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.

Thanks, Joe. As Joe mentioned, last night we reported adjusted funds from operations of $1.38 per share. a 3% increase compared to adjusted FFO of $1.34 per share for the same period in 2017. These results were near the high end of our forecast, driven by better-than-expected same-store performance, as well as continued growth at our lease-up facilities. Our same-store performance is highlighted by NOI growth of 4.1%, achieved by both improved revenue growth and controlled expenses. Specifically, Same-store revenue rose 3% over the same period last year, driven by improvement in rental rates. Same-store realized rates per square foot increased 3.8% over the fourth quarter of 2017. The 4.1% NOI growth exceeded the high end of our guidance range, which was 3.25%, while the 3% revenue growth achieved the high end of our guidance range. Fourth quarter same-store expenses outside of property taxes, were well controlled, decreasing 1.4%. Our teams continued to identify efficiencies at the stores, and this is showing up on the expense side. As we anticipated, the only significant expense pressure was from property taxes, which increased 5.4% in the fourth quarter. That being said, the increase was below expectations as we had significant property tax revaluation wins in Texas. In addition to the strong performance of our same store portfolio, we continue to see consistent growth trends at the properties that we purchased at certificate of occupancy or very early in the lease-up stage. With quarterly occupancies of 81.4%, these lease-up stores still have room to grow. We added four lease-up properties in late 2018, and we expect to add additional lease-up properties to this group in 2019. Our overall fourth quarter revenue increase also reflected a 9.6% increase in other operating income, driven by a 24.3% increase in third-party management fees. Our balance sheet remains very solid, and we continue to have significant flexibility to capitalize on attractive investment opportunities when they meet our return requirements. At quarter end, we had cash on hand of $13.6 million, and $408 million available on our line of credit. In the fourth quarter, we closed on the refinancing of our bank credit facility, which included extending the maturity on the revolver until March of 2023 and reducing the credit spreads by 15 basis points at our current investment grade rating. Our weighted average debt maturity is 7.1 years, and 89% of our total debt is fixed rates. Our debt service coverage ratio was a healthy 4.6 times, and our net debt to recurring EBITDA ratio improved to 5.3 times. Regarding guidance, although we continue to achieve positive trends in our same-store pool, we remain cautious due to the impact of new supply. Therefore, we currently anticipate same-store revenue growth of 1.5% to 2.5% for the 2019 fiscal year. Excluding property taxes, we expect operating costs to grow 2% to 3% for the full year, with pressure from payroll and internet marketing spent. Property taxes are expected to grow 5.5% to 6.5% in 2019. The cumulative effect of these assumptions results in expected same-store NOI growth of 1% to 2% for the year. Consistent with our past practice, we are not including in our same-store group, any stores acquired in the early stages of lease-up that were less than 80% occupied at market rates as of the beginning of the prior year. As Joe explained in his opening remarks, we expect to continue to optimize our asset pool in 2019 by rotating out of mature, lower-revenue stores with limited growth opportunities into newer stores in markets with more attractive demographics and growth prospects. Specifically, in our projections, we have included $225 million of acquisition activity for 2019 and $225 million of dispositions. Using proceeds generated from the sale of mature properties to acquire newer, higher-growth potential properties, we expect to incur between 10 and 12 cents dilution of FFO per share in 2019. However, this asset rotation should provide significant net asset value and FFO growth potential in subsequent years. Including the noted dilution in 2019 from our portfolio optimization strategy, we forecast adjusted FFOs per share of $1.27 to $1.31 for the first quarter, and between $5.53 and $5.63 for the full year 2019. I will now turn the call over to Dave Rogers for a few comments. Thank you, Andy.

As Joe noted in his kind remarks, I've been with Life Storage for 35 years, which for its first 10 was a privately held company and then, since 1995, a publicly traded one. This is the 94th quarterly earnings call I've helped host. I've been to a combined 47 NAE REIT weeks or NAE REIT forums, 21 city conferences, and dozens of NDRs and analyst meetings. Upon completion of our IPO, we had an enterprise value of $136 million. Today, that enterprise value is well over $6 billion, more than 45 times original size. And yet, there's a lot of growing still to do. The self-storage industry has millions of potential customers yet to reach. Life Storage's platforms, its people, its innovativeness, our brand, they're all top shelf. Our leadership team is outstanding. from our recently refreshed and expanded board of directors to an engaged and experienced C-suite, including Eddie Killeen, our chief operating officer, Andy here, and Joe, to their extremely competent lieutenants in the property management, marketing, sales, training, finance, HR, IT, construction, legal, and data service departments. We've enjoyed tremendous support from the investment community, including many of you on the call today, and we thank you for the confidence you've placed in us over these past 24 years. I've enjoyed the many relationships and friendships garnered over that time, and I thank you for those as well. I'm excited to remain a part of this ongoing story as a member of the Board of Directors. The Board, my co-founders, and I share a great optimism in the prospects for our industry and have the utmost confidence in the Life Storage's ability to deliver strong growth and outstanding results on behalf of all of us shareholders. And now, Operator, would you please open the line to questions for Joe and Andy? Thank you. The answer? Thank you.

Thank you. We will now be conducting a question and answer session. As a reminder, we ask that you please limit yourself to one question and one follow-up and rejoin the queue for any additional. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Shirley Wu with Bank of America Merrill Lynch. Please proceed with your question. Good morning, guys.

Best of luck, Dave and Brad Joe. Thank you. So for my first question, I guess I just want to talk about your transactions. So given you have so much visibility into your the acquisitions in 2019. Could you talk a little about the decisions you have planned to fund those acquisitions, maybe the markets as well as the timing?

Sorry, Shirley, was that the acquisitions we have in queue that have not yet closed?

Exactly, yeah.

Yeah, I mean, as I mentioned in my remarks, they're very similar to the characteristics of what we purchased in the fourth quarter. These are all newer stores, bigger stores. There are markets that we are already present, and there are markets with better demographics than the properties that we're looking to dispo. We're excited about them. We think that this is going to continue the transformation of our portfolio.

What about the physicians that you have planned to fund those acquisitions?

The dispositions, specifically, they're in markets that we've identified previously. We may have talked about them in the past, but they're in markets that are less quality demographics that we look into when we're making acquisitions. They're smaller stores. They're lower rates per square foot. There are markets that, unlikely, we're looking to buy more assets. Again, these are properties that they're great for cash flow. There's a lot of interest in them. But for us, they've been holding us back over the last several years in terms of potential growth and prospects going forward.

Got it. Could you talk about your street rates in 4Q and even your to-date, as well as your net effective rents?

Hi, Shirley. It's Andy. Street rates in 4Q were up about 1.9%. Not effective, slightly negative. We do have increased concessions year over year. Really, it's a tale of markets. We see Houston with street rates down significantly as we have a tough comp with the hurricane-driven demand we had in late 17. So that was a tough comp in 4Q, and it will continue in Q1, even some in the Q2. But then you look on the other side where you have Vegas where you have net effective rents up 17%, and Buffalo and upstate up 10%. So it is a tale of markets. Our biggest market is a tough comp right now. January and February, January was very similar on the street rate side. Concessions were a little easier of a comp compared to last year, so in that effect, it was still negative, but less negative than it was in the fourth quarter.

Great. Thanks for the call, Eric.

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

Hi. Thanks. I was wondering, again, on the strategy of selling mature properties and buying newer properties. Could you just talk a little bit about the spread you expect to sell at versus buy? And I think you mentioned some of these are still in lease-up. So, you know, what's your confidence that you can kind of get to – you know, stabilization within a reasonable timeframe given, you know, it seems like pricing across the industry is pretty tough right now. And, you know, is there, are you, will you drive, you know, occupancy led strategy and then look to raise prices later or maybe just some detail around that?

Yeah. Hi, hi speech. Thanks for the question. You know, on the, on the, on the dispose, you know, the conditions have never been better for, you know, selling at this time. The, the, the, The price that assets are going for in secondary markets has never been closer to primary markets. So it's been a great time, and there's a lot of interest for us to look to sell. And what we're buying are really what I mentioned earlier, Class A properties in markets we like and markets we want a bigger presence. We've been pleasantly surprised. Initially, when we started talking about this strategy about a year ago, we thought the spread between what we're selling and what we're buying would be wider, and so far we're quite pleased with the first bunch that we sold around a mid-five cap. And the properties we're buying, again, they're all in various stages of lease-up, but these aren't CO deals. They're already well on their way. We have a better idea of where these properties are pricing at in terms of street rates, but the upside is there, and we have a track record of really doing well with lease-up properties. Most of our leased-up properties are getting to the mature stage, so this is really an opportunity for us to revamp those growth opportunities without taking a ton of risk.

And the ones that you're selling, they'll leave the life storage brand, I guess?

No. So the ones we sold in the fourth quarter, we kept an equity stake. They will remain life storage. We'll have third-party management fees on those, and the intention is to do the same with the next batch.

Okay, and then can I just ask you on your first quarter guidance, it was below consensus forecast. I mean, do you attribute that primarily to just maybe a more difficult comp than what people had been anticipating, or is there something going on in the first quarter?

Hi, Shamit. There's a few things going on, right? We still do have that difficult comp in Houston, our largest market. So that is, and part of the first quarter is the dilution from what we did in 4Q. The first dispositions, that $91 million was in December 15th or 16th. So it was the end of December. And what we bought is, you know, it's a 200 basis point spread between what we are buying and what we sold. And the reason there's that 200 basis points is because the occupancy is 65% on what we bought versus the 90% of what we sold. So there's some dilution on that $91 million that's hitting in the first quarter as well. Thank you. You're welcome.

Thank you. Our next question comes from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi. Thanks. Good morning. First, Dave, just want to say good luck in retirement and your future endeavors. So just wanted to follow up again here on the capital recycling activity. So it seems like you're further along on the acquisitions and you've identified the disposition pool, but What's the timeframe to get those sold? What's the timing that's embedded in guidance and how far along are you? Just so we can understand the risk here of sort of buying first and then selling since you'll be increasing leverage a little bit here in the near term, it seems like.

Yeah, I think the timing is working out. We probably couldn't have planned it better, Todd. We did a formal process for the second batch of properties we're selling. and we expect that is moving along very well, and we expect that hopefully if things go well enough and we come to terms, it would close around July, July 1st, and the big chunk of our acquisitions that we have under contract would also close around that same time. So really, it couldn't be more ideal.

Okay, and then just curious in terms of the The projects, the contracts that you're taking over in Canada, you mentioned in the press release about the population of 7 million within the greater Toronto area, which felt or seemed sort of unprompted, maybe a justification to some extent of taking on those four management contracts. Is there more being considered in Canada, either for management or for acquisitions by the company?

Yeah. Canada, as you know, we can see Toronto from Buffalo on a nice day, and it's a sprawling market. It's one of the fastest growing in terms of population, and we have looked in the past, and what's changed is we have a very strong partner up there that we've been working with in the U.S. for many, many years, one of our longest third-party clients. It was just the right time for us to go up there and support their growth. It's a bit of walk before you run. I think there are future opportunities for us down the road. At this time, we're getting comfortable in a foreign country. We're learning how to run. We're learning how to hire. We're understanding the laws. And we're going to do most of our activity with this partner in the foreseeable future. But I would expect if things go well that we would be a bigger player in Canada down the road. It's a great market. Our platforms are well ahead of what's there now. And I think we could make a difference. And the demographics are just something you don't see in the U.S. anymore.

And just following up on that then, can you just sort of describe the market in Canada, you know, relative to the U.S. a little bit in terms of competition and any other sort of industry, you know, dynamics and how they might differ in Canada versus the U.S.?

Yeah, I mean, in terms of supply, it's about half of what we see on average in the U.S. I think they're around three square feet per capita versus the average of seven in the U.S., You know, the competition, there's a lot of smaller mom-and-pops, but there's also, you know, one large publicly traded company, Storage Vault, that we know, and they've been doing some good things up there. And, you know, Public is up there, and I believe a couple other U.S. private REITs are up there. There's been a lot of development in Toronto, but, again, the supply is low. The rates are very good. But, again, we think that the platforms in general are behind what we see in the U.S. A lot of the competitions don't publicize their rates online. There's nothing on the web. It's hard to scrape the web. So there's an immense opportunity to go in there with our platforms such as RentNow, our revenue management systems, and so forth, and really improve the performance of our partner stores. And then, again, once we get to know how to run up there, which so far it's been fantastic. I mean, I can't thank our team for doing this pretty quickly and getting up there and running on January 2. But we like what we see, and we think it could be a great market for us going forward.

Okay. Thank you.

Thank you. Our next question comes from the line of Keebin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. Good morning. And Dave, congrats, and definitely going to miss you. Joe, can you talk about the incremental changes that you're contemplating for LSI and what we can expect where you would focus more on?

Sure. You know, I think what you've seen over the last year, 18 months, and what really the company's been doing over the last few years, the biggest priority is to continue to kind of recycle our assets. Again, we want to have larger stores and markets with better prospects, and we've talked a bunch about that today. We're going to continue to do that. I think we're always going to be looking to add talent to our team. We've got a great team in place, but, you know, the world is changing. We just hired our first head of data science, and we'll be looking at ways we can improve our company from the talent perspective. You know, we're doing things like Warehouse Anywhere and attracting businesses every day. So we're looking for different types of people that traditionally wouldn't join a traditional storage company, such as the people from FedEx and so forth. So I see us looking at talent. And then most importantly, we're going to continue to invest in technology. I think our platforms, as we've demonstrated, are innovative, best in class. You know, we have a great team here, and we're going to continue to invest in technology. And then the last thing I think, which, you know, we pretty much started last year when we brought our acquisitions team in-house, the importance of developing relationships in the industry. You know, that's something that has gone over very well. And we're going to continue to do that. I think it's important. It helps us find opportunities for JVs, for acquisitions, and obviously for third-party management. And we're going to continue to really develop these relationships. People like to work with LifeStores. They like our team. They like our culture. And, you know, everything seems to be aligned for further growth going forward.

Okay. Okay. And you guys made a pretty big change to the existing customer rating increase program last year by allowing customers who get a rent increase letter to be above market. And I think the kind of second incremental change was how much above market should we let the rent increase letters go above. And I would have just thought, obviously, you saw a nice positive impact to your sales for revenue last year, but I thought it would have maybe kind of carried forward into 2019, right? So maybe can you talk about implicitly what is your same-store revenue guidance and a contribution from the ECRI program, and if there's a little bit more outsized growth embedded in 2019 guidance or not?

Thank you, Ben. Regarding the in-place strategy, we're going to remain aggressive, as you saw, as we were in 2018. We've got to continually monitor that and tweak that, and we will. we would expect the contribution to be 1% to 2%. I mean, it's not a perfect science doing that calculation because when somebody moves out and how it affects what happens with the specials on those spaces where somebody moves out and what it does to rates through the algorithm, it's not exact science, but 1% to 2% is what we would expect to get out of the in-place rent increases.

So if I take that, does that mean implicitly what you're looking for is street rates in 2019 is probably... slightly negative, not effective?

I would think we're going to start the year that way, especially with our biggest market where it's at, Houston. But that comp gets easier as we go through the year. I would think the same thing with occupancy. It will become an easier comp as we go through the year, but we wouldn't expect to see occupancy increases. So most of it will come from the in-place strategy.

We're being a bit cautious, Keith, just with the new supply coming on. You know, from 17, 18, you know, those are still in lease-up mode, and then, you know, we are seeing a bunch of deliveries expected for 19. You know, fortunately, we believe 19 is somewhat the peak of new deliveries and construction. We're seeing a bit of a, you know, slowdown in what we monitor in terms of planning, but there is an absorption phase, so we feel that's going to pressure street rates.

And just to follow up on that, when you said 19 would peak in new deliveries, is that for the industry as a whole or for what impacts your portfolio?

Well, we monitor what's in our three-mile, five-mile store radius, so we don't necessarily follow as closely some of the other markets we're in, such as Portland, where it's quite hot. But, you know, from our stores and from what's affecting our stores, we believe 19 is peaking. Okay. Thank you. Mm-hmm.

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

Hey, good morning, guys. This is James Shin on for Jeremy. I just had a question. It looks like expansions was a roughly 50 basis point benefit to rental income in 2018. Do you expect a similar benefit in 2019? And then based on your guidance for a higher spend this year, 40 to 50 million, should we expect that benefit to widen in 2020?

Hi, James. The contribution to the same store is very difficult to calculate. The back of the envelope, you can get to that 50 basis points, but we're knocking down buildings when we're putting new buildings in place. As we constantly do that, the impact year over year has been pretty constant. There's not really that impact until we stop that process. We expect the spend to be very similar. We had some delays in getting some things actually opened in the fourth quarter, and some of those will hit Q1. I think we only completed 20-some-odd million during the year that we opened of expansions. So openings will probably have more in 2019, but the total spend on them will be very consistent. So any impact should be very consistent year-over-year. Got it.

And then for dispositions, of the $225 million, How much is on the market right now? And then do you look to contribute some of those to a similar JV that was done in 4Q?

So that full 225 is what we have on market right now, and we expect to do a similar JV, not necessarily with the same party, but a similar structure. That's our intention.

And then, I guess, if they're going to be put into a JV, does the 10 to 12 cent dilution include management fees? Yes, it does. From the JV? It does? Yes. All right. Thanks, guys.

Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Thanks. I guess two questions. First, on the development, Joe, you kind of mentioned that you're starting to see supply abate a bit. And I'm just curious... you know, as you guys look to work with people or look at development yields, you know, where would you sort of guess that they are in your core markets today? And I guess that's the first question. The second one's really kind of on the corporate business and just sort of what you're seeing. And it sounds like you're pretty excited about that, but I'm not sure how much of that you sort of baked into that, you know, top-line revenue growth for 2019.

You know, again, I'll start with the second question, Steve. You know, the B2B business, as you know, is something that we focused on for a number of years. We spent several years building out the 10,000 store network that we have. So we believe that's quite difficult for anyone to copy. And now we're really building out the actual product suite and the delivery of that and attracting, you know, hits on the web and and gaining that sort of recognition. We have some great clients who are advancing through our portfolio suite and expanding their reach. But, again, this is an early-stage business. It's growing. I think all in, it's about $11 million when you include the rent and the fees. And conservatively, we think we can grow this to at least 30% going forward. In terms of the development yields, yes, we are working with a number of developers. We don't develop ourselves. We've talked about doing some early investments and some developments. But, again, I think the expectations of a yield is still around 7% in the markets we're looking to participate in.

Okay, thanks.

Okay.

Thank you. Our next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.

Thank you. Dave, best of luck in your new journey. Congratulations on a long, fruitful career. Thank you, Eric. Sure. Can you just go through the dilution calculation, the 10 to 12 cents? That seems a little bit high just relative to the trades and what you're describing in terms of the relatively narrow cap rate spread. So maybe you can just talk through that. Thank you.

Sure, Eric. Two pieces to that dilution. First is the $91 million that we put to work. We sold at the end of 2018, put that to work. The dilution on that, at least the upfront dilution, obviously the yields will be great going forward, but upfront will be 250 basis points on that $91 million for the whole year. So in the guidance is that dilution for the whole year. The $225 million, the same thing, there's about a 250 basis point spread. The assets we're buying are 50% occupied or so. So if this all closes mid-year, so we took the calculation on that $225 million for half a year, 250 basis points of dilution on that.

Okay, thanks. And then just a quick follow-up on the dispositions. I'm assuming you probably keep a similar 20% stake in what you're selling. Is that correct? Would it be lower or higher?

Around 20% is our goal. Okay, great.

Thank you.

Thank you.

Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.

Hey, good morning. Just curious what the impact of the same-store definitional change was directionally on 2019 revenue and NOI growth rates. I assume positive given some more less stabilized assets are added sooner, but I know it can vary for same-store NOI given taxes and other factors on the expense line.

Hi, Jonathan. We really didn't change the definition. The stores that were in our C of O group, and there was 14 of them that will be added to the same store in 2019. They were stable at the end of 17 at stable rates. So at the end of 17, they were stable. We did not add them in 18, so we add them in 19. So they will be added in 19, and there's 14 of those. You can see them on the schedule in the supplement, all the ones that were greater than, most of them were greater than 90%, but the ones greater than 80% as of the beginning of, or at the end of 17. So they'll be added. And then there were three other stores that, suffered damage back in 2016, and they were stable at the end of 2017, so they'll be added as well. So small change to the pool, we would not expect. And you'll see it, as we always do, we show the different pools each quarter. I would not expect it would be 10 basis points or less difference between the new pool and the old pool.

Okay. Yeah, I just had gotten a little confused because last quarter it said those would be added. You know, after the second year of achieving 80% occupancy in this quarter, it said, would they be added after the first year?

Yeah, we'll clarify that going forward, but that's the case. It's really the same definition.

Okay. All right. That's helpful. And then I guess what's the contribution from the new same-store assets on revenue and NOI growth guidance, and how should that trend throughout the year? I know it's grown by 2.5% or so, but any numbers around that would be helpful.

Yeah, like I said, the change in the pool won't affect the stores much, but we would expect with the new supply, first of all, at Q1 we'll have a tough comp with Houston. After that new supply, we would expect to continue to put pressure on rates and the revenue line.

Okay, I'll follow up. I appreciate the time, and Dave, congrats again on your retirement. Thanks, Jonathan.

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Sapphire for any closing remarks.

Okay. Well, I want to thank you all for dialing in today, and we look forward to seeing you all at the various shows this year. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.