlanta, 5%; Seattle, 6.6%; Houston, down 4.2%; and Dallas, up 2.3%.

Okay, that's helpful. One other quick thing. You gave the Denver growth rate for the first quarter; is it possible to get the revenue growth in Denver for the fourth quarter?

Denver was down 1.1%.

In the first quarter.

Yes.

And do you know what it was in the fourth quarter?

In the fourth quarter, I do not have that here. No.

Okay. Separately, on the acquisition front, can you talk about the rationale to continue to buy despite a softening macro environment and weak rental rates? I do understand that you're not buying much, but if you could just walk us through the rationale, that would be great.

Why, I'd say we're not buying much, so it's harder [to product to] pencil given the environment, right? If I talk about the acquisition environment as a whole, I'd say today there's quite a gap between buyer and seller. We're not seeing much product come to market, and the product that we are seeing is of lower quality. Not a lot of deals transacting. It's a much different market than just a year ago, where we were still in the, I would call it, the latter stages of the feeding frenzy. And that has certainly dissipated. People are much more cautious. And as someone mentioned, obviously, buyers -- potential buyers are underwriting much more conservative, probably street rates, as well as growth rates. So the acquisition environment overall has changed quite a bit over the last year.

You have a question from the line of Smedes Rose with Citigroup.

Ron, it's Michael Bilerman. I had a couple of questions. You talked a little about increased marketing spend. Can you talk about the other aspect of promotional discounts? You've been running around $80 million, $83 million the last couple of years. I guess, what's the cadence right now in terms of your promotional discounts that we should be thinking about to stimulate increased activity?

Michael, actually in Q1, our promotional discounts were down slightly year-over-year about $700,000. But that's in part, rates were, as John touched on, basically flat and move-in volume was down. So assuming move-in volume picks up with respect -- due to television and Internet marketing, then I would expect the absolute dollar of move-in discounts to increase.

So the spread between move-ins and move-outs, which had been a negative drag in '16, what was it in the first quarter?

In the aggregate, Michael, or do you want it by monthly rates?

I guess, just in the aggregate would be helpful.

Yes, I think it would be much more helpful. So in the aggregate, the rent [roll down] between move-ins and move-outs for the first quarter of 2017 was about $1.9 million negative roll down . That compares to about $700,000 negative roll-down in Q1 of 2016.

And where are you right now in your annual rent increases that you're pushing through, because that's at least a helpful offset to drive revenue growth?

We're still moving forward with the same strategies we've had for the past couple of years, albeit much more cautious in terms of how we're doing it and testing the waters to make sure that we're not disrupting the length of stay of the long-term tenant. But so far -- and it's really early, so far, nothing has led us to believe that we should change that strategy yet.

And then just a balance sheet corporate structure question. Ron, we had talked, I think it was last year, when you were inverted on a multiple basis, an implied cost of equity to where your preferred is. And you're probably 25, maybe 40 basis points wide today. Do you give any thought to a stock buyback given where your implied multiple and equity cost is?

Well, Michael, the preferred market, if you recall, post our 4.9% issuance last October, really backed up. Those issues traded down. We have seen some modest resumption of activity in the preferred market. And interest rates have come back down post the Trump election. So we'll wait and see what happens. But I can tell you, at the forefront of -- for John and I, in terms of capital allocation, we're always looking at, are we doing development, are we doing acquisitions, should we be doing shares repurchases? So we're looking at that menu all the time.

Yes. Just didn't know how it fell in your pecking order; your preferreds are probably 5.25% and your implied equity is probably in the high 4s, with growth that's still coming. So I just thought the math could work today and I just didn't know how aggressive you would actually want to be.

Well, you can see from our balance sheet, we have tremendous financial flexibility to do whatever creates the most meaningful value for shareholders.

Your next question comes from the line of Todd Thomas with KeyBanc Capital.

Just a follow-up. Ron, I wanted to just circle back again to the comments you made about the macro factors impacting the business a bit. And as we think about self-storage as an needs-based product or service, I'm not sure I fully understand your comments, whether you've witnessed a change to consumer behavior as it pertains to self-storage at all or if you're simply just saying that the consumer appears to be sort of stretched or tapped out a bit.

The latter. And why do I say that, Todd? Well, we opened Jersey City 60 days ago, 4,000 units. It's 10% occupied. We opened Red Hill down in Irvine, California a little less than a year ago, 3,000 units. It's 55% occupied. So there's no change in customer behavior. Our volumes are still good across the platform. They're just not as robust as they were. And so when you start to think about why aren't they as robust, unemployment's flattening out. And the customer has -- our customer has a fair number of headwinds that they're facing. But their use of storage is still the same.

Okay. And would you say that the use of storage from some of the different sources of demand is consistent throughout also? Students-moving related activity, commercial uses, have you seen any change to any one of those different sources of demand?

We don't track that, but we haven't seen any change. Our college properties are still behaving as our college properties. Where we have commercial tenants around us, they're still behaving the same way. But in terms of absolute change, I couldn't tell you.

Your next question comes from the line of Ki Bin Kim with SunTrust.

Ron, is there any reason why development should really slow down at this point?

Is that a question for Public Storage or is that a macro question?

Macro.

Macro?

Yes.

Well, if you're a local developer or regional developer and you've decided to build, you probably have created an infrastructure for yourself. You've hired acquisition people. You've hired construction people. You've hired development people. And you're developing and you've got this overhead. And more likely than not, given the way developers behave, is you're going to continue to build until the capital dries up. Now it has made sense for these local regional peoples to build because they are monetizing their developments, unoccupied, at 1.5 to 2x what it cost to build the product. So if you're that person and you can monetize it at those multiples to cost, you're going to build as much as you can. The challenge then for that person is as the market changes, as buyer expectations change and the buyers dial back their -- the multiple of cost that they're willing to pay or don't even want to buy. As I mentioned, Life Storage has said "We're out of that market." So as buyers kind of dissipate, then those developers are stuck with the product. And they will build out -- assuming they have the financial capability, they will build out the product, but then they will slow down and/or stop development.

And just gut opinion, how far are we from any kind of slowdown? Or is there still kind of a green light right now, besides LSI?

Well, some -- as long as you can do this, so the fundamental economics somewhat take a backseat. So there was a self-storage convention, I think, 1 month, 1.5 months ago, and my guys told me it was record attendance. So I would say that -- and the word is develop, develop, develop. So I'd say we're a ways from the new product supply slowing down.

And maybe I just missed this, but I don't see where you're developing in some of your releases. I'm not sure if I just missed it, but can you just talk about where your development projects are?

Sure. It's in -- our largest market is Texas, Dallas and Houston where we've been developing for quite a while. Texas is -- pipeline is 5.2 million square feet, so Texas is half of that. California is about 1 million square feet. Colorado is 0.5 million. Ohio is 100,000. Florida is 300,000. Washington -- state of Washington is 300,000. Seattle is 342,000. North Carolina is 170,000. Then it kind of spreads across the variety of other states.

Okay. And if I can just squeeze one more in.

I think that's 3, isn't it?

I was just wondering if I -- given the comments about Texas, is that just longer term, it's not really that much of a concern. Is that why you're comfortable doing Texas at this point?

Well, this is stuff, Ki, we have under construction. And so we made this decision last year to build, and so we bought the land and we're building.

Your next question comes from the line of Jon Hughes with Raymond James.

Just two for me. Could you clarify the Houston rental rate growth number? Was that down 8% from last year's rate? Or did the growth in rental rate slow from positive 7% last year to negative 1% this year?

That's where the Houston street rate growth is year-over-year as of yesterday.

Okay. So it's actually down 8% year-over-year.

The Houston revenue growth -- same-store revenue growth for the first quarter was down 1.4%.

Right. And it was up 6.8% last year on a per-foot basis. So I was asking if the actual rate was down 8% or if it just slowed 8%.

No, it's down.

The street rate.

The street rate that we are asking today is down 8% versus the street rate we were asking last year.

Okay. And then one more. Supervisory payroll and allocated overhead that's included in same-store expenses increased about 7% year-over-year. What drove that increase? And is this expected to moderate through the rest of the year?

The increase is a few more district managers, some pay increases, and then Joe Russell, who's running operations, is in that number. So he popped into that number, I think, in the third quarter of last year. So it'll be up year-over-year through the second quarter and then you'll -- it'll be -- moderate in the third and fourth quarter.

Your next question comes from the line of Ryan Burke with Green Street Advisors.

John, a couple calls ago, you defined move-in demand as call volume plus Internet traffic plus walk-ins. And at that point, call volume was up, Internet traffic was flat and walk-ins were down about 7%. Do you have -- are you able to quantify what happened in those 3 buckets for the first quarter?

Yes, let me give you -- this is just with respect for our same-stores. I don't have the whole -- and you can kind of allocate towards same-store. But it's pretty close to the whole enchilada, so to speak. So calls into our call center were up about 1%. The inquiries into our website, and then combining our desktop and our mobile, were actually down about 5%. Walk-in traffic was down 9% year-over-year for the quarter.

All right. And then Ron, you mentioned the wide bid/ask spread between buyer and seller. How much higher would cap rates be if that spread were to close today, would you say?

In whose favor?

In the favor that -- whatever favor it should go. In your favor, let's say.

Well, so buyers are, for the most part, north of the trend line -- well, last year, deals would get done at about 4.5% -- 4% to 4.5% cap rates. And I think we're back up to about 5.5% to 6%. But again, there's -- Ryan, there's not a lot of product trading, so that's a kind of best guess number. It's -- there's not a lot of transactions to say, "There's the number."

Okay. So you're not saying the cap rates you think are up 100 basis points. You think that's what the buyer expectation is and maybe if there's a spread, it's up 50 basis points. Or...

Yes, I -- there's not enough transaction volume for me to say exactly what it is. But most buyer expectations are still at last year's cap rates, and seller's expectations of what the purchase price is has changed. And so that gap is creating a slowdown in transaction volume.

Okay. So seller expectations have actually moved higher than this time last year from a value -- property value perspective.

Yes.

Okay. And actually, last question here. The -- in the 2016 acquisition bucket, your contract rents are down pretty meaningfully. Is that to say that you guys actually cut rents on those properties? Or is that more of just a mix of the properties that you owned during the first quarter of last year versus those that you owned for the first quarter of this year?

It's a mix, Ryan. The first quarter last year, we had predominantly bought some properties in Florida and higher-rate markets. And then throughout the year, we were buying some properties in lower-rate markets. For example, in the fourth quarter, we bought portfolio properties in Oklahoma City, which is a lower-rate market than the Florida market. So it's just -- truly just a mix. It's not because we're cutting rates in those particular properties.

Our final question comes from the line of Nick Yulico with UBS.

I joined a little late. I know you went over some of this, but on the move-in versus vacate rents, you gave some of the details there. And I thought in the 10-K, you did a good job of explaining how that played out last year. And I know in the first quarter, it sounds like you're saying the delta got a little bit worse versus a year ago. And so what I'm wondering is, how should we think about that impact for the rest of the year and particularly, what's going to help that? Is it just street rate growth going up? Or are you just facing just some natural high rent burn-off from some of the vacates that your street rate growth can't really make up for?

I think that, obviously, we would like to see the street rates get much higher than where they are today and combined with increased move-in volumes -- or at least move-in volumes that are able to offset the vacate. In terms of the vacate rate, we are starting to see a slowdown in the actual rental rate -- the year-over-year rental rate that they're paying, so that the delta right now is -- they're moving out paying about $137 a month versus last year, they moved out paying about $134 a month. So that's about a $3 delta. That delta is -- has been narrowing, which is somewhat of a good thing, because it gives us a lower hurdle on the move-in rate to cover. But still, right now, it's about a $13 negative delta between our move-ins and our move-out rates. So the move-out -- the move-in rate is at about $124 a month. So that's the key, at least, in my mind right now, is to get those street rates up. But we also need to get them up with the additive move-in volumes so that we're not losing occupancy.

I would add that in the first quarter there is generally a negative spread, because the rental rates and the street rates are lower than they are as we head into the rental season, April, May, June, July and August. So as that plays out over the course of the year, that gap should close. We'll see whether move-in rates achieve or exceed move-out rates.

At this time, there are no further questions. I will turn the conference back to Clem Teng.

Thank you for participating on our call, and we look forward to talking to you in our second quarter. Thank you. Bye.

This concludes today's conference call. You may now disconnect.