Extra Space Storage Inc

Greetings and welcome to the Life Storage fourth quarter and full year 2018 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr. David Dodman, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, and welcome to our fourth quarter 2018 earnings conference call. Leading today's discussion will be Joe Sapphire, incoming Chief Executive Officer of Life Storage, effective later this week, and Andy Gregory, 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 SEC filings. A copy of our press release and quarterly supplement may be found on the investor relations page at lifestorage.com. As a reminder, during today's question and answer session, we ask that you please limit yourself to two questions to allow time for everyone who wishes to participate. Please reach you with any follow-up questions thereafter. At this time, I'll turn the call over to Joe.

Thanks, Dave, and welcome, everyone, to our fourth quarter and year-end 2018 conference call. Before we delve into our results... I want to take a moment and recognize Dave Rogers as one of our four founders and for his 35 years of service and commitment to life storage. Under Dave, the company changed dramatically. We broadened our scale meaningfully. We diversified the geography of our platform significantly. We added third-party management capabilities, and we embarked on a number of industry-leading technology initiatives that will put us well ahead of our competitors over time. Dave has been a value leader as CEO and as a pillar in the industry, and we are lucky to have him remain on the board where we can continue to benefit from his perspective. As I complete my transition this week to CEO, I am thrilled to be working with a driven and passionate team. Thank you, Dave, for your hand in building the platform and the team. We promise to make you proud as we take life storage to the next level. I am now pleased to turn to our results. We reported fourth quarter and full year 2018 results late yesterday that were very strong. We achieved core FFO per share of $1.38 and $5.51, respectively, for the fourth quarter and the full year. Andy will speak to you about the details shortly, but both results were at the high end of the guidance range we provided on our third quarter conference call. On to asset management. We are executing on the portfolio optimization strategy we have discussed on previous calls in order to increase exposure to markets with more attractive demographics and newer properties with higher revenue and better growth prospects. In the fourth quarter, we sold 12 mature assets to a joint venture for approximately $91 million, contributing $9 million of those proceeds back into the entity in exchange for a 20% equity stake and reinvested the balance into newer properties with improved growth prospects. We continue to manage these JV properties. The revamping of our acquisitions team has started to pay dividends. During the fourth quarter, we added six wholly-owned properties for $58 million. Those properties are located in New York, Sacramento, Orlando, St. Louis, and Atlanta. Including the two stores that we required, In the Boston and Sacramento markets in the third quarter, for almost $20 million, we have successfully redeployed the proceeds of the 12-store asset sale. With respect to these asset exchanges, we have traded stores that were on average 27 years old for stores that are on average 7 years old. We increased the rent per square foot from less than $12 to nearly $17. and we moved out of fully mature stores with plus 90% occupancy and moved into ones that are roughly 65% occupied. We have also improved the revenue per store opportunity from 760,000 per store to over a million per store, which is nearly a 50% improvement. We expect to continue to capitalize on favorable market conditions in 2019 and project sales of up to another 225 million of mature assets with the expectation that those proceeds will be reinvested in properties with improved growth prospects. On that note, we have continued to identify and act upon opportunities to upgrade our portfolio since the new year began. In January, we acquired the remaining 60% ownership in a store in Queens, New York, from one of our JV partners, and we are under contract on 17 additional stores totaling almost $187 million in various Mid-Atlantic, Midwest, and Southeastern markets. The impact of these opportunities are consistent with the characteristics I described for the transactions we closed in the fourth quarter. Newer, higher rates, lower occupancy, and revenue per store greater than $1 million. We hope to close these additional stores by the end of third quarter. However, these opportunities remain subject to further due diligence and closing conditions. and therefore no assurance can be given that they will be purchased according to the currently contemplated terms. I should add that the majority of the assets that we have closed or are under contract were secured off-market, thus avoiding competitive auction-like bidding. This is a complement to our ongoing efforts to further develop our relationships throughout the industry. Our asset rotation strategy to systematically prune lower assets while investing in higher growth stores will result in minor FFO dilution in 2019, and Andy will provide details shortly. However, we believe these transactions will better position our portfolio for future growth and improve our overall portfolio cap rate. Now on to operations. With regard to same-store performance, we continue to drive positive trends. We generated favorable revenue growth in 27 of our 33 major markets, with the strongest trends in Vegas, New York, New Jersey, New England, Buffalo, LA, Sacramento, and Cleveland. Our view of supply remains generally unchanged and our watch markets are the same. We continue to see pressure in Chicago, Miami, and our Texas markets of Dallas, Houston, and Austin. We are not as exposed to some of the hotspots in the country such as Portland, Nashville, and Denver. With regard to our third-party platform, we wrapped up a record year with the successful onboarding of 42 high-quality stabilized stores in the southeast on November 1st. All in for 2018, we added 69 stores to our platform and have an additional 22 under contract. As of the year end 2018, almost 50% of our managed portfolio now includes properties where life storage holds no ownership interest. That's an almost 100% increase for two consecutive years. And subsequent to year end, we added four managed properties in the greater Toronto area, one of the largest North American markets. We are excited by the traction we have generated in our third-party management business, and we will continue to drive additional business going forward. Our pipeline remains strong. The growth of our third-party platform has also provided us with a robust pipeline of off-market purchase opportunities. In fact, of the acquisitions mentioned above, four were from stores we were managing. On to RentNow. We continue to roll out RentNow, our fully digital rental platform for customers who prefer to self-serve and skip the counter. As of today, RentNow is available in 530 stores, and we remain on track to complete a rollout across our owned and managed portfolios in the second quarter. We remain excited about the prospects of this industry-leading new technology platform. We believe we are the leader in providing multiple digital ways to sign a lease. Our customers now have the option to self-serve from the comfort of their homes, or anywhere for that matter. We believe this to be a game changer in our industry. And finally, we continue to invest in Warehouse Anywhere, our differentiated commercial strategy for B2B and B2C customers. Our pipeline continues to grow with the enhanced product portfolio we rolled out in the fourth quarter. Our digital marketing efforts are paying off with the number of views to our WarehouseAnywhere.com website expected to grow from just 4,000 views in 2017 to an expected 200,000 views in 2019. More hits and views means more leads. Our Warehouse Anywhere brand continues to gain traction. We continue to add business development resources to support this business growth. In fact, we are probably the only storage company to recruit and hire executives from traditional logistics businesses such as FedEx. We are a firm believer in the role that traditional storage can play with the last mile delivery component of e-commerce. We are excited that the February issue of the Self Storage Association's Globe Magazine highlighted our Warehouse Anywhere offering. In summary, I'm excited for 2019. Though supply concerns remain, we have a great team and strategy in place to continue driving shareholder value. Andy, over to you.